Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Assets and liabilities measured at fair value on a recurring basis

Following is a description of the methodologies used to estimate the fair values of assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which those measurements are typically classified.

Investment securities available for sale and marketable equity securities—Fair value measurements are based on quoted prices in active markets when available; these measurements are classified within level 1 of the fair value hierarchy. These securities typically include U.S. Treasury securities and certain preferred stocks. If quoted prices in active markets are not available, fair values are estimated using quoted prices of securities with similar characteristics, quoted prices of identical securities in less active markets, discounted cash flow techniques, or matrix pricing models. These securities are generally classified within level 2 of the fair value hierarchy and include U.S. Government agency securities, U.S. Government agency and sponsored enterprise MBS, preferred stock investments for which level 1 valuations are not available, non-mortgage asset-backed securities, single family rental real estate-backed securities, certain private label residential MBS and CMOs, private label commercial MBS, collateralized loan obligations and state and municipal obligations. Pricing of these securities is generally primarily spread driven. Observable inputs that may impact the valuation of these securities include benchmark yield curves, credit spreads, reported trades, dealer quotes, bids, issuer spreads, current rating, historical constant prepayment rates,

historical voluntary prepayment rates, structural and waterfall features of individual securities, published collateral data, and for certain securities, historical constant default rates and default severities.

The Company uses third-party pricing services in determining fair value measurements for investment securities. To obtain an understanding of the methodologies and assumptions used, management reviews written documentation provided by the pricing services, conducts interviews with valuation desk personnel and reviews model results and detailed assumptions used to value selected securities as considered necessary. Management has established a robust price challenge process that includes a review by the treasury front office of all prices provided on a monthly basis. Any price evidencing unexpected month over month fluctuations or deviations from expectations is challenged. If considered necessary to resolve any discrepancies, a price will be obtained from an additional independent valuation source. The Company does not typically adjust the prices provided, other than through this established challenge process. The results of price challenges are subject to review by executive management. The Company has also established a quarterly process whereby prices provided by its primary pricing service for a sample of securities are validated. Any price discrepancies are resolved based on careful consideration of the assumptions and inputs employed by each of the pricing sources.

Servicing rights—Commercial servicing rights are valued using a discounted cash flow methodology incorporating contractually specified servicing fees and market based assumptions about prepayments, discount rates, default rates and costs of servicing. Prepayment and default assumptions are based on historical industry data for loans with similar characteristics. Assumptions about costs of servicing are based on market convention. Discount rates are based on rates of return implied by observed trades of underlying loans in the secondary market. These instruments are classified within level 2 of the fair value hierarchy.

Derivative financial instruments—Fair values of interest rate swaps are determined using widely accepted discounted cash flow modeling techniques. These discounted cash flow models use projections of future cash payments and receipts that are discounted at mid-market rates. Observable inputs that may impact the valuation of these instruments include LIBOR swap rates and LIBOR forward yield curves. These fair value measurements are generally classified within level 2 of the fair value hierarchy.

The following tables present assets and liabilities measured at fair value on a recurring basis at the dates indicated (in thousands):


	September 30, 2020

	Level 1		Level 2		Total
Investment securities available for sale:
U.S. Treasury securities	$	76,910	$	—	$	76,910
U.S. Government agency and sponsored enterprise residential MBS	—		2,314,754		2,314,754
U.S. Government agency and sponsored enterprise commercial MBS	—		541,536		541,536

Private label residential MBS and CMOs	—		1,167,706		1,167,706
Private label commercial MBS	—		2,440,550		2,440,550
Single family rental real estate-backed securities	—		768,898		768,898
Collateralized loan obligations	—		1,142,404		1,142,404
Non-mortgage asset-backed securities	—		251,839		251,839
State and municipal obligations	—		242,921		242,921
SBA securities	—		241,759		241,759

Marketable equity securities	101,606		—		101,606
Servicing rights	—		7,568		7,568
Derivative assets	—		138,332		138,332
Total assets at fair value	$	178,516	$	9,258,267	$	9,436,783
Derivative liabilities	$	—	$	(49,482)	$	(49,482)
Total liabilities at fair value	$	—	$	(49,482)	$	(49,482)


	December 31, 2019

	Level 1		Level 2		Total
Investment securities available for sale:
U.S. Treasury securities	$	70,325	$	—	$	70,325
U.S. Government agency and sponsored enterprise residential MBS	—		2,022,175		2,022,175
U.S. Government agency and sponsored enterprise commercial MBS	—		370,976		370,976

Private label residential MBS and CMOs	—		1,012,177		1,012,177
Private label commercial MBS	—		1,724,684		1,724,684
Single family rental real estate-backed securities	—		470,025		470,025
Collateralized loan obligations	—		1,197,366		1,197,366
Non-mortgage asset-backed securities	—		194,904		194,904
State and municipal obligations	—		273,302		273,302
SBA securities	—		362,731		362,731

Marketable equity securities	60,572		—		60,572
Servicing rights	—		7,977		7,977
Derivative assets	—		43,686		43,686
Total assets at fair value	$	130,897	$	7,680,003	$	7,810,900
Derivative liabilities	$	—	$	(19,029)	$	(19,029)
Total liabilities at fair value	$	—	$	(19,029)	$	(19,029)

Assets and liabilities measured at fair value on a non-recurring basis

Following is a description of the methodologies used to estimate the fair values of assets and liabilities that may be measured at fair value on a non-recurring basis, and the level within the fair value hierarchy in which those measurements are typically classified.

Collateral dependent loans, OREO and other repossessed assets—The carrying amount of collateral dependent impaired loans is typically based on the fair value of the underlying collateral, which may be real estate or other business assets, less estimated costs to sell when repayment is expected to come from the sale of the collateral. The carrying value of OREO is initially measured based on the fair value of the real estate acquired in foreclosure and subsequently adjusted to the lower of cost or estimated fair value, less estimated cost to sell. Fair values of real estate collateral and OREO are typically based on third-party real estate appraisals which utilize market and income approaches to valuation incorporating both observable and unobservable inputs. When current appraisals are not available, the Company may use brokers’ price opinions, home price indices or other available information about changes in real estate market conditions to adjust the latest appraised value available. These adjustments to appraised values may be subjective and involve significant management judgment. The fair value of repossessed assets or collateral consisting of other business assets may be based on third-party appraisals or internal analyses that use market approaches to valuation incorporating a combination of observable and unobservable inputs.

Fair value measurements related to collateral dependent impaired loans, OREO and other repossessed assets are generally classified within level 3 of the fair value hierarchy.

Operating lease equipment—Fair values of impaired operating lease equipment are typically based upon discounted

cash flow analyses, considering expected lease rates and estimated end of life residual values, typically obtained from independent appraisals. These fair value measurements are classified within level 3 of the fair value hierarchy.

The following tables present the carrying value of assets for which non-recurring changes in fair value have been recorded for the periods indicated (in thousands):



	September 30, 2020								Losses from Fair Value Changes
	Level 1		Level 2		Level 3		Total		Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
OREO and repossessed assets	$	—	$	—	$	3,803	$	3,803	$	(30)	$	(390)
Collateral dependent loans	$	—	$	—	$	74,661	$	74,661	$	(14,513)	$	(56,737)
Operating lease equipment	$	—	$	—	$	277	$	277	$	—	$	(691)



	September 30, 2019								Losses from Fair Value Changes
	Level 1		Level 2		Level 3		Total		Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
OREO and repossessed assets	$	—	$	—	$	1,638	$	1,638	$	(2,376)	$	(2,372)
Collateral dependent loans	$	—	$	—	$	21,104	$	21,104	$	(2,351)	$	(2,265)

The following table presents the carrying value and fair value of financial instruments and the level within the fair value hierarchy in which those measurements are classified at the dates indicated (dollars in thousands):


		September 30, 2020				December 31, 2019

	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and cash equivalents	1	$	369,776	$	369,776	$	214,673	$	214,673
Investment securities	1/2	$	9,300,883	$	9,301,948	$	7,769,237	$	7,769,949
Non-marketable equity securities	2	$	208,614	$	208,614	$	253,664	$	253,664
Loans held for sale	2	$	3,816	$	4,056	$	37,926	$	39,731
Loans, net	3	$	23,505,187	$	24,007,794	$	23,046,317	$	23,350,684
Derivative assets	2	$	138,332	$	138,332	$	43,686	$	43,686
Liabilities:
Demand, savings and money market deposits	2	$	20,709,307	$	20,709,307	$	17,047,344	$	17,047,344
Time deposits	2	$	5,887,903	$	5,905,597	$	7,347,247	$	7,377,301
Federal funds purchased	2	$	180,000	$	180,000	$	100,000	$	100,000
FHLB and PPPLF borrowings	2	$	4,118,460	$	4,124,405	$	4,480,501	$	4,500,969
Notes and other borrowings	2	$	722,592	$	818,868	$	429,338	$	473,327
Derivative liabilities	2	$	49,482	$	49,482	$	19,029	$	19,029

- 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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