NOTE

– FAIR VALUES

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. Various valuation techniques are used to determine fair value, including market, income and cost approaches. There are

three

levels of inputs that

may

be used to measure fair values:

Level

Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.

Level

Significant other observable inputs other than Level

prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are

not

active, and other inputs that are observable or can be corroborated by observable market data.

Level

Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In certain cases, the inputs used to measure fair value

may

fall into different levels of the fair value hierarchy. When that occurs, the fair value hierarchy is classified on the lowest level of input that is significant to the fair value measurement. The following methods and significant assumptions are used to estimate fair value.

Securities:

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level

in the fair value hierarchy. For securities where quoted prices are

not

available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads,

two

-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level

in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are

not

available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level

in the fair value hierarchy. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Impaired Loans:

An impaired loan is evaluated at the time the loan is identified as impaired and is recorded at fair value less costs to sell. Fair value is measured based on the value of the collateral securing the loan and is classified as Level

in the fair value hierarchy. Fair value is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals

may

utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level

classification of the inputs for determining fair value.

Management routinely apply internal discounts to the value of appraisals used in the fair value evaluation of our impaired loans. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from

10%

for routine real estate collateral to

25%

for real estate that is determined to have a thin trading market or to be specialized collateral. This is in addition to estimated discounts for cost to sell of

six

ten

percent.

Management also apply discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation or foreclosure. Resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. Discounts ranging from

10%

33%

have been utilized in our impairment evaluations when applicable.

Impaired loans are evaluated quarterly for additional impairment. Management obtains updated appraisals on properties securing our loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and the assessment of deterioration of real estate values in the market in which the property is located.

Other Real Estate Owned (OREO)

: OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal evaluation less estimated cost to sell. Quarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, management consults with staff from the Bank’s special assets group as well as external realtors and appraisers. Based on these consultations, management determines asking prices for OREO properties being marketed for sale. If the internally evaluated fair value or asking price is below the recorded investment in the property, appropriate write-downs are taken.

For larger dollar commercial real estate properties, management obtains a new appraisal of the subject property or has staff in the special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Management generally obtains updated appraisals within

five

quarters of the anniversary date of ownership unless a sale is imminent. When an asking price is lowered below the most recent appraised value, appropriate write-downs are taken.

Financial assets measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements at December 31, 201 9 Using
			(in thousands)
Description	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Government and federal agency	$	22,330	$	—	$	22,330	$	—
Agency mortgage-backed: residential		92,200		—		92,200		—
Collateralized loan obligations		49,419		—		49,419		—
State and municipal		28,366		—		28,366		—
Corporate bonds		16,685		—		16,685		—
Total	$	209,000	$	—	$	209,000	$	—

			Fair Value Measurements at December 31, 201 8 Using
			(in thousands)
Description	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Government and federal agency	$	22,560	$	—	$	22,560	$	—
Agency mortgage-backed: residential		85,990		—		85,990		—
Collateralized loan obligations		49,839		—		49,839		—
State and municipal		32,812		—		32,812		—
Corporate bonds		9,991		—		9,991		—
Total	$	201,192	$	—	$	201,192	$	—

There were

transfers between Level

and Level

during

2019

2018.

Financial assets measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at December 31, 201 9 Using
			(in thousands)
Description	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired lo ans :
Commercial	$	21	$	—	$	—	$	21
Commercial real estate:
Farmland		245		—		—		245
Residential real estate:
1-4 Family		145		—		—		145

			Fair Value Measurements at December 31, 2018 Using
			(in thousands)
Description	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial real estate:
Nonfarm nonresidential	$	124	$	—	$	—	$	124
Residential real estate:
1-4 Family		552		—		—		552
Other real estate owned, net:
Commercial real estate:
Construction		3,485		—		—		3,485

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of

$453,000,

with a valuation allowance of

$42,000,

December 31, 2019,

resulting in

additional provision for loan losses for the year ended

December 31, 2019.

December 31, 2018,

impaired loans had a carrying amount of

$879,000,

with a valuation allowance of

$203,000,

December 31, 2018,

resulting in

additional provision for loan losses for the year ended

December 31, 2018.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of

$3.5

million at

December 31, 2018.

Write-downs of

$850,000

were recorded on OREO for the years ended

December 31, 2018.

The following table presents qualitative information about level

fair value measurements for financial assets measured at fair value on a non-recurring basis at

December 31, 2018:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	(in thousands)

Impaired loans – Residential real estate	$	552	Sales comparison approach	Adjustment for differences between the comparable sales	0%	-	26%	(11%)

Other real estate owned – Commercial real estate	$	3,485	Sales comparison approach	Adjustment for differences between the comparable sales	0%	-	35%	(18%)
			Income approach	Discount or capitalization rate		25%		(25%)

Carrying amount and estimated fair values of financial instruments were as follows at year-end

2019:

			Fair Value Measurements at December 31, 201 9 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	30,203	$	30,203	$	—	$	—	$	30,203
Securities available for sale		209,000		—		209,000		—		209,000
Federal Home Loan Bank stock		6,237		N/A		N/A		N/A		N/A
Loans, net		917,895		—		—		925,388		925,388
Accrued interest receivable		4,257		—		1,118		3,139		4,257
Financial liabilities
Deposits	$	1,026,975	$	187,551	$	839,882	$	—	$	1,027,433
Federal Home Loan Bank advances		61,389		—		61,395		—		61,395
Junior subordinated debentures		21,000		—		—		17,466		17,466
Subordinated capital note		17,000		—		—		17,003		17,003
Senior debt		5,000		—		—		5,022		5,022
Accrued interest payable		1,129		—		647		482		1,129

Carrying amount and estimated fair values of financial instruments were as follows at year-end

2018:

			Fair Value Measurements at December 31, 201 8 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	35,361	$	35,361	$	—	$	—	$	35,361
Securities available for sale		201,192		—		201,192		—		201,192
Federal Home Loan Bank stock		7,233		N/A		N/A		N/A		N/A
Loans, net		756,364		—		—		744,076		744,076
Accrued interest receivable		3,665		—		1,222		2,443		3,665
Financial liabilities
Deposits	$	894,231	$	142,618	$	750,015	$	—	$	892,633
Federal Home Loan Bank advances		46,549		—		46,519		—		46,519
Junior subordinated debentures		21,000		—		—		16,226		16,226
Senior debt		10,000		—		—		9,585		9,585
Accrued interest payable		658		—		598		60		658

In accordance with the Company’s adoption of ASU

2016

as of

January 1, 2018,

the methods utilized to measure the fair value of financial instruments represent an approximation of exit price; however, an actual exit price

may

differ.