Note 12 - Fair Value Measurements and Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2024

Notes to Financial Statements

Fair Value Disclosures [Text Block]

12. 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:

● 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 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 March 31, 2024 and December 31, 2023:

	March 31, 2024
	Fair Value Measurements Using						Total Fair Value
	Level 1		Level 2		Level 3		Measurements
	(In thousands)
Assets
Securities AFS
U.S. Treasury securities	$	541,798	$	—	$	—	$	541,798
U.S. government agency entities		—		12,058		—		12,058
U.S. government sponsored entities		—		59,745		—		59,745
Mortgage-backed securities		—		754,162		—		754,162
Collateralized mortgage obligations		—		27,198		—		27,198
Corporate debt securities		—		258,206		—		258,206
Total securities AFS		541,798		1,111,369		—		1,653,167
Equity securities
Mutual funds		5,526		—		—		5,526
Preferred stock of government sponsored entities		2,384		—		—		2,384
Other equity securities		23,470		—		—		23,470
Total equity securities		31,380		—		—		31,380
Interest rate swaps		—		55,138		—		55,138
Foreign exchange contracts		—		334		—		334
Total assets	$	573,178	$	1,166,841	$	—	$	1,740,019
Liabilities
Interest rate swaps	$	—	$	42,014	$	—	$	42,014
Foreign exchange contracts		—		186		—		186
Total liabilities	$	—	$	42,200	$	—	$	42,200

	December 31, 2023
	Fair Value Measurements Using						Total Fair Value
	Level 1		Level 2		Level 3		Measurements
	(In thousands)
Assets
Securities AFS
U.S. Treasury securities	$	495,300	$	—	$	—	$	495,300
U.S. government agency entities		—		48,169		—		48,169
Mortgage-backed securities		—		786,723		—		786,723
Collateralized mortgage obligations		—		28,044		—		28,044
Corporate debt securities		—		246,334		—		246,334
Total securities AFS		495,300		1,109,270		—		1,604,570
Equity securities
Mutual funds		5,585		—		—		5,585
Preferred stock of government sponsored entities		1,821		—		—		1,821
Other equity securities		33,000		—		—		33,000
Total equity securities		40,406		—		—		40,406
Interest rate swaps		—		54,268		—		54,268
Foreign exchange contracts		—		379		—		379
Total assets	$	535,706	$	1,163,917	$	—	$	1,699,623
Liabilities
Interest rate swaps	$	—	$	45,762	$	—	$	45,762
Foreign exchange contracts		—		175		—		175
Total liabilities	$	—	$	45,937	$	—	$	45,937

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 March 31, 2024, and December 31, 2023, 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 March 31, 2024, and December 31, 2023, 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 March 31, 2024, and December 31, 2023, and the total losses for the periods indicated:

	As of March 31, 2024								Total Losses
	Fair Value Measurements Using						Total Fair Value		For the Three Months Ended
	Level 1		Level 2		Level 3		Measurements		March 31, 2024		March 31, 2023
	(In thousands)
Assets
Non accrual loans by type:
Commercial loans	$	—	$	—	$	129	$	129	$	1,038	$	2,793
Commercial real estate loans		—		—		20,002		20,002		251		3,990
Total non accrual loans		—		—		20,131		20,131		1,289		6,783
Other real estate owned (1)		—		—		20,446		20,446		—		—
Investments in venture capital		—		—		93		93		—		—
Total assets	$	—	$	—	$	40,670	$	40,670	$	1,289	$	6,783

(1) Other real estate owned balance of $19.4 million in the Consolidated Balance Sheets is net of estimated disposal costs.

	As of December 31, 2023								Total Losses
	Fair Value Measurements Using						Total Fair Value		For the Twelve Months Ended
	Level 1		Level 2		Level 3		Measurements		December 31, 2023		December 31, 2022
	(In thousands)
Assets
Non accrual loans by type:
Commercial loans	$	—	$	—	$	191	$	191	$	—	$	1,786
Commercial real estate loans		—		—		6,882		6,882		4,069		2,091
Total non accrual loans		—		—		7,073		7,073		4,069		3,877
Other real estate owned (1)		—		—		20,446		20,446		—		—
Investments in venture capital		—		—		237		237		227		268
Total assets	$	—	$	—	$	27,756	$	27,756	$	4,296	$	4,145

(1) Other real estate owned balance of $19.4 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.

Loans held for sale are recorded at the lower of cost or fair value upon transfer. Loans held for sale may be measured at fair value on a nonrecurring basis when fair value is less than cost. Fair value is generally determined based on available market data for similar loans and therefore, are classified as Level 2 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.

There were no warrants outstanding as of March 31, 2024, and December 31, 2023.

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 March 31, 2024, and December 31, 2023:

	March 31, 2024				December 31, 2023
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(In thousands)
Financial Assets
Cash and due from banks	$	165,284	$	165,284	$	173,988	$	173,988
Short-term investments		1,010,651		1,010,651		654,813		654,813
Securities AFS		1,653,167		1,653,167		1,604,570		1,604,570
Loans held-for-sale		23,171		23,171		—		—
Loans held for investment, net		19,263,070		19,597,530		19,382,858		19,605,152
Equity securities		31,380		31,380		40,406		40,406
Investment in Federal Home Loan Bank stock		17,250		17,250		17,746		17,746

	Notional				Notional
	Amount		Fair Value		Amount		Fair Value
Foreign exchange contracts	$	250,648	$	334	$	124,452	$	379
Interest rate swaps		1,100,019		55,138		1,406,879		54,268

	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Financial Liabilities
Deposits	$	19,846,259	$	19,855,328	$	19,325,447	$	19,347,070
Advances from Federal Home Loan Bank		265,000		264,596		540,000		536,996
Other borrowings		17,557		15,373		15,787		13,978
Long-term debt		119,136		73,102		119,136		72,304

	Notional				Notional
	Amount		Fair Value		Amount		Fair Value
Foreign exchange contracts	$	66,081	$	186	$	101,378	$	175
Interest rate swaps		952,560		42,014		1,078,880		45,762

	Notional					Notional
	Amount		Fair Value			Amount		Fair Value
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	3,925,285	$	(19,052	)	$	3,808,620	$	(14,344	)
Standby letters of credit		386,442		(3,031	)		368,618		(2,821	)
Other letters of credit		19,450		(17	)		11,308		(10	)

The following tables set forth the level in the fair value hierarchy for the estimated fair values of financial instruments as of March 31, 2024, and December 31, 2023, excluding financial instruments recorded at fair value on a recurring basis already presented in other tables in this note:

	As of March 31, 2024
	Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets
Cash and due from banks	$	165,284	$	165,284	$	—	$	—
Short-term investments		1,010,651		1,010,651		—		—
Loans held-for-sale		23,171		—		23,171		—
Loans held for investment, net		19,597,530		—		—		19,597,530
Equity securities		31,380		31,380		—		—
Investment in Federal Home Loan Bank stock		17,250		—		17,250		—
Financial Liabilities
Deposits		19,855,328		—		—		19,855,328
Advances from Federal Home Loan Bank		264,596		—		264,596		—
Other borrowings		15,373		—		—		15,373
Long-term debt		73,102		—		73,102		—

	As of December 31, 2023
	Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets
Cash and due from banks	$	173,988	$	173,988	$	—	$	—
Short-term investments		654,813		654,813		—		—
Loans held for investment, net		19,605,152		—		—		19,605,152
Equity securities		40,406		40,406		—		—
Investment in Federal Home Loan Bank stock		17,746		—		17,746		—
Financial Liabilities
Deposits		19,347,070		—		—		19,347,070
Advances from Federal Home Loan Bank		536,996		—		536,996		—
Other borrowings		13,978		—		—		13,978
Long-term debt		72,304		—		72,304		—