Fair Value of Assets and Liabilities

Fair Value Hierarchy and Fair Value Measurement

We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant Management judgment and estimation.

Transfers between levels of the fair value hierarchy are recognized through our monthly and/or quarterly valuation process in the reporting period during which the event or circumstances that caused the transfer occurred. No such transfers occurred in the years presented.

The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.



(in thousands) Description of Financial Instruments	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Measurement Categories: Changes in Fair Value Recorded In¹
December 31, 2018
Securities available for sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies	$	278,403	$	—	$	278,403	$	—	OCI
SBA-backed securities	$	50,781	$	—	$	50,781	$	—	OCI
Debentures of government sponsored agencies	$	53,018	$	—	$	53,018	$	—	OCI
Privately-issued collateralized mortgage obligations	$	297	$	—	$	297	$	—	OCI
Obligations of state and political subdivisions	$	77,960	$	—	$	77,960	$	—	OCI
Corporate bonds	$	2,005	$	—	$	2,005	$	—	OCI
Derivative financial assets (interest rate contracts)	$	161	$	—	$	161	$	—	NI
Derivative financial liabilities (interest rate contracts)	$	375	$	—	$	375	$	—	NI
December 31, 2017
Securities available for sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies	$	188,061	$	—	$	188,061	$	—	OCI
SBA-backed securities	$	25,982	$	—	$	25,817	$	165	OCI
Debentures of government sponsored agencies	$	12,938	$	—	$	12,938	$	—	OCI
Privately-issued collateralized mortgage obligations	$	1,431	$	—	$	1,431	$	—	OCI
Obligations of state and political subdivisions	$	97,491	$	—	$	97,491	$	—	OCI
Corporate bonds	$	6,564	$	—	$	6,564	$	—	OCI
Derivative financial assets (interest rate contracts)	$	74	$	—	$	74	$	—	NI
Derivative financial liabilities (interest rate contracts)	$	740	$	—	$	740	$	—	NI

¹Other comprehensive income ("OCI") or net income ("NI").

Securities available-for-sale are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of securities available-for-sale. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2). Level 2 securities include obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, privately-issued collateralized mortgage obligations and corporate bonds. As of December 31, 2018 and 2017, there were no securities that were considered Level 1 securities. As of December 31, 2017, we had one Level 3 available-for-sale U.S. government agency obligation, which was paid off in 2018.

Securities held-to-maturity may be written down to fair value (determined using the same techniques discussed above for securities available-for-sale) as a result of an other-than-temporary impairment, and we did not record any write-downs during 2018 or 2017.

On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate (“LIBOR”) and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using either LIBOR or OIS curves depending on whether the swap positions are fully collateralized as of the measurement date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties. We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to the Bank. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 14, Derivative Financial Instruments and Hedging Activities.

Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent and other real estate owned ("OREO"). As of December 31, 2018 and 2017, we did not carry any assets measured at fair value on a non-recurring basis.

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of December 31, 2018 and 2017, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI") and non-maturity deposit liabilities. Additionally, we held shares of FHLB stock and Visa Inc. Class B common stock, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of December 31, 2018. Both FHLB stock and Visa Inc. Class B common stock were held at cost as of December 31, 2017, prior to adoption of ASU No. 2016-01. See further detail on the adoption of the ASU within Note 1, Summary of Significant Accounting Policies, and further discussion on values within Note 2, Investment Securities, above.



	December 31, 2018					December 31, 2017
(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy
Financial assets:
Cash and cash equivalents	$	34,221	$	34,221	Level 1	$	203,545	$	203,545	Level 1
Investment securities held-to-maturity	157,206		153,894		Level 2	151,032		151,032		Level 2
Loans, net	1,748,043		1,700,971		Level 3	1,663,246		1,650,198		Level 3
Interest receivable	8,292		8,292		Level 2	7,501		7,501		Level 2
Financial liabilities:
Time deposits	117,182		116,584		Level 2	160,116		159,540		Level 2
Subordinated debentures	2,640		3,268		Level 3	5,739		5,118		Level 3
Interest payable	104		104		Level 2	191		191		Level 2

Commitments - The value of unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material as of December 31, 2018 and 2017.