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Fair Value Measurements

9 Months Ended

Sep. 30, 2019

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, corporate debt securities, SBA securities, 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
	September 30, 2019
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available‑for‑sale:
Agency residential CMOs	$	1,172,555	$	—	$	1,172,555	$	—
Agency commercial MBS	1,100,017		—		1,100,017		—
Municipal securities	721,981		—		721,981		—
Agency residential MBS	324,929		—		324,929		—
Asset-backed securities	214,151		—		182,783		31,368
Collateralized loan obligations	113,874		—		113,874		—
Private label residential CMOs	93,868		—		87,273		6,595
SBA securities	49,746		—		49,746		—
Corporate debt securities	21,024		—		21,024		—
U.S. Treasury securities	5,203		5,203		—		—
Total securities available-for-sale	3,817,348		5,203		3,774,182		37,963
Equity warrants	3,532		—		—		3,532
Other derivative assets	2,297		—		2,297		—
Equity investments with readily determinable fair values	4,715		4,715		—		—
Total recurring assets	$	3,827,892	$	9,918	$	3,776,479	$	41,495
Derivative liabilities	$	1,446	$	—	$	1,446	$	—



	Fair Value Measurements as of
	December 31, 2018
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available‑for‑sale:
Municipal securities	$	1,312,194	$	—	$	1,312,194	$	—
Agency commercial MBS	1,112,704		—		1,112,704		—
Agency residential CMOs	632,850		—		632,850		—
U.S. Treasury securities	403,405		403,405		—		—
Agency residential MBS	281,088		—		281,088		—
Private label residential CMOs	101,205		—		93,917		7,288
Asset-backed securities	81,385		—		41,440		39,945
SBA securities	67,047		—		67,047		—
Corporate debt securities	17,553		—		17,553		—
Total securities available-for-sale	4,009,431		403,405		3,558,793		47,233
Equity warrants	4,793		—		—		4,793
Other derivative assets	3,292		—		3,292		—
Equity investments with readily determinable fair values	4,891		4,891		—		—
Total recurring assets	$	4,022,407	$	408,296	$	3,562,085	$	52,026
Derivative liabilities	$	142	$	—	$	142	$	—

During the nine months ended September 30, 2019, there was a $108,000 transfer from Level 3 equity warrants to Level 1 equity investments with readily determinable fair values 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:



	September 30, 2019
	Private Label CMOs		Asset-Backed Securities
		Weighted	Input or	Weighted
	Range	Average	Range	Average
Unobservable Inputs	of Inputs	Input	of Inputs	Input
Voluntary annual prepayment speeds	2.9% - 18.2%	11.4%	12.0% - 15.0%	13.7%
Annual default rates ⁽¹⁾	0.0% - 11.1%	1.8%	2.0%	2.0%
Loss severity rates ⁽¹⁾	24.1% - 117.6%	58.5%	60.0%	60.0%
Discount rates	2.5% - 9.2%	6.3%	3.2% - 5.2%	4.3%

____________________


(1)	The annual default rates and loss severity rates were the same for all of the asset-backed securities.

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:



	September 30, 2019
	Equity Warrants
	Weighted
	Average
Unobservable Inputs	Input
Volatility	17.0%
Risk-free interest rate	1.6%
Remaining life assumption (in years)	3.27

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, 2018	$	7,288		$	39,945		$	4,793
Total included in earnings	340			(66		)	7,429
Total included in other comprehensive income	(160		)	646			—
Issuances	—			—			226
Salesand dispositions ⁽¹⁾	—			—			(8,808		)
Net settlements	(873		)	(9,157		)	—
Transfers to Level 1	—			—			(108		)
Balance, September 30, 2019	$	6,595		$	31,368		$	3,532

______________________


(1)	Includes the exercise of warrants that upon exercise become equity securities in public companies. These are often subject to lock-up restrictions that must be met before the equity security can be sold, during which time they are reported as equity investments with readily determinable fair values.

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



	Fair Value Measurement as of
	September 30, 2019
Measured on a Non‑Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired loans	$	29,552	$	—	$	2,962	$	26,590
OREO	128		—		—		128
Total non-recurring	$	29,680	$	—	$	2,962	$	26,718



	Fair Value Measurement as of
	December 31, 2018
Measured on a Non‑Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired loans	$	24,432	$	—	$	1,800	$	22,632
OREO	1,136		—		1,136		—
Total non-recurring	$	25,568	$	—	$	2,936	$	22,632

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



	Three Months Ended				Nine Months Ended
Losses on Assets	September 30,				September 30,
Measured on a Non‑Recurring Basis	2019		2018		2019		2018
	(In thousands)
Impaired loans	$	8,339	$	14,347	$	10,091	$	31,351
OREO	54		—		54		65
Total losses	$	8,393	$	14,347	$	10,145	$	31,416

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:

September 30, 2019

Valuation

Unobservable

Weighted

Asset

Fair Value

Technique

Inputs

Range

Average

(In thousands)

Impaired loans

21,543

Discounted cash flows

Discount rates

3.75% - 8.77%

7.58%

Impaired loans

5,047

Third party appraisals

No discounts

OREO

128

Third party appraisals

Discount (1)

31.91%

Total non-recurring Level 3

26,718

____________________


(1)	Relates to one OREO property at September 30, 2019.

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



	September 30, 2019
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	252,596	$	252,596	$	252,596	$	—	$	—
Interest‑earning deposits in financial institutions	483,405		483,405		483,405		—		—
Securities available‑for‑sale	3,817,348		3,817,348		5,203		3,774,182		37,963
Investment in FHLB stock	26,865		26,865		—		26,865		—
Loans and leases held for investment, net	18,596,991		18,751,105		—		2,962		18,748,143
Equity warrants	3,532		3,532		—		—		3,532
Other derivative assets	2,297		2,297		—		2,297		—
Equity investments with readily determinable fair values	4,715		4,715		4,715		—		—

Financial Liabilities:
Core deposits	16,471,264		16,471,264		—		16,471,264		—
Non-core non-maturity deposits	479,732		479,732		—		479,732		—
Time deposits	2,782,207		2,781,713		—		2,781,713		—
Borrowings	1,253,031		1,253,031		953,000		300,031		—
Subordinated debentures	456,145		439,895		—		439,895		—
Derivative liabilities	1,446		1,446		—		1,446		—



	December 31, 2018
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	175,830	$	175,830	$	175,830	$	—	$	—
Interest‑earning deposits in financial institutions	209,937		209,937		209,937		—		—
Securities available‑for‑sale	4,009,431		4,009,431		403,405		3,558,793		47,233
Investment in FHLB stock	32,103		32,103		—		32,103		—
Loans and leases held for investment, net	17,825,241		17,013,860		—		1,800		17,012,060
Equity warrants	4,793		4,793		—		—		4,793
Other derivative assets	3,292		3,292		—		3,292		—
Equity investments with readily determinable fair values	4,891		4,891		4,891		—		—

Financial Liabilities:
Core deposits	16,346,671		16,346,671		—		16,346,671		—
Non-core non-maturity deposits	518,192		518,192		—		518,192		—
Time deposits	2,005,638		2,017,137		—		2,017,137		—
Borrowings	1,371,114		1,371,114		1,371,000		114		—
Subordinated debentures	453,846		435,251		—		435,251		—
Derivative liabilities	142		142		—		142		—

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 13. Fair Value Measurements, to the Consolidated Financial Statements of the Company's 2018 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 September 30, 2019, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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