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NOTE 8 - FAIR VALUE | 9 Months Ended
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Sep. 30, 2019
Fair Value. |
FAIR VALUE | NOTE 8 – 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 September 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)
September 30, 2019: |  |  |  |  |  |  |  |  |  |  |  |
Securities AFS: |  |  |  |  |  |  |  |  |  |  |  |
U.S. govt. sponsored agency securities |  | $ | 21,268 |  | $ | — |  | $ | 21,268 |  | $ | —
Residential mortgage-backed and related securities |  |  | 123,880 |  |  | — |  |  | 123,880 |  |  | —
Municipal securities |  |  | 48,902 |  |  | — |  |  | 48,902 |  |  | —
Other securities |  |  | 17,882 |  |  | — |  |  | 17,882 |  |  | —
Interest rate swaps - assets |  |  | 102,956 |  |  | — |  |  | 102,956 |  |  | —
Total assets measured at fair value |  | $ | 314,888 |  | $ | — |  | $ | 314,888 |  | $ | —
Interest rate swaps - liabilities |  | $ | 107,847 |  | $ | — |  | $ | 107,847 |  | $ | —
Total liabilities measured at fair value |  | $ | 107,847 |  | $ | — |  | $ | 107,847 |  | $ | —
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 swaps - assets |  |  | 22,196 |  |  | — |  |  | 22,196 |  |  | —
Total assets measured at fair value |  | $ | 283,252 |  | $ | — |  | $ | 283,252 |  | $ | —
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 nine months ended September 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 swaps are executed for select commercial customers. The interest rate swaps are further described in Note 5 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 5 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 September 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)
September 30, 2019: |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans/leases |  | $ | 3,839 |  | $ | — |  | $ | — |  | $ | 3,839
OREO |  |  | 4,588 |  |  | — |  |  | — |  |  | 4,588
|  | $ | 8,427 |  | $ | — |  | $ | — |  | $ | 8,427
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 |  |  |  |  |  |  |  |  |  |  |
|  | September 30, |  | December 31, |  |  |  |  |  |  |  |  |  |  |
|  | 2019 |  | 2018 |  | Valuation Technique |  | Unobservable Input |  | Range |
|  | (dollars in thousands) |
Impaired loans/leases |  | $ | 3,839 |  | $ | 9,657 |  | Appraisal of collateral |  | Appraisal adjustments |  | (10.00) | % | to |  | (30.00) | %
OREO |  |  | 4,588 |  |  | 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 nine months ended September 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 September 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 |  | $ | 91,671 |  | $ | 91,671 |  | $ | 85,523 |  | $ | 85,523
Federal funds sold |  | Level 2 |  |  | 9,300 |  |  | 9,300 |  |  | 26,398 |  |  | 26,398
Interest-bearing deposits at financial institutions |  | Level 2 |  |  | 187,963 |  |  | 187,963 |  |  | 133,198 |  |  | 133,198
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
HTM |  | Level 2 |  |  | 343,477 |  |  | 363,474 |  |  | 401,913 |  |  | 400,770
AFS |  | * |  |  | 211,932 |  |  | 211,932 |  |  | 261,056 |  |  | 261,056
Loans/leases receivable, net |  | Level 3 |  |  | 3,555 |  |  | 3,839 |  |  | 8,942 |  |  | 9,657
Loans/leases receivable, net |  | Level 2 |  |  | 3,570,599 |  |  | 3,495,905 |  |  | 3,683,965 |  |  | 3,639,329
Interest rate caps |  | Level 2 |  |  | — |  |  | — |  |  | 459 |  |  | 459
Interest rate swaps - assets |  | Level 2 |  |  | 102,956 |  |  | 102,956 |  |  | 22,196 |  |  | 22,196
Assets held for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | Level 2 |  |  | 13,446 |  |  | 13,446 |  |  | — |  |  | —
Securities |  | Level 2 |  |  | 66,009 |  |  | 68,389 |  |  | — |  |  | —
Loans, net |  | Level 2 |  |  | 362,011 |  |  | 354,438 |  |  | — |  |  | —
Deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Nonmaturity deposits |  | Level 2 |  |  | 3,050,033 |  |  | 3,050,033 |  |  | 3,002,327 |  |  | 3,002,327
Time deposits |  | Level 2 |  |  | 752,208 |  |  | 748,305 |  |  | 974,704 |  |  | 968,906
Short-term borrowings |  | Level 2 |  |  | 18,526 |  |  | 18,526 |  |  | 28,774 |  |  | 28,774
FHLB advances |  | Level 2 |  |  | 195,800 |  |  | 195,697 |  |  | 266,492 |  |  | 265,926
Other borrowings |  | Level 2 |  |  | — |  |  | — |  |  | 67,250 |  |  | 67,770
Subordinated notes |  | Level 2 |  |  | 68,334 |  |  | 68,521 |  |  | 4,782 |  |  | 4,933
Junior subordinated debentures |  | Level 2 |  |  | 37,797 |  |  | 30,494 |  |  | 37,670 |  |  | 29,992
Interest rate swaps - liabilities |  | Level 2 |  |  | 107,847 |  |  | 107,847 |  |  | 23,347 |  |  | 23,347
Liabilities hed for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | Level 2 |  |  | 451,546 |  |  | 447,869 |  |  | — |  |  | —
Borrowings |  | Level 2 |  |  | 16,157 |  |  | 16,149 |  |  | — |  |  | —
*See previous table in Note 8.

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- Definition 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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