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NOTE 7 - FAIR VALUE

9 Months Ended

Sep. 30, 2021

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:

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

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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

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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 September 30, 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)
September 30, 2021:
Securities AFS:
U.S. treasuries and govt. sponsored agency securities		$	23,689		$	—		$	23,689		$	—
Residential mortgage-backed and related securities			100,744			—			100,744			—
Municipal securities			166,359			—			166,359			—
Asset-backed securities			30,607			—			30,607			—
Other securities			23,317			—			23,317			—
Derivatives			198,393			—			198,393			—
Total assets measured at fair value		$	543,109		$	—		$	543,109		$	—

Derivatives		$	201,450		$	—		$	201,450		$	—
Total liabilities measured at fair value		$	201,450		$	—		$	201,450		$	—


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 loans, 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 September 30, 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)

September 30, 2021:
Loans/leases evaluated individually		$	65,027		$	—		$	—		$	65,027
OREO			—			—			—			—
		$	65,027		$	—		$	—		$	65,027

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
		September 30,			December 31,
		2021			2020			Valuation Technique		Unobservable Input		Range

		(dollars in thousands)

Loans/leases evaluated individually		$	65,027		$	9,926		Appraisal of collateral		Appraisal adjustments		-10.00	%	to		-30.00	%
OREO			—			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 and nine months ended September 30, 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 September 30, 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		$	57,310		$	57,310		$	61,329		$	61,329
Federal funds sold		Level 2			6,985			6,985			9,080			9,080
Interest-bearing deposits at financial institutions		Level 2			63,841			63,841			86,596			86,596
Investment securities:
HTM		Level 2			484,003			531,279			476,165			521,277
AFS		Level 2			344,716			344,716			361,966			361,966
Loans/leases receivable, net		Level 3			60,210			65,027			9,191			9,926
Loans/leases receivable, net		Level 2			4,458,850			4,361,433			4,157,562			4,112,735
Derivatives		Level 2			198,393			198,393			222,757			222,757

Deposits:
Nonmaturity deposits		Level 2			4,426,844			4,426,844			4,138,478			4,138,478
Time deposits		Level 2			444,984			440,549			460,659			465,681
Short-term borrowings		Level 2			1,600			1,600			5,430			5,430
FHLB advances		Level 2			30,000			30,000			15,000			14,998
Subordinated notes		Level 2			113,811			116,321			118,691			112,406
Junior subordinated debentures		Level 2			38,103			30,912			37,993			30,618
Derivatives		Level 2			201,450			201,450			229,270			229,270

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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