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 municipal securities, agency residential and commercial MBS, collateralized loan obligations, registered publicly rated private label CMOs and asset-backed securitizations.

•

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 non-rated private label CMOs, non-rated private label asset-backed securities, and equity warrants.

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, CDI, and other long‑lived assets.

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



	Fair Value Measurements as of
	June 30, 2017
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available‑for‑sale:
Residential MBS and CMOs:
Agency MBS	$	404,320	$	—	$	404,320	$	—
Agency CMOs	133,792		—		133,792		—
Private label CMOs	159,701		—		100,162		59,539
Municipal securities	1,534,554		—		1,534,554		—
Agency commercial MBS	918,210		—		918,210		—
Corporate debt securities	19,185		—		19,185		—
Collateralized loan obligations	66,301		—		66,301		—
SBA securities	178,056		—		178,056		—
Asset-backed and other securities	60,441		3,721		49,957		6,763
Total securities available-for-sale	3,474,560		3,721		3,404,537		66,302
Equity warrants	5,452		—		—		5,452
Other derivative assets	235		—		235		—
Total recurring assets	$	3,480,247	$	3,721	$	3,404,772	$	71,754
Derivative liabilities	$	2,235	$	—	$	2,235	$	—



	Fair Value Measurements as of
	December 31, 2016
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available‑for‑sale:
Residential MBS and CMOs:
Agency MBS	$	502,443	$	—	$	502,443	$	—
Agency CMOs	146,289		—		146,289		—
Private label CMOs	125,469		—		68,567		56,902
Municipal securities	1,456,459		—		1,456,459		—
Agency commercial MBS	547,692		—		547,692		—
Corporate debt securities	47,509		—		47,509		—
Collateralized loan obligations	156,887		—		156,887		—
SBA securities	178,845		—		178,845		—
Asset-backed and other securities	62,237		2,080		51,784		8,373
Total securities available-for-sale	3,223,830		2,080		3,156,475		65,275
Equity warrants	5,497		—		—		5,497
Other derivative assets	694		—		694		—
Total recurring assets	$	3,230,021	$	2,080	$	3,157,169	$	70,772
Derivative liabilities	$	3,285	$	—	$	3,285	$	—

During the six months ended June 30, 2017, there were no transfers of assets between Level 1 and Level 2, and there were no transfers of assets in or out of Level 3 of the fair value hierarchy for assets measured on a recurring basis.

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 private label CMOs and asset-backed securities available-for-sale measured at fair value on a recurring basis as of the date indicated:



	June 30, 2017
	Private Label CMOs		Asset-Backed Securities (1)
		Weighted
	Range	Average
Unobservable Inputs	of Inputs	Input	Input
Voluntary annual prepayment speeds	2.7% - 23.9%	11.5%	5.0%
Annual default rates	0.1% - 14.1%	2.2%	1.0%
Loss severity rates	3.8% - 132.7%	50.4%	10.0%
Discount rates	1.4% - 9.8%	4.2%	3.5%

_________________________________


(1)	There was only one asset-backed security at June 30, 2017.

The following table presents information about quantitative inputs and assumptions used in the modified Black-Scholes option pricing model to determine the fair value for our Level 3 equity warrants measured at fair value on a recurring basis as of the date indicated:



	June 30, 2017
	Equity Warrants
	Weighted
	Average
Unobservable Inputs	Input
Volatility	17.3%
Risk-free interest rate	1.7%
Remaining life assumption (in years)	3.7

The following table summarizes activity for our Level 3 private label CMOs available-for-sale, asset-backed securities available-for-sale, and equity warrants measured at fair value on a recurring basis for the period indicated:



	Private			Asset-Backed			Equity
	Label CMOs			Securities			Warrants
	(In thousands)
Balance, December 31, 2016	$	56,902		$	8,373		$	5,497
Total included in earnings	2,230			59			969
Total included in other comprehensive income	(887		)	(75		)	—
Purchases	18,643			—			—
Issuances	—			—			535
Sales	(4,732		)	—			(1,549		)
Net settlements	(12,617		)	(1,594		)	—
Balance, June 30, 2017	$	59,539		$	6,763		$	5,452

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



	Fair Value Measurement as of
	June 30, 2017
Measured on a Non‑Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired Non‑PCI loans	$	80,495	$	—	$	6,575	$	73,920
Loans held for sale	175,880		—		175,880		—
Total non-recurring	$	256,375	$	—	$	182,455	$	73,920



	Fair Value Measurement as of
	December 31, 2016
Measured on a Non‑Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired Non‑PCI loans	$	149,749	$	—	$	1,661	$	148,088
OREO	11,224		—		11,224		—
Investments carried at cost	242		—		—		242
Total non-recurring	$	161,215	$	—	$	12,885	$	148,330

The following table presents losses recognized on assets measured on a nonrecurring basis for the periods indicated:



	Three Months Ended				Six Months Ended
Losses on Assets	June 30,				June 30,
Measured on a Non‑Recurring Basis	2017		2016		2017		2016
	(In thousands)
Impaired Non‑PCI loans	$	9,435	$	603	$	17,250	$	16,779
Loans held for sale	7,198		—		7,198		—
OREO	14		—		14		—
Total losses	$	16,647	$	603	$	24,462	$	16,779

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

June 30, 2017

Valuation

Unobservable

Weighted

Asset

Fair Value

Technique

Inputs

Range

Average

(In thousands)

Impaired Non-PCI loans

65,157

Discounted cash flows

Discount rates

0% - 8.50%

6.47%

8,763

Third party appraisals

No discounts

Total non-recurring Level 3

73,920

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 carrying amounts and estimated fair values of certain financial instruments as of the dates indicated:



	June 30, 2017
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	180,330	$	180,330	$	180,330	$	—	$	—
Interest‑earning deposits in financial institutions	107,150		107,150		107,150		—		—
Securities available‑for‑sale	3,474,560		3,474,560		3,721		3,404,537		66,302
Investment in FHLB stock	22,059		22,059		—		22,059		—
Investments carried at cost	1,158		11,719		—		—		11,719
Loans held for sale	175,158		175,880		—		175,880		—
Loans and leases held for investment, net	15,397,499		15,611,222		—		6,575		15,604,647
Equity warrants	5,452		5,452		—		—		5,452
Other derivative assets	235		235		—		235		—

Financial Liabilities:
Demand, interest checking, money market,
and savings deposits	14,546,898		14,546,898		—		14,546,898		—
Time deposits	2,328,079		2,318,904		—		2,318,904		—
Borrowings	217,454		217,461		217,000		461		—
Subordinated debentures	445,743		429,366		—		429,366		—
Derivative liabilities	2,235		2,235		—		2,235		—



	December 31, 2016
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	337,965	$	337,965	$	337,965	$	—	$	—
Interest‑earning deposits in financial institutions	81,705		81,705		81,705		—		—
Securities available‑for‑sale	3,223,830		3,223,830		2,080		3,156,475		65,275
Investment in FHLB stock	21,870		21,870		—		21,870		—
Investments carried at cost	1,416		3,843		—		—		3,843
Loans and leases held for investment, net	15,298,716		15,494,808		—		1,661		15,493,147
Equity warrants	5,497		5,497		—		—		5,497
Other derivative assets	694		694		—		694		—

Financial Liabilities:
Demand, interest checking, money market,
and savings deposits	13,698,321		13,698,321		—		13,698,321		—
Time deposits	2,172,290		2,166,187		—		2,166,187		—
Borrowings	905,812		905,838		591,000		314,838		—
Subordinated debentures	440,744		424,507		—		424,507		—
Derivative liabilities	3,285		3,285		—		3,285		—

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value, with fair value adjustments recorded on a nonrecurring basis. The loans held for sale at June 30, 2017 consisted primarily of healthcare loans, and the fair value of these loans was based on sale agreements which we entered into during the second quarter of 2017. Loans held for sale which are under contract for sale are considered Level 2 in the fair value hierarchy.

For information regarding the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820), and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825), see Note 1. Nature of Operations and Summary of Significant Accounting Policies, and Note 13. Fair Value Measurements, to the Consolidated Financial Statements of the Company's 2016 Annual Report on Form 10-K.

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 reasonable 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 June 30, 2017, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.