Annual report pursuant to Section 13 and 15(d)

Note 21 - Fair Value Measurement

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Note 21 - Fair Value Measurement
12 Months Ended
Dec. 31, 2019
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

NOTE 21.

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 $22,924,000 and $14,942,000 during the years ended December 31, 2019 and 2018, 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 $432,000 and $775,000 was recognized during the years ended December 31, 2019 and 2018, 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 was one residential real estate loan foreclosure for $103,000 classified as OREO as of December 31, 2019, compared to $360,000 as of December 31, 2018.

 

One residential real estate loan for $287,000 was in the process of being foreclosed as of December 31, 2019.

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of December 31, 2019 and December 31, 2018:

 

   

Fair Value Measurements at December 31, 2019 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 securities

  $ -     $ 49,210     $ -     $ 49,210  

Government agency securities

            18,386               18,386  

Mortgage-backed securities

    -       474,054       -       474,054  

State and municipal securities

    -       57,272       -       57,272  

Corporate debt

    -       153,881       6,596       160,477  

Total assets at fair value

  $ -     $ 752,803     $ 6,596     $ 759,399  

 

   

Fair Value Measurements at December 31, 2018 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 securities

  $ -     $ 58,428     $ -     $ 58,428  

Government agency securities

            18,565               18,565  

Mortgage-backed securities

    -       304,304       -       304,304  

State and municipal securities

    -       105,994       -       105,994  

Corporate debt

    -       96,375       6,518       102,893  

Total assets at fair value

  $ -     $ 583,666     $ 6,518     $ 590,184  

 

The carrying amount and estimated fair value of the Company’s financial instruments were as follows:

 

   

Fair Value Measurements at December 31, 2019 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

  $ -       -     $ 33,344     $ 33,344  

Other real estate owned and repossessed assets

    -       -       8,178       8,178  

Total assets at fair value

    -       -     $ 41,522     $ 41,522  

 

 

   

Fair Value Measurements at December 31, 2018 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

  $ -     $ -     $ 30,463     $ 30,463  

Other real estate owned

    -       -       5,169       5,169  

Total assets at fair value

  $ -     $ -     $ 35,632     $ 35,632  

 

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:

 

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.

 

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.

 

The carrying amount, estimated fair value and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2019 and December 31, 2018 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,

 
   

2019

   

2018

 
   

Carrying

Amount

   

Fair Value

   

Carrying

Amount

   

Fair Value

 
   

(In Thousands)

 

Financial Assets:

                               

Level 1 Inputs:

                               

Cash and cash equivalents

  $ 530,127     $ 530,127     $ 458,050     $ 458,050  
                                 

Level 2 Inputs:

                               

Debt securities available for sale

  $ 752,803     $ 752,803     $ 583,666     $ 583,666  

Equity securities

    -       -       894       894  

Federal funds sold

    100,473       100,473       223,845       223,845  

Mortgage loans held for sale

    6,302       6,312       120       121  
                                 

Level 3 Inputs:

                               

Debt securities available for sale

  $ 6,596     $ 6,596     $ 6,518     $ 6,518  

Debt securities held to maturity

    250       250       -       -  

Loans, net

    7,184,867       7,132,542       6,464,899       6,398,604  
                                 

Financial Liabilities:

                               

Level 2 Inputs:

                               

Deposits

  $ 7,530,433     $ 7,534,984     $ 6,915,708     $ 6,910,176  

Federal funds purchased

    470,749       470,749       288,725       288,725  

Other borrowings

    64,703       65,048       64,666       64,613