The Company follows FASB ASC

820-10,

Fair Value Measurements and Disclosures and ASU

2016-1,

“Financial Instruments-Overall” (Subtopic

825-10)

Recognition and Measurement of Financial Assets and Financial Liabilities

, which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC

820-10

establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:

Level I – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as

G-7

government, agency securities, listed equities and money market securities, as well as listed derivative instruments.

Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments which are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds, and OTC derivatives.

Level III – Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have

two-way

markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, and distressed debt and

non-investment

grade residual interests in securitizations, as well as certain highly structured OTC derivative contracts.

	Securities AFS Fair Value Measurements Using
	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
	(in thousands)
U.S. Treasury	$	1,998	$	—	$	1,998	$	—
U.S. Government Sponsored Enterprises		3,942		—		3,942		—
SBA Backed Securities		72,588		—		72,588		—
U.S. Government Agency and Sponsored Mortgage-Backed Securities		194,205		—		194,205		—
Privately Issued Residential Mortgage-Backed Securities		649		—		649		—
Obligations Issued by States and Political Subdivisions		68,107		—		4,775		63,332
Other Debt Securities		3,600		—		3,600		—
Total	$	345,089	$	—	$	281,757	$	63,332

Other Real Estate Owned	$	2,225	$	—	$	—	$	2,225
Financial Instruments Measured at Fair Value on a Recurring Basis Equity Securities	$	1,649	$	328	$	1,321	$	—
Financial Instruments Measured at Fair Value on a Non-recurring Basis Impaired Loans	$	195	$	—	$	—	$	195

Impaired loan balances represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not observable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific (credits) provisions relate to impaired loans recognized for the three month period ended March 31, 2019 amounted to ($2,000).

The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands). Management continues to monitor the assumptions used to value the assets listed below.

Asset

Fair

Value

Valuation Technique

Unobservable Input

Value or Range

Securities AFS (4)

63,332

Discounted cash flow

Discount rate

2.1%-3.8% (3)

Other Real Estate Owned

2,225

Appraisal of collateral

(1)

Appraisal adjustments

(2)

30% discount

Impaired Loans

195

Appraisal of collateral

(1)

Appraisal adjustments

(2)

0%-30% discount

(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
(3)	Weighted averages.
(4)	Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.

	Auction Rate Securities		Obligations Issued by States & Political Subdivisions			Total
	(in thousands)
Balance at December 31, 2018	$	—	$	88,728		$	88,728
Purchases		—		970			970
Maturities and calls		—		(26,352	)		(26,352	)
Amortization		—		(14	)		(14	)
Changes in fair value		—		—			—
Balance at March 31, 2019	$	—	$	63,332		$	63,332

The amortized cost of Level 3 securities was $

63,332

,000 at March 31, 2019 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair value. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity. There was no change in the fair value of other real estate owned for the first three months of 2019. The fair value of impaired loans decreased by $56,000, for the first three months of 2019, mainly as a result of a charge-off of one loan. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the three month period ended March 31, 2019.

	Auction Rate Securities			Obligations Issued by States & Political Subdivisions			Total
	(in thousands)
Balance at December 31, 2017	$	4,459		$	78,141		$	82,600
Purchases		—			20,416			20,416
Maturities and calls		—			(22,068	)		(22,068	)
Transfer to Level 2		(4,459	)		—			(4,459	)
Amortization		—			(24	)		(24	)
Changes in fair value		—			—			—
Balance at March 31, 2018	$	—		$	76,465		$	76,465

The amortized cost of Level 3 securities was $

76,465

,000 at March 31, 2018 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

	Securities AFS Fair Value Measurements Using
	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
	(in thousands)
U.S. Treasury	$	1,992	$	—	$	1,992	$	—
U.S. Government Sponsored Enterprises		3,915		—		3,915		—
SBA Backed Securities		70,194		—		70,194		—
U.S. Government Agency and Sponsored Mortgage-Backed Securities		162,890		—		162,890		—
Privately Issued Residential Mortgage-Backed Securities		672		—		672		—
Obligations Issued by States and Political Subdivisions		93,503		—		4,775		88,728
Other Debt Securities		3,593				3,593
Total	$	336,759	$	—	$	248,031	$	88,728
Other Real Estate Owned	$	2,225	$	—	$	—	$	2,225
Financial Instruments Measured at Fair Value on a Recurring Basis Equity Securities	$	1,596	$	293	$	1,303	$	—
Financial Instruments Measured at Fair Value on a Non-recurring Basis Impaired Loans	$	251	$	—	$	—	$	251

Impaired loan balances represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions relate to impaired loans recognized for 2018 for the estimated credit loss amounted to $540,000.

There was a transfer of an auction rate security during 2018 from level 3 to level 2. Quoted prices on the auction rate security became available but traded infrequently. There were no other transfers between level 1, 2 and 3 for the year ended December 31, 2018. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2018.

Asset

Fair

Value

Valuation Technique

Unobservable Input

Value or Range

Securities AFS (4)

88,728

Discounted cash flow

Discount rate

2.1%-4.1% (3)

Other Real Estate Owned

2,225

Appraisal of collateral

(1)

Appraisal adjustments

(2)

30% discount

Impaired Loans

251

Appraisal of collateral

(1)

Appraisal adjustments

(2)

0%-30% discount

(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
(3)	Weighted averages.
(4)	Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.