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Note 13 - Fair Value Measurements and Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Fair Value Disclosures [Text Block]

13. Fair Value Measurements and Fair Value of Financial Instruments

The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily securities available-for-sale and derivatives. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for individually evaluated loans and other real estate owned and also to record impairment on certain assets, such as goodwill, CDI, and other long-lived assets.

The Company used valuation methodologies to measure assets at fair value under ASC Topic 820 and ASC Topic 825, as amended by ASU 2016-01 and ASU 2018-03, to estimate the fair value of financial instruments not recorded at fair value. The fair value of the Company’s assets and liabilities is classified and disclosed in one of the following three categories:

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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 classification of assets and liabilities within the hierarchy is based on whether inputs to the valuation methodology used are observable or unobservable, and the significance of those inputs in the fair value measurement. The Company’s assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurements.

Financial assets and liabilities measured at fair value on a recurring basis

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 and Equity Securities - For certain actively traded agency preferred stocks, mutual funds, U.S. Treasury securities, and other 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. 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.

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 – The Company measures the fair value of interest rate swaps using third party models with observable market data, a Level 2 measurement.

Currency Option Contracts and Foreign Exchange Contracts - The Company measures the fair value of currency option contracts and foreign exchange contracts based on observable market rates on a recurring basis, a Level 2 measurement.

The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020:

		September 30, 2021
		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		$	40,211			$	—			$	—			$	40,211
U.S. government agency entities			—				90,943				—				90,943
Mortgage-backed securities			—				805,067				—				805,067
Collateralized mortgage obligations			—				9,561				—				9,561
Corporate debt securities			—				133,434				—				133,434
Total securities available-for-sale			40,211				1,039,005				—				1,079,216

Equity securities
Mutual funds			6,289				—				—				6,289
Preferred stock of government sponsored entities			1,493				—				—				1,493
Other equity securities			12,335				—				—				12,335
Total equity securities			20,117				—				—				20,117

Warrants			—				—				22				22
Interest rate swaps			—				5,187				—				5,187
Foreign exchange contracts			—				1,319				—				1,319
Total assets		$	60,328			$	1,045,511			$	22			$	1,105,861

Liabilities
Interest rate swaps		$	—			$	9,037			$	—			$	9,037
Foreign exchange contracts			—				1,723				—				1,723
Total liabilities		$	—			$	10,760			$	—			$	10,760

		December 31, 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		$	80,948			$	—			$	—			$	80,948
U.S. government agency entities			—				99,839				—				99,839
Mortgage-backed securities			—				727,068				—				727,068
Collateralized mortgage obligations			—				10,324				—				10,324
Corporate debt securities			—				118,371				—				118,371
Total securities available-for-sale			80,948				955,602				—				1,036,550

Equity securities
Mutual funds			6,413				—				—				6,413
Preferred stock of government sponsored entities			5,485				—				—				5,485
Other equity securities			11,846				—				—				11,846
Total equity securities			23,744				—				—				23,744

Warrants			—				—				21				21
Interest rate swaps			—				3,409				—				3,409
Foreign exchange contracts			—				4,658				—				4,658
Total assets		$	104,692			$	963,669			$	21			$	1,068,382

Liabilities
Interest rate swaps		$	—			$	10,286			$	—			$	10,286
Foreign exchange contracts			—				2,200				—				2,200
Total liabilities		$	—			$	12,486			$	—			$	12,486

Financial assets and liabilities 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, 2021, and December 31, 2020, 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.

For financial assets measured at fair value on a nonrecurring basis that were still reflected in the Consolidated Balance Sheets as of September 30, 2021, 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, 2021, and December 31, 2020, and the total losses for the periods indicated:

		As of September 30, 2021																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, 2021				September 30, 2020				September 30, 2021				September 30, 2020
		(In thousands)
Assets
Loans held-for-investment:
Commercial loans		$	—			$	—			$	5,355			$	5,355			$	—			$	6,950			$	2,037			$	6,950
Commercial mortgage loans			—				—				13,332				13,332				—				—				—				—
Residential mortgage loans and equity lines			—				—				2,277				2,227				—				—				—				—
Total loans held-for-investment			—				—				20,964				20,914				—				6,950				2,037				6,950
Other real estate owned ⁽¹⁾			—				—				5,497				5,497				(55	)			—				(8	)			717
Investments in venture capital and private company stock			—				—				1,007				1,007				8				3				143				107
Total assets		$	—			$	—			$	27,468			$	27,418			$	(47	)		$	6,953			$	2,172			$	7,774

(1) Other real estate owned balance of $5.3 million in the Consolidated Balance Sheets is net of estimated disposal costs.

		As of December 31, 2020
		Fair Value Measurements Using												Total Fair Value
		Level 1				Level 2				Level 3				Measurements
		(In thousands)
Assets
Impaired loans by type:
Commercial loans		$	—			$	—			$	5,342			$	5,342
Commercial mortgage loans			—				—				25,749				25,749
Residential mortgage loans and equity lines			—				—				4,307				4,307
Total impaired loans			—				—				35,398				35,398
Other real estate owned ⁽¹⁾			—				—				5,141				5,141
Investments in venture capital and private company stock			—				—				1,381				1,381
Total assets		$	—			$	—			$	41,920			$	41,920

(1) Other real estate owned balance of $4.9 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 individually evaluated 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 fair value of individually evaluated loans is calculated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent individually evaluated loans are recorded based on the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value using discounted future cash flows or old appraisals which are then adjusted based on recent market trends, a Level 3 measurement.

The significant unobservable inputs (Level 3) 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 individually evaluated loans, quoted price, or loan sale price of loans held for sale, and appraised value of OREO.

The significant unobservable inputs in the Black-Scholes option pricing model for the fair value of warrants are their expected life ranging from one to five years, risk-free interest rate from 0.18% to 1.16%, and stock volatility from 14.86% to 20.34%.

Fair value is estimated in accordance with ASC Topic 825. Fair value estimates are made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following table sets forth the carrying and notional amounts and estimated fair value of financial instruments as of September 30, 2021, and December 31, 2020:

		September 30, 2021								December 31, 2020
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
		(In thousands)
Financial Assets
Cash and due from banks		$	156,287			$	156,287			$	138,616			$	138,616
Short-term investments			1,667,875				1,667,875				1,282,462				1,282,462
Securities available-for-sale			1,079,216				1,079,216				1,036,550				1,036,550
Loans, net			15,976,781				16,301,993				15,475,364				16,103,471
Equity securities			20,117				20,117				23,744				23,744
Investment in Federal Home Loan Bank stock			17,250				17,250				17,250				17,250
Warrants			22				22				21				21

		Notional								Notional
		Amount				Fair Value				Amount				Fair Value
Foreign exchange contracts		$	161,535			$	1,319			$	151,244			$	4,658
Interest rate swaps			664,288				5,187				96,889				3,409

		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
Financial Liabilities
Deposits		$	17,006,870			$	17,007,694			$	16,109,401			$	16,125,808
Advances from Federal Home Loan Bank			20,000				20,856				150,000				155,133
Other borrowings			23,197				19,164				23,714				19,632
Long-term debt			119,136				62,274				119,136				65,487

		Notional								Notional
		Amount				Fair Value				Amount				Fair Value
Foreign exchange contracts		$	70,184			$	1,723			$	132,813			$	2,200
Interest rate swaps			788,802				9,037				679,648				10,286

		Notional								Notional
		Amount				Fair Value				Amount				Fair Value
Off-Balance Sheet Financial Instruments
Commitments to extend credit		$	3,255,421			$	(11,020	)		$	2,977,528			$	(8,432	)
Standby letters of credit			248,958				(2,172	)			234,200				(1,630	)
Other letters of credit			25,205				(15	)			16,821				(16	)
Bill of lading guarantees			—				—				238				—

The following tables set forth the level in the fair value hierarchy for the estimated fair values of financial instruments as of September 30, 2021, and December 31, 2020.

		As of September 30, 2021
		Estimated
		Fair Value
		Measurements				Level 1				Level 2				Level 3
		(In thousands)
Financial Assets
Cash and due from banks		$	156,287			$	156,287			$	—			$	—
Short-term investments			1,667,875				1,667,875				—				—
Securities available-for-sale			1,079,216				40,211				1,039,005				—
Loans, net			16,301,993				—				—				16,301,993
Equity securities			20,117				20,117				—				—
Investment in Federal Home Loan Bank stock			17,250				—				17,250				—
Warrants			22				—				—				22
Financial Liabilities
Deposits			17,007,694				—				—				17,007,694
Advances from Federal Home Loan Bank			20,856				—				20,856				—
Other borrowings			19,164				—				—				19,164
Long-term debt			62,274				—				62,274				—

		As of December 31, 2020
		Estimated
		Fair Value
		Measurements				Level 1				Level 2				Level 3
		(In thousands)
Financial Assets
Cash and due from banks		$	138,616			$	138,616			$	—			$	—
Short-term investments			1,282,462				1,282,462				—				—
Securities available-for-sale			1,036,550				80,948				955,602				—
Loans, net			16,103,471				—				—				16,103,471
Equity securities			23,744				23,744				—				—
Investment in Federal Home Loan Bank stock			17,250				—				17,250				—
Warrants			21				—				—				21
Financial Liabilities
Deposits			16,125,808				—				—				16,125,808
Advances from Federal Home Loan Bank			155,133				—				155,133				—
Other borrowings			19,632				—				—				19,632
Long-term debt			65,487				—				65,487				—

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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