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Note 13 - Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

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

13. Fair Value Measurements

The Company determined the fair values of our financial instruments based on the following:

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Level 1 - Quoted prices in active markets for identical assets or liabilities.

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Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.

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Level 3 – Unobservable inputs based on the Company’s own judgment about the assumptions that a market participant would use.

The Company uses the following methodologies to measure the fair value of its financial assets and liabilities on a recurring basis:

Securities Available for Sale - For certain U.S. Treasury securities, the Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures securities by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement. This category generally includes U.S. Government agency securities, U.S. Government sponsored entities, state and municipal securities, mortgage-backed securities (“MBS”), collateralized mortgage obligations and corporate bonds.

Equity Securities – The Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a level 1 measurement. Equity securities are comprised of mutual funds, preferred stock of government-sponsored entities and other equity securities.

Foreign Exchange Contracts - The Company measures the fair value of foreign exchange contracts based on dealer quotes, a Level 2 measurement.

Warrants - The Company measures the fair value of warrants based on unobservable inputs based on assumptions and management judgment, a Level 3 measurement.

Interest Rate Swaps - Fair value of interest rate swaps is derived from third party models with observable market data, a Level 2 measurement.

Assets measured at estimated fair value on a non-recurring basis:

Certain assets or liabilities are required to be measured at estimated fair value on a nonrecurring basis subsequent to initial recognition. Generally, these adjustments are the result of lower-of-cost-or-fair value or other impairment write-downs of individual assets. In determining the estimated fair values during the period, the Company determined that substantially all the changes in estimated fair value were due to declines in market conditions versus instrument specific credit risk. For the nine months ended September 30, 2019 and December 31, 2018, there were no material adjustments to fair value for the Company’s assets and liabilities measured at fair value on a nonrecurring basis in accordance with GAAP.

The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2019, and December 31, 2018:

	September 30, 2019
	Fair Value Measurements Using						Total Fair Value
	Level 1		Level 2		Level 3		Measurements
	(In thousands)
Assets
Securities available-for-sale
U.S. government agency entities	$	—	$	92,954	$	—	$	92,954
U.S. government sponsored entities		—		347,699		—		347,699
Mortgage-backed securities		—		886,735		—		886,735
Collateralized mortgage obligations		—		665		—		665
Corporate debt securities		—		99,385		—		99,385
Total securities available-for-sale	$	—	$	1,427,438	$	—	$	1,427,438

Equity securities
Mutual funds	$	6,307	$	—	$	—	$	6,307
Preferred stock of government sponsored entities		15,145		—		—		15,145
Other equity securities		11,410		—		—		11,410
Total equity securities	$	32,862	$	—	$	—	$	32,862

Warrants	$	—	$	—	$	31	$	31
Interest rate swaps		—		1,697		—		1,697
Foreign exchange contracts		—		965		—		965
Total assets	$	32,862	$	1,430,100	$	31	$	1,462,993

Liabilities
Option contracts	$	—	$	6	$	—	$	6
Interest rate swaps		—		17,734		—		17,734
Foreign exchange contracts		—		2,435		—		2,435
Total liabilities	$	—	$	20,175	$	—	$	20,175

	December 31, 2018
	Fair Value Measurements Using						Total Fair Value
	Level 1		Level 2		Level 3		Measurements
	(In thousands)
Assets
Securities available-for-sale
U.S. Treasury securities	$	124,751	$	—	$	—	$	124,751
U.S. government agency entities		—		5,871		—		5,871
U.S. government sponsored entities		—		388,363		—		388,363
Mortgage-backed securities		—		656,744		—		656,744
Collateralized mortgage obligations		—		977		—		977
Corporate debt securities		—		65,803		—		65,803
Total securities available-for-sale	$	124,751	$	1,117,758	$	—	$	1,242,509

Equity securities
Mutual funds	$	6,094	$	—	$	—	$	6,094
Preferred stock of government sponsored entities		7,822		—		—		7,822
Other equity securities		11,182		—		—		11,182
Total equity securities	$	25,098	$	—	$	—	$	25,098

Warrants	$	—	$	—	$	184	$	184
Interest rate swaps		—		7,810		—		7,810
Foreign exchange contracts		—		397		—		397
Total assets	$	149,849	$	1,125,965	$	184	$	1,275,998

Liabilities
Option contracts	$	—	$	6	$	—	$	6
Interest rate swaps		—		1,543		—		1,543
Foreign exchange contracts		—		1,763		—		1,763
Total liabilities	$	—	$	3,312	$	—	$	3,312

The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs. The fair value adjustment of warrants was included in other operating income in the third quarter of 2019. The significant unobservable inputs in the Black-Scholes option pricing model for the fair value of warrants are their expected life ranging from 1 to 6 years, risk-free interest rate from 1.77% to 1.87%, and stock volatility from 13.86% to 20.46%.

For financial assets measured at fair value on a nonrecurring basis that were still reflected in the Condensed Consolidated Balance Sheets as of September 30, 2019, the following tables set forth the level of valuation assumptions used to determine each adjustment, the carrying value of the related individual assets as of September 30, 2019, and December 31, 2018, and the total losses for the periods indicated:

	As of September 30, 2019								Total Losses
	Fair Value Measurements Using						Total Fair		For the Three Months Ended				For the Nine Months Ended
	Level 1		Level 2		Level 3		Value Measurements		September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
	(In thousands)
Assets
Impaired loans by type:
Commercial loans	$	—	$	—	$	12,491	$	12,491	$	—	$	—	$	—	$	—
Commercial mortgage loans		—		—		25,752		25,752		—		—		—		—
Residential mortgage loans and equity lines		—		—		5,696		5,696		—		—		—		—
Total impaired loans		—		—		43,939		43,939		—		—		—		—
Loans held-for-sale		—		—		36,778		36,778		120		—		120		—
Other real estate owned ⁽¹⁾		—		7,625		4,343		11,968		—		—		494		—
Investments in venture capital and private company stock		—		—		1,671		1,671		83		62		101		326
Total assets	$	—	$	7,625	$	86,731	$	94,356	$	203	$	62	$	715	$	326

⁽¹⁾ Other real estate owned balance of $11.3 million in the condensed consolidated balance sheet is net of estimated disposal costs.

	As of December 31, 2018								Total Losses/(Gains)
	Fair Value Measurements Using						Total Fair Value		For the Twelve Months Ended
	Level 1		Level 2		Level 3		Measurements		December 31, 2018			December 31, 2017
	(In thousands)
Assets
Impaired loans by type:
Commercial loans	$	—	$	—	$	4,733	$	4,733	$	—		$	25
Commercial mortgage loans		—		—		26,186		26,186		—			—
Residential mortgage loans and equity lines		—		—		6,850		6,850		—			—
Total impaired loans		—		—		37,769		37,769		—			25
Other real estate owned ⁽¹⁾		—		9,023		4,343		13,366		(619	)		457
Investments in venture capital and private company stock		—		—		2,162		2,162		330			392
Total assets	$	—	$	9,023	$	44,274	$	53,297	$	(289	)	$	874

⁽¹⁾ Other real estate owned balance of $12.7 million in the Consolidated Balance Sheets is net of estimated disposal costs.

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent impaired loans are primarily based on the appraised value of collateral adjusted by estimated sales cost and commissions. The Company generally obtains new appraisal reports every twelve months as appropriate. As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. During the 2018 reported period, collateral discounts ranged from 55% in the case of accounts receivable collateral to 65% in the case of inventory collateral. In the current year, the Company began using borrower specific collateral discounts with various discount levels.

The significant unobservable inputs used in the fair value measurement of other real estate owned (“OREO”) are primarily based on the appraised value of OREO adjusted by estimated sales cost and commissions. The Company applies estimated sales cost and commissions ranging from 3% to 6% of the collateral value of impaired loans, quoted price, or loan sale price of loans held for sale, and appraised value of OREO.