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Fair Value Measurements

9 Months Ended

Sep. 30, 2023

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, 2023, the fair value of these investments was $77.8 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, 2023
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Agency residential MBS	$	2,000,900	$	—	$	2,000,900	$	—
U.S. Treasury securities	664,202		664,202		—		—
Agency commercial MBS	470,894		—		470,894		—
Agency residential CMOs	417,979		—		417,979		—
Municipal securities	336,531		—		336,531		—
Corporate debt securities	285,288		—		282,924		2,364
Private label residential CMOs	148,946		—		148,946		—
Collateralized loan obligations	105,980		—		105,980		—
Private label commercial MBS	21,653		—		21,653		—
Asset-backed securities	20,991		—		20,991		—
SBA securities	13,808		—		13,808		—
Total securities available-for-sale	$	4,487,172	$	664,202	$	3,820,606	$	2,364
Equity investments with readily determinable fair values	$	1	$	1	$	—	$	—
Derivatives (1):
Equity warrants	3,807		—		—		3,807
Interest rate and economic contracts	8,463		—		8,463		—
Derivative liabilities	6,931		—		6,931		—
Credit-linked notes	123,782		—		—		123,782


	Fair Value Measurements as of
	December 31, 2022
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Agency residential MBS	$	2,242,042	$	—	$	2,242,042	$	—
U.S. Treasury securities	670,070		670,070		—		—
Agency commercial MBS	487,606		—		487,606		—
Agency residential CMOs	457,063		—		457,063		—
Municipal securities	339,326		—		339,326		—
Corporate debt securities	311,905		—		311,905		—
Private label residential CMOs	166,724		—		166,724		—
Collateralized loan obligations	102,261		—		102,261		—
Private label commercial MBS	26,827		—		26,827		—
Asset-backed securities	22,413		—		22,413		—
SBA securities	17,250		—		17,250		—
Total securities available-for-sale	$	4,843,487	$	670,070	$	4,173,417	$	—
Equity investments with readily determinable fair values	$	1	$	1	$	—	$	—
Derivatives (1):
Equity warrants	4,048		—		—		4,048
Interest rate and economic contracts	7,814		—		7,814		—
Derivative liabilities	5,906		—		5,906		—
Credit-linked notes	132,030		—		—		132,030

____________________

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

During the nine months ended September 30, 2023, there was a $36,000 transfer from Level 3 equity warrants to Level 1 equity investments with readily determinable fair values measured on a recurring basis. There was also an $3.0 million transfer of corporate debt securities from Level 2 to Level 3 during the nine months ended September 30, 2023.

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 corporate debt securities available-for-sale measured at fair value on a recurring basis as of the date indicated:


	September 30, 2023
	Corporate Debt Securities
	Input or	Weighted
	Range	Average
Unobservable Inputs	of Inputs	Input (1)
Spread to 10 Year Treasury	4.2% - 6.5%	5.3%
Discount rates	8.8% - 11.1%	9.9%

____________________

(1) Unobservable inputs for corporate debt securities were weighted by the relative fair values of the instruments.

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, 2023
	Equity Warrants
		Weighted
	Range	Average
Unobservable Inputs	of Inputs	Input (1)
Volatility	13.8% - 153.8%	26.4%
Risk-free interest rate	4.6% - 5.5%	4.8%
Remaining life assumption (in years)	0.08 - 5.00	3.30

____________________

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


	Corporate		Equity		Credit-Linked
	Debt Securities		Warrants		Notes
	(In thousands)
Balance, December 31, 2022	$	—	$	4,048	$	132,030
Total included in earnings	—		(545)		3,896
Total included in other comprehensive income	(636)		—		(7,107)

Issuances	—		524		—
Principal payments	—		—		(5,037)

Transfer from Level 2	3,000		—		—


Exercises and settlements	—		(184)		—
Transfers to Level 1 (equity investments with readily
determinable fair values)	—		(36)		—
Balance, September 30, 2023	$	2,364	$	3,807	$	123,782

Unrealized net gains (losses) for the period included in other
comprehensive income for securities held at quarter-end	$	(636)

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, 2023
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Individually evaluated loans and leases	$	34,343	$	—	$	28,234	$	6,109

OREO	322		—		322		—
Total non-recurring	$	34,665	$	—	$	28,556	$	6,109


	Fair Value Measurement as of
	December 31, 2022
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Individually evaluated loans and leases	$	34,077	$	—	$	28,065	$	6,012
OREO	47		—		47		—
Total non-recurring	$	34,124	$	—	$	28,112	$	6,012

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	2023		2022		2023		2022
	(In thousands)
Individually evaluated loans and leases	$	6,108	$	5,234	$	11,083	$	6,892

OREO	16		—		16		—
Total losses	$	6,124	$	5,234	$	11,099	$	6,892

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, 2023

Valuation

Unobservable

Input or

Weighted

Asset

Fair Value

Technique

Inputs

Range

Average

(Dollars in thousands)

Individually evaluated

loans and leases (1)

1,504

Discounted cash flows

Discount rates

9.25% - 9.25%

9.25%

Individually evaluated

loans and leases

4,605

Third-party appraisals

No discounts

Total non-recurring Level 3

6,109

____________________

(1) Relates to one loan at September 30, 2023.

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


	September 30, 2023
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	182,261	$	182,261	$	182,261	$	—	$	—
Interest-earning deposits in financial institutions	5,887,406		5,887,406		5,887,406		—		—
Securities available-for-sale	4,487,172		4,487,172		664,202		3,820,606		2,364
Securities held-to-maturity	2,282,586		2,013,295		165,663		1,844,757		2,875
Investment in FHLB stock	17,250		17,250		—		17,250		—
Loans held for sale	188,866		188,906		—		188,906		—
Loans and leases held for investment, net	21,698,649		19,585,880		—		28,234		19,557,646
Equity investments with readily determinable fair values	1		1		1		—		—
Equity warrants	3,807		3,807		—		—		3,807
Interest rate and economic contracts	8,463		8,463		—		8,463		—
Servicing rights	701		701		—		—		701

Financial Liabilities:
Demand, checking, money market, and savings deposits	19,483,888		19,483,888		—		19,483,888		—
Time deposits	7,114,793		7,063,958		—		7,063,958		—
Borrowings	6,294,525		6,278,804		4,894,279		—		1,384,525
Subordinated debt	870,896		729,712		—		729,712		—
Derivative liabilities	6,931		6,931		—		6,931		—


	December 31, 2022
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	212,273	$	212,273	$	212,273	$	—	$	—
Interest-earning deposits in financial institutions	2,027,949		2,027,949		2,027,949		—		—
Securities available-for-sale	4,843,487		4,843,487		670,070		4,173,417		—
Securities held-to-maturity	2,269,135		2,110,472		171,700		1,938,772		—
Investment in FHLB stock	34,290		34,290		—		34,290		—
Loans held for sale	65,076		65,501		—		65,501		—
Loans and leases held for investment, net	28,408,397		26,627,985		—		28,065		26,599,920
Equity investments with readily determinable fair values	1		1		1		—		—
Equity warrants	4,048		4,048		—		—		4,048
Interest rate and economic contracts	7,814		7,814		—		7,814		—
Servicing rights	633		633		—		—		633

Financial Liabilities:
Demand, checking, money market, and savings deposits	29,198,491		29,198,491		—		29,198,491		—
Time deposits	4,737,843		4,700,054		—		4,700,054		—
Borrowings	1,764,030		1,764,037		882,000		750,007		132,030
Subordinated debt	867,087		870,534		—		870,534		—
Derivative liabilities	5,906		5,906		—		5,906		—

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, 2023, 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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