Annual report pursuant to Section 13 and 15(d)

Note 23 - Fair Value Measurement

v3.8.0.1
Note 23 - Fair Value Measurement
12 Months Ended
Dec. 31, 2017
Notes to Financial Statements  
Fair Value Disclosures [Text Block]
NOTE
23.
FAIR VALUE MEASUREMENT
 
Measurement of fair value under U.S. GAAP establishes a hierarchy that prioritizes observable and unobservable inputs used to measure fair value, as of the measurement date, into
three
broad levels, which are described below:
 
Level
1:
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level
1
inputs.
 
Level
2:
Observable prices that are based on inputs
not
quoted on active markets, but corroborated by market data.
 
Level
3:
Unobservable inputs are used when little or
no
market data is available. The fair value hierarchy gives the lowest priority to Level
3
inputs.
 
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and also considers counterparty credit risk in its assessment of fair value.
 
Debt Securities
. Where quoted prices are available in an active market, securities are classified within Level
1
of the hierarchy. Level
1
securities include highly liquid government securities such as U.S. Treasuries and exchange-traded equity securities. For securities traded in secondary markets for which quoted market prices are
not
available, the Company generally relies on pricing services provided by independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants
may
be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing service regarding their methods of price discovery. Securities measured with these techniques are classified within Level
2
of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow calculations using inputs observable in the market where available. Examples include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, and certain corporate, asset-backed and other securities. In cases where Level
1
or Level
2
inputs are
not
available, as in the case of certain corporate securities, these securities are classified in Level
3
of the hierarchy.
 
Impaired Loans
. Impaired loans are measured and reported at fair value when full payment under the loan terms is
not
probable. Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does
not
incorporate the exit-price concept of fair value described in ASC
820
-
10
and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on appraisals performed by certified and licensed appraisers using inputs such as absorption rates, capitalization rates and market comparables, adjusted for estimated costs to sell. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level
3
within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly based on the same factors identified above. The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis was
$13,253,000
and
$7,424,000
during the years ended
December 31, 2017
and
2016,
respectively.
 
Other Real Estate Owned
. Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. Appraisals are performed by certified and licensed appraisers. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value,
not
to exceed the new cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level
3
within the valuation hierarchy. Net losses on the sale and write-downs of OREO of
$227,000
and
$585,000
was recognized during the years ended
December 31, 2017
and
2016,
respectively. These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO. OREO is classified within Level
3
of the hierarchy.
 
There were
no
residential real estate loan foreclosures classified as OREO as of
December 31, 2017,
compared to
$189,000
as of
December 31, 2016.
 
No
residential real estate loans were in the process of being foreclosed as of
December 31, 2017.
 
The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of
December 31, 2017
and
December 31, 2016:
 
    Fair Value Measurements at December 31, 2017 Using
    Quoted Prices in            
    Active Markets   Significant Other   Significant    
    for Identical   Observable Inputs   Unobservable    
    Assets (Level 1)   (Level 2)   Inputs (Level 3)   Total
Assets Measured on a Recurring Basis:    
(In Thousands)
Available-for-sale securities:                                
U.S. Treasury and government sponsored agencies   $
-
    $
55,356
    $
-
    $
55,356
 
Mortgage-backed securities    
-
     
276,498
     
-
     
276,498
 
State and municipal securities    
-
     
134,849
     
-
     
134,849
 
Corporate debt    
-
     
64,877
     
6,500
     
71,377
 
Total assets at fair value   $
-
    $
531,580
    $
6,500
    $
538,080
 
 
    Fair Value Measurements at December 31, 2016 Using
    Quoted Prices in            
    Active Markets   Significant Other   Significant    
    for Identical   Observable Inputs   Unobservable    
    Assets (Level 1)   (Level 2)   Inputs (Level 3)   Total
Assets Measured on a Recurring Basis:  
(In Thousands)
Available-for-sale securities                                
U.S. Treasury and government sponsored agencies   $
-
    $
46,254
    $
-
    $
46,254
 
Mortgage-backed securities    
-
     
227,190
     
-
     
227,190
 
State and municipal securities    
-
     
139,930
     
-
     
139,930
 
Corporate debt    
-
     
9,001
     
-
     
9,001
 
Total assets at fair value   $
-
    $
422,375
    $
-
    $
422,375
 
 
The carrying amount and estimated fair value of the Company’s financial instruments were as follows:
 
    Fair Value Measurements at December 31, 2017 Using
    Quoted Prices in            
    Active Markets   Significant Other   Significant    
    for Identical   Observable   Unobservable    
    Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3)   Total
Assets Measured on a Nonrecurring Basis:  
(In Thousands)
Impaired loans   $
-
     
-
    $
34,901
    $
34,901
 
Other real estate owned and repossessed assets    
-
     
-
     
6,701
     
6,701
 
Total assets at fair value    
-
     
-
    $
41,602
    $
41,602
 
 
    Fair Value Measurements at December 31, 2016 Using
    Quoted Prices in            
    Active Markets   Significant Other   Significant    
    for Identical   Observable   Unobservable    
    Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3)   Total
Assets Measured on a Nonrecurring Basis:  
(In Thousands)
Impaired loans   $
-
    $
-
    $
37,437
    $
37,437
 
Other real estate owned    
-
     
-
     
4,988
     
4,988
 
Total assets at fair value   $
-
    $
-
    $
42,425
    $
42,425
 
 
The fair value of a financial instrument is the current amount that would be exchanged in a sale between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are
no
quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are
not
available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates
may
not
be realized in an immediate settlement of the instrument. Current U.S. GAAP excludes certain financial instruments and all nonfinancial instruments from its fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented
may
not
necessarily represent the underlying fair value of the Company.
 
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
 
Cash and due from banks:
The carrying amounts reported in the statements of financial condition approximate those assets’ fair values.
 
Debt securities:
Where quoted prices are available in an active market, securities are classified within Level
1
of the hierarchy. Level
1
securities include highly liquid government securities such as U.S. treasuries and exchange-traded equity securities. For securities traded in secondary markets for which quoted market prices are
not
available, the Company generally relies on prices obtained from independent vendors. Such independent pricing services are to advise the Company on the carrying value of the securities available for sale portfolio. As part of the Company’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, the Company investigates further to determine if the price is valid. If needed, other market participants
may
be utilized to determine the correct fair value. The Company has also reviewed and confirmed its determinations in discussions with the pricing service regarding their methods of price discovery. Securities measured with these techniques are classified within Level
2
of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow calculations using inputs observable in the market where available. Examples include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, and certain corporate, asset-backed and other securities. In cases where Level
1
or Level
2
inputs are
not
available, securities are classified in Level
3
of the fair value hierarchy.
 
Equity securities:
Fair values for other investments are considered to be their cost as they are redeemed at par value.
 
Federal funds sold:
The carrying amounts reported in the statements of financial condition approximate those assets’ fair values.
 
Mortgage loans held for sale:
Loans are committed to be delivered to investors on a “best efforts delivery” basis within
30
days or origination. Due to this short turn-around time, the carrying amounts of the Company’s agreements approximate their fair values.
 
Bank owned life insurance contracts:
The carrying amounts in the statements of condition approximate these assets’ fair value.
 
Loans, net:
For variable-rate loans that re-price frequently and with
no
significant change in credit risk, fair value is based on carrying amounts. The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The method of estimating fair value does
not
incorporate the exit-price concept of fair value as prescribed by ASC
820
and generally produces a higher value than an exit-price approach. The measurement of the fair value of loans is classified within Level
3
of the fair value hierarchy.
 
Deposits:
The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation using interest rates currently offered for deposits with similar remaining maturities. The fair value of the Company’s time deposits do
not
take into consideration the value of the Company’s long-term relationships with depositors, which
may
have significant value. Measurements of the fair value of certificates of deposit are classified within Level
2
of the fair value hierarchy.
 
Federal funds purchased:
The carrying amounts in the statements of condition approximate these liabilities’ fair value.
 
Other borrowings:
The fair values of other borrowings are estimated using a discounted cash flow analysis, based on interest rates currently being offered on the best alternative debt available at the measurement date. These measurements are classified as Level
2
in the fair value hierarchy.
 
Loan commitments:
The fair values of the Company’s off-balance-sheet financial instruments are based on fees currently charged to enter into similar agreements. Since the majority of the Company’s other off-balance-sheet financial instruments consists of non-fee-producing, variable-rate commitments, the Company has determined they do
not
have a distinguishable fair value.
 
The carrying amount, estimated fair value and placement in the fair value hierarchy of the Company’s financial instruments as of
December 31, 2017
and
December 31, 2016
are presented in the following table. This table includes those financial assets and liabilities that are
not
measured and reported at fair value on a recurring basis or nonrecurring basis.
 
    December 31,
    2017   2016
    Carrying Amount   Fair Value   Carrying Amount   Fair Value
    (In Thousands)
Financial Assets:                                
Level 1 Inputs:                                
Cash and cash equivalents   $
238,062
    $
238,062
    $
623,562
    $
623,562
 
                                 
Level 2 Inputs:                                
Debt securities available for sale   $
531,580
    $
531,580
    $
422,375
    $
422,375
 
Debt securities held to maturity    
-
     
-
     
25,052
     
25,431
 
Equity securities    
1,034
     
1,034
     
1,024
     
1,024
 
Federal funds sold    
239,524
     
239,524
     
160,435
     
160,435
 
Mortgage loans held for sale    
4,459
     
4,459
     
4,675
     
4,736
 
Bank owned life insurance contracts    
127,519
     
127,519
     
114,388
     
114,388
 
                                 
Level 3 Inputs:                                
Debt securities available for sale   $
6,500
    $
6,500
    $
-
    $
-
 
Debt securities held to maturity    
250
     
250
     
37,512
     
37,871
 
Loans, net    
5,791,855
     
5,747,342
     
4,859,877
     
4,872,689
 
                                 
Financial Liabilities:                                
Level 2 Inputs:                                
Deposits   $
6,091,674
    $
6,086,085
    $
5,420,311
    $
5,417,320
 
Federal funds purchased    
301,797
     
301,797
     
355,944
     
355,944
 
Other borrowings    
64,832
     
65,921
     
55,262
     
54,203