10.

Fair Value Measurements

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of June 30, 2014, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets and liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Assets measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 (in thousands):


	Fair Value Measurement at June 30, 2014
Description	June 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
U.S. Treasury	$	400	$	400	$	—	$	—
U.S. Agencies		260		—		260		—
Mortgage-backed		—		—		—		—
State and political subdivisions		7,494		—		7,494		—
Trading - other		18,330		18,330		—		—

Trading securities		26,484		18,730		7,754		—

U.S. Treasury		466,675		466,675		—		—
U.S. Agencies		969,366		—		969,366		—
Mortgage-backed		3,188,205		—		3,188,205		—
State and political subdivisions		1,943,362		—		1,943,362		—
Corporates		133,015		133,015		—		—

Available for sale securities		6,700,623		599,690		6,100,933		—
Company-owned life insurance		20,452		—		20,452		—
Derivatives		4,831		—		4,831		—

Total	$	6,752,390	$	618,420	$	6,133,970	$	—

Liabilities
Deferred compensation		25,377		25,377		—		—
Contingent consideration liability		52,027		—		—		52,027
Derivatives		4,947		—		4,947		—

Total	$	82,351	$	25,377	$	4,947	$	52,027


	Fair Value Measurement at December 31, 2013
Description	December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
U.S. Treasury	$	400	$	400	$	—	$	—
U.S. Agencies		—		—		—		—
Mortgage-backed		515		—		515		—
State and political subdivisions		3,072		—		3,072		—
Trading - other		24,477		24,477		—		—

Trading securities		28,464		24,877		3,587		—

U.S. Treasury		110,200		110,200		—		—
U.S. Agencies		1,257,663		—		1,257,663		—
Mortgage-backed		2,944,566		—		2,944,566		—
State and political subdivisions		1,995,246		—		1,995,246		—
Corporates		454,736		454,736		—		—

Available for sale securities		6,762,411		564,936		6,197,475		—
Company-owned life insurance		19,619		—		19,619		—
Derivatives		2,518		—		2,518		—

Total	$	6,813,012	$	589,813	$	6,223,199	$	—

Liabilities
Deferred compensation	$	19,825	$	19,825	$	—	$	—
Contingent consideration liability		46,201		—		—		46,201
Derivatives		2,346		—		2,346		—

Total	$	68,372	$	19,825	$	2,346	$	46,201

The following table reconciles the beginning and ending balances of the contingent consideration liability for the six months ended June 30, 2014 (in thousands):


	Six Months Ended June 30,
	2014			2013
Beginning Balance	$	46,201		$	51,163
Contingency reserve		14,272			—
Payment of contingent considerations on acquisitions		(13,725	)		(16,171	)
Income from fair value adjustments		—			(138	)
Expense from fair value adjustments		5,279			3,329

Ending Balance	$	52,027		$	38,183

During the six month period ended June 30, 2014, the Company recorded contingency reserve expense of $20.3 million in its Consolidated Statement of Income related to the resolution of the PCM dispute. On June 30, 2014, the Company made a payment of $6.0 million, reducing the remaining contingency reserve to $14.3 million. The settlement agreement amends the original asset purchase agreement dated June 27, 2010, and subsequent to the settlement, the remaining contingency reserve liability has been included in the table above as additional contingent consideration recorded at fair value.

The following table presents certain quantitative information about the significant unobservable input used in the fair value measurement for the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3):


Description	Valuation Techniques	Significant Unobservable Inputs	Range
Liabilities
Contingent consideration liability	Discounted cash flows	Revenue growth percentage	1% - 98%

An increase in the revenue growth percentage may result in a significantly higher estimated fair value of the contingent consideration liability. Alternatively, a decrease in the revenue growth percentage may result in a significantly lower estimated fair value of the contingent consideration liability.

Valuation methods for instruments measured at fair value on a recurring basis

The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a recurring basis:

Securities Available for Sale and Investment Securities Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Trading Securities Fair values for trading securities (including financial futures), are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.

Company-owned Life Insurance Fair values are based on quoted market prices or dealer quotes with adjustments for dividends, capital gains, and administrative charges.

Derivatives Fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. 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, thresholds, mutual puts, and guarantees.

Deferred Compensation Fair values are based on quoted market prices or dealer quotes.

Contingent Consideration The fair value of contingent consideration liabilities are derived from a discounted cash flow model of future contingent payments. The valuation of these liabilities are estimated by a collaborative effort of the Company’s mergers and acquisitions group, business unit management, and the corporate accounting group. These groups report primarily to the Company’s Chief Financial Officer and Chief Executive Officer. These future contingent payments are calculated based on estimates of future income and expense from each acquisition. These estimated cash flows are projected by the business unit management and reviewed by the mergers and acquisitions group. To obtain a current valuation of these projected cash flows, an expected present value technique is utilized to calculate a discount rate. The cash flow projections and discount rates are reviewed quarterly and updated as market conditions necessitate. Potential valuation adjustments are made as future income and expense projections for each acquisition are made which affect the calculation of the related contingent consideration payment. These adjustments are recorded through noninterest income and expense.

Assets measured at fair value on a non-recurring basis as of June 30, 2014 and December 31, 2013 (in thousands):


	Fair Value Measurement at June 30, 2014
Description	June 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) Recognized During the Six Months Ended June 30
Impaired loans	$	9,669	$	—	$	—	$	9,669	$	637
Other real estate owned		205		—		—		205	$	—

Total	$	9,874	$	—	$	—	$	9,874	$	637


	Fair Value Measurement at December 31, 2013
Description	December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) Recognized During the Twelve Months Ended December 31
Impaired loans	$	15,496	$	—	$	—	$	15,496	$	(2,496	)
Other real estate owned		329		—		—		329		(125	)

Total	$	15,825	$	—	$	—	$	15,825	$	(2,621	)

Valuation methods for instruments measured at fair value on a nonrecurring basis

The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a non-recurring basis:

Impaired loans While the overall loan portfolio is not carried at fair value, adjustments are recorded on certain loans to reflect partial write-downs that are based on the value of the underlying collateral. In determining the value of real estate collateral, the Director of Property Management, who reports to the Chief Administrative Officer, obtains external appraisals. The external appraisals are generally based on recent sales of comparable properties which are then adjusted for the unique characteristics of the property being valued. Upon receiving the external appraisal, the Company’s appraisal department led by the Chief Appraiser who reports to the Chief Credit Officer review the appraisal to determine if the appraisal is a reasonable basis for the value of the property based upon historical experience and detailed knowledge of the specific property and location. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists within the Company’s property management group and the Company’s credit department. The valuation of the impaired loans is reviewed on a quarterly basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

Other real estate owned Other real estate owned consists of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including auto, recreational and marine vehicles. Other real estate owned is recorded as held for sale initially at the lower of the loan balance or fair value of the collateral. The initial valuation of the foreclosed property is obtained through an appraisal process similar to the process described in the impaired loans paragraph above. Subsequent to foreclosure, valuations are reviewed quarterly and updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals or third-party price opinions and, accordingly, those measurements may be classified as Level 2. Other fair value measurements may be based on internally developed pricing methods, and those measurements may be classified as Level 3.

Fair value disclosures require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value of the Company’s financial instruments at June 30, 2014 and December 31, 2013 are as follows (in millions):


	Fair Value Measurement at June 30, 2014
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
FINANCIAL ASSETS
Securities held to maturity	$	238.8	$	—	$	269.7	$	—	$	269.7
Federal Reserve Bank and other stock		67.5		—		67.5		—		67.5
Loans (exclusive of allowance for loan loss)		6,923.8		—		6,937.5		—		6,937.5
FINANCIAL LIABILITIES
Time deposits		1,020.0		—		1,019.5		—		1,019.5
Long-term debt		5.7		—		5.9		—		5.9
OFF-BALANCE SHEET ARRANGEMENTS
Commitments to extend credit for loans										2.9
Commercial letters of credit										0.1
Standby letters of credit										1.2


	Fair Value Measurement at December 31, 2013
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
FINANCIAL ASSETS
Securities held to maturity	$	209.8	$	—	$	231.5	$	—	$	231.5
Federal Reserve Bank and other stock		50.5		—		50.5		—		50.5
Loans (exclusive of allowance for loan loss)		6,521.9		—		6,571.6		—		6,571.6
FINANCIAL LIABILITIES
Time deposits		1,449.6		—		1,449.4		—		1,449.4
Long-term debt		5.1		—		4.5		—		4.5
OFF-BALANCE SHEET ARRANGEMENTS
Commitments to extend credit for loans										6.0
Commercial letters of credit										0.1
Standby letters of credit										2.0

The fair values of cash and short-term investments, demand and savings deposits, federal funds and repurchase agreements, and short-term debt approximate the carrying values.

Securities Held to Maturity Fair value of held-to-maturity securities are estimated by discounting the future cash flows using the current rates at which similar investments would be made to borrowers with similar credit ratings and for the same remaining maturities.

Federal Reserve Bank and Other Amount consists of Federal Reserve Bank stock held by the Bank, Prairie Capital Management equity-method investments, and other miscellaneous investments. The fair value of Federal Reserve Bank stock is considered to be the carrying value as no readily determinable market exists for these investments because they can only be redeemed with the FRB. The fair value of Prairie Capital Management marketable equity-method investments are based on quoted market prices used to estimate the value of the underlying investment. For non-marketable equity-method investments, the Company’s proportionate share of the income or loss is recognized on a one-quarter lag based on the valuation of the underlying investment(s).

Loans Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, consumer, and credit card. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Time Deposits The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates that are currently offered for deposits of similar remaining maturities.

Long-Term Debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Other Off-Balance Sheet Instruments The fair value of loan commitments and letters of credit are determined based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. Neither the fees earned during the year on these instruments nor their fair value at year-end are significant to the Company’s consolidated financial position.

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2014 and December 31, 2013. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amount presented herein.