FAIR VALUE MEASUREMENTS

ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three‑level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:


•	Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2: Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument. This category generally includes government agency and government‑sponsored enterprise securities.

•

Level 3: Inputs to a valuation methodology that are unobservable, supported by little or no market activity, and significant to the fair value measurement. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation. This category also includes observable inputs from a pricing service not corroborated by observable market data, and includes our covered private label CMOs.

We use 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 impaired loans and other real estate owned and also to record impairment on certain assets, such as goodwill, core deposit intangibles, and other long‑lived assets.

The following tables presents information on the assets measured and recorded at fair value on a recurring basis as of the dates indicated:



	Fair Value Measurements as of
	December 31, 2014
Measured on a Recurring Basis:	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available‑for‑sale:
Government agency and government‑sponsored enterprise
pass-through securities	$	535,672	$	—	$	535,672	$	—
Government agency and government‑sponsored enterprise
collateralized mortgage obligations	277,946		—		277,946		—
Covered private label CMOs	33,947		—		—		33,947
Other private label CMOs	10,914		—		10,914		—
Municipal securities	536,116		—		536,116		—
Corporate debt securities	110,109		—		110,109		—
Government‑sponsored enterprise debt securities	36,757		—		36,757		—
Other securities	25,716		519		25,197		—
Total securities available-for-sale	1,567,177		519		1,532,711		33,947
Derivative assets	5,234		—		5,234		—
Total recurring assets	$	1,572,411	$	519	$	1,537,945	$	33,947
Derivative liabilities	$	118	$	—	$	118	$	—



	Fair Value Measurements as of
	December 31, 2013
Measured on a Recurring Basis:	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available‑for‑sale:
Government agency and government‑sponsored enterprise
pass-through securities	$	707,188	$	—	$	707,188	$	—
Government agency and government‑sponsored enterprise
collateralized mortgage obligations	192,873		—		192,873		—
Covered private label CMOs	37,904		—		—		37,904
Municipal securities	436,658		—		436,658		—
Corporate debt securities	82,707		—		82,707		—
Government‑sponsored enterprise debt securities	9,872		—		9,872		—
Other securities	27,543		507		27,036		—
Total recurring assets	$	1,494,745	$	507	$	1,456,334	$	37,904

There were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets measured on a recurring basis during the year ended December 31, 2014.

The following table presents information about quantitative inputs and assumptions used to determine the fair values provided by our third party pricing service for our Level 3 covered private label CMOs measured at fair value on a recurring basis as of December 31, 2014:



	Covered Private Label CMOs
Unobservable Inputs:	Range of Inputs	Weighted Average Input
Voluntary annual prepayment speeds	0% - 36.4%	6.3%
Annual default rates	0% - 38.0%	2.3%
Loss severity rates	0% - 68.6%	24.0%
Discount rates	0.2% - 6.7%	4.9%

The following table summarizes activity for assets measured at fair value on a recurring basis that are categorized as Level 3 for the years indicated:



	Year Ended December 31,
	2014			2013			2012
Covered Private Label CMOs:	(In thousands)
Balance, beginning of year	$	37,904		$	44,684		$	45,149
Total realized in earnings⁽¹⁾	1,627			1,938			340
Total unrealized gain (loss) in comprehensive income	(344		)	(1,204		)	4,883
Net settlements	(5,240		)	(7,514		)	(5,688		)
Balance, end of year	$	33,947		$	37,904		$	44,684

_________________________


(1)	Includes other-than-temporary impairment of $1.1 million for 2012.

The following tables present assets measured at fair value on a non‑recurring basis as of the dates indicated:



	Fair Value Measurement as of
	December 31, 2014
	Total		Level 1		Level 2		Level 3
Measured on a Non‑Recurring Basis:	(In thousands)
Impaired Non‑PCI loans	$	42,693	$	—	$	2,366	$	40,327
Other real estate owned	24,015		—		18,400		5,615
Investments carried at cost	566		—		—		566
Total non-recurring	$	67,274	$	—	$	20,766	$	46,508



	Fair Value Measurement as of
	December 31, 2013
	Total		Level 1		Level 2		Level 3
Measured on a Non‑Recurring Basis:	(In thousands)
Impaired Non‑PCI loans	$	40,886	$	—	$	2,051	$	38,835
Other real estate owned	10,877		—		8,784		2,093
Total non-recurring	$	51,763	$	—	$	10,835	$	40,928

The following table presents gains and (losses) recognized on assets measured on a nonrecurring basis for the years indicated:



	Year Ended December 31,
	2014			2013			2012
Gain (Loss) on Assets Measured on a Non‑Recurring Basis:	(In thousands)
Impaired Non‑PCI loans	$	(7,006	)	$	(1,206	)	$	(5,582	)
Other real estate owned	(6,737		)	(1,045		)	(3,920		)
Investments carried at cost	(141		)	—			—
Total net loss	$	(13,884	)	$	(2,251	)	$	(9,502	)

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of December 31, 2014:



Asset	Fair Value (In thousands)		Valuation Technique	Unobservable Inputs	Range	Weighted Average
Impaired Non-PCI loans	$	36,149	Discounted cash flows	Discount rates	0% - 12.17%	5.92%
	4,178		Appraisals	No discounts
Other real estate owned	5,615		Appraisals	Discount, including selling costs	24% - 38%	35%
Investments carried at cost	566		Market and Income Approach	Illiquidity Discount	75%	75%
Total non-recurring Level 3	$	46,508

ASC Topic 825, “Financial Instruments,” requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.

The following tables present a summary of the carrying values and estimated fair values of certain financial instruments as of the dates indicated:



	December 31, 2014
	Carrying or Contract		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	164,757	$	164,757	$	164,757	$	—	$	—
Interest‑earning deposits in financial institutions	148,469		148,469		148,469		—		—
Securities available‑for‑sale	1,567,177		1,567,177		519		1,532,711		33,947
Investment in FHLB stock	40,609		40,609		—		40,609		—
Investments carried at cost	3,691		3,691		—		—		3,691
Investments accounted for under the equity method	21,461		21,700		—		—		21,700
Loans and leases, net	11,797,977		11,757,951		—		2,366		11,755,585
Derivative assets	5,234		5,234		—		5,234		—

Financial Liabilities:
Deposits:
Demand, money market, interest checking, and savings deposits	6,256,190		6,256,190		—		6,256,190		—
Time deposits	5,498,938		5,202,464		—		5,202,464		—
Borrowings	383,402		383,539		380,000		3,539		—
Subordinated debentures	433,583		417,657		—		417,657		—
Derivative liabilities	118		118		—		118		—



	December 31, 2013
	Carrying or Contract		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	96,424	$	96,424	$	96,424	$	—	$	—
Interest‑earning deposits in financial institutions	50,998		50,998		50,998		—		—
Securities available‑for‑sale	1,494,745		1,494,745		507		1,456,334		37,904
Investment in FHLB stock	27,939		27,939		—		27,939		—
Loans and leases, net	4,230,318		4,231,078		—		2,051		4,229,027
Financial Liabilities:
Deposits:
Demand, money market, interest checking, and savings deposits	4,616,616		4,616,616		—		4,616,616		—
Time deposits	664,371		665,148		—		665,148		—
Borrowings	113,726		113,726		106,600		7,126		—
Subordinated debentures	132,645		132,498		—		132,498		—

The following is a description of the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820, “Fair Value Measurement”) and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825).

Cash and due from banks. The carrying amount is assumed to be the fair value because of the liquidity of these instruments.

Interest‑earning deposits in financial institutions. The carrying amount is assumed to be the fair value given the short‑term nature of these deposits.

Securities available‑for‑sale. Securities available‑for‑sale are measured and carried at fair value on a recurring basis. Unrealized gains and losses on available‑for‑sale securities are reported as a component of “Accumulated other comprehensive income” in the consolidated balance sheets. See Note 5, Investment Securities, for further information on unrealized gains and losses on securities available‑for‑sale.

Fair value for securities categorized as Level 1, which are publicly traded securities, are based on readily available quoted prices. In determining the fair value of the securities categorized as Level 2, we obtain a report from a nationally recognized broker‑dealer detailing the fair value of each investment security we hold as of each reporting date. The broker‑dealer uses observable market information to value our securities, with the primary source being a nationally recognized pricing service. We review the market prices provided by the broker‑dealer for our securities for reasonableness based on our understanding of the marketplace and we consider any credit issues related to the securities. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

Our covered private label CMOs are categorized as Level 3 due in part to the inactive market for such securities. There is a wide range of prices quoted for private label CMOs among independent third party pricing services and this range reflects the significant judgment being exercised over the assumptions and variables that determine the pricing of such securities. We consider this subjectivity to be a significant unobservable input and have concluded that the covered private label CMOs should be categorized as a Level 3 measured asset. Our fair value estimate was based on prices provided to us by a nationally recognized pricing service which we also use to determine the fair value of the majority of our securities portfolio. We determined the reasonableness of the fair values by reviewing assumptions at the individual security level about prepayment, default expectations, estimated severity loss factors, and discount rates, all of which are not directly observable in the market. Significant changes in default expectations, severity loss factors, or discount rates, which occur all together or in isolation, would result in different fair value measurements.

FHLB stock. Investments in FHLB stock are recorded at cost and measured for impairment quarterly. Ownership of FHLB stock is restricted to member banks and the securities do not have a readily determinable market value. Purchases and sales of these securities are at par value with the issuer. The fair value of investments in FHLB stock is equal to the carrying amount.

Non-PCI loans and leases. As Non-PCI loans and leases are not measured at fair value, the following discussion relates to estimating the fair value disclosures under ASC Topic 825. Fair values are estimated for portfolios of loans and leases with similar financial characteristics. Loans are segregated by type and further segmented into fixed and adjustable rate interest terms by credit risk categories. The fair value estimates do not take into consideration the value of the loan portfolio in the event the loans are sold outside the parameters of normal operating activities. The fair value of performing fixed-rate loans is estimating by discounting scheduled cash flows through the estimated maturity using estimated market prepayment speeds. The fair value of equipment leases is estimated by discounting scheduled lease and expected lease residual cash flows over their remaining term. The estimated market discount rates used for performing fixed-rate loans and equipment leases are current market rates for instruments with similar risk and similar terms. The fair value of performing adjustable-rate loans is estimated by discounting scheduled cash flows through the next repricing date. As these loans reprice frequently at market rates and the credit risk is not considered to be greater than normal, the market value is typically close to the carrying amount of these loans. These methods and assumptions are not based on the exit price concept of fair value.

Impaired Non‑PCI loans. Nonaccrual loans and performing restructured loans are considered impaired for reporting purposes and are measured and recorded at fair value on a non‑recurring basis. Nonaccrual Non‑PCI loans with an unpaid principal balance over $250,000 and all performing restructured loans are reviewed individually for the amount of impairment, if any. Nonaccrual Non‑PCI loans with an unpaid principal balance less than $250,000 are not individually assessed for impairment but are instead reserved for under our general reserve component.

To the extent a loan is collateral dependent, we measure such impaired loan based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 2 measurement. The Level 2 measurement is based on appraisals obtained within the last 12 months and for which a charge‑off was recognized or a change in the specific valuation allowance was made during the year ended December 31, 2014.

When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. The impaired loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, including an SBA government guarantee, cash flows discounted at the effective loan rate, and management’s judgment.

The impaired Non‑PCI loan balances shown above as measured on a non-recurring basis represent those nonaccrual and restructured loans for which impairment was recognized during the year ended December 31, 2014. The amounts shown as net losses include the impairment recognized during the year ended December 31, 2014, for the loan balances shown. Of the $83.6 million of nonaccrual Non-PCI loans at December 31, 2014, $4.4 million were written down to their collateral fair values through charge‑offs during the year ended December 31, 2014.

Investments that do not have readily determinable fair values. Other investments accounted for under the cost or equity methods of accounting are carried at fair value on a nonrecurring basis to the extent that they are determined to be other-than-temporarily impaired during the period. As there is rarely an observable price or market for such investments, we determine fair value using internally developed models. Our models utilize industry valuation benchmarks, such as multiples of net revenue or EBITA, to determine a value for the underlying enterprise. We may also reduce the value determined by the model due to illiquidity or other investee-specific characteristics which may affect the fair value. Significant decreases to these valuation benchmarks would result in significant decreases in the estimated fair values. We reduce this value by the value of debt outstanding to arrive at an estimated equity value of the enterprise. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the pricing indicated by the external event is used to corroborate our internal valuation. Fair value measurements related to these investments are typically classified within Level 3 of the fair value hierarchy.

Other real estate owned ("OREO"). The fair value of foreclosed real estate is generally based on the lower of estimated market prices from independently prepared current appraisals or negotiated sales prices with potential buyers, less estimated costs to sell; such valuation inputs result in a fair value measurement that is categorized as a Level 2 measurement on a nonrecurring basis. As a matter of policy, appraisals are required annually and may be updated more frequently as circumstances require in the opinion of management. The Level 2 measurement for OREO is based on appraisals obtained within the last 12 months and for which a write‑down was recognized during the year ended December 31, 2014.

When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value as a result of known changes in the market or the collateral and there is no observable market price, such valuation inputs result in a fair value measurement that is categorized as a Level 3 measurement. To the extent a negotiated sales price or reduced listing price represents a significant discount to an observable market price, such valuation input would result in a fair value measurement that is also considered a Level 3 measurement. The OREO losses disclosed are write‑downs based on either a recent appraisal obtained after foreclosure or an accepted purchase offer by an independent third party received after foreclosure.

Deposits. Deposits are carried at historical cost. The fair value of deposits with no stated maturity, such as noninterest‑bearing demand deposits, interest checking, money market, and savings accounts, is equal to the amount payable on demand as of the balance sheet date and considered Level 2. The fair value of time deposits is based on the discounted value of contractual cash flows and considered Level 2. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. No value has been separately assigned to the Company’s long‑term relationships with its deposit customers, such as a core deposit intangible.

Borrowings. Borrowings include overnight FHLB advances and other fixed‑rate term borrowings. Borrowings are carried at amortized cost. The fair value of overnight FHLB advances is equal to the carrying value and considered Level 1. The fair value of fixed‑rate borrowings is calculated by discounting scheduled cash flows through the estimated maturity dates or call dates, if applicable, using estimated market discount rates that reflect current rates offered for borrowings with similar remaining maturities and characteristics and are considered Level 2.

Subordinated debentures. Subordinated debentures are carried at amortized cost. The fair value of subordinated debentures with variable rates is determined using a market discount rate on the expected cash flows.

Derivative assets and liabilities. Derivatives are carried at fair value on a recurring basis and primarily relate to forward exchange contracts which we enter into to manage foreign exchange risk. Our derivatives are principally traded in over-the-counter markets where quoted market prices are not readily available. Instead, the fair value of derivatives is estimated using market observable inputs such as foreign exchange forward rates, interest rate yield curves, volatilities and basis spreads. We also consider counterparty credit risk in valuing our derivatives. We typically classify our derivatives in Level 2 of the fair value hierarchy.

Commitments to extend credit. The majority of our commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the borrower or us, they only have value to the borrower and us. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the table above because it is not material.

Limitations

Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect income taxes or any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on what management believes to be conservative judgments regarding expected future cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimated fair values 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. Since the fair values have been estimated as of December 31, 2014, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.