Note 3. Fair Value Measurements

The following tables summarize assets and liabilities measured at fair value as of December 31, 2014 and 2013 by level in the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of December 31, 2014		Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Measured on a Recurring Basis
Assets
Securities available-for-sale:
U.S. Treasury	$	116,926	$	116,926	$	—	$	—
Federal agency—Debt		1,398,581		—		1,398,581		—
Federal agency—MBS		104,526		—		104,526		—
CMOs—Federal agency		3,580,590		—		3,580,590		—
CMOs—Non-agency		24,014		—		24,014		—
State and municipal		479,031		—		475,484		3,547
Other debt securities		176,169		—		176,169		—
Equity securities and mutual funds		3,146		3,146		—		—
Trading securities		173,188		171,778		1,410		—
Derivative assets (1)		51,586		6,106		44,598		882
Contingent consideration asset (1)		2,930		—		—		2,930

Total assets at fair value	$	6,110,687	$	297,956	$	5,805,372	$	7,359


Liabilities
Derivative liabilities	$	51,309	$	6,623	$	44,686	$	—
Contingent consideration liability		34,983		—		—		34,983
FDIC clawback liability		15,106		—		—		15,106
Other liabilities		946		—		946		—

Total liabilities at fair value (2)	$	102,344	$	6,623	$	45,632	$	50,089


Redeemable noncontrolling interest	$	39,978	$	—	$	—	$	39,978
Measured on a Nonrecurring Basis
Assets
Other real estate owned (3)	$	5,644	$	—	$	—	$	5,644

Total assets at fair value	$	5,644	$	—	$	—	$	5,644

(1)	Reported in Other assets in the consolidated balance sheets.
(2)	Reported in Other liabilities in the consolidated balance sheets.
(3)	Includes covered OREO.

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of December 31, 2013		Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Measured on a Recurring Basis
Assets
Securities available-for-sale:
U.S. Treasury	$	35,335	$	35,335	$	—	$	—
Federal agency—Debt		1,410,536		—		1,410,536		—
Federal agency—MBS		157,226		—		157,226		—
CMOs—Federal agency		3,997,298		—		3,997,298		—
CMOs—Non-agency		37,462		—		37,462		—
State and municipal		415,995		—		412,362		3,633
Other debt securities		178,822		—		178,822		—
Equity securities and mutual funds		8,443		8,443		—		—
Trading securities		82,357		80,659		1,698		—
Derivative assets (1)		34,613		3,487		31,126		—

Total assets at fair value	$	6,358,087	$	127,924	$	6,226,530	$	3,633


Liabilities
Derivative liabilities	$	32,970	$	3,333	$	29,637	$	—
Contingent consideration liability		49,900		—		—		49,900
FDIC clawback liability		11,967		—		—		11,967
Other liabilities		1,044		—		1,044		—

Total liabilities at fair value (2)	$	95,881	$	3,333	$	30,681	$	61,867


Redeemable noncontrolling interest	$	39,768	$	—	$	—	$	39,768
Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3):
Commercial real estate mortgages	$	1,220	$	—	$	—	$	1,220
Residential mortgages		1,300		—		—		1,300
Other real estate owned (4)		18,251		—		—		18,251
Private equity and alternative investments		895		—		—		895

Total assets at fair value	$	21,666	$	—	$	—	$	21,666

(1)	Reported in Other assets in the consolidated balance sheets.
(2)	Reported in Other liabilities in the consolidated balance sheets.
(3)	Impaired loans for which fair value was calculated using the collateral valuation method.
(4)	Includes covered OREO.

At December 31, 2014, $6.11 billion, or approximately 19 percent, of the Company's total assets were recorded at fair value on a recurring basis, compared with $6.36 billion, or 21 percent, at December 31, 2013. The majority of these financial assets were valued using Level 1 or Level 2 inputs. Less than one percent of total assets were measured using Level 3 inputs. At December 31, 2014, $102.3 million of the Company's total liabilities were recorded at fair value using mostly Level 2 or Level 3 inputs, compared with $95.9 million at December 31, 2013. There were no transfers between Level 1 and Level 2 of the fair value hierarchy for assets or liabilities measured on a recurring basis during 2014. At December 31, 2014, $5.6 million of the Company's total assets were recorded at fair value on a nonrecurring basis, compared with $21.7 million at December 31, 2013. These assets represent less than one percent of total assets and were measured using Level 3 inputs.

Recurring Fair Value Measurements

Assets and liabilities for which fair value measurement is based on significant unobservable inputs are classified as Level 3 in the fair value hierarchy. The following table provides a reconciliation of the beginning and ending balances for Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2014 and 2013.

Level 3 Assets and Liabilities Measured on a Recurring Basis

	For the year ended December 31, 2014
(in thousands)	Securities Available-for- Sale			Equity Warrants			Contingent Consideration Asset		Contingent Consideration Liability			FDIC Clawback Liability
Balance, beginning of period	$	3,633		$	—		$	—	$	(49,900	)	$	(11,967	)
Total realized/unrealized gains (losses):
Included in earnings		—			73			—		(802	)		(3,139	)
Included in other comprehensive income		14			—			—		—			—
Additions		—			838			2,930		—			—
Settlements		(100	)		(29	)		—		17,368			—
Other (1)		—			—			—		(1,649	)		—

Balance, end of period	$	3,547		$	882		$	2,930	$	(34,983	)	$	(15,106	)

	For the year ended December 31, 2013
(in thousands)	Securities Available- for-Sale			Contingent Consideration Liability			FDIC Clawback Liability
Balance, beginning of period	$	65,187		$	(47,724	)	$	(9,970	)
Total realized/unrealized gains (losses):
Included in earnings		(5,302	)		—			(1,997	)
Included in other comprehensive income		5,916			—			—
Sales		(15,096	)		—			—
Settlements		(47,180	)		—			—
Other (1)		108			(2,176	)		—

Balance, end of period	$	3,633		$	(49,900	)	$	(11,967	)

(1)	Other rollforward activity consists of amortization of premiums and accretion of discounts recognized on the initial purchase of securities available-for-sale and accretion of discount related to the contingent consideration liability.

Redeemable noncontrolling interest is classified as Level 3 in the fair value hierarchy and measured on a recurring basis. Refer to Note 1, Summary of Significant Accounting Policies, for a discussion of the methodology used in valuing redeemable noncontrolling interest and Note 22, Noncontrolling Interest, for a rollforward of activity for the years ended December 31, 2014 and 2013.

Level 3 assets measured at fair value on a recurring basis include municipal auction rate securities that are classified in securities available-for-sale, a contingent consideration asset and equity warrants classified as derivative assets. Municipal auction rate securities were valued using an average yield on California variable rate notes that were comparable in credit rating and maturity to the securities held, plus a liquidity premium. The contingent consideration asset represents the fair value of future payments to be received on the sale of the Company's retirement services recordkeeping business. The fair value of contingent consideration was determined by discounting the expected future cash flows using a bond rate for an investment grade finance company. Equity warrants in private companies obtained in association with certain loan transactions are measured at fair value on a recurring basis. Refer to Note 1, Summary of Significant Accounting Policies and Note 15, Derivative Instruments, for additional discussion of equity warrants.

Level 3 liabilities measured at fair value on a recurring basis consist of contingent consideration and an FDIC clawback liability that are included in other liabilities. As part of its acquisition of Rochdale Investment Management, LLC and associated entities (collectively, "Rochdale"), the Company entered into a contingent consideration arrangement that requires the Company to pay additional cash consideration to Rochdale's former shareholders at certain points in time over the six years after the date of acquisition if certain criteria, such as revenue growth and pre-tax margin, are met. In 2014, the Company made total contingent consideration payments to Rochdale's former shareholders of approximately $17.4 million. The fair value of the remaining contingent consideration was estimated using a probability-weighted discounted cash flow model. Although the acquisition agreement does not set a limit on the total payment, the Company estimates that the remaining contingent consideration payment could be in the range of $27 million to $53 million, but will ultimately be determined based on actual future results. The contingent consideration liability is remeasured to fair value at each reporting date until its settlement. Refer to Note 1, Summary of Significant Accounting Policies, for further discussion of the methodology used to value the contingent consideration liability and FDIC clawback liability.

There were no transfers into or out of Level 3 assets or liabilities measured on a recurring basis during the years ended December 31, 2014 and 2013. Paydowns of $0.1 million and $47.2 million were received on Level 3 assets measured on a recurring basis for the years ended December 31, 2014 and 2013, respectively. During the year ended December 31, 2013, the Company sold its investment in a collateralized debt obligation senior note. The carrying value of the security was $15.1 million and the Company recognized a loss of $5.3 million.

Nonrecurring Fair Value Measurements

Assets measured at fair value on a nonrecurring basis using significant unobservable inputs include certain collateral dependent impaired loans, OREO for which fair value is not solely based on market observable inputs, and certain private equity and alternative investments. Private equity and alternative investments do not have readily determinable fair values. These investments are carried at cost and evaluated for impairment on a quarterly basis. Due to the lack of readily determinable fair values for these investments, the impairment assessment is based primarily on a review of investment performance and whether the Company expects to recover the cost of an investment.

The table below provides information about valuation method, inputs and assumptions for nonrecurring Level 3 fair value measurements. The weight assigned to each input is based on the facts and circumstances that exist at the date of measurement.

Information About Nonrecurring Level 3 Fair Value Measurements

(in thousands)		Fair Value at December 31, 2014			Valuation Method		Unobservable Inputs
Other real estate owned		$	5,644		Third-party appraisal		—Fair values are primarily based on unadjusted appraised values. —A limited number of properties were valued using comparable sales values or income approaches, resulting in discounts to appraised values ranging from 14% to 35%.

For assets measured at fair value on a nonrecurring basis, the following table presents the total net gains and losses, which include charge-offs, recoveries, specific reserves, OREO valuation write-downs and write-ups, gains and losses on sales of OREO, and impairment write-downs on private equity investments, recognized in 2014 and 2013:

	For the year ended December 31,
(in thousands)	2014			2013
Collateral dependent impaired loans:
Commercial	$	—		$	(15	)
Commercial real estate mortgages		(5	)		(641	)
Residential mortgages		36			(469	)
Home equity loans and lines of credit		—			116
Installment		—			(138	)
Other real estate owned (1)		1,386			(5,892	)
Private equity and alternative investments		—			(532	)

Total net gains (losses) recognized	$	1,417		$	(7,571	)

(1)	Net gains and losses on OREO include amounts related to covered OREO, a significant portion of which is payable to or reimbursable by the FDIC.

Fair Value of Financial Instruments

A financial instrument is broadly defined as cash, evidence of an ownership interest in another entity, or a contract that imposes a contractual obligation on one entity and conveys a corresponding right to a second entity to require delivery or exchange of financial assets or liabilities. Refer to Note 1, Summary of Significant Accounting Policies, for additional information on fair value measurements.

The disclosure does not include estimated fair value amounts for assets and liabilities which are not defined as financial instruments but which have significant value. These assets and liabilities include the value of customer-relationship intangibles, goodwill, affordable housing investments carried at cost, other assets, deferred taxes and other liabilities. Accordingly, the total of the fair values presented does not represent the underlying value of the Company.

The following tables summarize the carrying amounts and estimated fair values of those financial instruments that are reported at amortized cost in the Company's consolidated balance sheets. The tables also provide information on the level in the fair value hierarchy for inputs used in determining the fair value of those financial instruments. Most financial assets and financial liabilities for which carrying amount equals fair value are considered by the Company to be Level 1 measurements in the fair value hierarchy.

	December 31, 2014
					Fair Value Measurements Using
	Carrying Amount		Total Fair Value		Fair Value Measurements Using
(in millions)	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	336.5	$	336.5	$	336.5	$	—	$	—
Due from banks—interest-bearing		120.0		120.0		120.0		—		—
Securities purchased under resale agreements		200.0		201.1		—		201.1		—
Securities held-to-maturity		3,427.0		3,484.6		—		3,484.6		—
Loans and leases, net of allowance		20,027.1		20,576.9		—		—		20,576.9
Covered loans, net of allowance		502.4		549.1		—		—		549.1
FDIC indemnification asset		50.5		40.2		—		—		40.2
Investment in FHLB and FRB stock		58.4		58.4		—		58.4		—
Financial Liabilities:
Deposits	$	28,108.1	$	28,109.6	$	—	$	27,435.1	$	674.5
Short-term borrowings		322.9		322.9		320.0		—		2.9
Long-term debt		638.6		704.3		—		605.3		99.0

	December 31, 2013
					Fair Value Measurements Using
	Carrying Amount		Total Fair Value		Fair Value Measurements Using
(in millions)	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	183.2	$	183.2	$	183.2	$	—	$	—
Due from banks—interest-bearing		552.7		552.7		552.7		—		—
Securities purchased under resale agreements		200.0		200.5		—		200.5		—
Securities held-to-maturity		2,957.8		2,883.9		—		2,883.9		—
Loans and leases, net of allowance		16,867.9		17,362.9		—		—		17,362.9
Covered loans, net of allowance		701.0		739.5		—		—		739.5
FDIC indemnification asset		89.2		74.3		—		—		74.3
Investment in FHLB and FRB stock		64.4		64.4		—		64.4		—
Financial Liabilities:
Deposits	$	25,679.4	$	25,682.2	$	—	$	24,990.8	$	691.4
Short-term borrowings		3.9		3.9		—		—		3.9
Long-term debt		736.0		788.9		—		697.8		91.1

Following is a description of the methods and assumptions used in estimating the fair values of these financial instruments:

Cash and due from banks and Due from banks—interest-bearing—For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities purchased under resale agreements—The fair value of securities purchased under term resale agreements is determined using a combination of quoted market prices and observable market inputs such as interest rates and credit spreads.

Securities held-to-maturity—For securities held-to-maturity, the fair value is generally determined by quoted market prices, where available, or based on observable market inputs appropriate for the type of security.

Loans and leases—Loans and leases, excluding covered loans, are not recorded at fair value on a recurring basis. Nonrecurring fair value adjustments are periodically recorded on impaired loans that are measured for impairment based on the fair value of collateral. Due to the lack of activity in the secondary market for the types of loans in the Company's portfolio, a model-based approach is used for determining the fair value of loans for purposes of the disclosures in the previous tables. The fair value of loans is estimated by discounting future cash flows using discount rates that incorporate the Company's assumptions for current market yields, credit risk and liquidity premiums. Loan cash flow projections are based on contractual loan terms adjusted for the impact of current interest rate levels on borrower behavior, including prepayments. Loan prepayment assumptions are based on industry standards for the type of loans being valued. Projected cash flows are discounted using yield curves based on current market conditions. Yield curves are constructed by product type using the Company's loan pricing model for like-quality credits. The discount rates used in the model represent the rates the Company would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans.

Covered loans—The fair value of covered loans is based on estimates of future loan cash flows and appropriate discount rates, which incorporate the Company's assumptions about market funding cost and liquidity premium. The future loan cash flows are estimated using the Company's assumptions concerning the amount and timing of principal and interest payments, prepayments and credit losses.

FDIC indemnification asset—The fair value of the FDIC indemnification asset is estimated by discounting expected cash flows with appropriate market discount rates.

Investment in FHLB and FRB stock—Investments in Federal Home Loan Bank of San Francisco ("FHLB") and FRB stock are recorded at cost. Ownership of these securities is restricted to member banks and the securities do not have a readily determinable market value. Purchases and sales of these securities are at par value with the issuer. The fair value of investments in FHLB and FRB stock is equal to the carrying amount.

Deposits—The fair value of demand and interest checking deposits, savings deposits, and certain money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit ("CD") is determined by discounting expected future cash flows using the rates offered by the Company for deposits of similar type and remaining maturity at the measurement date. This value is compared to the termination value of each CD given the Company's standard early withdrawal penalties. The fair value reported is the higher of the discounted present value of each CD and the termination value after the recovery of prepayment penalties. The Company reviews pricing for its CD products weekly. This review gives consideration to market pricing for products of similar type and maturity offered by other financial institutions.

Short-term borrowings—The fair value of the current portion of long-term debt classified in short-term borrowings is obtained through third-party pricing sources. The fair value of nonrecourse debt is determined by discounting expected cash flows with appropriate market discount rates. The carrying amount of the remaining short-term borrowings is a reasonable estimate of fair value.

Long-term debt—The fair value of long-term debt, excluding nonrecourse debt, is obtained through third-party pricing sources. The fair value of nonrecourse debt is determined by discounting expected cash flows with appropriate market discount rates.

Off-balance sheet commitments, which include commitments to extend credit, are excluded from the tables. A reasonable estimate of fair value for these instruments is the carrying amount of deferred fees and the reserve for any credit losses related to these off-balance sheet instruments. This estimate is not material to the Company's financial position.