(

) Fair Value of Financial Instruments

and Fair Value Measurements

Generally accepted accounting standards in the U.S. require disclosure of fair value information about financial instruments, whether or

not

recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company and the Bank’s financial instruments are detailed hereafter. Where quoted prices are

not

available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

Generally accepted accounting principles related to Fair Value Measurements define fair value, establish a framework for measuring fair value, establish a

three

-level valuation hierarchy for disclosure of fair value measurement and enhance disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The

three

levels are defined as follows:

● Level

inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

● Level

inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

● Level

inputs to the valuation methodology are unobservable and represent the Company’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The following disclosures should

not

be considered a surrogate of the liquidation value of the Company, but rather a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

Cash and Short-Term Investments

– For cash, due from banks, bank-owned deposits and federal funds sold, the carrying amount is a reasonable estimate of fair value and is classified as Level

Investment Securities

– Fair values for investment securities are based on quoted market prices where available and classified as Level

If quoted market prices are

not

available, estimated fair values are based on quoted market prices of comparable instruments and classified as Level

If a comparable is

not

available, the investment securities are classified as Level

Federal Home Loan Bank Stock

– The fair value of Federal Home Loan Bank stock approximates carrying value and is classified as Level

Loans Held for Sale

– The fair value of loans held for sale is determined on outstanding commitments from

third

party investors in the secondary markets and is classified within Level

of the valuation hierarchy.

Loans –

The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value. Most loans are classified as Level

but impaired loans with a related allowance are classified as Level

Bank-Owned Life Insurance –

The carrying value of bank-owned life insurance policies approximates fair value and is classified as Level

Deposit Liabilities

– The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date and is classified as Level

The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities and is classified as Level

Subordinated Debentures

– The fair value of subordinated debentures is estimated by discounting the future cash flows using the current rates at which similar advances would be obtained. Subordinate Debentures are classified as Level

Other Borr

wed Money

– The fair value of other borrowed money is calculated by discounting contractual cash flows using an estimated interest rate based on current rates available to the Company for debt of similar remaining maturities and collateral terms. Other borrowed money is classified as Level

due to their expected maturities.

Disclosures of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are

not

measured and reported at fair value on a recurring basis or non-recurring basis, are required in the financial statements.

The carrying amount, estimated fair values, and placement in the fair value hierarchy of the Company’s financial instruments as of

June 30, 2019

and

December 31, 2018

are as follows:

	Fair Value Measurements at
	June 30, 2019
	Carrying		Estimated		Level		Level		Level
	Value		Fair Value		1		2		3

Assets
Cash and Short-Term Investments	$	75,412	$	75,412	$	75,412	$	-	$	-
Investment Securities Available for Sale		409,839		409,839		-		406,405		3,434
Other Investments, at Cost		3,261		3,261		3,261		-		-
Loans Held for Sale		3,813		3,813		-		3,813		-
Loans, Net		927,917		925,547		-		922,868		2,679
Bank-Owned Life Insurance		21,357		21,357		21,357		-		-

Liabilities
Deposits		1,297,723		1,300,200		908,153		392,047		-
Subordinated Debentures		24,229		24,229		-		24,229		-
Other Borrowed Money		55,063		54,865		-		54,865		-

	Fair Value Measurements at
	December 31, 2018
	Carrying		Estimated		Level		Level		Level
	Value		Fair Value		1		2		3

Assets
Cash and Short-Term Investments	$	60,156	$	60,156	$	60,156	$	-	$	-
Investment Securities Available for Sale		353,066		353,066		-		348,788		4,278
Federal Home Loan Bank Stock		2,978		2,978		2,978		-		-
Loans, Net		774,249		769,809		-		766,457		3,352
Bank-Owned Life Insurance		17,598		17,598		17,598		-		-

Liabilities
Deposits		1,085,125		1,086,503		744,094		342,409		-
Subordinated Debentures		24,229		24,229		-		24,229		-
Other Borrowed Money		44,000		44,032		-		44,032		-

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do

not

reflect any premium or discount that could result from offering for sale at

one

time the Company’s entire holdings of a particular financial instrument. Because

market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are

not

considered financial instruments. Significant assets and liabilities that are

not

considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have

not

been considered in the estimates.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring and nonrecurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Assets

Securities

– Where quoted prices are available in an active market, securities are classified within level

of the valuation hierarchy. Level

inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are

not

available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Examples of such instruments, which would generally be classified within level

of the valuation hierarchy, include certain collateralized mortgage and debt obligations and certain high-yield debt securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level

of the valuation hierarchy. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

Impaired

oans

– Impaired loans are those loans which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent

third

-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level

fair values, based upon the lowest level of input that is significant to the fair value measurements.

Other Real Estate

– Other real estate owned assets are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned. Typically, an external,

third

-party appraisal is performed on the collateral upon transfer into the other real estate owned account to determine the asset’s fair value. Subsequent adjustments to the collateral’s value

may

be based upon either updated

third

-party appraisals or management’s knowledge of the collateral and the current real estate market conditions. Appraised amounts used in determining the asset’s fair value, whether internally or externally prepared, are discounted

percent to account for selling and marketing costs. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a level

classification of the inputs for determining fair value. Because of the high degree of judgment required in estimating the fair value of other real estate owned assets and because of the relationship between fair value and general economic conditions, we consider the fair value of other real estate owned assets to be highly sensitive to changes in market conditions.

Assets and Liabilities Measured at Fair Value on a Recurring

and Nonrecurring

Basis –

The following table presents the recorded amount of the Company’s assets measured at fair value on a recurring and nonrecurring basis as of

June 30, 2019

and

December 31, 2018,

aggregated by the level in the fair value hierarchy within which those measurements fall. The table below includes only impaired loans with a specific reserve and only other real estate properties with a valuation allowance at

June 30, 2019

and at

December 31, 2018.

Those impaired loans and other real estate properties are shown net of the related specific reserves and valuation allowances.

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	Total Fair		Identical Assets		Observable		Inputs
June 30, 2019	Value		(Level 1)		Inputs (Level 2)		(Level 3)

Recurring Securities Available for Sale
U.S. Government Agencies Mortgage-Backed	$	403,408	$	-	$	400,189	$	3,219
State, County and Municipal		3,574		-		3,359		215
Corporate Bonds		2,857		-		2,857		-
	$	409,839	$	-	$	406,405	$	3,434

Nonrecurring
Impaired Loans	$	2,679	$	-	$	-	$	2,679

Other Real Estate	$	714	$	-	$	-	$	714

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	Total Fair		Identical Assets		Observable		Inputs
December 31, 2018	Value		(Level 1)		Inputs (Level 2)		(Level 3)

Recurring Securities Available for Sale
U.S. Government Agencies Mortgage-Backed	$	346,205	$	-	$	342,142	$	4,063
State, County and Municipal		3,989		-		3,775		214
Corporate Bonds		2,872		-		2,872		-

	$	353,066	$	-	$	348,789	$	4,277

Nonrecurring
Impaired Loans	$	3,352	$	-	$	-	$	3,352

Other Real Estate	$	1,183	$	-	$	-	$	1,183

Liabilities

The Company did

not

identify any liabilities that are required to be presented at fair value.

Fair Value Measurements Using Significant Unobservable Inputs (Level

)

The following table presents quantitative information about the significant unobservable inputs used in the fair value measurements for assets in level

of the fair value hierarchy measured on a nonrecurring basis at

June 30, 2019

and

December 31, 2018.

This table is comprised primarily of collateral dependent impaired loans and other real estate owned:

			Valuation	Unobservable	Range
	June 30, 2019		Techniques	Inputs	Weighted Avg

Real Estate
Residential Real Estate		218	Sales Comparison	Adjustment for Differences	(10.86)%	-	6.70%
				Between the Comparable Sales		(2.08)%

				Management Adjustments for	0.00%	-	25.00%
				Age of Appraisals and/or Current		12.50%
				Market Conditions

Commercial Real Estate		2,134	Income Approach	Capitalization Rate	7.75%	-	10.50%
						9.13%

				Management Adjustments for	0.00%	-	10.00%
				Age of Appraisals and/or Current		5.00%
				Market Conditions

Farmland		327	Sales Comparison	Adjustment for Differences	(71.00)%	-	(3.50)%
				Between the Comparable Sales		(37.25)%

				Management Adjustments for	10.00%	-	80.00%
				Age of Appraisals and/or Current		45.00%
				Market Conditions

Other Real Estate Owned		714	Sales Comparison	Adjustment for Differences	(30.00)%	-	25.02%
				Between the Comparable Sales		(2.49)%

				Management Adjustments for	9.82%	-	99.39%
				Age of Appraisals and/or Current		40.36%
				Market Conditions

			Sales Contract	Adjustment for Estimated Costs	0.00%	-	0.00%
				to Sell		(0.00)%

			Income Approach	Discount Rate		10.00%

			Valuation	Unobservable	Range
	December 31, 2018		Techniques	Inputs	Weighted Avg

Real Estate
Commercial Construction	$	360	Sales Comparison	Adjustment for Differences	(6.00)%	-	1,975.00%
				Between the Comparable Sales		984.20%

				Management Adjustments for	0.00%	-	10.00%
				Age of Appraisals and/or Current		5.00%
				Market Conditions

Residential Real Estate		213	Sales Comparison	Adjustment for Differences	(10.86)%	-	6.70%
				Between the Comparable Sales		(2.08)%

				Management Adjustments for	0.00%	-	25.00%
				Age of Appraisals and/or Current		12.50%
				Market Conditions

Commercial Real Estate		2,415	Sales Comparison	Adjustment for Differences	(60.00)%	-	80.00%
				Between the Comparable Sales		10.00%

				Management Adjustments for	0.00%	-	35.00%
				Age of Appraisals and/or Current		17.50%
				Market Conditions

			Income Approach	Capitalization Rate		10.13%

Farmland		328	Sales Comparison	Adjustment for Differences	(71.00)%	-	(3.50)%
				Between the Comparable Sales		(37.25)%

				Management Adjustments for	10.00%	-	80.00%
				Age of Appraisals and/or Current		45.00%
				Market Conditions

Commercial		36	Sales Contract	Adjustment for Estimated Costs	0.00%	-	0.00%
				to Sell		(0.00)%

				Management Adjustment for	0.00%	-	15.00%
				Age of Appraisals and/or Current		15.00%
				Market Conditions

Other Real Estate Owned		1,183	Sales Comparison	Adjustment for Differences	(30.00)%	-	25.02%
				Between the Comparable Sales		(2.49)%

				Management Adjustment for	9.82%	-	99.39%
				Age of Appraisals and/or Current		35.26%
				Market Conditions

			Income Approach	Capitalization Rate		10.00%

The table below presents a reconciliation and statement of income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (level

) for the

six

months ended

June 30, 2019

and the

twelve

months ended

December 31, 2018.

	Available for Sale Securities
	June 30, 2019			December 31, 2018

Balance, Beginning	$	4,277		$	7,298
Transfers out of Level 3		-			(2,009	)
Maturities		-			-
Purchases		-			-
Paydowns		(883	)		(886	)
Unrealized Gains included in Other Comprehensive Income (Loss)		40			(126	)


Balance, Ending	$	3,434		$	4,277

The Company’s policy is to recognize transfers in and transfers out of levels

and

as of the end of a reporting period. There were

transfers of securities between levels for the

six

months ended

June 30, 2019

and

one

security totaling

$2,009

transferred from level

to level

for the

twelve

months ended

December 31, 2018.

The following table presents quantitative information about recurring level

fair value measurements as of

June 30, 2019.

				Unobservable	Range
June 30, 2019	Fair Value		Valuation Techniques	Inputs	(Weighted Avg)

State, County and Municipal	$	215	Discounted Cash Flow	Discount Rate or Yield		N/A*

U. S. Government Agencies Mortgage -Backed		3,219	Fundamental Analysis	Discount Rate or Yield		N/A*

* The Company relies on a

third

-party pricing service to value its securities. The details of the unobservable inputs and other adjustments used by the

third

-party pricing service were

not

readily available to the Company.