The fair value of an asset or liability is the exchange price that would be received to sell that asset or paid to transfer that liability (exit price) in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value are discussed below.

In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured 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. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.

Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models, and similar techniques.

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 2019 and 2018.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The following is a description of both the general and specific valuation methodologies used for certain instruments measured at fair value, as well as the general classification of these instruments pursuant to the valuation hierarchy.

Investment securities – Investment securities are generally valued based upon quotes obtained from an independent third-party pricing service, which uses evaluated pricing applications and model processes. Observable market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data are considered as part of the evaluation. The inputs are related directly to the security being evaluated, or indirectly to a similarly situated security. Market assumptions and market data are utilized in the valuation models. The Company reviews the market prices provided by the third-party pricing service for reasonableness based on the Company’s understanding of the market place and credit issues related to the securities. The Company has not made any adjustments to the market quotes provided by them and, accordingly, the Company categorized its investment portfolio within Level 2 of the fair value hierarchy.

Derivative assets and liabilities – The Company originates a variable rate loan and enters into a variable-to fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back swap agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a market standard discounted cash flow approach. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps is classified as Level 2.



	At December 31, 2019
	Fair Value Measurement Using
	Level 1		Level 2		Level 3		Securities at Fair Value
	(dollars in thousands)
Financial assets
Investment securities available-for-sale:
U.S. Treasury	$	—	$	63,555	$	—	$	63,555
Agency	—		246,358		—		246,358
Corporate	—		151,353		—		151,353
Municipal bonds	—		397,298		—		397,298
Collateralized mortgage obligation: residential	—		9,984		—		9,984
Mortgage-backed securities: residential	—		499,836		—		499,836
Total securities available-for-sale	$	—	$	1,368,384	$	—	$	1,368,384

Derivative assets	$	—	$	2,103	$	—	$	2,103

Financial liabilities
Derivative liabilities	$	—	$	2,103	$	—	$	2,103



	At December 31, 2018
	Fair Value Measurement Using
	Level 1		Level 2		Level 3		Securities at Fair Value
	(dollars in thousands)
Financial assets
Investment securities available-for-sale:
U.S. Treasury	$	—	$	60,912	$	—	$	60,912
Agency	—		130,070		$	—	130,070
Corporate	—		103,543		$	—	103,543
Municipal bonds	—		238,630		—		238,630
Collateralized mortgage obligation: residential	—		24,338		—		24,338
Mortgage-backed securities: residential	—		545,729		—		545,729
Total securities available-for-sale	$	—	$	1,103,222	$	—	$	1,103,222

Derivative assets	$	—	$	1,681	$	—	$	1,681

Financial liabilities
Derivative liabilities	$	—	$	1,681	$	—	$	1,681

Impaired Loans – A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted expected future cash flows. Collateral generally consists of accounts receivable, inventory, fixed assets, real estate and cash. The Company measures impairment on all non-accrual loans for which it has reduced the principal balance to the value of the underlying collateral less the anticipated selling cost.

Other Real Estate Owned – OREO is initially recorded at the fair value less estimated costs to sell. This amount becomes the property’s new basis. Any fair value adjustments based on the property’s fair value less estimated costs to sell at the date of acquisition are charged to the ALLL.

The fair value of impaired loans and other real estate owned were determined using Level 3 assumptions, and represents impaired loan and other real estate owned balances for which a specific reserve has been established or on which a write down has been taken. Generally, the Company obtains third party appraisals (or property valuations) and/or collateral audits in conjunction with internal analysis based on historical experience on its impaired loans and other real estate owned to determine fair value. In determining the net realizable value of the underlying collateral for impaired loans, the Company will then discount the valuation to cover both market price fluctuations and selling costs the Company expected would be incurred in the event of foreclosure. In addition to the discounts taken, the Company’s calculation of net realizable value considered any other senior liens in place on the underlying collateral.

At December 31, 2019, substantially all of the Company’s impaired loans were evaluated based on the fair value of their underlying collateral based upon the most recent appraisal available to management. The Company completed partial charge-offs on certain impaired loans individually evaluated for impairment based on recent real estate appraisals and released the related specific reserves during the year ended December 31, 2019. The Company has recorded no specific reserve on loans deemed impaired at December 31, 2019.



	At December 31, 2019
	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
	(dollars in thousands)
Assets:
Cash and cash equivalents	$	326,850	$	326,850	$	—	$	—	$	326,850
Interest-bearing time deposits with financial institutions	2,708		2,708		—		—		2,708
Investments held-to-maturity	37,838		—		38,760		—		38,760
Investment securities available-for-sale	1,368,384		—		1,368,384		—		1,368,384
Loans held for sale	1,672		—		1,821		—		1,821
Loans held for investment, net	8,722,311		—		—		8,691,019		8,691,019
Derivative asset	2,103		—		2,103		—		2,103
Accrued interest receivable	39,442		39,442		—		—		39,442
Liabilities:
Deposit accounts	8,898,509		7,850,667		1,048,583		—		8,899,250
FHLB advances	517,026		—		517,291		—		517,291
Other borrowings	—		—		—		—		—
Subordinated debentures	215,145		—		237,001		—		237,001
Derivative liability	2,103		—		2,103		—		2,103
Accrued interest payable	2,686		2,686		—		—		2,686



	At December 31, 2018
	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
	(dollars in thousands)
Assets:
Cash and cash equivalents	$	203,406	$	203,406	$	—	$	—	$	203,406
Interest-bearing time deposits with financial institutions	6,143		6,143		—		—		6,143
Investments held-to-maturity	45,210		—		44,672		—		44,672
Investment securities available-for-sale	1,103,222		—		1,103,222		—		1,103,222
Loans held for sale	5,719		—		6,072		—		6,072
Loans held for investment, net	8,836,818		—		—		8,697,594		8,697,594
Derivative asset	1,929		—		1,681		—		1,681
Accrued interest receivable	37,837		37,837		—		—		37,837
Liabilities:
Deposit accounts	8,658,351		7,247,673		1,403,524		—		8,651,197
FHLB advances	667,606		—		666,864		—		666,864
Other borrowings	75		—		75		—		75
Subordinated debentures	110,313		—		115,613		—		115,613
Derivative liability	1,929		—		1,681		—		1,681
Accrued interest payable	3,255		3,255		—		—		3,255

The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.