Note 11 - Fair Value Measurement

6 Months Ended

Jun. 30, 2022

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: 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 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. 

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 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. 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, 2022 was 0% to 75% and 21.2%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2021 was 0% to 75% and 24.1% 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 $1.2 million and $1.8 million during the three and six months ended June 30, 2022, respectively, and $1.4 million and $3.3 million during the three and six months ended June 30, 2021, 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, 2022 was 10% to 100% and 57%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2021 was 0% to 100% and 40.6%, 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 $125,000 and $119,000 was recognized for the three and six months ended June 30, 2022, respectively, and $540,000 and $697,000 for the three and six months ended June 30, 2021, 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 with a balance of $60,000 foreclosed and classified as OREO as of June 30, 2022, compared to one residential real estate loan foreclosure for $50,000 as of December 31, 2021.

Two residential real estate loans for $212,000 was in the process of being foreclosed as of June 30, 2022. There were one residential real estate loan for $299,000 in process of foreclosure as of December 31, 2021.

The following table presents the Company’s financial assets carried at fair value on a recurring basis as of June 30, 2022 and December 31, 2021. There were no liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021.

	Fair Value Measurements at June 30, 2022 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	$	5,966	$	-	$	-	$	5,966
Government agencies		-		14		-		14
Mortgage-backed securities		-		285,428		-		285,428
State and municipal securities		-		16,280		-		16,280
Corporate debt		-		410,775		6,000		416,775
Total available-for-sale debt securities		5,966		712,497		6,000		724,463
Interest rate cap derivative		-		6,446		-		6,446
Total assets at fair value	$	5,966	$	718,943	$	6,000	$	730,909

	Fair Value Measurements at December 31, 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	$	9,104	$	-	$	-	$	9,104
Government agencies		-		6,041		-		6,041
Mortgage-backed securities		-		425,161		-		425,161
State and municipal securities		-		21,634		-		21,634
Corporate debt		-		363,638		16,992		380,630
Total available-for-sale debt securities		9,104		816,474		16,992		842,570
Interest rate cap derivative		-		1,152		-		1,152
Total assets at fair value	$	9,104	$	817,626	$	16,992	$	843,722

The following table presents the Company’s financial assets carried at fair value on a nonrecurring basis as of June 30, 2022 and December 31, 2021:

	Fair Value Measurements at June 30, 2022
	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	$	-	$	-	$	56,673	$	56,673
Other real estate owned and repossessed assets		-		-		1,207		1,207
Total assets at fair value	$	-	$	-	$	57,880	$	57,880

	Fair Value Measurements at December 31, 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	$	-	$	-	$	73,173	$	73,173
Other real estate owned and repossessed assets		-		-		1,208		1,208
Total assets at fair value	$	-	$	-	$	74,381	$	74,381

There were no liabilities measured at fair value on a non-recurring basis as of June 30, 2022, and December 31, 2021.

In the case of the investment securities portfolio, the Company monitors the portfolio to ascertain when transfers between levels have been affected.  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, 2022, there was three 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, 2022 and June 30, 2021 (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:

	For the three months ended June 30,						For the six months ended June 30,
	2022			2021			2022			2021
	Available-for-sale Securities			Available-for-sale Securities			Available-for-sale Securities			Available-for-sale Securities
	(In Thousands)
Fair value, beginning of period	$	11,500		$	10,301		$	16,992		$	-
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		(462	)		193			(805	)		494
Purchases		-			8,500			-			12,500
Transfers out of Level 3		(5,038	)		(4,000	)		(10,187	)		(4,000	)
Fair value, end of period	$	6,000		$	14,994		$	6,000		$	14,994

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, 2022 and December 31, 2021 were as follows:

	June 30, 2022				December 31, 2021
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(In Thousands)
Financial Assets:
Level 1 inputs:
Cash and due from banks	$	1,587,149	$	1,587,149	$	4,163,724	$	4,163,724
Level 2 inputs:
Federal funds sold		101,447		101,447		58,372		58,372
Held to maturity debt securities		1,065,505		1,003,590		462,707		466,036
Mortgage loans held for sale		3,451		3,390		1,114		1,111
Level 3 inputs:
Held to maturity debt securities		250		250		250		250
Loans, net		10,432,260		10,432,260		9,416,274		9,403,012
Financial liabilities:
Level 2 inputs:
Deposits	$	11,772,337	$	11,777,719	$	12,452,836	$	12,454,140
Federal funds purchased		1,389,167		1,389,167		1,711,777		1,711,777
Other borrowings		64,716		65,457		64,706		65,476