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Note 11 - Fair Value Measurement
 3 Months Ended
Mar. 31, 2024
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 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.

 

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 individually evaluation. A portion of the ACL 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 March 31, 2024 was 0% to 68% and 24%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2023 was 0% to 66% and 25% 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 $1.1 million during the three months ended March 31, 2024, and $2.3 million during the three months ended March 31, 2023.

 

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 ACL 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 March 31, 2024 was 25% to 100% and 49.7%, respectively. The range of fair value adjustments and weighted average adjustment as of December 31, 2023 was 25% to 100% and 38.3%, respectively. These measurements are classified as Level 3 within the valuation hierarchy. Net losses on the sale and write-downs of OREO of $95,000 during the three months ended March 31, 2024, compared to no losses during the three months ended March 31, 2023. 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 four residential real estate loans with an aggregate balance of $450,000 foreclosed and classified as OREO as of March 31, 2024 and compared to three residential real estate loan foreclosures for $360,000 as of December 31, 2023.

 

Three residential real estate loans for $547,000 were in the process of foreclosure as of March 31, 2024. There were three residential real estate loans for $292,000 that were in the process of being foreclosed as of December 31, 2023.

 

The following table presents the Company’s financial assets carried at fair value on a recurring basis as of March 31, 2024 and December 31, 2023. There were no liabilities measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023.

 

  

Fair Value Measurements at March 31, 2024 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

 $493,969  $-  $-  $493,969 

Mortgage-backed securities

  -   254,915   -   254,915 

State and municipal securities

  -   9,958   -   9,958 

Corporate debt

  -   315,086   -   315,086 

Total available-for-sale debt securities

  493,969   579,959   -   1,073,929 

Total assets at fair value

 $493,969  $579,959  $-  $1,073,929 

 

  

Fair Value Measurements at December 31, 2023 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

 $340,807  $-  $-  $340,807 

Mortgage-backed securities

  -   215,485   -   215,485 

State and municipal securities

  -   10,223   -   10,223 

Corporate debt

  -   326,808   6,860   333,668 

Total available-for-sale debt securities

  340,807   552,516   6,860   900,183 

Total assets at fair value

 $340,807  $552,516  $6,860  $900,183 

 

The following table presents the Company’s financial assets carried at fair value on a nonrecurring basis as of March 31, 2024 and December 31, 2023. There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2024 and December 31, 2023.

 

  

Fair Value Measurements at March 31, 2024 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)

 

Loans individually evaluated

 $-  $-  $81,871  $81,871 

Other real estate owned and repossessed assets

  -   -   490   490 

Total assets at fair value

 $-  $-  $82,361  $82,361 

 

  

Fair Value Measurements at December 31, 2023 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)

 

Loans individually evaluated

 $-  $-  $70,735  $70,735 

Other real estate owned

  -   -   995   995 

Total assets at fair value

 $-  $-  $71,730  $71,730 

 

There were no liabilities measured at fair value on a non-recurring basis as of March 31, 2024 and December 31, 2023.

 

In the case of the debt securities portfolio, the Company monitors the portfolio to ascertain when transfers between levels have been affected. For the three months ended March 31, 2024, there were two transfers out of Level 3 into Level 2.

 

The table below includes a roll forward of the balance sheet amounts for the period ended March 31, 2024 and March 31, 2023 (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 period ended March 31,

 
  

2024

  

2023

 
  

Available-for-sale Securities

  

Available-for-sale Securities

 
  

(In Thousands)

 

Fair value, beginning of period

 $6,860  $10,860 

Transfers into Level 3

  -   - 

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

  (1,329)  160 

Purchases

  -   - 

Transfers out of Level 3

  (5,531)  (4,160)

Fair value, end of period

 $-  $6,860 

 

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 March 31, 2024 and December 31, 2023 were as follows:

 

  

March 31, 2024

  

December 31, 2023

 
  

Carrying

      

Carrying

     
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 
  

(In Thousands)

 

Financial Assets:

                

Level 1 Inputs:

                

Cash and cash equivalents

 $1,280,274  $1,280,274  $2,030,513  $2,030,513 

Held to maturity U.S. Treasury securities

  393,932   368,868   508,985   484,267 
                 

Level 2 Inputs:

                

Federal funds sold

  170,625   170,625   100,575   100,575 

Held to maturity debt securities

  473,514   416,152   473,429   422,674 

Mortgage loans held for sale

  7,592   7,592   5,071   5,071 

Restricted equity securities

  11,300   11,300   10,226   10,226 
                 

Level 3 Inputs:

                

Held to maturity debt securities

  250   250   250   250 

Loans, net

  11,642,933   11,195,399   11,505,512   11,032,819 
                 

Financial Liabilities:

                

Level 2 Inputs:

                

Deposits

 $12,751,448  $12,743,505  $13,273,511  $13,266,640 

Federal funds purchased

  1,345,328   1,345,328   1,256,724   1,256,724 

Other borrowings

  64,737   58,337   64,735   58,083