NOTE 7 - FAIR VALUE

3 Months Ended

Mar. 31, 2021

Fair Value

FAIR VALUE

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 March 31, 2021 and December 31, 2020:

			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)
March 31, 2021:
Securities AFS:
U.S. govt. sponsored agency securities	$	14,581	$	—	$	14,581	$	—
Residential mortgage-backed and related securities		118,052		—		118,052		—
Municipal securities		162,573		—		162,573		—
Asset-backed securities		39,815		—		39,815		—
Other securities		11,852		—		11,852		—
Derivatives		122,668		—		122,668		—
Total assets measured at fair value	$	469,541	$	—	$	469,541	$	—
Derivatives	$	125,863	$	—	$	125,863	$	—
Total liabilities measured at fair value	$	125,863	$	—	$	125,863	$	—
December 31, 2020:
Securities AFS:
U.S. govt. sponsored agency securities	$	15,336	$	—	$	15,336	$	—
Residential mortgage-backed and related securities		132,842		—		132,842		—
Municipal securities		152,408		—		152,408		—
Asset-backed securities		40,683		—		40,683		—
Other securities		20,697		—		20,697		—
Derivatives		222,757		—		222,757		—
Total assets measured at fair value	$	584,723	$	—	$	584,723	$	—
Derivatives	$	229,270	$	—	$	229,270	$	—
Total liabilities measured at fair value	$	229,270	$	—	$	229,270	$	—

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 used for the purpose of hedging interest rate risk on FHLB advances, brokered deposits and 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).

Interest rate swaps are also 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).

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 a loan/lease is collaterally dependent).

Assets measured at fair value on a non-recurring basis comprise the following at March 31, 2021 and December 31, 2020:

			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)
March 31, 2021:
Loans/leases evaluated individually	$	31,472	$	—	$	—	$	31,472
OREO		187		—		—		187
	$	31,659	$	—	$	—	$	31,659
December 31, 2020:
Loans/leases evaluated individually	$	9,926	$	—	$	—	$	9,926
OREO		22		—		—		22
	$	9,948	$	—	$	—	$	9,948

The increase in loans/leases evaluated individually is due to the change in ACL methodology with the adoption of ASU 2016-13 as well as the downgrading of one large relationship.

Loans/leases evaluated individually are valued 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
	March 31,		December 31,
	2021		2020		Valuation Technique	Unobservable Input	Range
	(dollars in thousands)
Loans/leases evaluated individually	$	31,472	$	9,926	Appraisal of collateral	Appraisal adjustments	-10.00	%	to	-30.00	%
OREO		187		22	Appraisal of collateral	Appraisal adjustments	0.00	%	to	-35.00	%

For the loans/leases evaluated individually 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 months ended March 31, 2021 and 2020.

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 March 31, 2021				As of December 31, 2020
	Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value
		(dollars in thousands)
Cash and due from banks	Level 1	$	78,814	$	78,814	$	61,329	$	61,329
Federal funds sold	Level 2		1,350		1,350		9,080		9,080
Interest-bearing deposits at financial institutions	Level 2		53,706		53,706		86,596		86,596
Investment securities:
HTM	Level 2		452,952		491,347		476,165		521,277
AFS	Level 2		346,873		346,873		361,966		361,966
Loans/leases receivable, net	Level 3		29,141		31,472		9,191		9,926
Loans/leases receivable, net	Level 2		4,250,079		4,200,051		4,157,562		4,112,735
Derivatives	Level 2		122,668		122,668		222,757		222,757
Deposits:
Nonmaturity deposits	Level 2		4,185,632		4,182,630		4,138,478		4,138,478
Time deposits	Level 2		446,150		447,790		460,659		465,681
Short-term borrowings	Level 2		6,840		6,840		5,430		5,430
FHLB advances	Level 2		25,000		24,998		15,000		14,998
Subordinated notes	Level 2		118,731		121,545		118,691		112,406
Junior subordinated debentures	Level 2		38,030		30,744		37,993		30,618
Derivatives	Level 2		125,863		125,863		229,270		229,270

*See previous table in Note 2.