Fair Value Measurements

U.S. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP also 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 exchange 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 and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

We have established and documented the Company's process for determining the fair values of our assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis:

Measured on a Recurring Basis

Securities

Securities available for sale are recorded at fair value on a recurring basis. Most securities at fair value are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification are considered a Level 2 input method. Securities that are traded on active exchanges are considered a Level 1 input method.

The following tables present the balance of assets measured at fair value on a recurring basis at December 31, 2013 and September 30, 2013:



	Fair Value at December 31, 2013
	Level 1		Level 2		Level 3		Total
	(In thousands)
Available-for-sale securities
Equity securities	$	100,246	$	503	$	—	$	100,749
Obligations of U.S. government	—		631,326		—		631,326
Obligations of states and political subdivisions	—		22,640		—		22,640
Corporate debt securities	—		450,113		—		450,113
Mortgage-backed securities					—
Agency pass-through certificates	—		1,633,676		—		1,633,676
Balance at end of period	$	100,246	$	2,738,258	$	—	$	2,838,504

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended December 31, 2013.



	Fair Value at September 30, 2013
	Level 1		Level 2		Level 3		Total
	(In thousands)
Available-for-sale securities
Equity securities	$	100,726	$	511	$	—	$	101,237
Obligations of U.S. government	—		533,975		—		533,975
Obligations of states and political subdivisions	—		22,545		—		22,545
Obligations of foreign governments	—		—		—		—
Corporate debt securities	—		452,015		—		452,015
Mortgage-backed securities
Agency pass-through certificates	—		1,251,176		—		1,251,176
Balance at end of period	$	100,726	$	2,260,222	$	—	$	2,360,948

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended September 30, 2013 other than a transfer from Level 2 to Level 1 of $511 in Equity Securities.

Measured on a Nonrecurring Basis

Impaired Loans & Real Estate Held for Sale

From time to time, and on a nonrecurring basis, fair value adjustments to collateral-dependent loans and real estate held for sale are recorded to reflect write-downs of principal balances based on the current appraised or estimated value of the collateral. When management determines that the fair value of the collateral or the real estate held for sale requires additional adjustments, either as a result of a non-current appraisal value or when there is no observable market price, the Company classifies the impaired loan or real estate held for sale as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at December 31, 2013 included loans for which a specific reserve allowance was established or a partial charge-off was recorded based on the fair value of collateral, as well as covered REO and real estate held for sale for which fair value of the properties was less than the cost basis.

Real estate held for sale consists principally of properties acquired through foreclosure.

The following tables present the aggregated balance of assets measured at estimated fair value on a nonrecurring basis through the three months ended December 31, 2013 and December 31, 2012, and the total losses resulting from those fair value adjustments for the quarters ended December 31, 2013 and December 31, 2012. These estimated fair values are shown gross of estimated selling costs.



	Through December 31, 2013								Quarter Ended December 31, 2013
	Level 1		Level 2		Level 3		Total		Total Losses
	(In thousands)
Impaired loans (1)	$	—	$	—	$	5,580	$	5,580	$	(805	)
Covered REO (2)	—		—		1,286		1,286		65
Real estate held for sale (2)	—		—		10,342		10,342		3,725
Balance at end of period	$	—	$	—	$	17,208	$	17,208	$	2,985



	Through December 31, 2012						Quarter Ended December 31, 2012
	Level 1	Level 2	Level 3		Total		Total Losses
	(In thousands)
Impaired loans (1)			$	21,238	$	21,238	$	9,813
Covered REO (2)			3,080		3,080		91
Real estate held for sale (2)			25,426		25,426		7,536
Balance at end of period			$	49,744	$	49,744	$	17,440

___________________


(1)	The losses represents remeasurements of collateral-dependent loans.


(2)	The losses represents aggregate writedowns and charge-offs on real estate held for sale.

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2013 or December 31, 2012.

The following describes the process used to value Level 3 assets measured on a nonrecurring basis:

Impaired loans - The Company adjusts the carrying amount of impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows or the fair value of the underlying collateral. Impaired loans with a specific reserve allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets.

The evaluations for impairment are prepared by the Problem Loan Review Committee, which is chaired by the Chief Credit Officer and includes the Loan Review manager and Special Credits manager, as well as senior credit officers, division managers and group executives, as applicable. These evaluations are performed in conjunction with the quarterly allowance for loan & lease loss ("ALLL") process.

Applicable loans are evaluated for impairment on a quarterly basis. Loans included in the previous quarter's review are reevaluated and if their values are materially different from the prior quarter evaluation, the underlying information (loan balance and collateral value) are compared. Material differences are evaluated for reasonableness and discussions are held between the relationship manager and their division manager to understand the difference and determine if any adjustment is necessary. The inputs are developed and substantiated on a quarterly basis, based on current borrower developments, market conditions and collateral values. The following method is used to value impaired loans:

•

The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations, assessments provided by third-party appraisers and other valuation models. The Company performs or reaffirms valuations of collateral-dependent impaired loans at least annually. Adjustments are made if management believes that more recent information is available and relevant with respect to the fair value of the collateral.

Real estate held for sale ("REO") - These assets are valued based on inputs such as appraisals and third-party price opinions, less estimated selling costs. Assets that are acquired through foreclosure are recorded initially at the lower of the loan balance or fair value at the date of foreclosure. After foreclosure, valuations are updated periodically, and current market conditions my require the assets to be written down further to a new cost basis. The following method is used to value real estate held for sale:

•

When a loan is reclassified from loan status to real estate held for sale due to the Company taking possession of the collateral, a Special Credits officer, along with the Special Credits manager, obtains a valuation, which may include a third-party appraisal, which is used to establish the fair value of the underlying collateral. The determined fair value, to the extent it does not exceed the carrying value of the loan, becomes the carrying value of the REO asset. In addition to the valuations from independent third-party sources, the carrying balance of REO assets are written down once a bona fide offer is contractually accepted, through execution of a Purchase and Sale Agreement, where the accepted price is lower than the current balance of the particular REO asset. The fair value of REO assets is re-evaluated quarterly and the REO asset is adjusted to reflect the lower of cost or fair value as necessary.

Fair Values of Financial Instruments

U. S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the statement of financial condition, for which it is practicable to estimate those values. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although management is not aware of any factors that would materially affect the estimated fair value amounts presented below, such amounts have not been comprehensively revalued for purposes of these financial statements since the dates shown, and therefore, estimates of fair value subsequent to those dates may differ significantly from the amounts presented below.



		December 31, 2013				September 30, 2013
	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
		(In thousands)
Financial assets
Cash and cash equivalents	1	$	967,348	$	967,348	$	203,563	$	203,563
Available-for-sale securities
Equity securities	1	100,749		100,749		101,237		101,237
Obligations of U.S. government	2	631,326		631,326		533,975		533,975
Obligations of states and political subdivisions	2	22,640		22,640		22,545		22,545
Corporate debt securities	2	450,113		450,113		452,015		452,015
Mortgage-backed securities
Agency pass-through certificates	2	1,633,676		1,633,676		1,251,176		1,251,176
Total available-for-sale securities		2,838,504		2,838,504		2,360,948		2,360,948
Held-to-maturity securities	2
Total held-to-maturity securities		1,630,936		1,521,390		1,654,666		1,582,849

Loans receivable	3	7,651,558		8,174,920		7,528,030		8,070,279
Covered loans	3	252,693		255,885		295,947		300,610
FDIC indemnification asset	3	57,818		56,848		64,615		62,300
FHLB stock	2	171,480		171,480		173,009		173,009

Financial liabilities
Customer accounts	2	10,402,726		9,728,207		9,090,271		8,585,068
FHLB advances and other borrowings	2	1,930,000		2,053,910		1,930,000		2,064,248

The following methods and assumptions were used to estimate the fair value of financial instruments:

Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value.

Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification are considered a Level 2 input method. Equity securities which are exchange traded are considered a Level 1 input method.

Loans receivable and covered loans – For certain homogeneous categories of loans, such as fixed- and variable-rate residential mortgages, fair value is estimated for securities backed by similar loans, adjusted for differences in loan characteristics, using the same methodology described above for AFS and HTM securities. The fair value of other loan types is estimated by discounting the future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were valued at carrying value because of their floating rate or expected maturity characteristics. Net deferred loan fees are not included in the fair value calculation but are included in the carrying amount.

FDIC indemnification asset – The fair value of the indemnification asset is estimated by discounting the expected future cash flows using the current rates.

FHLB stock – The fair value is based upon the par value of the stock which equates to its carrying value.

Customer accounts – The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.

FHLB advances and other borrowings – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.

The following tables provide a reconciliation of amortized cost to fair value of available-for-sale and held-to-maturity securities as of December 31, 2013 and September 30, 2013:



	December 31, 2013
	Amortized Cost		Gross Unrealized					Fair Value		Yield
			Gains		Losses
	(In thousands)
Available-for-sale securities
U.S. government and agency securities due
1 to 5 years	61,002		3,021		(196		)	63,827		1.98
5 to 10 years	237,101		—		(2,396		)	234,705		1.64
Over 10 years	335,626		465		(3,297		)	332,794		0.93
Equity Securities
Within 1 year	500		3		—			503		2.17
1 to 5 years	100,000		246		—			100,246		1.80
5 to 10 years	—		—		—			—		—
Corporate bonds due
Within 1 year	—		—		—			—		—
1 to 5 years	334,278		2,051		(93		)	336,236		0.80
5 to 10 years	113,095		1,523		(741		)	113,877		1.53
Municipal bonds due
Over 10 years	20,417		2,223		—			22,640		6.45
Mortgage-backed securities
Agency pass-through certificates	1,636,178		4,896		(7,398		)	1,633,676		2.51
	2,838,197		14,428		(14,121		)	2,838,504		2.00
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates	1,630,936		1,409		(110,955		)	1,521,390		3.13
	$	4,469,133	$	15,837	$	(125,076	)	$	4,359,894	2.41	%



	September 30, 2013
	Amortized Cost		Gross Unrealized						Fair Value		Yield
			Gains		Losses
	(In thousands)
Available-for-sale securities
U.S. government and agency securities due
1 to 5 years	61,002		3,393			(252		)	64,143		1.98
5 to 10 years	129,219		—			(1,547		)	127,672		0.86
Over 10 years	344,571		—			(2,411		)	342,160		0.93
Equity Securities
1 to 5 years	500		11			—			511		2.17
5 to 10 years	100,000		726			—			100,726		1.80
Corporate bonds due
Within 1 year	19,500		3			—			19,503		0.49
1 to 5 years	317,190		1,980			(130		)	319,040		0.75
5 to 10 years	113,060		1,180			(768		)	113,472		1.53
Municipal bonds due
Over 10 years	20,422		2,123			—			22,545		6.45
Mortgage-backed securities
Agency pass-through certificates	1,245,400		10,270			(4,494		)	1,251,176		2.18
	2,350,864		19,686			(9,602		)	2,360,948		1.70
Mortgage-backed securities
Agency pass-through certificates	1,654,666		3,387			(75,204		)	1,582,849		3.14
	$	4,005,530	$	23,073		$	(84,806	)	$	3,943,797	2.30	%

During the quarter ended December 31, 2013, there were no available-for-sale securities sold. There were $43,899,000 of available-for-sale securities sold during the quarter ended December 31, 2012, resulting in a gain of $0. These securities were acquired from South Valley Bank and sold on the same day. Substantially all mortgage-backed securities have contractual due dates that exceed 10 years.

The following tables show the unrealized gross losses and fair value of securities at December 31, 2013 and September 30, 2013, by length of time that individual securities in each category have been in a continuous loss position. Management believes that the declines in fair value of these investments are not an other than temporary impairment.



December 31, 2013	Less than 12 months					12 months or more					Total
	Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value

Corporate bonds due	$	(522	)	$	54,478	$	(312	)	$	32,782	$	(834	)	$	87,260
U.S. government and agency securities due	(5,819		)	523,034		(70		)	13,067		(5,889		)	536,101
Agency pass-through certificates	(102,068		)	2,211,194		(16,285		)	388,526		(118,353		)	2,599,720
	$	(108,409	)	$	2,788,706	$	(16,667	)	$	434,375	$	(125,076	)	$	3,223,081



September 30, 2013	Less than 12 months					12 months or more					Total
	Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value

Corporate bonds due	$	(660	)	$	52,434	$	(238	)	$	9,763	$	(898	)	$	62,197
U.S. government and agency securities due	(4,144		)	309,109		(66		)	14,091		(4,210		)	323,200
Agency pass-through certificates	(78,291		)	1,703,948		(1,407		)	166,503		(79,698		)	1,870,451
	$	(83,095	)	$	2,065,491	$	(1,711	)	$	190,357	$	(84,806	)	$	2,255,848