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Fair Value Measurements

9 Months Ended

Sep. 30, 2020

FAIR VALUE MEASUREMENTS

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 individually evaluated loans and leases and other real estate owned and also to record impairment on certain assets, such as goodwill, CDI, and other long-lived assets.

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 14. Fair Value Measurements, to the Consolidated Financial Statements of the Company's 2019 Annual Report on Form 10-K.

The Company also holds SBIC investments measured at fair value using the NAV per share practical expedient that are not required to be classified in the fair value hierarchy. At September 30, 2020, the fair value of these investments was $27.4 million.

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, 2020
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Agency commercial MBS	$	1,204,315	$	—	$	1,204,315	$	—
Municipal securities	1,203,030		—		1,203,030		—
Agency residential CMOs	1,165,872		—		1,165,872		—
Agency residential MBS	246,498		—		246,498		—
Asset-backed securities	234,103		—		203,881		30,222
Corporate debt securities	174,282		—		174,282		—
Collateralized loan obligations	135,333		—		135,333		—
Private label residential CMOs	121,162		—		116,111		5,051
SBA securities	42,684		—		42,684		—
U.S. Treasury securities	5,335		5,335		—		—
Total securities available-for-sale	$	4,532,614	$	5,335	$	4,492,006	$	35,273
Equity investments with readily determinable fair values	$	1,135	$	1,135	$	—	$	—
Derivatives (1):
Equity warrants	4,742		—		—		4,742
Interest rate and economic contracts	3,614		—		3,614		—
Derivative liabilities	81		—		81		—


	Fair Value Measurements as of
	December 31, 2019
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Agency commercial MBS	$	1,108,224	$	—	$	1,108,224	$	—
Agency residential CMOs	1,136,397		—		1,136,397		—
Municipal securities	735,159		—		735,159		—
Agency residential MBS	305,198		—		305,198		—
Asset-backed securities	214,783		—		198,348		16,435
Collateralized loan obligations	123,756		—		123,756		—
Private label residential CMOs	99,483		—		93,219		6,264
SBA securities	48,258		—		48,258		—
Corporate debt securities	20,748		—		20,748		—
U.S. Treasury securities	5,181		5,181		—		—
Total securities available-for-sale	$	3,797,187	$	5,181	$	3,769,307	$	22,699
Equity investments with readily determinable fair values	$	2,998	$	2,998	$	—	$	—
Derivatives (1):
Equity warrants	3,434		—		—		3,434
Interest rate and economic contracts	1,234		—		1,234		—
Derivative liabilities	755		—		755		—

____________________

(1) For information regarding derivative instruments, see Note 10. Derivatives.

During the nine months ended September 30, 2020, there was an $8,000 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 residential CMOs and asset-backed securities available-for-sale measured at fair value on a recurring basis as of the date indicated:


	September 30, 2020
	Private Label Residential CMOs		Asset-Backed Securities
		Weighted	Input or	Weighted
	Range	Average	Range	Average
Unobservable Inputs	of Inputs	Input (1)	of Inputs	Input (2)
Voluntary annual prepayment speeds	5.3% - 16.1%	10.7%	10.0% - 15.0%	12.1%
Annual default rates (3)	0.7% - 29.8%	3.1%	2.0%	2.0%
Loss severity rates (3)	1.9% - 165.2%	53.0%	60.0%	60.0%
Discount rates	2.1% - 7.9%	6.0%	3.0% - 5.2%	3.8%

____________________

(1) Unobservable inputs for private label residential CMOs were weighted by the relative fair values of the instruments.

(2) Voluntary annual prepayment speeds and discount rates for asset-backed securities were weighted by the relative fair values of the instruments.

(3) 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, 2020
	Equity Warrants
		Weighted
	Range	Average
Unobservable Inputs	of Inputs	Input (1)
Volatility	23.7% - 224.4%	31.8%
Risk-free interest rate	0.1% - 0.3%	0.2%
Remaining life assumption (in years)	0.20 - 4.95	2.85

____________________

(1) Unobservable inputs for equity warrants were weighted by the relative fair values of the instruments.

The following table summarizes activity for our Level 3 private label residential 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 Label		Asset-Backed		Equity
	Residential CMOs		Securities		Warrants
	(In thousands)
Balance, December 31, 2019	$	6,264	$	16,435	$	3,434
Total included in earnings	326		42		3,310
Total included in other comprehensive income	(447)		(389)		—
Purchases	—		20,100		—
Issuances	—		—		240
Sales	—		—		(2,234)


Net settlements	(1,092)		(5,966)		—

Transfers to Level 1 (equity investments with readily
determinable fair values)	—		—		(8)
Balance, September 30, 2020	$	5,051	$	30,222	$	4,742

Unrealized net gains (losses) for the period included in other
comprehensive income for securities held at quarter-end	$	1,239	$	(192)

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, 2020
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Individually evaluated loans and leases (1)	$	63,865	$	—	$	3,031	$	60,834


Total non-recurring	$	63,865	$	—	$	3,031	$	60,834

______________________

(1) Includes nonaccrual loans and leases and performing TDRs with balances greater than $250,000.


	Fair Value Measurement as of
	December 31, 2019
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired loans and leases (1)	$	28,706	$	—	$	1,083	$	27,623
OREO	105		—		—		105
Total non-recurring	$	28,811	$	—	$	1,083	$	27,728

_____________________

(1) Includes all nonaccrual loans and leases and performing TDRs.

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	2020		2019		2020		2019
	(In thousands)
Individually evaluated loans and leases (1)	$	29,047	$	8,339	$	40,920	$	10,091

OREO	157		54		267		54
Total losses	$	29,204	$	8,393	$	41,187	$	10,145

_____________________

(1) For 2019, losses are based on impaired loans and leases.

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, 2020

Valuation

Unobservable

Input or

Weighted

Asset

Fair Value

Technique

Inputs

Range

Average

(In thousands)

Individually evaluated

loans and leases

26,357

Discounted cash flows

Discount rates

3.75% - 10.46%

8.19%

Individually evaluated

Discount from

loans and leases (1)

26,889

Third party appraisal

appraisal

23.00%

Individually evaluated

loans and leases

7,588

Third party appraisals

No discounts

Total non-recurring Level 3

60,834

_____________________

(1) Relates to one loan at September 30, 2020.

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


	September 30, 2020
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	187,176	$	187,176	$	187,176	$	—	$	—
Interest-earning deposits in financial institutions	2,766,020		2,766,020		2,766,020		—		—
Securities available-for-sale	4,532,614		4,532,614		5,335		4,492,006		35,273
Investment in FHLB stock	17,250		17,250		—		17,250		—

Loans and leases held for investment, net	18,680,234		19,040,922		—		3,031		19,037,891
Equity warrants	4,742		4,742		—		—		4,742
Interest rate and economic contracts	3,614		3,614		—		3,614		—
Equity investments with readily determinable fair values	1,135		1,135		1,135		—		—

Financial Liabilities:
Core deposits	21,117,629		21,117,629		—		21,117,629		—
Non-core non-maturity deposits	1,123,909		1,123,909		—		1,123,909		—
Time deposits	1,724,157		1,731,333		—		1,731,333		—
Borrowings	60,000		59,988		50,000		9,988		—
Subordinated debentures	463,282		445,978		—		445,978		—
Derivative liabilities	81		81		—		81		—


	December 31, 2019
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	172,585	$	172,585	$	172,585	$	—	$	—
Interest-earning deposits in financial institutions	465,039		465,039		465,039		—		—
Securities available-for-sale	3,797,187		3,797,187		5,181		3,769,307		22,699
Investment in FHLB stock	40,924		40,924		—		40,924		—
Loans and leases held for investment, net	18,708,087		19,055,004		—		1,083		19,053,921
Equity warrants	3,434		3,434		—		—		3,434
Interest rate and economic contracts	1,234		1,234		—		1,234		—
Equity investments with readily determinable fair values	2,998		2,998		2,998		—		—

Financial Liabilities:
Core deposits	16,187,287		16,187,287		—		16,187,287		—
Non-core non-maturity deposits	496,407		496,407		—		496,407		—
Time deposits	2,549,342		2,549,260		—		2,549,260		—
Borrowings	1,759,008		1,759,008		1,759,000		8		—
Subordinated debentures	458,209		441,617		—		441,617		—
Derivative liabilities	755		755		—		755		—

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, 2020, 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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