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Note 12 - Fair Value Measurements and Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 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 September 30, 2024, and December 31, 2023:

 

   

September 30, 2024

         
   

Fair Value Measurements Using

   

Total Fair Value

 
   

Level 1

   

Level 2

   

Level 3

   

Measurements

 
   

(In thousands)

 

Assets

                               

Securities AFS

                               

U.S. Treasury securities

  $ 495,011     $     $     $ 495,011  

U.S. government agency entities

          10,125             10,125  

Mortgage-backed securities

          734,536             734,536  

Collateralized mortgage obligations

          26,434             26,434  

Corporate debt securities

          242,250             242,250  

Total securities AFS

    495,011       1,013,345             1,508,356  
                                 

Equity securities

                               

Mutual funds

    5,704                   5,704  

Preferred stock of government sponsored entities

    2,514                   2,514  

Other equity securities

    25,984                   25,984  

Total equity securities

    34,202                   34,202  
                                 

Interest rate swaps

          32,807             32,807  

Foreign exchange contracts

          535             535  

Total assets

  $ 529,213     $ 1,046,687     $     $ 1,575,900  
                                 

Liabilities

                               

Interest rate swaps

  $     $ 38,001     $     $ 38,001  

Foreign exchange contracts

          693             693  

Total liabilities

  $     $ 38,694     $     $ 38,694  

 

   

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 September 30, 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.

 

During the second quarter of 2024, the Company entered into a restructuring support agreement and received equity securities for equity interest in a private company, a Level 3 measurement.  The fair value of the Company’s Level 3 equity security was measured using the private company’s projected earnings plus cash on hand. The primary inputs and assumptions used in the fair value measurement was derived from the issuer’s projected earnings and collateral, which included cash on hand, the financial standing of the issuer, the business and financial plan of the issuer, among other factors. Significant increases or decreases in any of the inputs or assumptions could result in a significant increase or decrease in the fair value measurement.

 

For financial assets measured at fair value on a nonrecurring basis that were still reflected in the Consolidated Balance Sheets as of September 30, 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 September 30, 2024, and December 31, 2023, and the total losses for the periods indicated:

 

   

As of September 30, 2024

   

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, 2024

   

September 30, 2023

   

September 30, 2024

   

September 30, 2023

 
   

(In thousands)

 

Assets

                                                               

Non-accrual loans by type:

                                                               

Commercial loans

  $     $     $ 5,732     $ 5,732     $ 1,923     $     $ 2,961     $  

Commercial real estate loans

                17,485       17,485       1,746       252       1,997       4,069  

Residential mortgage loans and equity lines

                249       249       59             59        

Total non-accrual loans

                23,466       23,466       3,728       252       5,017       4,069  

Other real estate owned (1)

                19,306       19,306                          

Other equity securities

                1,539       1,539                          

Investments in venture capital

                93       93                          

Total assets

  $     $     $ 44,404     $ 44,404     $ 3,728     $ 252     $ 5,017     $ 4,069  
                                                                 

(1) Other real estate owned balance of $18.3 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.

 

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, 2024, and December 31, 2023:

 

   

September 30, 2024

   

December 31, 2023

 
   

Carrying

           

Carrying

         
   

Amount

   

Fair Value

   

Amount

   

Fair Value

 
   

(In thousands)

 

Financial Assets

                               

Cash and due from banks

  $ 182,542     $ 182,542     $ 173,988     $ 173,988  

Short-term investments

    1,156,223       1,156,223       654,813       654,813  

Securities AFS

    1,508,356       1,508,356       1,604,570       1,604,570  

Loans held-for-sale

    5,190       5,190              

Loans held for investment, net

    19,199,355       19,794,300       19,382,858       19,605,152  

Equity securities

    35,741       35,741       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

  $ 68,329     $ 535     $ 124,452     $ 379  

Interest rate swaps

    983,562       32,807       1,406,879       54,268  

 

   

Carrying

           

Carrying

         
   

Amount

   

Fair Value

   

Amount

   

Fair Value

 

Financial Liabilities

                               

Deposits

  $ 19,943,941     $ 19,961,429     $ 19,325,447     $ 19,347,070  

Advances from Federal Home Loan Bank

    60,000       58,927       540,000       536,996  

Other borrowings

    17,783       15,281       15,787       13,978  

Long-term debt

    119,136       76,135       119,136       72,304  

 

   

Notional

           

Notional

         
   

Amount

   

Fair Value

   

Amount

   

Fair Value

 

Foreign exchange contracts

  $ 211,941     $ 693     $ 101,378     $ 175  

Interest rate swaps

    1,195,424       38,001       1,078,880       45,762  

 

   

Notional

           

Notional

         
   

Amount

   

Fair Value

   

Amount

   

Fair Value

 

Off-Balance Sheet Financial Instruments

                               

Commitments to extend credit

  $ 3,686,392     $ (18,171 )   $ 3,808,620     $ (14,344 )

Standby letters of credit

    422,763       (3,146 )     368,618       (2,821 )

Other letters of credit

    10,858       (12 )     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 September 30, 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 September 30, 2024

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 
   

(In thousands)

 

Financial Assets

                               

Cash and due from banks

  $ 182,542     $ 182,542     $     $  

Short-term investments

    1,156,223       1,156,223              

Loans held-for-sale

    5,190             5,190        

Loans held for investment, net

    19,794,300                   19,794,300  

Equity securities

    34,202       34,202              

Investment in Federal Home Loan Bank stock

    17,250             17,250        

Financial Liabilities

                               

Deposits

    19,961,429                   19,961,429  

Advances from Federal Home Loan Bank

    58,927             58,927        

Other borrowings

    15,281                   15,281  

Long-term debt

    76,135             76,135        

 

   

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