Quarterly report pursuant to Section 13 or 15(d)

Note 11 - Fair Value Measurement

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Note 11 - Fair Value Measurement
6 Months Ended
Jun. 30, 2021
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

NOTE 11 - 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:          Quotes 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 source 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. The Company periodically buys corporate debt securities in private placement transactions.  Level 2 inputs are not available for these securities.  The Company uses average observable prices of similar corporate securities owned by the Company to value such securities and are classified in Level 3 of the hierarchy.  The weighted average value as of June 30, 2021 was 4% observed for the Company’s other similar corporate securities.

 

Derivative instruments. The fair values of derivatives are determined based on a valuation pricing model using readily available observable market parameters such as interest rate curves, adjusted for counterparty credit risk. These measurements are classified as level 2 within the valuation hierarchy.

 

Loans Individually Evaluated. Loans individually evaluated are measured and reported at fair value when full payment under the loan terms is not probable. Loans individually evaluated 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. Loans individually evaluated are subject to nonrecurring fair value adjustment upon initial recognition or subsequent individual evaluation. A portion of the allowance for credit losses is allocated to loans individually evaluated if the value of such loans is deemed to be less than the unpaid balance. The range of fair value adjustments and weighted average adjustment as of June 30, 2021 was 0% to 64% and 24.02%, respectively.  The range of fair value adjustments and weighted average adjustment as of December 31, 2020 was 0% to 56% and 22.3% respectively.  Loans individually evaluated 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 to write-down individually evaluated loans that are measured at fair value on a nonrecurring basis was $1.4 million and $3.3 million during the three and six months ended June 30, 2021, respectively, and $3.8 million and $8.8 million during the three and six months ended June 30, 2020, 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 credit 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. The range of fair value adjustments and weighted average adjustment as of June 30, 2021 was 10% to 25% and 15.5%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2020 was 5% to 27% and 12.5%, respectively. These measurements are classified as Level 3 within the valuation hierarchy. A loss on the sale and write-downs of OREO and repossessed assets of $540,000 and $697,000 was recognized for the three and six months ended June 30, 2021, respectively, and $1.3 million and $1.9 million for the three and six months ended June 30, 2020, 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 two residential real estate loans with a balance of $222,000 foreclosed and classified as OREO as of June 30, 2021, compared to one residential real estate loan foreclosure for $209,000 as of December 31, 2020.

 

One residential real estate loan for $111,000 was in the process of being foreclosed as of June 30, 2021. There were no residential real estate loans in process of foreclosure as of December 31, 2020.

 

The following table presents the Company’s financial assets carried at fair value on a recurring basis as of June 30, 2021 and December 31, 2020. There were no liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020.

 

   

Fair Value Measurements at June 30, 2021 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 debt securities:

                               

U.S. Treasury securities

  $ -     $ 14,235     $ -     $ 14,235  

Government agency securities

    -       12,139       -       12,139  

Mortgage-backed securities

    -       599,092       -       599,092  

State and municipal securities

    -       26,281       -       26,281  

Corporate debt

    -       346,792       14,994       361,786  

Total available-for-sale debt securities

    -       998,539       14,994       1,013,533  

Interest rate cap derivative

    -       412       -       412  

Total assets at fair value

  $ -     $ 998,951     $ 14,994     $ 1,013,945  

 

   

Fair Value Measurements at December 31, 2020 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 debt securities:

                               

U.S. Treasury securities

  $ -     $ 14,357     $ -     $ 14,357  

Government agency securities

    -       15,458       -       15,458  

Mortgage-backed securities

    -       495,109       -       495,109  

State and municipal securities

    -       38,115       -       38,115  

Corporate debt

    -       323,649       -       323,649  

Total available-for-sale debt securities

            886,688               886,688  

Interest rate cap derivative

            139               139  

Total assets at fair value

  $ -     $ 886,827     $ -     $ 886,827  

 

The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of June 30, 2021 and December 31, 2020:

 

   

Fair Value Measurements at June 30, 2021

         
   

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

   

Significant Other
Observable Inputs
(Level 2)

   

Significant
Unobservable
Inputs (Level 3)

   

Total

 

Assets Measured on a Nonrecurring Basis:

 

(In Thousands)

 

Loans individually evaluated

  $ -     $ -     $ 68,663     $ 68,663  

Other real estate owned and repossessed assets

    -       -       2,039       2,039  

Total assets at fair value

  $ -     $ -     $ 70,702     $ 70,702  

 

   

Fair Value Measurements at December 31, 2020

         
   

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

   

Significant Other
Observable Inputs
(Level 2)

   

Significant
Unobservable
Inputs (Level 3)

   

Total

 

Assets Measured on a Nonrecurring Basis:

 

(In Thousands)

 

Loans individually evaluated

  $ -     $ -     $ 80,817     $ 80,817  

Other real estate owned and repossessed assets

    -       -       6,497       6,497  

Total assets at fair value

  $ -     $ -     $ 87,314     $ 87,314  

 

In the case of the investment securities portfolio, the Company monitors the portfolio to ascertain when transfers between levels have been effected.  The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare.  For the six months ended June 30, 2021, there were two transfers between Levels 1, 2 or 3.

 

The table below includes a rollforward of the balance sheet amounts for the three and six months ended June 30, 2021 and June 30, 2020 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy measured at fair value on a recurring basis including changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):

 

   

For the Three months ended June 30,

   

For the Six months ended June 30,

 
   

2021

   

2020

   

2021

   

2020

 
   

Available-for-sale
Securities

   

Available-for-
sale Securities

   

Available-for-
sale Securities

   

Available-for-
sale Securities

 
                                 

Fair value, beginning of period

  $ 10,301     $ 6,647     $ -     $ 6,596  

Transfers into Level 3

    -       -       6,000       -  

Total realized gains included in income

    -       -       -       -  

Changes in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at period-end

    193       (52 )     494       (1 )

Purchases

    8,500       -       12,500       -  

Transfers out of Level 3

    (4,000 )     -       (4,000 )     -  

Fair value, end of period

  $ 14,994     $ 6,595     $ 14,994     $ 6,595  

 

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 estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis as of June 30, 2021 and December 31, 2020 were as follows:

 

   

June 30, 2021

   

December 31, 2020

 
   

Carrying

           

Carrying

         
   

Amount

   

Fair Value

   

Amount

   

Fair Value

 
   

(In Thousands)

 

Financial Assets:

                               

Level 1 inputs:

                               

Cash and due from banks

  $ 3,173,276     $ 3,173,276     $ 2,209,640     $ 2,209,640  
                                 

Level 2 inputs:

                               

Federal funds sold

    7,500       7,500       1,771       1,771  

Mortgage loans held for sale

    6,147       7,019       14,425       14,497  
                                 

Level 3 inputs:

                               

Held to maturity debt securities

    250       250       250       250  

Loans, net

    8,476,361       8,442,506       8,377,746       8,387,718  
                                 

Financial liabilities:

                               

Level 2 inputs:

                               

Deposits

  $ 10,958,236     $ 10,965,495     $ 9,975,724     $ 9,987,665  

Federal funds purchased

    1,059,474       1,059,474       851,545       851,545  

Other borrowings

    64,696       65,524       64,748       65,560