Note 22. Fair Value

Accounting guidance on fair value measurements 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 measured at fair value on a recurring basis comprised the following at December 31, 2019 and 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)
December 31, 2019:
Securities AFS:
U.S. govt. sponsored agency securities	$	20,078	$	—	$	20,078	$	—
Residential mortgage-backed and related securities		120,587		—		120,587		—
Municipal securities		48,257		—		48,257		—
Other securities		21,773		—		21,773		—
Interest rate caps		3,148		—		3,148		—
Interest rate swaps - assets		84,679		—		84,679		—
Total assets measured at fair value	$	298,522	$	—	$	298,522	$	—

Interest rate swaps - liabilities	$	88,437	$	—	$	88,437	$	—
Total liabilities measured at fair value	$	88,437	$	—	$	88,437	$	—


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 during the years ended December 31, 2019 or 2018.

The remainder of the securities available for sale 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).

Note 22. Fair Value (continued)

Interest rate caps are used for the purpose of hedging interest rate risk. See Note 7 to the Consolidated Financial Statements for the details of these instruments. 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 used for the purpose of hedging interest rate risk on junior subordinated debt. See Note 7 to the Consolidated Financial Statements for the details of these instruments. 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 executed for select commercial customers. See Note 7 to the Consolidated Financial Statements for the detail of these instruments. The fair values are determined by comparing the contractual 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 comprised the following at December 31, 2019 and 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)
December 31, 2019:
Impaired loans/leases	$	3,394	$	—	$	—	$	3,394
OREO		4,459		—		—		4,459
	$	7,853	$	—	$	—	$	7,853

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 a 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 may be 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.

Other real estate owned 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 a 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.

Note 22. Fair Value (continued)

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
	December 31,		December 31,
	2019		2018		Valuation Technique	Unobservable Input	Range
	(dollars in thousands)

Impaired loans/leases	$	3,394	$	9,657	Appraisal of collateral	Appraisal adjustments	(10.00)	%	to	(30.00)	%
OREO		4,459		10,128	Appraisal of collateral	Appraisal adjustments	0.00	%	to	(35.00)	%

For impaired loans/leases and other real estate owned, 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 measured at fair value during the years ended December 31, 2019 or 2018.

The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company’s consolidated balance sheet, 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 December 31, 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	$	76,254	$	76,254	$	85,523	$	85,523
Federal funds sold	Level 2		9,800		9,800		26,398		26,398
Interest-bearing deposits at financial institutions	Level 2		147,891		147,891		133,198		133,198
Investment securities:
HTM	Level 2		400,646		426,545		401,913		400,770
AFS	*		210,695		210,695		261,056		261,056
Loans/leases receivable, net	Level 3		3,143		3,394		8,942		9,657
Loans/leases receivable, net	Level 2		3,651,061		3,606,520		3,683,965		3,639,329
Interest rate caps	Level 2		3,148		3,148		459		459
Interest rate swaps - assets	Level 2		84,679		84,679		22,196		22,196

Deposits:
Nonmaturity deposits	Level 2		3,184,726		3,184,726		3,002,327		3,002,327
Time deposits	Level 2		726,325		742,444		974,704		968,906
Short-term borrowings	Level 2		13,423		13,423		28,774		28,774
FHLB advances	Level 2		159,300		159,193		266,492		265,926
Other borrowings	Level 2		—		—		67,250		67,770
Subordinated notes	Level 2		68,394		68,563		4,782		4,933
Junior subordinated debentures	Level 2		37,838		30,477		37,670		29,992
Interest rate swaps - liabilities	Level 2		88,437		88,437		23,347		23,347