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FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2019

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value, including assets classified as discontinued operations on the consolidated balance sheets. See Note 3 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

Recurring Fair Value Measurements of Financial Instruments

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of year-end 2019 and 2018 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



	December 31, 2019
(In thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Trading security	$	—	$	—	$	10,769	$	10,769
Available-for-sale securities:
Municipal bonds and obligations	—		110,138		—		110,138
Agency collateralized mortgage obligations	—		748,812		—		748,812
Agency residential mortgage-backed securities	—		147,744		—		147,744
Agency commercial mortgage-backed securities	—		147,096		—		147,096
Corporate bonds	—		73,610		42,966		116,576
Other bonds and obligations	—		41,189		—		41,189
Marketable equity securities	40,499		1,057		—		41,556
Loans held for sale (1)	—		140,280		—		140,280
Derivative assets (1)	—		77,562		2,628		80,190
Capitalized servicing rights (1)	—		—		12,299		12,299
Derivative liabilities (1)	227		80,454		—		80,681

(1) Includes assets and liabilities classified as discontinued operations.



	December 31, 2018
(In thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Trading security	$	—	$	—	$	11,212	$	11,212
Available-for-sale securities:
Municipal bonds and obligations	—		111,207		—		111,207
Agency collateralized mortgage obligations	—		930,884		—		930,884
Agency residential mortgage-backed securities	—		170,321		—		170,321
Agency commercial mortgage-backed securities	—		58,925		—		58,925
Corporate bonds	—		119,956		—		119,956
Other bonds and obligations	—		8,354		—		8,354
Marketable equity securities	56,074		564		—		56,638
Loans held for sale (1)	—		96,233		—		96,233
Derivative assets (1)	—		31,727		3,927		35,654
Capitalized servicing rights (1)	—		—		11,485		11,485
Derivative liabilities (1)	734		33,239		—		33,973

(1) Includes assets and liabilities classified as discontinued operations.

During the year ended December 31, 2019, the Company had four transfers totaling $44.0 million in corporate bonds from Level 2 to Level 3 based on recent inactivity in the market related to pricing information for similar bonds. There were no transfers between Level 1, 2, and 3 during the years ended December 31, 2018 and 2017.

Trading Security at Fair Value. The Company holds one security designated as a trading security. It is a tax advantaged economic development bond issued to the Company by a local nonprofit which provides wellness and health programs. The determination of the fair value for this security is determined based on a discounted cash flow methodology. Certain inputs to the fair value calculation are unobservable and there is little to no market activity in the security; therefore, the security meets the definition of a Level 3 security. The discount rate used in the valuation of the security is sensitive to movements in the 3-month LIBOR rate.

Securities Available for Sale and Marketable Equity Securities. Marketable equity securities classified as Level 1 consist of publicly-traded equity securities for which the fair values can be obtained through quoted market prices in active exchange markets. Marketable equity securities classified as Level 2 consist of securities with infrequent trades in active exchange markets, and pricing is primarily sourced from third party pricing services. AFS securities classified as Level 2 include most of the Company’s debt securities. The pricing on Level 2 and Level 3 was primarily sourced from third party pricing services, overseen by management, and is based on models that consider standard input factors such as dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and condition, among other things. Level 3 pricing includes inputs unobservable to market participants.

Loans held for sale. The Company elected the fair value option for all mortgage loans originated for sale (HFS) that were originated for sale on or after May 1, 2012. Loans HFS are classified as Level 2 as the fair value is based on input factors such as quoted prices for similar loans in active markets.



	Aggregate Fair Value		Aggregate Unpaid Principal		Aggregate Fair Value Less Aggregate Unpaid Principal
December 31, 2019 (In thousands)	Aggregate Fair Value		Aggregate Unpaid Principal		Aggregate Fair Value Less Aggregate Unpaid Principal
Loans held for sale - continuing operations	$	7,625	$	7,485	$	140
Loans held for sale - discontinued operations	132,655		129,622		3,033
Loans Held for Sale	$	140,280	$	137,107	$	3,173



	Aggregate Fair Value		Aggregate Unpaid Principal		Aggregate Fair Value Less Aggregate Unpaid Principal
December 31, 2018 (In thousands)	Aggregate Fair Value		Aggregate Unpaid Principal		Aggregate Fair Value Less Aggregate Unpaid Principal
Loans held for sale - continuing operations	$	2,184	$	2,141	$	43
Loans held for sale - discontinued operations	94,049		90,878		3,171
Loans Held for Sale	$	96,233	$	93,019	$	3,214

The changes in fair value of loans held for sale for years ended December 31, 2019, were gains of $97 thousand from continuing operations and losses of $138 thousand from discontinued operations. The changes in fair value of loans held for sale for years ended December 31, 2018, were losses of $61 thousand from continuing operations and $1.3 million from discontinued operations. During 2019, originations of loans held for sale from continuing operations totaled $67 million and sales of loans originated for sale from continuing operations totaled $62 million. During 2019, originations of loans held for sale from discontinued operations totaled $2.9 billion and sales of loans originated for sale from discontinued operations totaled $2.8 billion. During 2018, originations of loans held for sale from continuing operations totaled $55 million and sales of loans originated for sale from continuing operations totaled $55 million. During 2018, originations of loans held for sale from discontinued operations totaled $1.9 billion and sales of loans originated for sale from discontinued operations totaled $2.0 billion.

Interest Rate Swaps. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings.

Although the Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of year-end 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Commitments to Lend. The Company enters into commitments to lend for residential mortgage loans intended for sale, which commit the Company to lend funds to a potential borrower at a certain interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood that the loan commitment will ultimately close, and by the non-refundable costs of originating the loan. The closing ratio is derived from the Bank’s internal data and is adjusted using significant management judgment. The costs to originate are primarily based on the Company’s internal commission rates that are not observable. As such, these commitments to lend are classified as Level 3 measurements. Commitments to lend are included in discontinued operations. See Note 3 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

Forward Sale Commitments. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the commitments to lend and loans originated for sale. To be announced (TBA) mortgage-backed securities forward commitment sales are used as hedging instruments, are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of the Company’s best efforts and mandatory delivery loan sale commitments are determined similarly to the commitments to lend using quoted prices in the market place that are observable. However, costs to originate and closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are considered factors that are not observable. As such, best efforts and mandatory forward sale commitments are classified as Level 3 measurements. Forward sale commitments are included in discontinued operations. See Note 3 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

Capitalized Servicing Rights. The Company accounts for certain capitalized servicing rights at fair value in its Consolidated Financial Statements, as the Company is permitted to elect the fair value option for each specific instrument. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy. Capitalized servicing rights

held at fair value are included in discontinued operations on the consolidated balance sheet. See Note 3 -

Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

The table below presents the changes in Level 3 assets that were measured at fair value on a recurring basis at year-end 2019 and 2018:



	Assets (Liabilities)
(In thousands)	Trading Security			Securities Available for Sale			Commitments to Lend (1)			Forward Commitments (1)			Capitalized Servicing Rights (1)
Balance as of December 31, 2017	$	12,277		$	—		$	5,259		$	19		$	3,834
Unrealized (loss), net recognized in other non-interest income	(400		)	—			—			—			—
Unrealized gain/(loss), net recognized in discontinued operations	—			—			46,014			(19		)	29
Paydown of trading security	(665		)	—			—			—			—
Transfers to loans held for sale	—			—			(47,346		)	—			—
Additions to servicing rights	—			—			—			—			7,622
Balance as of December 31, 2018	$	11,212		$	—		$	3,927		$	—		$	11,485
Unrealized (loss) gain, net recognized in other non-interest income	258			—			—			—			—
Unrealized gain/(loss), net recognized in discontinued operations	—			—			55,771			—			(10,322		)
Unrealized (loss) included in accumulated other comprehensive loss	—			(162		)	—			—			—
Transfers to Level 3	—			43,128			—			—			—
Paydown of trading security	(701		)	—			—			—			—
Transfers to loans held for sale	—			—			(57,070		)	—			—
Additions to servicing rights	—			—			—			—			11,136
Balance as of December 31, 2019	$	10,769		$	42,966		$	2,628		$	—		$	12,299

Unrealized gains/(losses) relating to instruments still held at December 31, 2019	$	1,379		$	(162	)	$	2,628		$	—		$	—
Unrealized gains/(losses) relating to instruments still held at December 31, 2018	$	1,122		$	—		$	3,927		$	—		$	—

(1) Classified as assets from discontinued operations on the consolidated balance sheets.

Quantitative information about the significant unobservable inputs within Level 3 recurring assets/(liabilities) as of December 31, 2019 and 2018 are as follows:



	Fair Value				Significant Unobservable Input Value
(In thousands)	December 31, 2019		Valuation Techniques	Unobservable Inputs	Significant Unobservable Input Value
Assets
Trading Security	$	10,769	Discounted Cash Flow	Discount Rate	2.21		%
Securities Available for Sale	42,966		Indication from Market Maker	Price	97.00 - 100.00
Commitments to Lend (1)	2,628		Historical Trend	Closing Ratio	77.81		%
			Pricing Model	Origination Costs, per loan	$	3,137
Capitalized Servicing Rights (1)	12,299		Discounted cash flow	Constant prepayment rate (CPR)	11.50		%
				Discount rate	10.00		%
Total	$	68,662

(1) Classified as assets from discontinued operations on the consolidated balance sheets.



	Fair Value				Significant Unobservable Input Value
(In thousands)	December 31, 2018		Valuation Techniques	Unobservable Inputs	Significant Unobservable Input Value
Assets
Trading Security	$	11,212	Discounted Cash Flow	Discount Rate	3.07		%
Commitments to Lend (1)	3,927		Historical Trend	Closing Ratio	82.36		%
			Pricing Model	Origination Costs, per loan	$	3,063
Capitalized Servicing Rights (1)	11,485		Discounted cash flow	Constant prepayment rate (CPR)	9.30		%
				Discount rate	10.00		%
Total	$	26,624

(1) Classified as assets from discontinued operations on the consolidated balance sheets.

Non-Recurring Fair Value Measurements

The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements. There are no liabilities measured on a non-recurring basis.



	December 31, 2019		Fair Value Measurements as of December 31, 2018
(In thousands)	Level 3 Inputs		Level 3 Inputs
Assets
Impaired loans	$	8,831	December 2019
Capitalized servicing rights	14,152		December 2019
Total	$	22,983



	December 31, 2018		Fair Value Measurements as of December 31, 2017
(In thousands)	Level 3 Inputs		Level 3 Inputs
Assets
Impaired loans	$	4,892	December 2018
Capitalized servicing rights	11,891		December 2018
Total	$	16,783

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets as of December 31, 2019 and 2018 are as follows:



(in thousands)	December 31, 2019		Valuation Techniques	Unobservable Inputs	Range (Weighted Average) (a)
Assets
Impaired loans	$	8,831	Fair value of collateral	Loss severity	15.72% to 0.12% (4.50%)
				Appraised value	$8.2 to $1,548 ($736.1)
Capitalized servicing rights	14,152		Discounted cash flow	Constant prepayment rate (CPR)	9.44% to 14.12% (12.25%)
				Discount rate	10.00% to 13.50% (11.78%)
Total Assets	$	22,983

(a) Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.



(in thousands)	December 31, 2018		Valuation Techniques	Unobservable Inputs	Range (Weighted Average) (a)
Assets
Impaired loans	$	4,892	Fair value of collateral	Loss severity	51.16% to 0.00% (6.75%)
				Appraised value	$0.3 to $877 ($363)
Capitalized servicing rights	11,891		Discounted cash flow	Constant prepayment rate (CPR)	7.74% to 11.29% (9.74%)
				Discount rate	10.00% to 14.13% (11.99%)
Total Assets	$	16,783

There were no Level 1 or Level 2 nonrecurring fair value measurements for year-end 2019 and 2018.

Impaired Loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, real estate collateral related nonrecurring fair value measurement adjustments have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.

Capitalized loan servicing rights. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

Summary of Estimated Fair Values of Financial Instruments

The following tables summarize the estimated fair values, which represent exit price, and related carrying amounts, of the Company’s financial instruments. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company. Certain assets and liabilities in the following disclosures include balances classified as discontinued operations. See Note 3 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.



	December 31, 2019
	Carrying Amount		Fair Value
(In thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	579,829	$	579,829	$	579,829	$	—	$	—
Trading security	10,769		10,769		—		—		10,769
Marketable equity securities	41,556		41,555		40,499		1,056		—
Securities available for sale	1,311,555		1,311,555		—		1,267,573		43,982
Securities held to maturity	357,979		373,277		—		355,513		17,764
FHLB stock and restricted equity securities	48,019		N/A		N/A		N/A		N/A
Net loans	9,438,853		9,653,550		—		—		9,653,550
Loans held for sale (1)	169,319		169,319		—		140,280		29,039
Accrued interest receivable	36,462		36,462		—		36,462		—
Derivative assets (1)	80,190		80,190		—		77,562		2,628
Financial Liabilities
Total deposits	10,335,977		10,338,993		—		10,338,993		—
Short-term debt	125,000		125,081		—		125,081		—
Long-term FHLB advances	605,501		606,381		—		606,381		—
Subordinated notes	97,049		101,055		—		101,055		—
Derivative liabilities (1)	80,681		80,681		227		80,454		—

(1) Includes assets and liabilities classified as discontinued operations.



	December 31, 2018
	Carrying Amount		Fair Value
(In thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	183,189	$	183,189	$	183,189	$	—	$	—
Trading security	11,212		11,212		—		—		11,212
Marketable equity securities	56,638		56,638		56,074		564		—
Securities available for sale	1,399,647		1,399,647		—		1,399,647		—
Securities held to maturity	373,763		371,224		—		353,182		18,042
FHLB stock and restricted equity securities	77,344		N/A		N/A		N/A		N/A
Net loans	8,981,784		9,026,442		—		—		9,026,442
Loans held for sale (1)	96,233		96,233		—		96,233		—
Accrued interest receivable	36,879		36,879		—		36,879		—
Derivative assets (1)	35,654		35,654		—		31,727		3,927
Financial Liabilities
Total deposits	8,982,381		8,970,321		—		8,970,321		—
Short-term debt	1,118,832		1,118,820		—		1,118,820		—
Long-term FHLB advances	309,466		308,336		—		308,336		—
Subordinated notes	89,518		97,376		—		97,376		—
Derivative liabilities (1)	33,973		33,973		734		33,239		—

(1) Includes assets and liabilities classified as discontinued operations.

- 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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