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Note 12 - Assets and Liabilities Measured and Reported at Fair Value

9 Months Ended

Sep. 30, 2021

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

(12)

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 Annual Report on Form 10-K for the year ended December 31, 2020.

Carrying values of assets measured at fair value on a recurring basis follows:

	Fair Value Measurements Using:						Total
September 30, 2021 (in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Available for sale debt securities:
U.S. Treasury and other U.S. Government obligations	$	83,712	$	—	$	—	$	83,712
Government sponsored enterprise obligations		—		146,287		—		146,287
Mortgage backed securities - government agencies		—		771,722		—		771,722
Obligations of states and political subdivisions		—		67,424		—		67,424
Other		—		1,003		—		1,003

Total available for sale debt securities		83,712		986,436		—		1,070,148

Interest rate swaps		—		4,180		—		4,180

Total assets	$	83,712	$	990,616	$	—	$	1,074,328

Liabilities:
Interest rate swaps	$	—	$	4,226	$	—	$	4,226

	Fair Value Measurements Using:						Total
December 31, 2020 (in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Available for sale debt securities:
Government sponsored enterprise obligations	$	—	$	138,078	$	—	$	138,078
Mortgage backed securities - government agencies		—		437,585		—		437,585
Obligations of states and political subdivisions		—		11,315		—		11,315

Total available for sale debt securities		—		586,978		—		586,978

Interest rate swaps		—		8,374		—		8,374

Total assets	$	—	$	595,352	$	—	$	595,352

Liabilities:
Interest rate swaps	$	—	$	8,391	$	—	$	8,391

There were no transfers into or out of Level 3 of the fair value hierarchy during 2021 or 2020.

Discussion of assets measured at fair value on a non-recurring basis follows:

MSRs – On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income. These measurements are classified as Level 3. At September 30, 2021 and December 31, 2020, there was no valuation allowance for MSRs, as the fair value exceeded the cost. Accordingly, the MSRs are not included in the following tabular disclosure for September 30, 2021 and December 31, 2020.

Collateral dependent loans – For collateral-dependent loans where Bancorp has determined that the liquidation or 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 estimated 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 or internal 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, comparable sales, or cost) vary based on the status of the project or property. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. Bancorp 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 or 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. Bancorp obtains the valuation of OREO with material balances from 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. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. Bancorp reviews the 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.

Carrying values of assets measured at fair value on a non-recurring basis follows:

									Losses recorded
									Three months		Nine months
	Fair Value Measurements Using:						Total		ended		ended
September 30, 2021 (in thousands)	Level 1		Level 2		Level 3		Fair Value		September 30, 2021		September 30, 2021

Collateral dependent loans	$	—	$	—	$	5,151	$	5,151	$	—	$	—
Other real estate owned		—		—		7,229		7,229		—		—

									Losses recorded
									Three months		Nine months
	Fair Value Measurements Using:						Total		ended		ended
December 31, 2020 (in thousands)	Level 1		Level 2		Level 3		Fair Value		September 30, 2020		September 30, 2020

Collateral dependent loans	$	—	$	—	$	7,546	$	7,546	$	—	$	—
Other real estate owned		—		—		281		281		—		—

There were no liabilities measured at fair value on a non-recurring basis at September 30, 2021 and December 31, 2020.

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.

	September 30, 2021
(dollars in thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average

Collateral dependent loans	$	5,151	Appraisal	Appraisal discounts		39.3	%
Other real estate owned		7,229	Appraisal	Appraisal discounts		31.4

	December 31, 2020
(dollars in thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average

Collateral dependend loans	$	7,546	Appraisal	Appraisal discounts		10.7	%
Other real estate owned		281	Appraisal	Appraisal discounts		36.0