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 Note 15 of the Company’s 2016 Form 10-K.

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 June 30, 2017 and December 31, 2016.

(Dollars in thousands)	Fair Value Measurements Using						Total
June 30, 2017	Level 1		Level 2		Level 3		Fair Value
Securities available for sale
U.S. Government agency obligations	$	—	$	133,805	$	—	$	133,805
U.S. Treasury notes		—		4,873		—		4,873
Mortgage-backed securities, residential		—		22,507		—		22,507
Asset backed securities		—		12,799		—		12,799
State and municipal		—		25,151		—		25,151
Corporate bonds		—		25,904		—		25,904
SBA pooled securities		—		144		—		144
Mutual fund		2,023		—		—		2,023
	$	2,023	$	225,183	$	—	$	227,206

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2016	Level 1		Level 2		Level 3		Fair Value
Securities available for sale
U.S. Government agency obligations	$	—	$	180,942	$	—	$	180,942
Mortgage-backed securities, residential		—		24,990		—		24,990
Asset backed securities		—		12,902		—		12,902
State and municipal		—		26,637		—		26,637
Corporate bonds		—		27,390		—		27,390
SBA pooled securities		—		157		—		157
Mutual fund		2,011		—		—		2,011
	$	2,011	$	273,018	$	—	$	275,029

There were no transfers between levels during 2017 or 2016.

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 June 30, 2017 and December 31, 2016.

(Dollars in thousands)	Fair Value Measurements Using						Total
June 30, 2017	Level 1		Level 2		Level 3		Fair Value
Impaired loans
Commercial real estate	$	—	$	—	$	43	$	43
Commercial		—		—		11,603		11,603
Factored receivables		—		—		1,745		1,745
Other real estate owned⁽¹⁾
Commercial		—		—		92		92
Construction, land development, land		—		—		2,000		2,000
1-4 family residential properties		—		—		83		83
	$	—	$	—	$	15,566	$	15,566

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2016	Level 1		Level 2		Level 3		Fair Value
Impaired loans
Commercial real estate	$	—	$	—	$	417	$	417
Construction, land development, land		—		—		252		252
1-4 family residential properties		—		—		7		7
Commercial		—		—		12,921		12,921
Factored receivables		—		—		1,630		1,630
PCI		—		—		170		170
Other real estate owned⁽¹⁾
Commercial		—		—		698		698
1-4 family residential properties		—		—		485		485
Construction, land development, land		—		—		467		467
	$	—	$	—	$	17,047	$	17,047

⁽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. For real estate loans, 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. For non-real estate loans, fair value of the impaired loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.

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 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 measured at fair value on a recurring or non-recurring basis at June 30, 2017 and December 31, 2016 were as follows:

(Dollars in thousands)	Carrying		Fair Value Measurements Using						Total
June 30, 2017	Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	117,502	$	117,502	$	—	$	—	$	117,502
Securities - held to maturity		26,036		—		17,902		8,464		26,366
Loans not previously presented, net		2,261,912		—		—		2,270,737		2,270,737
FHLB stock		14,566	N/A		N/A		N/A		N/A
Accrued interest receivable		11,699		—		11,699		—		11,699

Financial liabilities:
Deposits		2,072,181		—		2,071,279		—		2,071,279
Customer repurchase agreements		14,959		—		14,959		—		14,959
Federal Home Loan Bank advances		340,000		—		339,957		—		339,957
Subordinated notes		48,780		—		50,768		—		50,768
Junior subordinated debentures		32,943		—		33,100		—		33,100
Accrued interest payable		2,933		—		2,933		—		2,933

(Dollars in thousands)	Carrying		Fair Value Measurements Using						Total
December 31, 2016	Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	114,514	$	114,514	$	—	$	—	$	114,514
Securities - held to maturity		29,352		—		27,498		3,323		30,821
Loans not previously presented, net		1,996,822		—		—		2,002,487		2,002,487
FHLB stock		8,430	N/A		N/A		N/A		N/A
Accrued interest receivable		12,663		—		12,663		—		12,663

Financial liabilities:
Deposits		2,015,785		—		2,014,922		—		2,014,922
Customer repurchase agreements		10,490		—		10,490		—		10,490
Federal Home Loan Bank advances		230,000		—		230,000		—		230,000
Subordinated notes		48,734		—		50,920		—		50,920
Junior subordinated debentures		32,740		—		32,905		—		32,905
Accrued interest payable		2,682		—		2,682		—		2,682