Note

: Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into

three

broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in

one

of the

three

levels. These levels are:

	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,
	●	inputs other than quoted prices that are observable, and
	●	model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level

–

Valuation is based on model-based techniques that use

one

or more significant inputs or assumptions that are unobservable in the market.

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. Consequently, the aggregate fair value amounts presented

may

not

necessarily represent the underlying fair value of the Company as of

March 31, 2020

and

December 31, 2019.

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

Financial Instruments

Measured at Fair Value on a Recurring Basis

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 of Richmond and FHLB 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, 2020

and

December 31, 2019.

			Fair Value Measurements at March 31, 2020 Using
Description	Balance as of March 31, 2020		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	$	101,607	$	---	$	101,607	$	---
States and political subdivisions		102,297		---		102,297		---
Mortgage-backed securities		230,989		---		230,989		---
Corporate debt securities		4,126		---		4,126		---
Total securities available for sale	$	439,019	$	---	$	439,019	$	---

			Fair Value Measurements at December 31, 2019 Using
Description	Balance as of December 31, 2019		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	$	121,123	$	---	$	121,123	$	---
States and political subdivisions		88,239		---		88,239		---
Mortgage-backed securities		221,783		---		221,783		---
Corporate debt securities		4,118		---		4,118		---
Total securities available for sale	$	435,263	$	---	$	435,263	$	---

The Company’s securities portfolio is valued using Level

inputs. The Company relies on a

third

party vendor to provide market valuations. The inputs used to determine value include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads,

two

-sided markets, benchmark securities, bids, offers and reference data including market research publications. The

third

-party vendor also monitors market indicators, industry activity and economic events as part the valuation process. Central to the final valuation is the assumption that the indicators used are representative of the fair value of securities held within the Company’s portfolio. Level

inputs are subject to a certain degree of uncertainty and changes in these assumptions or methodologies in the future, if any,

may

impact securities fair value, deferred tax assets or liabilities, or expense.

Interest Rate Loan Contracts

and Forward Contracts

The Company originates consumer real estate loans which it intends to sell to a correspondent lender. Interest rate loan contracts and forward contracts result from originating loans held for sale and are derivatives reported at fair value. The Company enters interest rate lock commitments with customers who apply for a loan which it intends to sell to a correspondent lender. The interest rate loan contract ends when the loan closes or the customer withdraws their application. Fair value of the interest rate loan contracts is based upon the correspondent lender’s pricing quotes at the report date. Fair value is adjusted for the estimated probability of the loan closing with the borrower.

At the time the Company enters into an interest rate loan contract with a customer, it also enters into a best efforts forward sales commitment with the correspondent lender. If the loan has been closed and funded, the best efforts commitment converts to a mandatory forward sales commitment. Fair value is based on the gain or loss that would occur if the Company were to pair-off the transaction with the investor at the measurement date. This is a level

input. The Company has elected to measure and report best efforts commitments at fair value.

Interest rate loan contracts and forward contracts are valued based on quotes from the correspondent lender at the reporting date. Pricing changes daily and if a loan has

not

been sold to the correspondent by the next reporting date, the fair value

may

be different from that reported currently. Changes in fair value measurement impacts net income.

				Fair Value Measurements at March 31, 2020 Using
Description	Balance as of December 31, 2019			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Interest rate loan contracts	$	(25	)	$	---	$	---	$	(25	)
Forward contracts	$	18		$	---	$	---	$	18

				Fair Value Measurements at December 31, 2019 Using
Description	Balance as of December 31, 2019			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Interest rate loan contracts	$	1		$	---	$	---	$	1
Forward contracts	$	(4	)	$	---	$	---	$	(4	)

March 31, 2020	Valuation Technique	Unobservable Input	Range (Weighted Average)
Interest rate loan contracts	Market approach	Pull-through rate	90.00% (1)
Forward contracts	Market approach	Pull-through rate	65.60% (1)

Interest rate loan contracts	Market approach	Current reference price	98.40%	-	100.51%	(99.62%) (2)
Forward contracts	Market approach	Current reference price	98.40%	-	100.51%	(99.91%) (2)

(

)

all contracts are valued using the same pull-through rate

(

)

Current reference prices were weighted by the relative amount of the loan

December 31, 2019	Valuation Technique	Unobservable Input	Range (Weighted Average)
Interest rate loan contracts	Market approach	Pull-through rate	90.00% (1)
Forward contracts	Market approach	Pull-through rate	65.60% (1)

Interest rate loan contracts	Market approach	Current reference price	101.49%	-	102.06%	(101.72%) (2)
Forward contracts	Market approach	Current reference price	101.49%	-	103.28%	(101.91%) (2)

(

)

all contracts are valued using the same pull-through rate

(

)

Current reference prices were weighted by the relative amount of the loan

Financial Instruments

Measured at Fair Value on a

Non-

Recurring Basis

Certain financial instruments are measured at fair value on a nonrecurring basis in accordance with U.S. 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 fair 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, 2020

December 31, 2019.

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 TDR.

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 secured by residential

family properties with outstanding principal balances greater than

$250

are based on an appraisal. Appraisals are also used to value impaired loans secured by commercial real estate with outstanding principal balances greater than

$500.

Collateral-method impaired loans secured by residential

family property with outstanding principal balances of

$250

or less, or secured by commercial real estate with outstanding principal balances of

$500

or less, are valued using an internal 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, 2020

and at

December 31, 2019.

				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, 2020	Impaired loans net of valuation allowance	$	1,004	$	---	$	---	$	1,004
December 31, 2019	Impaired loans net of valuation allowance		1,005		---		---		1,005

The following tables present information about Level

Fair Value Measurements for

March 31, 2020

and

December 31, 2019.

Impaired Loans	Valuation Technique	Unobservable Input	Range (Weighted Average (1) )
March 31, 2020	Present value of cash flows	Discount rate	5.50%	–	6.50%	(5.77%)
December 31, 2019	Present value of cash flows	Discount rate	5.50%	–	6.50%	(5.77%)

(

)

Unobservable inputs were weighted by the relative fair value of the impaired loans.

March 31, 2020

and

December 31, 2019,

all impaired loans measured at fair value on a nonrecurring basis were measured using the present value of cash flows. The loans at each date are TDRs and the discount rate is the contractual rate that was in effect prior to modification to TDR status. Inherent in the measurement of impaired loans using the present value of cash flows method are judgements and assumptions, including the appropriateness of the discount rate and the projections of cash flows. Cash flows in the future

may

differ from those used in the measurement. Future changes in cash flow assumptions or if the loans are charged off

may

result in greater losses than estimated at the reporting dates. An increase in the impairment measurement or a charge-off would increase the provision for loan losses.

Other Real Estate Owned

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

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 OREO 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, 2020	Other real estate owned net of valuation allowance	$	1,584	$	---	$	---	$	1,584
December 31, 2019	Other real estate owned net of valuation allowance		1,612		---		---		1,612

The following tables present information about Level

Fair Value Measurements for

March 31, 2020

and

December 31, 2019.

March 31, 2020	Valuation Technique	Unobservable Input	Range (Weighted Average (1) )

Other real estate owned	Discounted appraised value	Selling cost	0.00% (2)	–	10.00%	(0.65%)
Other real estate owned	Discounted appraised value	Discount for lack of marketability and age of appraisal	0.00%	–	4.00%	(0.33%)

December 31, 2019	Valuation Technique	Unobservable Input	Range (Weighted Average (1) )

Other real estate owned	Discounted appraised value	Selling cost	0.00% (2)	–	6.00%	(0.68%)
Other real estate owned	Discounted appraised value	Discount for lack of marketability and age of appraisal	0.00%	–	45.17%	(1.28%)

( 1 )	Discounts were weighted by the relative appraised value of the OREO properties.
( 2 )	The appraised value is discounted by selling costs if the OREO property is listed with a realtor and if appraised value exceeds the list price, less estimated selling costs. Selling costs do not discount appraised value if the Company markets the OREO property independently or if the OREO property is listed with a realtor and the list price less estimated selling costs exceeds appraised value.

March 31, 2020

and

December 31, 2019,

OREO properties were measured using appraised value, and if applicable, discounted by selling costs, lack of marketability and age of appraisal. Determining the discount to appraisals for selling cost and lack of marketability and age of the appraisal relies on certain key assumptions and judgements.

Discounts for selling costs and in some instances, marketability, result when the Company markets OREO properties via local realtors. The Company works with the realtor to determine the list price, which

may

be set at appraised value or at a different amount based on the realtor’s advice and management’s judgement of marketability. Selling costs for improved land generally are estimated at

of the list price, and for raw land at

10%

of the list price. If the final sale price is different from the list price, the amount of selling costs will also be different from those estimated. Discounts for age

may

be applied if current appraisals cannot be obtained prior to reporting dates. The most recent appraised value available

may

be discounted based upon management judgement.

There is uncertainty in determining discounts to appraised value. Future changes to marketability assumptions or updated appraisals

may

indicate in a lower fair value, with a corresponding impact to net income. The current COVID-

pandemic and associated economic crisis

may

negatively affect the value of the Company’s OREO and

may

result in additional OREO properties. Ultimate proceeds from the sale of OREO property

may

be less than the estimated fair value, reducing net income.

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, 2020

and

December 31, 2019.

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 FHLB and Federal Reserve Bank of Richmond 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 are estimated using the exit price notion.

	March 31 , 20 20
	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	$	12,404	$	12,404	$	---	$	---
Interest-bearing deposits		71,898		71,898		---		---
Securities		439,019		---		439,019		---
Restricted securities		1,279		---		1,279		---
Loans held for sale		1,787		---		1,787		---
Loans, net		722,243		---		---		705,836
Accrued interest receivable		4,280		---		4,280		---
Bank-owned life insurance		35,788		---		35,788		---
Forward contracts		18		---		---		18
Financial Liabilities:
Deposits	$	1,108,183	$	---	$	984,385	$	124,912
Accrued interest payable		137		---		137		---
Interest rate loan contracts		25		---		---		25

	December 31, 201 9
	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	$	10,290	$	10,290	$	---	$	---
Interest-bearing deposits		76,881		76,881		---		---
Securities		435,263		---		435,263		---
Restricted securities		1,220		---		1,220		---
Loans held for sale		905		---		905		---
Loans, net		726,588		---		---		718,299
Accrued interest receivable		4,285		---		4,285		---
Bank-owned life insurance		35,567		---		35,567		---
Interest rate loan contracts		1		---		---		1
Financial Liabilities:
Deposits	$	1,119,753	$	---	$	991,725	$	128,011
Accrued interest payable		144		---		144		---
Forward contracts		4		---		---		4