FAIR VALUE

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value represents the exchange price that would be received from selling an asset or paid to transfer a liability, otherwise known as an “exit price,” in the principal or most advantageous market available to the entity in an orderly transaction between market participants on the measurement date.

Fair Value Hierarchy

The Company groups 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. These levels are:


•	Level 1—Quoted prices 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 management’s judgment and assumptions that market participants would use in pricing an asset or liability that are supported by little or no market activity.

The carrying amounts and estimated fair values of financial instruments that are reported on the balance sheet are as follows:



	As of September 30, 2017
	Carrying		Estimated Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	192,427	$	192,427	$	—	$	—	$	192,427
Available for sale securities	323,856		—		323,856		—		323,856
Loans held for investment, net of allowance	2,177,818		—		—		2,184,269		2,184,269
FHLB stock	12,790		N/A		N/A		N/A		N/A
Accrued interest receivable	7,993		1		2,081		5,911		7,993

Financial liabilities
Deposits	$	2,286,615	$	—	$	2,284,709	$	—	$	2,284,709
Accrued interest payable	521		—		521		—		521
Borrowed funds	207,569		—		206,850		—		206,850
Subordinated debentures	9,277		—		9,277		—		9,277



	As of December 31, 2016
	Carrying		Estimated Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	142,098	$	142,098	$	—	$	—	$	142,098
Available for sale securities	316,455		—		316,455		—		316,455
Loans held for investment, net of allowance	1,873,724		—		—		1,872,056		1,872,056
FHLB stock	13,175		N/A		N/A		N/A		N/A
Accrued interest receivable	9,007		3		3,616		5,388		9,007

Financial liabilities
Deposits	$	1,870,183	$	—	$	1,868,429	$	—	$	1,868,429
Accrued interest payable	285		—		285		—		285
Borrowed funds	285,569		—		284,989		—		284,989
Subordinated debentures	9,196		—		9,196		—		9,196

The fair value estimates presented above are based on pertinent information available to management as of the dates indicated. The methods used to determine fair value are described in the Company's audited financial statements which are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

The following tables present fair values for assets measured at fair value on a recurring basis:



	As of September 30, 2017
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Available for sale securities:
U.S. Government and agency securities	$	—	$	8,780	$	—	$	8,780
Municipal securities	—		238,372		—		238,372
Agency mortgage-backed pass-through securities	—		30,132		—		30,132
Corporate bonds and other	—		46,572		—		46,572
Total	$	—	$	323,856	$	—	$	323,856



	As of December 31, 2016
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Available for sale securities:
U.S. Government and agency securities	$	—	$	6,149	$	—	$	6,149
Municipal securities	—		237,802		—		237,802
Agency mortgage-backed pass-through securities	—		27,324		—		27,324
Corporate bonds and other	—		45,180		—		45,180
Total	$	—	$	316,455	$	—	$	316,455

There were no liabilities measured at fair value on a recurring basis as of September 30, 2017 or December 31, 2016. There were no transfers between levels during the three and nine months ended September 30, 2017 or 2016.

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances such as evidence of impairment.



	As of September 30, 2017
	Level 1		Level 2		Level 3
	(Dollars in thousands)
Impaired loans:
Commercial and industrial	$	—	$	—	$	4,622
Commercial real estate (including multi-family residential)	—		—		8,663
Consumer and other	—		—		28
Other real estate owned	—		—		453
	$	—	$	—	$	13,766



	As of December 31, 2016
	Level 1		Level 2		Level 3
	(Dollars in thousands)
Impaired loans:
Commercial and industrial	$	—	$	—	$	1,785
Commercial real estate (including multi-family residential)	—		—		468
Other real estate owned	—		—		1,503
	$	—	$	—	$	3,756

Impaired Loans with Specific Allocation of Allowance

During the nine months ended September 30, 2017 and the year ended December 31, 2016, certain impaired loans were reevaluated and reported at fair value through a specific allocation of the allowance for loan losses. At September 30, 2017, the total reported fair value of impaired loans of $13.3 million based on collateral valuations utilizing Level 3 valuation inputs had a carrying value of $17.1 million that was reduced by specific allowance allocations totaling $3.8 million. At December 31, 2016, the total reported fair value of impaired loans of $2.3 million based on collateral valuations utilizing Level 3 valuation inputs had a carrying value of $3.9 million that was reduced by specific allowance allocations totaling $1.7 million.

Other Real Estate Owned

At September 30, 2017, the balance of other real estate owned included $453 thousand of foreclosed commercial real estate properties recorded as a result of obtaining physical possession of the property. At September 30, 2017, there was no formal foreclosure in process on this other real estate owned. The Company had $1.5 million of other real estate owned at December 31, 2016.