Note

. Fair Value

Financial Instruments Measured at Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy ranks the inputs used in measuring fair value as follows:

●

Level

– Observable, unadjusted quoted prices in active markets

●

Level

– Inputs other than quoted prices included in Level

that are directly or indirectly observable for the asset or liability

●

Level

– Unobservable inputs with little or

market activity that require the Company to use reasonable inputs and assumptions

The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company

may

be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations

may

not

be precise. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period. The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.

Assets and Liabilities Reported at Fair Value on a Recurring Basis

Available-for-Sale Debt Securities

. Debt Securities available for sale are reported at fair value on a recurring basis. The fair value of Level

securities is based on quoted market prices in active markets, if available. If quoted market prices are

not

available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level

securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that

may

include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level

securities include U.S. Agency and Treasury securities, municipal securities, single issue trust preferred securities, and mortgage-backed securities. Securities are based on Level

inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

Fair value models

may

be required when trading activity has declined significantly or does

not

exist, prices are

not

current, or pricing variations are significant. For Level

securities, the Company obtains the cash flow of specific securities from

third

parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level

securities are determined by applying proper market observable discount rates to the cash flow derived from

third

-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.

Equity Securities.

Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level

inputs to value equity securities that are traded in active markets. Equity securities that are

not

actively traded are classified in Level

Loans Held for Investment

. Loans held for investment are reported at fair value using the exit price notion, which is derived from

third

-party models. Loans related to fair value hedges are recorded at fair value on a recurring basis.

Deferred Compensation Assets and Liabilities

. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level

equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

Derivative Assets and Liabilities

. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level

inputs, based on observable data to value derivatives.

The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

	March 31, 2018
	Total		Fair Value Measurements Using
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3
Available-for-sale debt securities
U.S. Agency securities	$	11,224	$	-	$	11,224	$	-
U.S. Treasury securities		19,942		-		19,942		-
Municipal securities		100,339		-		100,339		-
Single issue trust preferred securities		8,991		-		8,991		-
Mortgage-backed Agency securities		23,641		-		23,641		-
Total available-for-sale debt securities		164,137		-		164,137		-
Equity securities		55		55		-		-
Fair value loans		5,825		-		-		5,825
Deferred compensation assets		4,070		4,070		-		-
Derivative assets		45		-		45		-
Deferred compensation liabilities		4,070		4,070		-		-

	December 31, 2017
	Total		Fair Value Measurements Using
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3
Available-for-sale debt securities
U.S. Agency securities	$	11,296	$	-	$	11,296	$	-
U.S. Treasury securities		19,971		-		19,971		-
Municipal securities		103,648		-		103,648		-
Single issue trust preferred securities		8,884		-		8,884		-
Mortgage-backed Agency securities		21,726		-		21,726		-
Total available-for-sale debt securities		165,525		-		165,525		-
Equity securities		55		55		-		-
Fair value loans		5,739		-		5,739		-
Deferred compensation assets		4,002		4,002		-		-
Deferred compensation liabilities		4,002		4,002		-		-
Derivative liabilities		90		-		90		-

As of

March 31, 2018,

the Company measured the fair value of loans held for investment using an exit price notion in accordance with the adoption of ASU

2016

01.

Prior to

March 31, 2018,

loans held for investment were reported at fair value using discounted future cash flows that apply current interest rates for loans with similar terms and borrower credit quality. As a result of using the exit price, certain loans were transferred from Level

into Level

of the fair value hierarchy during the

three

months ended

March 31, 2018.

transfers into or out of Level

of the fair value hierarchy occurred during the

three

months ended

March 31, 2017.

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired Loans

. Impaired loans are recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan’s collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level

inputs.

The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining

third

-party collateral valuations to help management identify potential credit impairment and determine the amount of impairment to record. The Company’s Special Assets staff manages and monitors all impaired loans. Internal collateral valuations are generally performed within

two

four

weeks of identifying the initial potential impairment. The internal valuation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. The Company typically receives a

third

-party valuation within

thirty

forty-five

days of completing the internal valuation. When a

third

-party valuation is received, it is reviewed for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but

not

limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.

Specific reserves are generally recorded for impaired loans while

third

-party valuations are in process and for impaired loans that continue to make some form of payment. While waiting to receive the

third

-party appraisal, the Company regularly reviews the relationship to identify any potential adverse developments and begins the tasks necessary to gain control of the collateral and prepare it for liquidation, including, but

not

limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower. Generally, the only difference between the current appraised value, less liquidation costs, and the carrying amount of the loan, less the specific reserve, is any downward adjustment to the appraised value that the Company deems appropriate, such as the costs to sell the property. Impaired loans that do

not

meet certain criteria and do

not

have a specific reserve have typically been written down through partial charge-offs to net realizable value. Based on prior experience, the Company rarely returns loans to performing status after they have been partially charged off. Credits identified as impaired move quickly through the process towards ultimate resolution, except in cases involving bankruptcy and various state judicial processes that

may

extend the time for ultimate resolution.

OREO

. OREO is recorded at fair value on a nonrecurring basis using Level

inputs. The Company calculates the fair value of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary qualitative adjustments that are deemed necessary.

The following tables present assets measured at fair value on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

	March 31, 2018
	Total		Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
(Amounts in thousands)
Impaired loans, non-covered	$	4,954	$	-	$	-	$	4,954
OREO, non-covered		3,032		-		-		3,032
OREO, covered		59		-		-		59

	December 31, 2017
	Total		Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
(Amounts in thousands)
Impaired loans, non-covered	$	5,015	$	-	$	-	$	5,015
OREO, non-covered		2,359		-		-		2,359
OREO, covered		105		-		-		105

Quantitative Information about Level

Fair Value Measurements

The following table provides quantitative information for assets measured at fair value on a nonrecurring basis using Level

valuation inputs as of the dates indicated:

	Valuation	Unobservable	Discount Range (Weighted Average)
	Technique	Input	March 31, 2018				December 31, 2017

Impaired loans, non-covered	Discounted appraisals (1)	Appraisal adjustments (2)	7%	to	100%	(37%)	6%	to	79%	(34%)
OREO, non-covered	Discounted appraisals (1)	Appraisal adjustments (2)	10%	to	61%	(23%)	8%	to	47%	(32%)
OREO, covered	Discounted appraisals (1)	Appraisal adjustments (2)	26%	to	49%	(44%)	0%	to	65%	(52%)

( 1 )	Fair value is generally based on appraisals of the underlying collateral.
( 2 )	Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

Fair Value of Financial Instruments

The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. A description of valuation methodologies used for instruments

not

previously discussed is as follows:

Cash and Cash Equivalents

. Cash and cash equivalents are reported at their carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

Held-to-Maturity Debt Securities

. Securities held to maturity are reported at fair value using quoted market prices or dealer quotes.

FDIC Indemnification Asset

. The FDIC indemnification asset is reported at fair value using discounted future cash flows that apply current discount rates.

Accrued Interest Receivable/Payable

. Accrued interest receivable/payable is reported at its carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

Deposits and Securities Sold Under Agreements to Repurchase

. Deposits and repurchase agreements with fixed maturities and rates are reported at fair value using discounted future cash flows that apply interest rates available in the market for instruments with similar characteristics and maturities.

FHLB and Other Borrowings

. FHLB and other borrowings are reported at fair value using discounted future cash flows that apply interest rates available to the Company for borrowings with similar characteristics and maturities. Trust preferred obligations are reported at fair value using current credit spreads in the market for similar issues.

Off-Balance Sheet Instruments

. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are

not

meaningful; therefore, off-balance sheet instruments are

not

addressed in the fair value disclosures. The Company believes it is

not

feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note

14,

“Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

The following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

	March 31, 2018
	Carrying				Fair Value Measurements Using
(Amounts in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	205,140	$	205,140	$	205,140	$	-	$	-
Debt securities available for sale		164,137		164,137		-		164,137		-
Debt securities held to maturity		25,115		24,987		-		24,987		-
Equity securities		55		55		55		-		-
Loans held for investment, net of allowance		1,773,609		1,758,212		-		-		1,758,212
FDIC indemnification asset		6,884		3,630		-		-		3,630
Interest receivable		5,155		5,155		-		5,155		-
Derivative financial assets		45		45		-		45		-
Deferred compensation assets		4,070		4,070		4,070		-		-

Liabilities
Time deposits		485,648		475,605		-		475,605		-
Securities sold under agreements to repurchase		29,115		29,300		-		29,300		-
Interest payable		1,072		1,072		-		1,072		-
FHLB and other borrowings		50,000		51,845		-		51,845		-
Deferred compensation liabilities		4,070		4,070		4,070		-		-

	December 31, 2017
	Carrying				Fair Value Measurements Using
(Amounts in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	157,951	$	157,951	$	157,951	$	-	$	-
Debt securities available for sale		165,525		165,525		-		165,525		-
Debt securities held to maturity		25,149		25,084		-		25,084		-
Equity securities		55		55		55		-		-
Loans held for investment, net of allowance		1,797,908		1,760,606		-		5,739		1,754,867
FDIC indemnification asset		7,161		3,927		-		-		3,927
Interest receivable		5,778		5,778		-		5,778		-
Deferred compensation assets		4,002		4,002		4,002		-		-

Liabilities
Demand deposits		454,143		454,143		-		454,143		-
Interest-bearing demand deposits		465,407		465,407		-		465,407		-
Savings deposits		512,795		512,795		-		512,795		-
Time deposits		497,546		490,628		-		490,628		-
Securities sold under agreements to repurchase		30,086		30,449		-		30,449		-
Interest payable		1,104		1,104		-		1,104		-
FHLB and other borrowings		50,000		52,702		-		52,702		-
Derivative financial liabilities		90		90		-		90		-
Deferred compensation liabilities		4,002		4,002		4,002		-		-