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.

Assets and liabilities measured at fair value on a recurring basis are summarized in the table below.

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2018	Level 1		Level 2		Level 3		Fair Value
Assets measured at fair value on a recurring basis
Securities available for sale
U.S. Government agency obligations	$	—	$	92,648	$	—	$	92,648
U.S. Treasury notes		—		1,932		—		1,932
Mortgage-backed securities, residential		—		39,736		—		39,736
Asset backed securities		—		10,145		—		10,145
State and municipal		—		118,451		—		118,451
Corporate bonds		—		68,787		—		68,787
SBA pooled securities		—		4,724		—		4,724
	$	—	$	336,423	$	—	$	336,423

Equity securities
Mutual fund	$	5,044	$	—	$	—	$	5,044

Loans held for sale	$	—	$	2,106	$	—	$	2,106

Liabilities measured at fair value on a recurring basis
ICC Contingent consideration	$	—	$	—	$	20,745	$	20,745

(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 liabilities measured at fair value on a recurring basis at December 31, 2017.

The Company used the following methods and assumptions to estimate fair value of financial instruments that are measured at fair value on a recurring basis:

Securities available for sale – The fair values of debt securities available for sale are determined by third party matrix pricing, which is a mathematical technique widely used 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 (Level 2 inputs).

Equity securities – The fair values of equity securities are determined based on quoted market prices in active markets and are classified in Level 1 of the valuation hierarchy.

Loans held for sale – Loans held for sale represent mortgage loan originations intended to be sold in the secondary market. The fair value of loans held for sale is determined using commitments on hand from investors or prevailing market prices and are classified in Level 2 of the valuation hierarchy.

ICC contingent consideration – The fair value of the ICC contingent consideration is based on a proprietary index designed to approximate the rise and fall of transportation invoice prices subsequent to acquisition and is correlated to monthly movements in average invoice prices historically experienced by ICC. The fair value is classified in Level 3 of the valuation hierarchy. ICC contingent consideration was initially recorded with an acquisition date fair value of $20,000,000. Subsequent to acquisition, the contingent consideration increased in fair value by $745,000 to a fair value of $20,745,000 at December 31, 2018. There were no disposals of contingent consideration during the period. At the end of a 30 month earnout period, a final average index price will be calculated and the contingent consideration will be settled in cash based on the final average index price.

There were no transfers between levels for the years ended December 31, 2018 and 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 December 31, 2018 and 2017.

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2018	Level 1		Level 2		Level 3		Fair Value
Impaired loans
Commercial real estate	$	—	$	—	$	5,123	$	5,123
Construction, land development, land		—		—		70		70
1-4 family residential properties		—		—		100		100
Farmland		—		—		842		842
Commercial		—		—		3,277		3,277
Factored receivables		—		—		4,791		4,791
Consumer		—		—		41		41
PCI		—		—		67		67
Other real estate owned⁽¹⁾:
Commercial		—		—		1,095		1,095
	$	—	$	—	$	15,406	$	15,406

(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 subsequent to its initial classification as OREO.

As of December 31, 2018 and 2017, the only Level 3 assets with material unobservable inputs are associated with impaired loans and OREO.

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 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 were as follows:

	December 31, 2018
	Carrying		Fair Value Measurements Using						Total
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	234,939	$	234,939	$	—	$	—	$	234,939
Securities - held to maturity		8,487		—		—		7,326		7,326
Loans not previously presented, gross		3,589,676		—		—		3,505,724		3,505,724
FHLB stock		15,943	N/A		N/A		N/A		N/A
Accrued interest receivable		19,094		19,094		—		—		19,094

Financial liabilities:
Deposits		3,450,349		—		3,440,570		—		3,440,570
Customer repurchase agreements		4,485		—		4,485		—		4,485
Federal Home Loan Bank advances		330,000		—		330,000		—		330,000
Subordinated notes		48,929		—		50,500		—		50,500
Junior subordinated debentures		39,083		—		40,808		—		40,808
Accrued interest payable		6,722		6,722		—		—		6,722



	December 31, 2017
	Carrying		Fair Value Measurements Using						Total
(Dollars in thousands)	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

For those financial instruments not previously described, the following methods and assumptions were used by the Company in estimating the fair values of financial instruments as disclosed herein:

For financial instruments with a shorter term or with no stated maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value and are considered a Level 1 classification.

The fair values of the Company’s investments in the subordinated notes of Trinitas IV, Trinitas V, and Trinitas VI classified as securities held to maturity are determined based on the securities’ discounted projected future cash flows (net present value), resulting in a Level 3 classification.

The fair values of the Company’s other securities held to maturity at December 31, 2016 were determined by third party matrix pricing, which is a mathematical technique widely used 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, resulting in a Level 2 classification. There were no such securities held at December 31, 2017.

Loans include loans held for investment and loans included in assets held for sale. Loans exclude impaired loans previously described above. For variable rate loans that reprice frequently and have no significant changes in credit risk, excluding previously presented impaired loans measured at fair value on a non-recurring basis, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses. In accordance with ASU 2016-01, which was adopted effective January 1, 2018, the discount rates used to determine the fair value of loans at December 31, 2018 use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. The discount rates used to determine the fair value of loans at December 31, 2017 were based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loans are considered a Level 3 classification.

FHLB stock is restricted to member banks and there are restrictions placed on its transferability. As a result, the fair value of FHLB stock was not practicable to determine.

The fair values disclosed for demand deposits and non-maturity transaction accounts are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts) and are considered a Level 2 classification. Fair values for fixed rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

The carrying amount of customer repurchase agreements approximates fair value due to their short term nature. The customer repurchase agreement fair value is considered a Level 2 classification.

The Company’s FHLB advances have variable rates or a maturity of less than three months and therefore fair value materially approximates carrying value and is considered a Level 2 classification.

The subordinated notes were valued based on quoted market prices, but due to limited trading activity for the subordinated notes in these markets, the subordinated notes are considered a Level 2 classification.

The junior subordinated debentures were valued by discounting future cash flows using current interest rates for similar financial instruments, resulting in a Level 2 classification.

The carrying amounts of accrued interest receivable and accrued interest payable approximate their fair values given the short term nature of the receivables and are considered a Level 1 classification.