NOTE 2: FAIR VALUE

Fair Value Measurements

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. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. 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 the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Assets Measured at Fair Value on a Recurring Basis

Securities available for sale and effective with the adoption of ASU 2016-01 on January 1, 2018, investments in equity securities are measured at fair value on a recurring basis depending upon whether the inputs are Level 1, 2 or 3 as described above.

The following tables show the recorded amounts of assets and liabilities measured at fair value on a recurring basis as of:

			Fair Value Measurement Level
	Total		Level 1		Level 2		Level 3
(dollars in thousands)
March 31, 2018:
Investment securities available for sale:
US Treasury securities	$	493	$	493	$	—	$	—
Agency mortgage-backed securities		438,868		—		438,868		—
Corporate bonds		39,100		—		39,100		—
Beneficial interest – FHLMC securitization		34,606		—		—		34,606
Investment in equity securities		400		400		—		—
Total assets at fair value on a recurring basis	$	513,467	$	893	$	477,968	$	34,606

December 31, 2017:
Investment securities available for sale:
US Treasury securities	$	493	$	493	$	—	$	—
Agency mortgage-backed securities		464,019		—		464,019		—
Corporate bonds		19,000		—		19,000		—
Beneficial interest – FHLMC securitization		35,852		—		—		35,852
Total assets at fair value on a recurring basis	$	519,364	$	493	$	483,019	$	35,852

The decrease in level 3 assets from December 31, 2017 was due to Beneficial interest – FHLMC securitization maturities.

Assets Measured at Fair Value on a Nonrecurring Basis

Additionally, from time to time, we may be required to measure at fair value other assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Impaired Loans. ASC 820-10 applies to loans measured for impairment in accordance with ASC 310-10, “Accounting by Creditors for Impairment of a Loan”, at the fair value of the loan’s collateral (if the loan is collateral dependent) less estimated selling costs. When the fair value of the collateral is based on an observable market price or a current appraised value, we measure the impaired loan at nonrecurring Level 2. When an appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price or a discounted cash flow has been used to determine the fair value, we measure the impaired loan at nonrecurring Level 3. The total collateral dependent impaired Level 3 loans were $13.3 million and $13.4 million at March 31, 2018 and December 31, 2017, respectively. There were no specific reserves related to these loans at March 31, 2018 and December 31, 2017.

Real Estate Owned. The fair value of real estate owned is based on external appraised values that include adjustments for estimated selling costs and assumptions of market conditions that are not directly observable, resulting in a Level 3 classification. As of March 31, 2018 and December 31, 2017, the fair value of real estate owned was $2.2 million and $2.9 million, respectively.

Fair Value of Financial Instruments

Fair value estimates are made at a discrete point in time based on relevant market information and other information about the financial instruments. Considerable judgment is required to interpret market data to develop estimates of fair value. These estimates are subjective in nature and invariably involve some inherent uncertainties. Additionally, unexpected changes in events or circumstances can occur that could require us to make changes to our assumptions and which, in turn, could significantly affect and require us to make changes to our previous estimates of fair value.

The methods of determining the fair value of assets and liabilities presented in this note as of March 31, 2018 are consistent with Note 3 of the Company’s 2017 Form 10-K except for the valuation of investment in equity securities. We refined the calculation used to determine the disclosed fair value of our investment in equity securities as part of adopting ASU 2016-01. The refined calculation did not have a significant impact on our fair value disclosures.

The carrying amounts and estimated fair values of financial instruments are as follows as of:

	Carrying		Fair Value Measurement Level
(dollars in thousands)	Value		1		2		3		Total
March 31, 2018:
Assets:
Cash and cash equivalents	$	177,356	$	177,356	$	—	$	—	$	177,356
Securities AFS		513,067		493		477,968		34,606		513,067
Loans held for sale		148,266		—		149,193		—		149,193
Loans, net		3,894,970		—		—		3,865,188		3,865,188
Investment in FHLB Stock		22,626		—		22,626		—		22,626
Investment in equity securities		400		400		—		—		—

Liabilities:
Deposits		3,636,192		2,598,821		1,038,615		—		3,637,436
Borrowings		769,000		—		739,000		30,000		769,000

December 31, 2017:
Assets:
Cash and cash equivalents	$	120,394	$	120,394	$	—	$	—	$	120,934
Securities AFS		519,364		493		483,019		35,852		519,364
Loans held for sale		154,380		—		155,345		—		154,380
Loans, net		3,645,327		—		—		3,617,060		3,617,060
Investment in FHLB Stock		19,060		—		19,060		—		19,060

Liabilities:
Deposits		3,443,527		2,542,730		901,877		—		3,444,607
Borrowings		678,000		—		628,000		50,000		678,000