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Note 11 - Fair Value Measurements | 9 Months Ended
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Sep. 30, 2016
Notes to Financial Statements |
Fair Value, Measurement Inputs, Disclosure [Text Block] | 1 1 . Fair Value Measurements The Company adopted ASC Topic 820 on January 1, 2008, and 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 actively traded agency preferred stock, mutual funds, and 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, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities, corporate bonds and trust preferred securities. Warrants . The Company measures the fair value of warrants based on unobservable inputs based on assumptions and management judgment, a Level 3 measurement. Foreign Exchange Contracts . The Company measures the fair value of foreign exchange contracts based on dealer quotes, a Level 2 measurement. Interest Rate Swaps . Fair value of interest rate swaps is derived from third party models with observable market data, a Level 2 measurement. The valuation techniques for the assets and liabilities valued on a nonrecurring basis are as follows: Impaired Loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement. Goodwill. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The two-step impairment testing process, if needed, begins by assigning net assets and goodwill to the two reporting units — Commercial Lending and Retail Banking. The Company then completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment. Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill. The implied fair value of goodwill is computed by assuming that all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill. This adjusted goodwill balance is the implied fair value used in step two. An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value. In connection with the determination of fair value, certain data and information is utilized, including earnings forecasts at the reporting unit level for the next four years. Other key assumptions include terminal values based on future growth rates and discount rates for valuing the cash flows, which have inputs for the risk-free rate, market risk premium, and adjustments to reflect inherent risk and required market returns. Because of the significance of unobservable inputs in the valuation of goodwill impairment, goodwill subject to nonrecurring fair value adjustments is classified as a Level 3 measurement. Core Deposit Intangibles. Core deposit intangibles is initially recorded at fair value based on a valuation of the core deposits acquired and is amortized over its estimated useful life to its residual value in proportion to the economic benefits consumed. The Company assesses the recoverability of this intangible asset on a nonrecurring basis using the core deposits remaining at the assessment date and the fair value of cash flows expected to be generated from the core deposits, a Level 3 measurement. Other Real Estate Owned. Real estate acquired in the settlement of loans is initially recorded at fair value based on the appraised value of the property on the date of transfer, less estimated costs to sell, a Level 2 measurement. From time to time, nonrecurring fair value adjustments are made to other real estate owned based on the current updated appraised value of the property, also a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement. Investments in Venture Capital. The Company periodically reviews its investments in venture capital for other-than-temporary impairment on a nonrecurring basis. Investments in venture capital were written down to their fair value based on available financial reports from venture capital partnerships and management’s judgment and estimation, a Level 3 measurement. Equity Investments . The Company records equity investments at fair value on a nonrecurring basis based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. 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, 2016, and December 31, 2015:
September 30, 2016 |  | Fair Value Measurements Using |  |  | Total at |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |
|  | (In thousands) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 390,009 |  |  | $ | - |  |  | $ | - |  |  | $ | 390,009 |
U.S. government sponsored entities |  |  | - |  |  |  | 250,010 |  |  |  | - |  |  |  | 250,010 |
Mortgage-backed securities |  |  | - |  |  |  | 563,638 |  |  |  | - |  |  |  | 563,638 |
Collateralized mortgage obligations |  |  | - |  |  |  | 30 |  |  |  | - |  |  |  | 30 |
Corporate debt securities |  |  | - |  |  |  | 74,469 |  |  |  | - |  |  |  | 74,469 |
Mutual funds |  |  | 5,926 |  |  |  | - |  |  |  | - |  |  |  | 5,926 |
Preferred stock of government sponsored entities |  |  | - |  |  |  | 3,188 |  |  |  | - |  |  |  | 3,188 |
Other equity securities |  |  | - |  |  |  | 11,199 |  |  |  | - |  |  |  | 11,199 |
Total securities available-for-sale |  |  | 395,935 |  |  |  | 902,534 |  |  |  | - |  |  |  | 1,298,469 |
Warrants |  |  | - |  |  |  | - |  |  |  | 75 |  |  |  | 75 |
Foreign exchange contracts |  |  | - |  |  |  | 1,711 |  |  |  | - |  |  |  | 1,711 |
Total assets |  | $ | 395,935 |  |  | $ | 904,245 |  |  | $ | 75 |  |  | $ | 1,300,255 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | - |  |  | $ | 15,186 |  |  | $ | - |  |  | $ | 15,186 |
Foreign exchange contracts |  |  | - |  |  |  | 712 |  |  |  | - |  |  |  | 712 |
Total liabilities |  | $ | - |  |  | $ | 15,898 |  |  | $ | - |  |  | $ | 15,898 |
December 31, 2015 |  | Fair Value Measurements Using |  |  | Total at |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |
|  | (In thousands) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 284,288 |  |  | $ | - |  |  | $ | - |  |  | $ | 284,288 |
U.S. government sponsored entities |  |  | - |  |  |  | 148,160 |  |  |  | - |  |  |  | 148,160 |
Mortgage-backed securities |  |  | - |  |  |  | 1,062,269 |  |  |  | - |  |  |  | 1,062,269 |
Collateralized mortgage obligations |  |  | - |  |  |  | 36 |  |  |  | - |  |  |  | 36 |
Corporate debt securities |  |  | - |  |  |  | 73,855 |  |  |  | - |  |  |  | 73,855 |
Mutual funds |  |  | 5,833 |  |  |  | - |  |  |  | - |  |  |  | 5,833 |
Preferred stock of government sponsored entities |  |  | - |  |  |  | 3,216 |  |  |  | - |  |  |  | 3,216 |
Other equity securities |  |  | - |  |  |  | 8,695 |  |  |  | - |  |  |  | 8,695 |
Total securities available-for-sale |  |  | 290,121 |  |  |  | 1,296,231 |  |  |  | - |  |  |  | 1,586,352 |
Warrants |  |  | - |  |  |  | - |  |  |  | 62 |  |  |  | 62 |
Foreign exchange contracts |  |  | - |  |  |  | 3,339 |  |  |  | - |  |  |  | 3,339 |
Total assets |  | $ | 290,121 |  |  | $ | 1,299,570 |  |  | $ | 62 |  |  | $ | 1,589,753 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Option contracts |  | $ | - |  |  | $ | 28 |  |  | $ | - |  |  | $ | 28 |
Interest rate swaps |  |  | - |  |  |  | 6,496 |  |  |  | - |  |  |  | 6,496 |
Foreign exchange contracts |  |  | - |  |  |  | 4,124 |  |  |  | - |  |  |  | 4,124 |
Total liabilities |  | $ | - |  |  | $ | 10,648 |  |  | $ | - |  |  | $ | 10,648 |
The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs. The fair value of warrants was $75,000 as of September 30, 2016, compared to $62,000 as of December 31, 2015. The fair value adjustment of warrants was included in other operating income in the third quarter of 2016. 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 7 years, risk-free interest rate from 0.73% to 1.38%, and stock volatility from 12.4% to 15.1%. 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, 2016, the following tables provide the level of valuation assumptions used to determine each adjustment, the carrying value of the related individual assets as of September 30, 2016, and December 31, 2015, and the total losses for the periods indicated:
|  | September 30, 2016 |  |  | Total (Gains)/Losses |
|  | Fair Value Measurements Using |  |  |  |  |  | Three Months Ended |  |  | Nine Months Ended |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total at Fair Value |  |  | September 30, 2016 |  |  | September 30, 2015 |  |  | September 30, 2016 |  |  | September 30, 2015 |
|  | (In thousands) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans by type: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  | $ | - |  |  | $ | - |  |  | $ | 1,897 |  |  | $ | 1,897 |  |  | $ | - |  |  | $ | 575 |  |  | $ | - |  |  | $ | 3,380 |
Commercial mortgage loans |  |  | - |  |  |  | - |  |  |  | 9,041 |  |  |  | 9,041 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 654 |
Residential mortgage loans and equity lines |  |  | - |  |  |  | - |  |  |  | 13,139 |  |  |  | 13,139 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 146 |
Total impaired loans |  |  | - |  |  |  | - |  |  |  | 24,077 |  |  |  | 24,077 |  |  |  | - |  |  |  | 575 |  |  |  | - |  |  |  | 4,180 |
Other real estate owned (1) |  |  | - |  |  |  | 3,095 |  |  |  | 4,372 |  |  |  | 7,467 |  |  |  | (206 | ) |  |  | 179 |  |  |  | 9 |  |  |  | 404 |
Investments in venture capital and private company stock |  |  | - |  |  |  | - |  |  |  | 4,291 |  |  |  | 4,291 |  |  |  | 187 |  |  |  | 81 |  |  |  | 419 |  |  |  | 408 |
Total assets |  | $ | - |  |  | $ | 3,095 |  |  | $ | 32,740 |  |  | $ | 35,835 |  |  | $ | (19 | ) |  | $ | 835 |  |  | $ | 428 |  |  | $ | 4,992 |
(1) Other real estate owned balance of $21.0 million in the condensed consolidated balance sheet is net of estimated disposal costs. |  |  |  |  |  |  |  |  |  |  |  |
|  | December 31, 2015 |  |  | Total Losses |
|  | Fair Value Measurements Using |  |  |  |  |  | Twelve Months Ended |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total at Fair Value |  |  | December 31, 2015 |  |  | December 31, 2014 |
|  | (In thousands) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans by type: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  | $ | - |  |  | $ | - |  |  | $ | 6,317 |  |  | $ | 6,317 |  |  | $ | 806 |  |  | $ | 17 |
Commercial mortgage loans |  |  | - |  |  |  | - |  |  |  | 20,359 |  |  |  | 20,359 |  |  |  | 598 |  |  |  | 3,914 |
Residential mortgage loans and equity lines |  |  | - |  |  |  | - |  |  |  | 13,009 |  |  |  | 13,009 |  |  |  | 146 |  |  |  | 27 |
Total impaired loans |  |  | - |  |  |  | - |  |  |  | 39,685 |  |  |  | 39,685 |  |  |  | 1,550 |  |  |  | 3,958 |
Other real estate owned (1) |  |  | - |  |  |  | 10,047 |  |  |  | 4,235 |  |  |  | 14,282 |  |  |  | 404 |  |  |  | 202 |
Investments in venture capital and private company stock |  |  | - |  |  |  | - |  |  |  | 4,922 |  |  |  | 4,922 |  |  |  | 553 |  |  |  | 436 |
Total assets |  | $ | - |  |  | $ | 10,047 |  |  | $ | 48,842 |  |  | $ | 58,889 |  |  | $ | 2,507 |  |  | $ | 4,596 |
(1) Other real estate owned balance of $24.7 million in the condensed consolidated balance sheet 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 was primarily based on the appraised value of collateral adjusted by estimated sales cost and commissions. The Company generally obtains new appraisal reports every nine months. 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. During the reported periods, collateral discounts ranged from 55% in the case of accounts receivable collateral to 65% in the case of inventory collateral. The significant unobservable inputs used in the fair value measurement of loans held for sale was primarily based on the quoted price or sale price adjusted by estimated sales cost and commissions. The significant unobservable inputs used in the fair value measurement of other real estate owned (“OREO”) was 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% to collateral value of impaired loans, quoted price, or loan sale price of loans held for sale, and appraised value of OREO.

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