FAIR VALUE MEASUREMENT

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following methods and assumptions were used by the Company in estimating the fair value of its assets and liabilities recorded at fair value and for estimating the fair value of its financial instruments.

Cash and Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold—The carrying value of these short-term instruments approximates fair value.

Securities Available-for-Sale—Fair value of securities available for sale is determined by various valuation methodologies. Where quoted market prices are available in active markets, securities are classified within Level 1 of the fair value hierarchy. If quoted market prices are not available , then fair values are estimated by using pricing models, quoted prices of securities within similar characteristics, or discounted cash flows. Level 2 securities include certain U.S. agency bonds, mortgage-backed securities and debt obligations, and municipal securities. The Level 2 fair value pricing is provided by an independent third party and is based upon similar securities in an active market. In certain cases where Level1 or 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Securities Held-to-Maturity—The fair value of securities held-to-maturity is determined in the same manner as securities available-for-sale noted above.

Other Investments—FHLB and FRB stock are examples of other investments and do not have readily determinable fair values, as such these investments are carried at original cost basis. It is not practical to determine the fair values of these investments due to restrictions placed on transferability. These investments are periodically evaluated for impairment based on ultimate recovery of par value or cost basis. The cost basis approximates fair value for these investments.

Loans—The fair value for loans held for investment is estimated using an exit price methodology. An exit price methodology considers expected cash flows that take into account contractual loan terms, as applicable, prepayment expectations, probability of default, loss severity in the event of default, recovery lag and, in the case of variable rate loans, expectations for future interest rate movements. These cash flows are present valued at a risk adjusted discount rate, which considers the cost of funding, liquidity, servicing costs, and other factors. Because observable quoted prices seldom exist for identical or similar assets carried in loans held for investment, Level 3 inputs are primarily used to determine fair value exit pricing. The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral values, where applicable. A loan is determined to be impaired if the Company believes it is probable that all principal and interest amounts due according to the terms of the note will not be collected as scheduled. The fair value of impaired loans is determined in accordance with ASC 310-10, Accounting by Creditors for Impairment of a Loan, and generally results in a specific reserve established through a charge to the provision for loan losses. Losses on impaired loans are charged to the allowance when management believes the uncollectability of a loan is confirmed. Management has determined that the majority of impaired loans are Level 3 assets due to the extensive use of market appraisals.

Cash Surrender Value of Life Insurance—The carrying value of cash value of bank owned life insurance approximates fair value.

Other Real Estate Owned—The fair value of OREO is determined using certified appraisals and internal evaluations that value the property at its highest and best uses by applying traditional valuation methods common to the industry. The Company does not hold any OREO for profit purposes and all other real estate is actively marketed for sale. In most cases, management has determined that additional write-downs are required beyond what is calculable from the appraisal to carry the property at levels that would attract buyers. Because this additional write-down is not based on observable inputs, management has determined that OREO should be classified as Level 3.

Assets Held For Sale—The fair value of assets held for sale is determined in the same manner as OREO noted above.

Derivative Financial Instruments—The Company has entered into derivative financial instruments to manage interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis, performed by an independent third party, reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value of the derivatives is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves derived from observable market interest rate curves).

Deposits—The carrying amount of demand deposits, savings deposits and variable-rate certificates of deposit approximates fair value. The fair value of fixed-rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently being offered for certificates of similar maturities.

Securities Sold Under Agreements to Repurchase—The carrying amount of securities sold under agreements to repurchase approximates fair value and is classified as Level 1. The carrying amount of variable rate other borrowings approximates fair value and is classified as Level 1. The fair value of fixed rate other borrowings is estimated based on discounted contractual cash flows using the current incremental borrowing rates for similar borrowing arrangements and is classified as Level 2.

Other borrowings—The fair value of the Company’s trust preferred securities is based on discounted cash flows using rates for securities with similar terms and remaining maturities and are classified as Level 2.

Off Balance Sheet-Instruments—Because commitments to extend credit and standby letters of credit are generally short-term and made using variable rates, the carrying value and estimated fair value associated with these instruments are immaterial.

The following table presents the fair value measurements of certain assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall (dollars in thousands):



	Recurring Basis Fair Value Measurements
	September 30, 2018
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
State. county, and municipal securities	$	22,759	$	—	$	22,759	$	—
Mortgage-backed securities	304,045		—		304,045		—
Mutual funds	1,994		1,994
Corporate debt securities	25,802		—		25,802		—
Derivative assets	$	1,513	$	—	$	1,513	$	—
Total recurring assets at fair value	$	356,113	$	1,994	$	354,119	$	—



	Recurring Basis Fair Value Measurements
	December 31, 2017
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
State, county, and municipal securities	$	22,809	$	—	$	22,809	$	—
Mortgage-backed securities	259,519		—		259,519		—
Mutual funds	2,061		2,061		—		—
Corporate debt securities	24,802		—		24,802		—
Derivative assets	$	1,078	$	—	$	1,078	$	—
Total recurring assets at fair value	$	310,269	$	2,061	$	308,208	$	—

The following table presents the fair value measurements of certain assets and liabilities measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall (dollars in thousands):



	Nonrecurring Basis Fair Value Measurements
	September 30, 2018
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Impaired loans	$	10,611	$	—	$	—	$	10,611
Other real estate	1,022		—		—		1,022
Assets held for sale	1,372		—		1,372		—
Total nonrecurring assets at fair value	$	13,005	$	—	$	1,372	$	11,633
	Nonrecurring Basis Fair Value Measurements
	December 31, 2017
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Impaired loans	$	10,227	$	—	$	—	$	10,227
Loans held for sale	15,737		—		15,737		—
Other real estate	2,001		—		—		2,001
Assets held for sale	3,572		—		3,572		—
Total nonrecurring assets at fair value	$	31,537	$	—	$	19,309	$	12,228

The inputs used to determine estimated fair value of impaired loans include market conditions, loan terms, underlying collateral characteristics and discount rates. The inputs used to determine fair value of OREO include market conditions, estimated marketing period or holding period, underlying collateral characteristics and discount rates.

For the nine months ended September 30, 2018 and the year ended December 31, 2017, there was not a change in the methods and significant assumptions used to estimate fair value for assets carried at fair value.

The following table shows significant unobservable inputs used in the fair value measurement of Level 3 assets (dollars in thousands):



	Fair Value at
Description	September 30, 2018		Technique	Unobservable Inputs
Impaired loans	$	10,611	Third party appraisals	Collateral discounts and estimated costs to sell
Other real estate	1,022		Third party appraisals	Collateral discounts and estimated costs to sell

	Fair Value at
Description	December 31, 2017		Technique	Unobservable Inputs
Impaired loans	$	10,227	Third party appraisals	Collateral discounts and estimated costs to sell
Other real estate	2,001		Third party appraisals	Collateral discounts and estimated costs to sell

The carrying amount and estimated fair value of the Company’s financial instruments, not shown elsewhere in these financial statements, were as follows. The methods used to estimate the fair value of financial instruments at December 31, 2017 approximated an entry price. In accordance with the adoption of ASU 2016-01, the methods utilized to estimate the fair value of financial instruments at June 30, 2018 represent an approximation of exit price; however, an actual price derived in an active market may differ.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows at September 30, 2018 and December 31, 2017 (dollars in thousands):



	Fair Value Measurements
	September 30, 2018
	Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks, interest-bearing deposits in banks and federal funds sold	$	302,888	$	302,888	$	—	$	—
Available-for-sale securities	352,606				352,606
Securities held-to-maturity	64,893		—		63,581		—
Other investments	16,508		16,508		—		—
Loans, net	938,293		—		—		938,603
Cash surrender value of life insurance	15,071		—		15,071		—
Financial liabilities:
Non-interest-bearing deposits	425,696		—		425,696		—
Interest-bearing deposits	1,083,433		—		981,921		—
Securities sold under agreements to repurchase	13,676		13,676		—		—
FHLB borrowings	27,506		—		27,506		—
Other borrowings	22,167		—		22,167		—



	Fair Value Measurements
	December 31, 2017
	Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks, interest-bearing deposits in banks and federal funds sold	$	152,964	$	152,964	$	—	$	—
Available-for-sale securities	309,191		2,061		307,130
Securities held-to-maturity	81,052		—		80,920		—
Other investments	12,214		12,214		—		—
Loans, net	1,156,538		—		—		1,160,614
Cash surrender value of life insurance	14,896		—		14,896		—
Financial liabilities:
Non-interest-bearing deposits	416,547		—		416,547		—
Interest-bearing deposits	1,063,142		—		881,139		179,910
Securities sold under agreements to repurchase	67,133		67,133		—		—
FHLB borrowings	50,021		—		50,021		—
Other borrowings	22,167		—		22,167		—