Note 11 - Assets and Liabilities Measured and Reported at Fair Value

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Fair Value Measurement and Measurement Inputs, Recurring and Nonrecurring [Text Block]

(11) Assets and Liabilities Measured and Reported at Fair Value

Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with the methodologies disclosed in Bancorp’s 2019 Annual Report on Form 10-K.

Assets and liabilities measured at fair value on a recurring basis are summarized as follows:

	Fair Value Measurements Using						Total
March 31, 2020 (in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Securities available for sale:
Government sponsored enterprise obligations	$	—	$	205,923	$	—	$	205,923
Mortgage backed securities - government agencies		—		226,572		—		226,572
Obligations of states and political subdivisions		—		13,318		—		13,318
Total Securities available for sale		—		445,813		—		445,813
Interest rate swaps		—		9,508		—		9,508
Total assets	$	—	$	455,321	$	—	$	455,321
Liabilities:
Interest rate swaps	$	—	$	9,924	$	—	$	9,924

	Fair Value Measurements Using						Total
December 31, 2019 (in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Securities available for sale:
U.S. Treasury and other U.S. government obligations	$	49,897	$	—	$	—	$	49,897
Government sponsored enterprise obligations		—		209,944		—		209,944
Mortgage backed securities - government agencies		—		193,861		—		193,861
Obligations of states and political subdivisions		—		17,036		—		17,036
Total Securities available for sale		49,897		420,841		—		470,738
Interest rate swaps		—		2,696		—		2,696
Total assets	$	49,897	$	423,537	$	—	$	473,434
Liabilities:
Interest rate swaps	$	—	$	2,767	$	—	$	2,767

There were no transfers into or out of Level 3 of the fair value hierarchy during 2020 or 2019. 

Assets measured at fair value on a non-recurring basis are summarized as follows:

									Losses recorded
									Three months
	Fair Value Measurements Using						Total		ended
March 31, 2020 (in thousands)	Level 1		Level 2		Level 3		Fair Value		March 31, 2020
Collateral dependent loans	$	—	$	—	$	778	$	778	$	—
Other real estate owned		—		—		493		493		—

									Losses recorded
									Three months
	Fair Value Measurements Using						Total		ended
December 31, 2019 (in thousands)	Level 1		Level 2		Level 3		Fair Value		March 31, 2019
Impaired loans	$	—	$	—	$	7,253	$	7,253	$	(3	)
Other real estate owned		—		—		493		493		—

There were no liabilities measured at fair value on a non-recurring basis at March 31, 2020 and December 31, 2019.

For Level 3 assets measured at fair value on a non-recurring basis, the significant unobservable inputs used in the fair value measurements are presented below.

March 31, 2020
(dollars in thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
Collateral dependent loans	$	778	Appraisal	Appraisal discounts		14.5	%
Other real estate owned		493	Appraisal	Appraisal discounts		17.1

December 31, 2019
(dollars in thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
Impaired loans - collateral dependent	$	7,253	Appraisal	Appraisal discounts		60.3	%
Other real estate owned		493	Appraisal	Appraisal discounts		17.1

Collateral Dependent Loans with an ACL (Impaired Loans with Specific Reserves prior to the adoption of ASC 326):   For collateral dependent loans where Bancorp has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For real estate loans, fair value of the loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction and improved real estate is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 8% to 10% of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the client and client’s business.

OREO:    OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ACL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction and improved real estate is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 8% to 10% of the appraised value.

The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis at March 31, 2020 and December 31, 2019 were as follows:

(in thousands)	Carrying				Fair Value Measurements Using
March 31, 2020	amount		Fair value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	254,511	$	254,511	$	254,511	$	—	$	—
Mortgage loans held for sale		8,141		8,353		—		8,353		—
Federal Home Loan Bank stock		11,284		11,284		—		11,284		—
Loans, net		2,895,223		2,929,957		—		—		2,929,957
Accrued interest receivable		8,563		8,563		8,563		—		—
Liabilities
Non-interest bearing deposits	$	858,883	$	858,883	$	858,883	$	—	$	—
Transaction deposits		1,917,009		1,917,009		—		1,917,009		—
Time deposits		422,986		429,930		—		429,930		—
Securities sold under agreement to repurchase		32,366		32,366		—		32,366		—
Federal funds purchased		9,747		9,747		—		9,747		—
FHLB advances		69,191		71,362		—		71,362		—
Accrued interest payable		419		419		419		—		—

(in thousands)	Carrying				Fair Value Measurements Using
December 31, 2019	amount		Fair value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	249,724	$	249,724	$	249,724	$	—	$	—
Mortgage loans held for sale		8,748		8,923		—		8,923		—
Federal Home Loan Bank stock		11,284		11,284		—		11,284		—
Loans, net		2,818,225		2,841,767		—		—		2,841,767
Accrued interest receivable		8,534		8,534		8,534		—		—
Liabilities
Non-interest bearing deposits	$	810,475	$	810,475	$	810,475	$	—	$	—
Transaction deposits		1,891,246		1,891,246		—		1,891,246		—
Time deposits		432,217		434,927		—		434,927		—
Securities sold under agreement to repurchase		31,895		31,895		—		31,895		—
Federal funds purchased		10,887		10,887		—		10,887		—
FHLB advances		79,953		80,906		—		80,906		—
Accrued interest payable		640		640		640		—		—

Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a significant portion of Bancorp’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect estimates.