FAIR VALUE MEASUREMENTS AND DISCLOSURES

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis. From time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, loans held-for-sale, other real estate and assets held-for-sale. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

Fair Value Hierarchy

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 – Valuation is based upon 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 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities which are either recorded or disclosed at fair value.

Cash and cash equivalents—The carrying value of cash and due from banks, federal funds sold and interest-bearing deposits in other banks, and time deposits in other banks approximate fair value.

Debt Securities—Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and Treasury securities that are traded by dealers or brokers in active over-the-counter market and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds, corporate debt securities and asset-backed securities and are valued based on observable inputs that include: quoted market prices for similar assets, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. Securities classified as Level 3 are valued based on estimates obtained from broker-dealers and are not directly observable.

Loans held-for-sale—Loans held-for-sale are carried at the lower of carrying value or fair value. Fair value is based upon quotes or bids on these loans directly from the purchaser.

Loans—For disclosure purposes, the fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made. For variable rate loans, the carrying amount is a reasonable estimate of fair value. The Company does not record loans at fair value on a recurring basis.

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 Policies—Fair value for life insurance cash surrender value is based on cash surrender values indicated by the insurance companies.

Other Real Estate—Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate, and annually thereafter to insure other real estate assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the other real estate as 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 adjusts the appraisal value by taking an additional discount for market conditions and there is no observable market prices, the Company records the other real estate asset as nonrecurring Level 3.

Derivative Instruments—The fair value of derivatives are determined by an independent valuation firm and are estimated using prices of financial instruments with similar characteristics. As a result, they are classified within Level 2 of the fair value hierarchy.

Deposits—The fair value of demand deposits, savings accounts, NOW accounts, and money market deposits is the carrying amount at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. The estimated fair value does not include customer related intangibles.

Securities Sold Under Agreements to Repurchase—The fair value approximates the carrying value of repurchase agreements due to their short-term nature.

Federal Home Loan Bank advances—The carrying amount approximates fair value because of the short maturity of these instruments.

Junior Subordinated Debentures—For junior subordinated debentures that bear interest on a floating basis, the carrying amount approximates fair value. For junior subordinated debentures that bear interest on a fixed rate basis, the fair value is estimated using a discounted cash flow analysis that applies interest rates currently being offered on similar types of borrowings.

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 for disclosure.

The following table presents the fair value measurement of 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 at the dates indicated (in thousands):



December 31, 2018	Fair Value		Level 1		Level 2		Level 3
U.S. Agencies	$	3,072	$	—	$	3,072	$	—
State, county and municipal securities	44,088		$	—	44,088		—
Mortgage-backed securities	365,877		—		365,877		—
Corporate debt securities	24,717		—		24,717		—
Derivative assets	1,067		—		1,067		—
Total recurring assets at fair value	$	438,821	$	—	$	438,821	$	—

December 31, 2017	Fair Value		Level 1		Level 2		Level 3
State, county and municipal securities	$	22,809	$	—	$	22,809	$	—
Mortgage-backed securities	259,519		$	—	259,519		—
Corporate debt securities	24,802		—		24,802		—
Derivative assets	1,078		$	—	1,078		—
Total recurring assets at fair value	$	308,208	$	—	$	308,208	$	—

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at the dates indicated (in thousands):



	Fair Value		Level 1		Level 2		Level 3
December 31, 2018
Impaired loans	$	3,086	$	—	$	—	$	3,086
Loans held-for-sale	23,876		—		23,876		—
Other real estate	1,067		—		—		1,067
Assets held-for-sale	1,024		—		1,024		—
	$	29,053	$	—	$	24,900	$	4,153

December 31, 2017
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		—
	$	31,537	$	—	$	19,309	$	12,228

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



Description	Fair Value at December 31, 2018		Technique	Unobservable Inputs
Impaired loans	$	3,086	Third party appraisals	Collateral discounts and estimated costs to sell
Other real estate	1,067		Third party appraisals	Collateral discounts and estimated costs to sell



Description	Fair Value at 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

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. 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 estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.

The estimated fair values of our financial instruments are as follows at December 31, 2018 and 2017 (in thousands):



			Fair Value Measurements:
December 31, 2018	Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	205,371		$	205,371	$	—	$	—
Securities available-for-sale	437,754		—		437,754		—
Securities held-to-maturity	37,759		—		36,974		—
Loans, net	882,355		—		—		885,054
Derivative assets	1,067		—		1,067		—
Cash surrender value of life insurance policies	15,135		—		15,135		—

Financial liabilities:
Non-interest-bearing deposits	$	383,167	—		383,167		—
Interest-bearing deposits	1,068,904		—		888,806		177,794
Securities sold under agreements to repurchase	11,220		11,220		—		—
Derivative liability	—		—		—		—
Federal Home Loan Bank advances	27,500				27,500		—
Junior subordinated debentures	22,167		—		22,167		—



			Fair Value Measurements
December 31, 2017	Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	152,964	$	152,964	$	—	$	—
Securities available-for-sale	309,191		2,061		307,130		—
Securities held-to-maturity	81,052		—		80,920		—
Loans, net	1,156,538		—		—		1,160,614
Derivative assets	1,078		$	—	1,078		—
Cash surrender value of life insurance policies	14,896		—		14,896		—

Financial liabilities:
Non-interest-bearing deposits	416,547		—		416,547		—
Interest-bearing deposits	1,063,142		—		881,139		179,110
Derivative liabilities	—		—		—		—
Securities sold under agreements to repurchase	67,133		67,133		—		—
Federal Home Loan Bank advances	50,021		—		50,021		—
Junior subordinated debentures	22,167		—		22,167		—