Note 13 - Fair Value Measurements

9 Months Ended

Sep. 30, 2020

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:

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

● 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.

● 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 periods ended September 30, 2020 and December 31, 2019, 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, 2020, and December 31, 2019:

	September 30, 2020
	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	$	99,980	$	—	$	—	$	99,980
U.S. government agency entities		—		104,596		—		104,596
Mortgage-backed securities		—		729,244		—		729,244
Collateralized mortgage obligations		—		211		—		211
Corporate debt securities		—		146,509		—		146,509
Total securities available-for-sale	$	99,980	$	980,560	$	—	$	1,080,540
Equity securities
Mutual funds	$	6,430	$	—	$	—	$	6,430
Preferred stock of government sponsored entities		5,522		—		—		5,522
Other equity securities		11,012		—		—		11,012
Total equity securities	$	22,964	$	—	$	—	$	22,964
Warrants	$	—	$	—	$	20	$	20
Interest rate swaps		—		3,992		—		3,992
Foreign exchange contracts		—		3,236		—		3,236
Total assets	$	122,944	$	987,788	$	20	$	1,110,752
Liabilities
Option contracts	$	—	$	6	$	—	$	6
Interest rate swaps		—		31,525		—		31,525
Foreign exchange contracts		—		1,592		—		1,592
Total liabilities	$	—	$	33,123	$	—	$	33,123

	December 31, 2019
	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	$	74,936	$	—	$	—	$	74,936
U.S. government agency entities		—		90,796		—		90,796
U.S. government sponsored entities		—		224,443		—		224,443
Mortgage-backed securities		—		887,790		—		887,790
Collateralized mortgage obligations		—		552		—		552
Corporate debt securities		—		173,325		—		173,325
Total securities available-for-sale	$	74,936	$	1,376,906	$	—	$	1,451,842
Equity securities
Mutual funds	$	6,277	$	—	$	—	$	6,277
Preferred stock of government sponsored entities		10,529		—		—		10,529
Other equity securities		11,199		—		—		11,199
Total equity securities	$	28,005	$	—	$	—	$	28,005
Warrants	$	—	$	—	$	39	$	39
Interest rate swaps		—		2,181		—		2,181
Foreign exchange contracts		—		2,411		—		2,411
Total assets	$	102,941	$	1,381,498	$	39	$	1,484,478
Liabilities
Option contracts	$	—	$	7	$	—	$	7
Interest rate swaps		—		14,229		—		14,229
Foreign exchange contracts		—		1,415		—		1,415
Total liabilities	$	—	$	15,651	$	—	$	15,651

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 first nine months of 2020. 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 0.23% to 0.66%, and stock volatility from 16.58% to 25.50%.

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, 2020, 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, 2020, and December 31, 2019, and the total losses for the periods indicated:

	As of September 30, 2020								Total Losses
	Fair Value Measurements Using						Total Fair Value		For the Three Months Ended				For the Nine Months Ended
	Level 1		Level 2		Level 3		Measurements		September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
	(In thousands)
Assets
Impaired loans by type:
Commercial loans	$	—	$	—	$	13,167	$	13,167	$	6,950	$	—	$	6,950	$	—
Commercial mortgage loans		—		—		30,437		30,437		—		—		—		—
Residential mortgage loans and equity lines		—		—		5,705		5,705		—		—		—		—
Total impaired loans		—		—		49,309		49,309		6,950		—		6,950		—
Loans held-for-sale		—		—		—		—		—		120		—		120
Other real estate owned (1)		—		905		4,238		5,143		—		—		717		494
Investments in venture capital and private company stock		—		—		1,381		1,381		3		83		107		101
Total assets	$	—	$	905	$	54,928	$	55,833	$	6,953	$	203	$	7,774	$	715

(1) Other real estate owned balance of $4.9 million in the condensed consolidated balance sheet is net of estimated disposal costs.

	As of December 31, 2019								Total Losses/(Gains)
	Fair Value Measurements Using						Total Fair Value		For the Twelve Months Ended
	Level 1		Level 2		Level 3		Measurements		December 31, 2019		December 31, 2018
	(In thousands)
Assets
Impaired loans by type:
Commercial loans	$	—	$	—	$	6,196	$	6,196	$	—	$	—
Commercial mortgage loans		—		—		25,566		25,566		—		—
Residential mortgage loans and equity lines		—		—		5,320		5,320		—		—
Total impaired loans		—		—		37,082		37,082		—		—
Other real estate owned (1)		—		6,490		4,343		10,833		681		(619	)
Investments in venture capital and private company stock		—		—		1,604		1,604		167		330
Total assets	$	—	$	6,490	$	43,029	$	49,519	$	848	$	(289	)

(1) Other real estate owned balance of $10.2 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. In the current year, the Company used 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.