NOTE 7 – FAIR VALUE

Accounting guidance on fair value measurement uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets;

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Assets and liabilities measured at fair value on a recurring basis comprise the following at June 30, 2019 and December 31, 2018:


			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
June 30, 2019:
Securities AFS:
U.S. govt. sponsored agency securities	$	35,762	$	—	$	35,762	$	—
Residential mortgage-backed and related securities		159,228		—		159,228		—
Municipal securities		53,189		—		53,189		—
Other securities		6,911		—		6,911		—
Interest rate caps		98		—		98		—
Interest rate swaps - assets		65,824		—		65,824		—
Total assets measured at fair value	$	321,012	$	—	$	321,012	$	—

Interest rate swaps - liabilities	$	69,556	$	—	$	69,556	$	—
Total liabilities measured at fair value	$	69,556	$	—	$	69,556	$	—


December 31, 2018:
Securities AFS:
U.S. govt. sponsored agency securities	$	36,411	$	—	$	36,411	$	—
Residential mortgage-backed and related securities		159,249		—		159,249		—
Municipal securities		58,546		—		58,546		—
Other securities		6,850		—		6,850		—
Interest rate caps		459		—		459		—
Interest rate swaps - assets		22,196		—		22,196		—
Total assets measured at fair value	$	283,711	$	—	$	283,711	$	—

Interest rate swaps - liabilities	$	23,347	$	—	$	23,347	$	—
Total liabilities measured at fair value	$	23,347	$	—	$	23,347	$	—

There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy for the three and six months ended June 30, 2019 or 2018.

The securities AFS portfolio consists of securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).

Interest rate caps are used for the purpose of hedging interest rate risk. The interest rate caps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).

Interest rate swaps are executed for select commercial customers. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

Interest rate swaps are also used for the purpose of hedging interest rate risk on junior subordinated debt. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Assets measured at fair value on a non-recurring basis comprise the following at June 30, 2019 and December 31, 2018:


			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
June 30, 2019:
Impaired loans/leases	$	7,539	$	—	$	—	$	7,539
OREO		9,328		—		—		9,328
	$	16,867	$	—	$	—	$	16,867

December 31, 2018:
Impaired loans/leases	$	9,657	$	—	$	—	$	9,657
OREO		10,128		—		—		10,128
	$	19,785	$	—	$	—	$	19,785

Impaired loans/leases are evaluated and valued at the time the loan/lease is identified as impaired, at the lower of cost or fair value, and are classified as Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business.

OREO in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the property.

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:


	Quantitative Information about Level Fair Value Measurements
	Fair Value		Fair Value
	June 30,		December 31,
	2019		2018		Valuation Technique	Unobservable Input	Range
	(dollars in thousands)

Impaired loans/leases	$	7,539	$	9,657	Appraisal of collateral	Appraisal adjustments	(10.00)	%	to	(30.00)	%
OREO		9,328		10,128	Appraisal of collateral	Appraisal adjustments	0.00	%	to	(35.00)	%

For the impaired loans/leases and OREO, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three and six months ended June 30, 2019 and 2018.

The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company's consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:


	Fair Value	As of June 30, 2019				As of December 31, 2018
	Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value
		(dollars in thousands)

Cash and due from banks	Level 1	$	87,919	$	87,919	$	85,523	$	85,523
Federal funds sold	Level 2		10,215		10,215		26,398		26,398
Interest-bearing deposits at financial institutions	Level 2		195,282		195,282		133,198		133,198
Investment securities:
HTM	Level 2		388,713		406,212		401,913		400,770
AFS	See Previous Table		255,090		255,090		261,056		261,056
Loans/leases receivable, net	Level 3		6,981		7,539		8,942		9,657
Loans/leases receivable, net	Level 2		3,862,434		3,842,781		3,683,965		3,639,329
Interest rate caps	Level 2		98		98		459		459
Interest rate swaps - assets	Level 2		65,824		65,824		22,196		22,196
Deposits:
Nonmaturity deposits	Level 2		3,275,004		3,275,004		3,002,327		3,002,327
Time deposits	Level 2		1,047,506		1,033,017		974,704		968,906
Short-term borrowings	Level 2		19,191		19,191		28,774		28,774
FHLB advances	Level 2		105,733		105,768		266,492		265,926
Other borrowings	Level 2		—		—		67,250		67,770
Subordinated notes	Level 2		68,274		68,478		4,782		4,933
Junior subordinated debentures	Level 2		37,755		30,465		37,670		29,992
Interest rate swaps - liabilities	Level 2		69,556		69,556		23,347		23,347