Fair Value Measurements

Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:


Level 1:	Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.


Level 2:	Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.


Level 3:	Significant unobservable inputs that reflect estimates of assumptions that market participants would use in pricing the asset or liability.

Securities Available for Sale

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair values of the Company’s Level 3 securities available for sale were measured using an income approach valuation technique. The primary inputs and assumptions used in the fair value measurement were derived from the securities’ underlying collateral, which included discount rates, prepayment speeds, payment delays, and an assessment of the risk of default of the underlying collateral, among other factors. Significant increases or decreases in any of the inputs or assumptions would result in a significant increase or decrease in the fair value measurement.

Impaired Loans

The fair values of impaired loans are generally measured for impairment using the practical expedients permitted by FASB ASC 310-10-35 including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, less costs to sell of 8.5%. For commercial and industrial and asset backed loans, independent valuations may be comprised of a 20-60% discount for accounts receivable and a 50-70% discount for inventory. These result in a Level 3 classification.

OREO

OREO is fair valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less costs to sell of 8.5% and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least an annual basis for additional impairment and adjusted to lower of cost or market accordingly, based on the same factors identified above.

Loans held for sale

Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments from investors, or based on recent comparable sales (Level 2 inputs), if available, and if not available, are based on discounted cash flows using current market rates applied to the estimated life and credit risk (Level 3 inputs) or may be assessed based upon the fair value of the collateral, which is obtained from recent real estate appraisals (Level 3 inputs). These appraisals may utilize a single valuation approach or a combination of approaches including the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in Level 3 classification of the inputs for determining fair value.

Assets and liabilities measured at fair value on a recurring basis are summarized below:



			Fair Value Measurements at the End of the Reporting Period Using
	June 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Securities available for sale:
GSE collateralized mortgage obligations	$	531,480	$	—	$	531,480	$	—
GSE mortgage-backed securities	505,010		—		505,010		—
Trust preferred securities	3,713		—		3,713		—
Municipal bonds	46,200		—		44,966		1,234
Mutual funds	13,541		13,541		—		—
Interest rate swaps	9,092		—		9,092		—

Liabilities:
Interest rate swaps	9,092		—		9,092		—



			Fair Value Measurements at the End of the Reporting Period Using
	December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Securities available for sale:
GSE collateralized mortgage obligations	$	449,980	$	—	$	449,980	$	—
GSE mortgage-backed securities	498,047		—		498,047		—
Trust preferred securities	3,749		—		3,749		—
Municipal bonds	45,511		—		44,345		1,166
Mutual funds	13,269		13,269		—		—
Interest rate swaps	2,680		—		2,680		—

Liabilities:
Interest rate swaps	2,680		—		2,680		—

There were no transfers between Level 1, 2 and 3 during the three and six months ended June 30, 2016 and 2015. There were no gains or losses recognized in earnings during the three months ended June 30, 2016 and 2015. For the six months ended June 30, 2016 and 2015, there were $0 and $424 thousand in gains recorded in earnings, respectively.

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2016:



	Six Months Ended June 30,
	2016		2015
	(In thousands)
Beginning Balance, January 1	$	1,166	$	1,178
Total gains or (losses) included in other comprehensive income	68		(32		)
Ending Balance, June 30	$	1,234	$	1,146

Assets measured at fair value on a non-recurring basis are summarized below:



			Fair Value Measurements at the End of the Reporting Period Using
	June 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Impaired loans at fair value:
Real estate loans	$	39,661	$	—	$	—	$	39,661
Commercial business	16,230		—		—		16,230
Trade finance	4,451		—		—		4,451
Consumer	161		—		—		161
Loans held for sale, net	307		—		307		—
OREO	6,964		—		—		6,964



			Fair Value Measurements at the End of the Reporting Period Using
	December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Impaired loans at fair value:
Real estate loans	$	18,251	$	—	$	—	$	18,251
Commercial business	9,366		—		—		9,366
Trade Finance	15,540		—		—		15,540
Consumer	391		—		—		391
Loans held for sale, net	348		—		348		—
OREO	18,308		—		—		18,308

For assets measured at fair value on a non-recurring basis, the total net gains (losses), which include charge offs, recoveries, specific reserves, and gains and losses on sales recognized are summarized below:



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2016			2015			2016			2015
	(In thousands)
Assets:
Impaired loans at fair value:
Real estate loans	$	(58	)	$	(89	)	$	251		$	445
Commercial business	(176		)	1,650			(2,848		)	2,924
Trade Finance	(215		)	315			1,081			5
Consumer	(32		)	712			(94		)	700
Loans held for sale, net	43			45			43			227
OREO	(668		)	325			(1,245		)	814

Fair Value of Financial Instruments

Carrying amounts and estimated fair values of financial instruments, not previously presented, at June 30, 2016 and December 31, 2015 were as follows:



	June 30, 2016
	Carrying Amount		Estimated Fair Value		Fair Value Measurement Using
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	286,173	$	286,173	Level 1
Other investments	44,465		44,579		Level 3
Loans held for sale	14,323		15,039		Level 2
Loans receivable—net	6,507,812		6,879,182		Level 3
Customers’ liabilities on acceptances	1,854		1,854		Level 2
Financial Liabilities:
Noninterest bearing deposits	$	1,717,045	$	1,717,045	Level 2
Saving and other interest bearing demand deposits	2,350,527		2,350,527		Level 2
Time deposits	2,569,950		2,574,647		Level 2
FHLB advances	610,398		618,831		Level 2
Subordinated debentures	42,415		44,100		Level 2
Bank’s liabilities on acceptances outstanding	1,854		1,854		Level 2
	December 31, 2015
	Carrying Amount		Estimated Fair Value		Fair Value Measurement Using
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	298,389	$	298,389	Level 1
Other investments	47,895		47,919		Level 3
Loans held for sale	8,273		8,669		Level 2
Loans receivable—net	6,171,933		6,559,838		Level 3
Customers’ liabilities on acceptances	1,463		1,463		Level 2
Financial Liabilities:
Noninterest bearing deposits	$	1,694,427	$	1,694,427	Level 2
Saving and other interest bearing demand deposits	2,170,748		2,170,748		Level 2
Time deposits	2,475,801		2,478,858		Level 2
FHLB advances	530,591		532,137		Level 2
Subordinated debentures	42,327		44,084		Level 2
Bank’s liabilities on acceptances outstanding	1,463		1,463		Level 2

The methods and assumptions used to estimate fair value are described as follows:

The carrying amount is the estimated fair value for cash and cash equivalents, savings and other interest bearing demand deposits, customer’s and Bank’s liabilities on acceptances, noninterest bearing deposits, short-term debt, secured borrowings and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. Fair value of SBA loans held for sale is based on market quotes. For fair value of non-SBA loans held for sale, see the measurement method discussed previously. Fair value of time deposits and debt is based on current rates for similar financing. It was not practicable to determine the fair value of FRB stock or FHLB stock due to restrictions placed on their transferability. The fair value of commitments to fund loans represents fees currently charged to enter into similar agreements with similar remaining maturities and is not presented herein. The fair value of these financial instruments is not material to the consolidated financial statements.