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 2017 Form 10-K, except for the valuation of loans held for investment which was impacted by the adoption of ASU 2016-01. In accordance with ASU 2016-01, the fair value of loans held for investment, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are considered a Level 3 classification.

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 September 30, 2018 and December 31, 2017.

(Dollars in thousands)	Fair Value Measurements Using						Total
September 30, 2018	Level 1		Level 2		Level 3		Fair Value
Securities available for sale
U.S. Government agency obligations	$	—	$	94,774	$	—	$	94,774
U.S. Treasury notes		—		1,905		—		1,905
Mortgage-backed securities, residential		—		30,581		—		30,581
Asset backed securities		—		10,805		—		10,805
State and municipal		—		144,062		—		144,062
Corporate bonds		—		68,986		—		68,986
SBA pooled securities		—		4,868		—		4,868
	$	—	$	355,981	$	—	$	355,981

Equity securities
Mutual fund	$	4,981	$	—	$	—	$	4,981

Loans held for sale	$	—	$	683	$	—	$	683

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2017	Level 1		Level 2		Level 3		Fair Value
Securities available for sale
U.S. Government agency obligations	$	—	$	109,890	$	—	$	109,890
U.S. Treasury notes		—		1,934		—		1,934
Mortgage-backed securities, residential		—		33,663		—		33,663
Asset backed securities		—		11,845		—		11,845
State and municipal		—		74,391		—		74,391
Corporate bonds		—		15,320		—		15,320
SBA pooled securities		—		3,560		—		3,560
	$	—	$	250,603	$	—	$	250,603

Equity securities
Mutual fund	$	5,006	$	—	$	—	$	5,006

There were no transfers between levels during 2018 or 2017.

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 September 30, 2018 and December 31, 2017.

(Dollars in thousands)	Fair Value Measurements Using						Total
September 30, 2018	Level 1		Level 2		Level 3		Fair Value
Impaired loans
Commercial real estate	$	—	$	—	$	5,450	$	5,450
Construction, land development, land		—		—		93		93
1-4 family residential properties		—		—		98		98
Farmland		—		—		842		842
Commercial		—		—		2,124		2,124
Factored receivables		—		—		4,925		4,925
Consumer		—		—		63		63
PCI		—		—		67		67
Other real estate owned⁽¹⁾
Commercial		—		—		819		819
	$	—	$	—	$	14,481	$	14,481

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2017	Level 1		Level 2		Level 3		Fair Value
Impaired loans
Commercial real estate	$	—	$	—	$	42	$	42
1-4 family residential properties		—		—		85		85
Commercial		—		—		7,785		7,785
Factored receivables		—		—		3,777		3,777
Consumer		—		—		191		191
Other real estate owned⁽¹⁾
Commercial		—		—		138		138
Construction, land development, land		—		—		202		202
	$	—	$	—	$	12,220	$	12,220

⁽¹⁾ Represents the fair value of OREO that was adjusted during the year to date 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 September 30, 2018 and December 31, 2017 were as follows:

(Dollars in thousands)	Carrying		Fair Value Measurements Using						Total
September 30, 2018	Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	282,409	$	282,409	$	—	$	—	$	282,409
Securities - held to maturity		8,403		—		—		8,094		8,094
Loans not previously presented, gross		3,494,184		—		—		3,432,384		3,432,384
FHLB stock		23,109	N/A		N/A		N/A		N/A
Accrued interest receivable		20,141		20,141		—		—		20,141

Financial liabilities:
Deposits		3,439,049		—		3,428,722		—		3,428,722
Customer repurchase agreements		13,248		—		13,248		—		13,248
Federal Home Loan Bank advances		330,000		—		330,000		—		330,000
Subordinated notes		48,903		—		51,125		—		51,125
Junior subordinated debentures		38,966		—		41,057		—		41,057
Accrued interest payable		6,072		6,072		—		—		6,072

(Dollars in thousands)	Carrying		Fair Value Measurements Using						Total
December 31, 2017	Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	134,129	$	134,129	$	—	$	—	$	134,129
Securities - held to maturity		8,557		—		—		7,527		7,527
Loans not previously presented, net		2,780,228		—		—		2,800,362		2,800,362
Loans included in assets held for sale, net		68,668		—		—		69,268		69,268
FHLB stock		16,006	N/A		N/A		N/A		N/A
Accrued interest receivable		15,517		15,517		—		—		15,517

Financial liabilities:
Deposits		2,621,348		—		2,616,034		—		2,616,034
Customer repurchase agreements		11,488		—		11,488		—		11,488
Federal Home Loan Bank advances		365,000		—		365,000		—		365,000
Subordinated notes		48,828		—		52,310		—		52,310
Junior subordinated debentures		38,623		—		41,563		—		41,563
Accrued interest payable		3,323		3,323		—		—		3,323