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.

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 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
	March 31, 2018
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available‑for‑sale:
Residential MBS and CMOs:
Agency MBS	$	251,776	$	—	$	251,776	$	—
Agency CMOs	545,945		—		545,945		—
Private label CMOs	116,245		—		94,164		22,081
Municipal securities	1,403,586		—		1,403,586		—
Agency commercial MBS	1,089,494		—		1,089,494		—
U.S. Treasury securities	148,582		148,582		—		—
SBA securities	148,264		—		148,264		—
Asset-backed securities	79,734		—		43,316		36,418
Corporate debt securities	18,360		—		18,360		—
Total securities available-for-sale	3,801,986		148,582		3,594,905		58,499
Equity warrants	5,284		—		—		5,284
Other derivative assets	3,327		—		3,327		—
Equity investments with readily determinable fair values	5,028		5,028		—		—
Total recurring assets	$	3,815,625	$	153,610	$	3,598,232	$	63,783
Derivative liabilities	$	642	$	—	$	642	$	—



	Fair Value Measurements as of
	December 31, 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	$	246,274	$	—	$	246,274	$	—
Agency CMOs	275,709		—		275,709		—
Private label CMOs	125,987		—		103,113		22,874
Municipal securities	1,680,068		—		1,680,068		—
Agency commercial MBS	1,163,969		—		1,163,969		—
SBA securities	160,334		—		160,334		—
Asset-backed securities	88,710		—		46,601		42,109
Corporate debt securities	19,295		—		19,295		—
Collateralized loan obligations	7,015		—		7,015		—
Equity investments	7,070		5,922		1,148		—
Total securities available-for-sale	3,774,431		5,922		3,703,526		64,983
Equity warrants	5,161		—		—		5,161
Other derivative assets	1,873		—		1,873		—
Total recurring assets	$	3,781,465	$	5,922	$	3,705,399	$	70,144
Derivative liabilities	$	1,379	$	—	$	1,379	$	—

During the three months ended March 31, 2018, there were no transfers of assets between Level 1 and Level 2, and there was a $13,000 transfer of private label CMOs from Level 3 to Level 2 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:



	March 31, 2018
	Private Label CMOs		Asset-Backed Securities
		Weighted		Weighted
	Range	Average	Range	Average
Unobservable Inputs	of Inputs	Input	of Inputs	Input
Voluntary annual prepayment speeds	3.8% - 52.7%	8.3%	5% - 15%	14.0%
Annual default rates	0.1% - 16.5%	2.5%	1% - 2%	1.9%
Loss severity rates	3.2% - 105.7%	46.3%	10% - 60%	55.2%
Discount rates	2.0% - 10.3%	5.3%	3.2% - 4.3%	3.6%

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:



	March 31, 2018
	Equity Warrants
	Weighted
	Average
Unobservable Inputs	Input
Volatility	16.8%
Risk-free interest rate	2.4%
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, 2017	$	22,874		$	42,109		$	5,161
Total included in earnings	165			(10		)	248
Total included in other comprehensive income	(141		)	(228		)	—
Issuances	—			—			206
Sales	—			—			(331		)
Transfer to Level 2	(13		)	—			—
Net settlements	(804		)	(5,453		)	—
Balance, March 31, 2018	$	22,081		$	36,418		$	5,284

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



	Fair Value Measurement as of
	March 31, 2018
Measured on a Non‑Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired loans	$	45,557	$	—	$	1,128	$	44,429
OREO	953		—		953		—
Total non-recurring	$	46,510	$	—	$	2,081	$	44,429



	Fair Value Measurement as of
	December 31, 2017
Measured on a Non‑Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired Non‑PCI loans	$	61,095	$	—	$	5,143	$	55,952
Loans held for sale	483,563		—		483,563		—
Total non-recurring	$	544,658	$	—	$	488,706	$	55,952

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



	Three Months Ended
Losses on Assets	March 31,
Measured on a Non‑Recurring Basis	2018		2017
	(In thousands)
Impaired loans ⁽¹⁾	$	7,816	$	13,617
OREO	65		—
Total losses	$	7,881	$	13,617

__________________________


(1)	Loss for 2018 period relates to total loans. Loss for 2017 period relates to Non-PCI loans.

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:

March 31, 2018

Valuation

Unobservable

Weighted

Asset

Fair Value

Technique

Inputs

Range

Average

(In thousands)

Impaired loans

32,638

Discounted cash flows

Discount rates

2.00% - 10.20%

7.33%

Impaired loans

11,791

Third party appraisals

No discounts

Total non-recurring Level 3

44,429

ASC Topic 825, “Financial Instruments,” (as amended by ASU 2016-01 and ASU 2018-03) 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.

On January 1, 2018, we adopted ASU 2016-01 and ASU 2018-03 which requires the use of the exit price notion when measuring the fair values of financial instruments for disclosure purposes. Starting in the first quarter of 2018, we updated our methodology used to estimate fair values for our loan portfolios to conform to the new requirements.

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



	March 31, 2018
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	235,061	$	235,061	$	235,061	$	—	$	—
Interest‑earning deposits in financial institutions	312,735		312,735		312,735		—		—
Securities available‑for‑sale	3,801,986		3,801,986		148,582		3,594,905		58,499
Investment in FHLB stock	17,250		17,250		—		17,250		—
Loans and leases held for investment, net	16,321,010		16,247,325		—		1,128		16,246,197
Equity warrants	5,284		5,284		—		—		5,284
Other derivative assets	3,327		3,327		—		3,327		—
Equity investments with readily determinable fair values	5,028		5,028		5,028		—		—

Financial Liabilities:
Core deposits	15,661,529		15,661,529		—		15,661,529		—
Non-core non-maturity deposits	585,399		585,399		—		585,399		—
Time deposits	1,831,860		1,820,330		—		1,820,330		—
Borrowings	575,284		575,285		575,000		285		—
Subordinated debentures	452,223		435,985		—		435,985		—
Derivative liabilities	642		642		—		642		—



	December 31, 2017
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	233,215	$	233,215	$	233,215	$	—	$	—
Interest‑earning deposits in financial institutions	165,222		165,222		165,222		—		—
Securities available‑for‑sale	3,774,431		3,774,431		5,922		3,703,526		64,983
Investment in FHLB stock	20,790		20,790		—		20,790		—
Loans held for sale	481,100		483,563		—		483,563		—
Loans and leases held for investment, net	16,833,287		17,023,098		—		5,143		17,017,955
Equity warrants	5,161		5,161		—		—		5,161
Other derivative assets	1,873		1,873		—		1,873		—

Financial Liabilities:
Core deposits	15,937,012		15,937,012		—		15,937,012		—
Non-core non-maturity deposits	863,202		863,202		—		863,202		—
Time deposits	2,065,322		2,055,104		—		2,055,104		—
Borrowings	467,342		467,342		467,000		342		—
Subordinated debentures	462,437		444,383		—		444,383		—
Derivative liabilities	1,379		1,379		—		1,379		—

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, as amended by ASU 2016-01 and ASU 2018-03), see Note 1. Nature of Operations and Summary of Significant Accounting Policies, and Note 12. Fair Value Measurements, to the Consolidated Financial Statements of the Company's 2017 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 March 31, 2018, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.