NOTE 10 - Fair Value Disclosures

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. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in our annual financial statements.

Assets measured at fair value on a recurring basis are summarized in the table below. There were no liabilities measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015.

(Dollars in thousands)	Fair Value Measurements Using						Total
March 31, 2016	Level 1		Level 2		Level 3		Fair Value
Securities available for sale
U.S. Government agency obligations	$	—	$	91,968	$	—	$	91,968
Mortgage-backed securities-residential		—		27,177		—		27,177
Asset backed securities		—		12,843		—		12,843
State and municipal		—		1,327		—		1,327
Corporate bonds		—		28,023		—		28,023
SBA pooled securities		—		179		—		179
	$	—	$	161,517	$	—	$	161,517

Loans held for sale	$	—	$	3,043	$	—	$	3,043

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2015	Level 1		Level 2		Level 3		Fair Value
Securities available for sale
U.S. Government agency obligations	$	—	$	91,034	$	—	$	91,034
Mortgage-backed securities-residential		—		28,340		—		28,340
Asset backed securities		—		17,526		—		17,526
State and municipal		—		1,526		—		1,526
Corporate bonds		—		24,559		—		24,559
SBA pooled securities		—		184		—		184
	$	—	$	163,169	$	—	$	163,169

Loans held for sale	$	—	$	1,341	$	—	$	1,341

There were no transfers between levels during 2016 or 2015.

Assets measured at fair value on a non-recurring basis are summarized in the table below. There were no liabilities measured at fair value on a non-recurring basis at March 31, 2016 and December 31, 2015.

(Dollars in thousands)	Fair Value Measurements Using						Total
March 31, 2016	Level 1		Level 2		Level 3		Fair Value
Impaired loans
Commercial real estate	$	—	$	—	$	432	$	432
1-4 family residential properties		—		—		12		12
Commercial		—		—		4,289		4,289
Factored receivables		—		—		2,861		2,861
PCI		—		—		982		982
Other real estate owned⁽¹⁾
1-4 family residential properties		—		—		124		124
	$	—	$	—	$	8,700	$	8,700

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2015	Level 1		Level 2		Level 3		Fair Value
Impaired loans
Commercial real estate	$	—	$	—	$	431	$	431
1-4 family residential properties		—		—		13		13
Commercial		—		—		695		695
Factored receivables		—		—		1,156		1,156
PCI		—		—		170		170
Other real estate owned⁽¹⁾
1-4 family residential properties		—		—		128		128
Construction, land development, land		—		—		1,377		1,377
	$	—	$	—	$	3,970	$	3,970

⁽¹⁾ Represents the fair value of OREO that was adjusted during the period and subsequent to its initial classification as OREO

Impaired Loans with Specific Allocation of ALLL: A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due pursuant to the contractual terms of the loan agreement. Impairment is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. Fair value of the impaired loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value of the underlying collateral.

OREO: OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs is charged to the ALLL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value.

The estimated fair values of the Company’s financial instruments not previously presented at March 31, 2016 and December 31, 2015 were as follows:

(Dollars in thousands)	Carrying		Fair Value Measurements Using						Total
March 31, 2016	Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	123,715	$	123,715	$	—	$	—	$	123,715
Securities - held to maturity		25,796		—		26,133		—		26,133
Loans not previously presented, net		1,225,171		—		—		1,231,620		1,231,620
FHLB stock		4,234	N/A		N/A		N/A		N/A
Accrued interest receivable		5,254		—		5,254		—		5,254

Financial liabilities:
Deposits		1,260,393		—		1,262,583		—		1,262,583
Customer repurchase agreements		9,641		—		9,641		—		9,641
Federal Home Loan Bank advances		110,000				110,000				110,000
Junior subordinated debentures		24,754		—		24,503		—		24,503
Accrued interest payable		1,272		—		1,272		—		1,272

(Dollars in thousands)	Carrying		Fair Value Measurements Using						Total
December 31, 2015	Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	105,277	$	105,277	$	—	$	—	$	105,277
Loans not previously presented, net		1,276,853		—		—		1,281,408		1,281,408
FHLB stock		3,818	N/A		N/A		N/A		N/A
Accrued interest receivable		4,832		—		4,832		—		4,832

Financial liabilities:
Deposits		1,248,950		—		1,249,751		—		1,249,751
Customer repurchase agreements		9,317		—		9,317		—		9,317
Federal Home Loan Bank advances		130,000		—		130,000		—		130,000
Junior subordinated debentures		24,687		—		23,153		—		23,153
Accrued interest payable		1,231		—		1,231		—		1,231