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

9 Months Ended

Sep. 30, 2022

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, 2022 and December 31, 2021:

		September 30, 2022
		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		$	241,400			$	—			$	—			$	241,400
U.S. government agency entities			—				69,112				—				69,112
Mortgage-backed securities			—				861,488				—				861,488
Collateralized mortgage obligations			—				31,709				—				31,709
Corporate debt securities			—				210,702				—				210,702
Total securities available-for-sale			241,400				1,173,011				—				1,414,411

Equity securities
Mutual funds			5,497				—				—				5,497
Preferred stock of government sponsored entities			2,110				—				—				2,110
Other equity securities			15,516				—				—				15,516
Total equity securities			23,123				—				—				23,123

Warrants			—				—				46				46
Interest rate swaps			—				98,498				—				98,498
Foreign exchange contracts			—				752				—				752
Total assets		$	264,523			$	1,272,261			$	46			$	1,536,830

Liabilities
Interest rate swaps		$	—			$	54,443			$	—			$	54,443
Foreign exchange contracts			—				2,054				—				2,054
Total liabilities		$	—			$	56,497			$	—			$	56,497

		December 31, 2021
		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		$	—			$	87,509			$	—			$	87,509
Mortgage-backed securities			—				888,665				—				888,665
Collateralized mortgage obligations			—				9,117				—				9,117
Corporate debt securities			—				142,018				—				142,018
Total securities available-for-sale			—				1,127,309				—				1,127,309

Equity securities
Mutual funds			6,230				—				—				6,230
Preferred stock of government sponsored entities			1,811				—				—				1,811
Other equity securities			14,278				—				—				14,278
Total equity securities			22,319				—				—				22,319

Warrants			—				—				23				23
Interest rate swaps			—				10,090				—				10,090
Foreign exchange contracts			—				1,113				—				1,113
Total assets		$	22,319			$	1,138,512			$	23			$	1,160,854

Liabilities
Interest rate swaps		$	—			$	12,642			$	—			$	12,642
Foreign exchange contracts			—				327				—				327
Total liabilities		$	—			$	12,969			$	—			$	12,969

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, 2022, and December 31, 2021, 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, 2022, 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, 2022, and December 31, 2021, and the total losses for the periods indicated:

		As of September 30, 2022																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, 2022				September 30, 2021				September 30, 2022				September 30, 2021
		(In thousands)
Assets
Non accrual loans by type:
Commercial loans		$	—			$	—			$	6,887			$	6,887			$	1,786			$	—			$	1,786			$	2,037
Commercial mortgage loans			—				—				10,956				10,956				—				—				—				—
Residential mortgage loans and equity lines			—				—				5,407				5,407				—				—				—				—
Other installment loans			—				—				9				9				—				—				—				—
Total non accrual loans			—				—				23,259				23,259				1,786				—				1,786				2,037
Other real estate owned ⁽¹⁾			—				—				4,269				4,269				—				(55	)			—				(8	)
Investments in venture capital			—				—				836				836				—				8				—				143
Total assets		$	—			$	—			$	28,364			$	28,364			$	1,786			$	(47	)		$	1,786			$	2,172

(1) Other real estate owned balance of $4.1 million in the Consolidated Balance Sheets is net of estimated disposal costs.

		As of December 31, 2021																Total Losses
		Fair Value Measurements Using												Total Fair Value				For the Twelve Months Ended
		Level 1				Level 2				Level 3				Measurements				December 31, 2021				December 31, 2020
		(In thousands)
Assets
Non accrual loans by type:
Commercial loans		$	—			$	—			$	4,327			$	4,327			$	1,012			$	7,012
Commercial mortgage loans			—				—				13,335				13,335				—				—
Residential mortgage loans and equity lines			—				—				5,243				5,243				—				—
Total non accrual loans			—				—				22,905				22,905				1,012				7,012
Other real estate owned ⁽¹⁾			—				—				4,589				4,589				17				717
Investments in venture capital			—				—				952				952				143				107
Total assets		$	—			$	—			$	28,446			$	28,446			$	1,172			$	7,836

(1) Other real estate owned balance of $4.4 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 4.21% to 4.49%, and stock volatility from 19.45% to 25.29%.

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, 2022, and December 31, 2021:

		September 30, 2022								December 31, 2021
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
		(In thousands)
Financial Assets
Cash and due from banks		$	200,051			$	200,051			$	134,141			$	134,141
Short-term investments			1,063,294				1,063,294				2,315,563				2,315,563
Securities available-for-sale			1,414,411				1,414,411				1,127,309				1,127,309
Loans, net			17,951,050				17,676,365				16,202,001				16,499,869
Equity securities			23,123				23,123				22,319				22,319
Investment in Federal Home Loan Bank stock			17,250				17,250				17,250				17,250
Warrants			46				46				23				23

		Notional								Notional
		Amount				Fair Value				Amount				Fair Value
Foreign exchange contracts		$	162,518			$	752			$	181,997			$	1,113
Interest rate swaps			1,464,567				98,498				904,635				10,090

		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
Financial Liabilities
Deposits		$	18,575,751			$	18,573,442			$	18,058,842			$	18,051,720
Advances from Federal Home Loan Bank			360,000				359,416				20,000				21,279
Other borrowings			22,651				18,357				23,145				18,945
Long-term debt			119,136				56,317				119,136				62,274

		*Notional*								*Notional*
		*Amount*				*Fair Value*				*Amount*				*Fair Value*
Option contracts		$	—			$	—			$	676			$	3
Foreign exchange contracts			45,990				2,054				51,782				327
Interest rate swaps			691,872				54,443				872,400				12,642

		*Notional*								*Notional*
		*Amount*				*Fair Value*				*Amount*				*Fair Value*
Off-Balance Sheet Financial Instruments
Commitments to extend credit		$	3,537,547			$	(14,650	)		$	3,297,362			$	(12,594	)
Standby letters of credit			290,618				(2,048	)			266,490				(2,640	)
Other letters of credit			13,070				(12	)			16,652				(13	)

The following tables set forth the level in the fair value hierarchy for the estimated fair values of financial instruments as of September 30, 2022, and December 31, 2021.

		As of September 30, 2022
		Estimated
		Fair Value
		Measurements				Level 1				Level 2				Level 3
		(In thousands)
Financial Assets
Cash and due from banks		$	200,051			$	200,051			$	—			$	—
Short-term investments			1,063,294				1,063,294				—				—
Securities available-for-sale			1,414,411				241,400				1,173,011				—
Loans, net			17,676,365				—				—				17,676,365
Equity securities			23,123				23,123				—				—
Investment in Federal Home Loan Bank stock			17,250				—				17,250				—
Warrants			46				—				—				46
Financial Liabilities
Deposits			18,573,442				—				—				18,573,442
Advances from Federal Home Loan Bank			359,416				—				359,416				—
Other borrowings			18,357				—				—				18,357
Long-term debt			56,317				—				56,317				—

		As of December 31, 2021
		Estimated
		Fair Value
		Measurements				Level 1				Level 2				Level 3
		(In thousands)
Financial Assets
Cash and due from banks		$	134,141			$	134,141			$	—			$	—
Short-term investments			2,315,563				2,315,563				—				—
Securities available-for-sale			1,127,309				—				1,127,309				—
Loans, net			16,499,869				—				—				16,499,869
Equity securities			22,319				22,319				—				—
Investment in Federal Home Loan Bank stock			17,250				—				17,250				—
Warrants			23				—				—				23
Financial Liabilities
Deposits			18,051,720				—				—				18,051,720
Advances from Federal Home Loan Bank			21,279				—				21,279				—
Other borrowings			18,945				—				—				18,945
Long-term debt			62,274				—				62,274				—

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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