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Fair Value Election

9 Months Ended

Sep. 30, 2022

FAIR VALUE MEASUREMENTS

The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily securities available-for-sale, derivatives, and certain debt liabilities. 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 15. Fair Value Measurements, to the Consolidated Financial Statements of the Company's 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, 2022, the fair value of these investments was $59.4 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, 2022
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Agency residential MBS	$	2,291,234	$	—	$	2,291,234	$	—
Agency commercial MBS	807,920		—		807,920		—
Agency residential CMOs	736,482		—		736,482		—
U.S. Treasury securities	663,389		663,389		—		—
Municipal securities	415,199		—		415,199		—
Collateralized loan obligations	353,762		—		353,762		—
Corporate debt securities	345,542		—		345,542		—
Private label residential CMOs	197,955		—		197,955		—
Asset-backed securities	32,022		—		32,022		—
Private label commercial MBS	29,178		—		29,178		—
SBA securities	18,645		—		18,645		—
Total securities available-for-sale	$	5,891,328	$	663,389	$	5,227,939	$	—
Equity investments with readily determinable fair values	$	2	$	2	$	—	$	—
Derivatives (1):
Equity warrants	4,215		—		—		4,215
Interest rate and economic contracts	6,149		—		6,149		—
Derivative liabilities	6,367		—		6,367		—
Credit-linked notes	132,815		—		—		132,815


	Fair Value Measurements as of
	December 31, 2021
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Agency residential MBS	$	2,898,210	$	—	$	2,898,210	$	—
Municipal securities	2,315,968		—		2,315,968		—
Agency commercial MBS	1,688,967		—		1,688,967		—
Agency residential CMOs	1,038,134		—		1,038,134		—
U.S. Treasury securities	966,898		966,898		—		—
Corporate debt securities	527,094		—		527,094		—
Private label commercial MBS	450,217		—		435,216		15,001
Collateralized loan obligations	385,362		—		385,362		—
Private label residential CMOs	264,417		—		264,417		—
Asset-backed securities	129,547		—		129,547		—
SBA securities	29,644		—		29,644		—
Total securities available-for-sale	$	10,694,458	$	966,898	$	9,712,559	$	15,001
Equity investments with readily determinable fair values	$	28,578	$	28,578	$	—	$	—
Derivatives (1):
Equity warrants	3,555		—		—		3,555
Interest rate and economic contracts	2,509		—		2,509		—
Derivative liabilities	931		—		931		—

____________________

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

During the nine months ended September 30, 2022, there was a $10,000 transfer from Level 3 equity warrants to Level 1 equity investments with readily determinable fair values measured on a recurring basis. There was also a $4.6 million transfer of private label commercial MBS from Level 3 to Level 2 during the nine months ended September 30, 2022.

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, 2022
	Equity Warrants
		Weighted
	Range	Average
Unobservable Inputs	of Inputs	Input (1)
Volatility	24.9% - 160.1%	28.1%
Risk-free interest rate	2.8% - 4.3%	4.1%
Remaining life assumption (in years)	0.08 - 5.00	3.15

____________________

(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 commercial MBS available-for-sale, and equity warrants and credit-linked notes measured at fair value on a recurring basis for the period indicated:


	Private Label		Equity		Credit-Linked
	Commercial MBS		Warrants		Notes
	(In thousands)
Balance, December 31, 2021	$	15,001	$	3,555	$	—
Total included in earnings	(8)		2,536		—
Total included in other comprehensive income (loss)	(156)		—		—

Issuances	—		604		132,815


Transfer to Level 2	(4,552)		—		—
Net settlements	(10,285)		—		—
Exercises and settlements	—		(2,470)		—
Transfers to Level 1 (equity investments with readily
determinable fair values)	—		(10)		—
Balance, September 30, 2022	$	—	$	4,215	$	132,815

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

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, 2022
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Individually evaluated loans and leases	$	36,971	$	—	$	26,333	$	10,638


Total non-recurring	$	36,971	$	—	$	26,333	$	10,638


	Fair Value Measurement as of
	December 31, 2021
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Individually evaluated loans and leases	$	30,882	$	—	$	2,915	$	27,967

Total non-recurring	$	30,882	$	—	$	2,915	$	27,967

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	2022		2021		2022		2021
	(In thousands)
Individually evaluated loans and leases	$	5,234	$	243	$	6,892	$	2,499

OREO	—		—		—		14
Total losses	$	5,234	$	243	$	6,892	$	2,513

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, 2022

Valuation

Unobservable

Input or

Weighted

Asset

Fair Value

Technique

Inputs

Range

Average

(Dollars in thousands)

Individually evaluated

loans and leases

4,719

Discounted cash flows

Discount rates

5.50% - 9.25%

7.05%

Individually evaluated

loans and leases

5,919

Third party appraisals

No discounts

Total non-recurring Level 3

10,638

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


	September 30, 2022
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	216,436	$	216,436	$	216,436	$	—	$	—
Interest-earning deposits in financial institutions	2,244,272		2,244,272		2,244,272		—		—
Securities available-for-sale	5,891,328		5,891,328		663,389		5,227,939		—
Securities held-to-maturity	2,264,601		2,060,846		170,010		1,890,836		—
Investment in FHLB stock	36,990		36,990		—		36,990		—
Loans held for sale	15,534		16,407		—		16,407		—
Loans and leases held for investment, net	27,470,714		25,527,716		—		26,333		25,501,383
Equity investments with readily determinable fair values	2		2		2		—		—
Equity warrants	4,215		4,215		—		—		4,215
Interest rate and economic contracts	6,149		6,149		—		6,149		—
Servicing rights	712		712		—		—		712

Financial Liabilities:
Core deposits	28,559,310		28,559,310		—		28,559,310		—
Wholesale non-maturity deposits	2,367,544		2,367,544		—		2,367,544		—
Time deposits	3,269,018		3,232,022		—		3,232,022		—
Borrowings	1,864,815		1,864,815		1,732,000		—		132,815
Subordinated debt	863,379		807,820		—		807,820		—
Derivative liabilities	6,367		6,367		—		6,367		—


	December 31, 2021
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	112,548	$	112,548	$	112,548	$	—	$	—
Interest-earning deposits in financial institutions	3,944,686		3,944,686		3,944,686		—		—
Securities available-for-sale	10,694,458		10,694,458		966,898		9,712,559		15,001
Investment in FHLB stock	17,250		17,250		—		17,250		—
Loans and leases held for investment, net	22,740,984		23,461,156		—		2,915		23,458,241
Equity investments with readily determinable fair values	28,578		28,578		28,578		—		—
Equity warrants	3,555		3,555		—		—		3,555
Interest rate and economic contracts	2,509		2,509		—		2,509		—
Servicing rights	1,228		1,228		—		—		1,228

Financial Liabilities:
Core deposits	32,734,949		32,734,949		—		32,734,949		—
Wholesale non-maturity deposits	889,976		889,976		—		889,976		—
Time deposits	1,372,832		1,371,527		—		1,371,527		—
Borrowings	—		—		—		—		—
Subordinated debt	863,283		917,342		—		917,342		—
Derivative liabilities	931		931		—		931		—

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, 2022, 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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