Note

Fair Value Measurements

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are

quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are

not

available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates

may

not

be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented

may

not

necessarily represent the underlying fair value of the Company.

The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additional considerations are involved to determine the fair value of financial assets in markets that are

not

active.

The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The

three

levels of the fair value hierarchy based on these

two

types of inputs are as follows:

	Level 1 –		Valuation is based on quoted prices in active markets for identical assets and liabilities.
	Level 2 –		Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
	Level 3 –		Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities Available for Sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level

). If quoted market prices are

not

available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and

may

determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level

). The carrying value of restricted Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.

The following tables present the balances of financial assets measured at fair value on a recurring basis as of

March 31, 2018

and

December 31, 2017.

			Fair Value Measurements at March 31, 2018 Using
Description	Balance as of March 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government agencies and corporations	$	314,889	$	---	$	314,889	$	---
States and political subdivisions		15,778		---		15,778		---
Mortgage-backed securities		608		---		608		---
Corporate debt securities		5,936		---		5,936		---
Total securities available for sale	$	337,211	$	---	$	337,211	$	---

			Fair Value Measurements at December 31, 2017 Using
Description	Balance as of December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government agencies and corporations	$	307,719	$	---	$	307,719	$	---
States and political subdivisions		16,834		---		16,834		---
Mortgage-backed securities		659		---		659		---
Corporate debt securities		6,175		---		6,175		---
Total securities available for sale	$	331,387	$	---	$	331,387	$	---

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market value. These loans currently consist of

one

-to-

four

family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is

not

materially different than cost due to the short duration between origination and sale (Level

). As such, the Company records any fair value adjustments on a nonrecurring basis.

nonrecurring fair value adjustments were recorded on loans held for sale at

March 31, 2018

December 31, 2017.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will

not

be collected according to the contractual terms of the loan agreement. Troubled debt restructurings are impaired loans. Impaired loans are measured at fair value on a nonrecurring basis. If an individually-evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

The fair value of an impaired loan and measurement of associated loss is based on

one

three

methods: the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral. The observable market price of a loan is categorized as a Level

input. The present value of projected cash flows method results in a Level

categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a troubled debt restructure.

Loans measured using the fair value of collateral method

may

be categorized in Level

or Level

Collateral

may

be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Most collateral is real estate. The Company bases collateral method fair valuation upon the “as-is” value of independent appraisals or evaluations. Valuations for impaired loans with outstanding principal balances of

$250

or more are based on a current appraisal. Appraisals are also used to value impaired loans with principal balances of

$100

or greater and secured by

one

piece of collateral. Collateral-method impaired loans with principal balances below

$100,

or if secured by multiple pieces of collateral, below

$250,

are valued using an evaluation.

The value of real estate collateral is determined by a current (less than

months of age) appraisal or internal evaluation utilizing an income or market valuation approach. Appraisals conducted by an independent, licensed appraiser outside of the Company using observable market data is categorized as Level

If a current appraisal cannot be obtained prior to a reporting date and an existing appraisal is discounted to obtain an estimated value, or if declines in value are identified after the date of the appraisal, or if an appraisal is discounted for estimated selling costs, the valuation of real estate collateral is categorized as Level

Valuations derived from internal evaluations are categorized as Level

The value of business equipment is based upon an outside appraisal (Level

) if deemed significant, or the net book value on the applicable business’ financial statements (Level

) if

not

considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level

The following table summarizes the Company’s impaired loans that were measured at fair value on a nonrecurring basis at

March 31, 2018

and at

December 31, 2017.

				Carrying Value
Date	Description	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	Assets:
March 31, 2018	Impaired loans net of valuation allowance	$	1,279	$	---	$	---	$	1,279
December 31, 2017	Impaired loans net of valuation allowance		1,303		---		---		1,303

The following tables present information about Level

Fair Value Measurements for

March 31, 2018

and

December 31, 2017.

Impaired Loans	Valuation Technique	Unobservable Input	Range (Weighted Average)
March 31, 2018	Present value of cash flows	Discount rate		5.50%	–	13.25%	(5.92%)
December 31, 2017	Present value of cash flows	Discount rate		5.50%	–	13.25%	(5.92%)

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. Valuation of other real estate owned is determined using current appraisals from independent parties, a level

two

input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level

estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level

inputs.

The following table summarizes the Company’s other real estate owned that was measured at fair value on a nonrecurring basis.

				Carrying Value
Date	Description	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	Assets:
March 31, 2018	Other real estate owned net of valuation allowance	$	2,741					$	2,741
December 31, 2017	Other real estate owned net of valuation allowance		2,817		---		---		2,817

The following tables present information about Level

Fair Value Measurements for

March 31, 2018

and

December 31, 2017.

March 31, 2018	Valuation Technique	Unobservable Input	Range (Weighted Average)

Other real estate owned	Discounted appraised value	Selling cost		5.00%	–	6.01%	(5.14%)
Other real estate owned	Discounted appraised value	Discount for lack of marketability and age of appraisal		1.68%	–	86.03%	(13.35%)

December 31, 2017	Valuation Technique	Unobservable Input	Range (Weighted Average)

Other real estate owned	Discounted appraised value	Selling cost		2.00%	–	6.01%	(4.72%)
Other real estate owned	Discounted appraised value	Discount for lack of marketability and age of appraisal		1.68%	–	68.33%	(11.07%)

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

March 31, 2018

and

December 31, 2017.

For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as Federal Home Loan Bank and Federal Reserve Bank stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having

stated maturity. Fair values for

March 31, 2018

are estimated under the exit price notion in accordance with the prospective adoption of ASU

2016

01,

“Recognition and Measurement of Financial Assets and Financial Liabilities.”

Fair values for

December 31, 2017

are estimated under the guidance in effect for that period, which did

not

require use of the exit price notion.

	March 31, 2018
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial Assets:
Cash and due from banks	$	10,598	$	10,598	$	---	$	---
Interest-bearing deposits		76,571		76,571		---		---
Securities		460,116		---		461,760		---
Restricted securities		1,221		---		1,221		---
Loans, net		651,272		---		---		648,273
Accrued interest receivable		5,360		---		5,360		---
Bank-owned life insurance		33,984		---		33,984		---
Financial Liabilities:
Deposits	$	1,072,940	$	---	$	961,305	$	111,627
Accrued interest payable		55		---		55		---

The following table presents the Company’s financial instruments as of

December 31, 2017.

	December 31, 201 7
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial Assets:
Cash and due from banks	$	12,926	$	12,926	$	---	$	---
Interest-bearing deposits		51,233		51,233		---		---
Securities		458,551		---		461,500		---
Restricted securities		1,200		---		1,200		---
Loans held for sale		260		---		260		---
Loans, net		660,144		---		---		656,399
Accrued interest receivable		5,297		---		5,297		---
Bank-owned life insurance		33,756		---		33,756		---
Financial Liabilities:
Deposits	$	1,059,734	$	---	$	944,850	$	113,053
Accrued interest payable		62		---		62		---