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Note 13 - Assets and Liabilities Measured and Reported at Fair Value | 6 Months Ended
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Jun. 30, 2022
Notes to Financial Statements |
Fair Value Measurement and Measurement Inputs, Recurring and Nonrecurring [Text Block] |
(13) | 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. Bancorp used the following methods and significant assumptions to estimate fair value of each type of financial instrument: AFS debt securities - Except for Bancorp’s U.S Treasury securities, the fair value of AFS debt securities is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Bancorp’s U.S. Treasury securities are based on quoted market prices (Level 1 inputs). Mortgage loans held for sale - The fair value of mortgage loans held for sale is determined using quoted secondary market prices (Level 2 inputs). Mortgage banking derivatives – Mortgage banking derivatives used in the ordinary course of business consist primarily of interest rate lock loan commitments and mandatory forward sales contracts. The fair value of the Bancorp’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from observable market inputs that can generally be verified and do not typically involve significant judgement by Bancorp (Level 2 inputs). Interest rate swap agreements – Interest rate swaps are valued using valuations received from the relevant dealer counterparty. These valuations consider multiple observable market inputs, including interest rate yield curves, time value and volatility factors (Level 2 inputs). Carrying values of assets measured at fair value on a recurring basis follows:
|  | Fair Value Measurements Using: |  |  | Total |
June 30, 2022 (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 |  | $ | 115,532 |  |  | $ | — |  |  | $ | — |  |  | $ | 115,532 |
Government sponsored enterprise obligations |  |  | — |  |  |  | 117,703 |  |  |  | — |  |  |  | 117,703 |
Mortgage backed securities - government agencies |  |  | — |  |  |  | 765,522 |  |  |  | — |  |  |  | 765,522 |
Obligations of states and political subdivisions |  |  | — |  |  |  | 135,268 |  |  |  | — |  |  |  | 135,268 |
Other |  |  | — |  |  |  | 6,014 |  |  |  | — |  |  |  | 6,014 |
Total available for sale debt securities |  |  | 115,532 |  |  |  | 1,024,507 |  |  |  | — |  |  |  | 1,140,039 |
Mortgage loans held for sale |  |  | — |  |  |  | 10,045 |  |  |  | — |  |  |  | 10,045 |
Rate lock loan commitments |  |  | — |  |  |  | 472 |  |  |  | — |  |  |  | 472 |
Mandatory forward contracts |  |  | — |  |  |  | 44 |  |  |  | — |  |  |  | 44 |
Interest rate swaps |  |  | — |  |  |  | 6,475 |  |  |  | — |  |  |  | 6,475 |
Total assets |  | $ | 115,532 |  |  | $ | 1,041,543 |  |  | $ | — |  |  | $ | 1,157,075 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  | $ | 6,487 |  |  | $ | — |  |  | $ | 6,487 |
|  | Fair Value Measurements Using: |  |  | Total |
December 31, 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 |  | $ | 122,501 |  |  | $ | — |  |  | $ | — |  |  | $ | 122,501 |
Government sponsored enterprise obligations |  |  | — |  |  |  | 135,021 |  |  |  | — |  |  |  | 135,021 |
Mortgage backed securities - government agencies |  |  | — |  |  |  | 846,624 |  |  |  | — |  |  |  | 846,624 |
Obligations of states and political subdivisions |  |  | — |  |  |  | 75,075 |  |  |  | — |  |  |  | 75,075 |
Other |  |  | — |  |  |  | 1,077 |  |  |  | — |  |  |  | 1,077 |
Total available for sale debt securities |  |  | 122,501 |  |  |  | 1,057,797 |  |  |  | — |  |  |  | 1,180,298 |
Interest rate swaps |  |  | — |  |  |  | 3,148 |  |  |  | — |  |  |  | 3,148 |
Total assets |  | $ | 122,501 |  |  | $ | 1,060,945 |  |  | $ | — |  |  | $ | 1,183,446 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  | $ | 3,162 |  |  | $ | — |  |  | $ | 3,162 |
There were no transfers into or out of Level 3 of the fair value hierarchy during 2022 or 2021. 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 June 30, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021. 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 |  |  | Six months |
|  | Fair Value Measurements Using: |  |  | Total |  |  | ended |  |  | ended |
June 30, 2022 (in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |  |  | June 30, 2022 |  |  | June 30, 2022 |
Collateral dependent loans |  | $ | — |  |  | $ | — |  |  | $ | 12,554 |  |  | $ | 12,554 |  |  | $ | — |  |  | $ | — |
Other real estate owned |  |  | — |  |  |  | — |  |  |  | 7,601 |  |  |  | 7,601 |  |  |  | — |  |  |  | — |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Losses recorded |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Three months |  |  | Six months |
|  | Fair Value Measurements Using: |  |  | Total |  |  | ended |  |  | ended |
December 31, 2021 (in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |  |  | June 30, 2021 |  |  | June 30, 2021 |
Collateral dependent loans |  | $ | — |  |  | $ | — |  |  | $ | 4,487 |  |  | $ | 4,487 |  |  | $ | — |  |  | $ | — |
Other real estate owned |  |  | — |  |  |  | — |  |  |  | 7,212 |  |  |  | 7,212 |  |  |  | — |  |  |  | — |
There were no liabilities measured at fair value on a non-recurring basis at June 30, 2022 and December 31, 2021. 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.
|  | June 30, 2022 |
(dollars in thousands) |  | Fair Value |  | Valuation Technique |  | Unobservable Inputs |  | Weighted Average |
Collateral dependent loans |  | $ | 12,554 |  | Appraisal |  | Appraisal discounts |  |  | 23.2 | %
Other real estate owned |  |  | 7,601 |  | Appraisal |  | Appraisal discounts |  |  | 30.7 |
|  | December 31, 2021 |
(dollars in thousands) |  | Fair Value |  | Valuation Technique |  | Unobservable Inputs |  | Weighted Average |
Collateral dependend loans |  | $ | 4,487 |  | Appraisal |  | Appraisal discounts |  |  | 41.1 | %
Other real estate owned |  |  | 7,212 |  | Appraisal |  | Appraisal discounts |  |  | 31.6 |

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- Definition The entire disclosure of the fair value measurement of assets and liabilities, which includes financial instruments measured at fair value that are classified in shareholders' equity, which may be measured on a recurring or nonrecurring basis. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI https://asc.fasb.org/topic&trid=2155941 + Details
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