The following table presents estimated fair values of the Company’s financial instruments as of June 30, 2012 and December 31, 2011, whether or not recognized or recorded at fair value in the Condensed Consolidated Balance Sheets:


(in thousands)
	June 30, 2012				December 31, 2011
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
FINANCIAL ASSETS:
Cash and cash equivalents	$	663,776	$	663,776	$	598,766	$	598,766
Trading securities		3,301		3,301		2,309		2,309
Securities available for sale		2,834,076		2,834,076		3,168,578		3,168,578
Securities held to maturity		4,506		4,446		4,714		4,759
Loans held for sale		209,607		209,607		98,691		98,691
Non-covered loans and leases, net		6,020,814		5,978,971		5,795,130		5,816,714
Covered loans and leases, net		553,963		626,618		622,451		722,295
Restricted equity securities		31,712		31,712		32,581		32,581
Mortgage servicing rights		22,513		22,513		18,184		18,184
Bank owned life insurance assets		93,360		93,360		92,555		92,555
FDIC indemnification asset		68,805		24,022		91,089		47,008
Derivatives		19,928		19,928		7,955		7,955
Visa Class B common stock		-		23,151		-		19,230

FINANCIAL LIABILITIES:
Deposits	$	9,132,181	$	9,151,402	$	9,236,690	$	9,260,327
Securities sold under agreements to repurchase		149,341		149,341		124,605		124,605
Term debt		254,641		283,244		255,676		284,911
Junior subordinated debentures, at fair value		83,993		83,993		82,905		82,905
Junior subordinated debentures, at amortized cost		102,382		69,089		102,544		68,698
Derivatives		20,207		20,207		6,509		6,509

Fair Value of Assets and Liabilities Not Measured at Fair Value

The following table presents information about the level in the fair value hierarchy for the Company’s assets and liabilities that are not measured at fair value as of June 30, 2012:


(in thousands)
	Fair Value at June 30, 2012
Description	Total		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	663,776	$	663,776	$	-	$	-
Securities held to maturity		4,446		-		-		4,446
Loans held for sale		209,607		-		209,607		-
Non-covered loans and leases, net		5,978,971		-		-		5,978,971
Covered loans and leases, net		626,618		-		-		626,618
Restricted equity securities		31,712		31,712		-		-
Bank owned life insurance assets		93,360		93,360		-		-
FDIC indemnification asset		24,022		-		-		24,022
Visa Class B common stock		23,151		-		-		23,151

Deposits
Non-maturity deposits	$	6,974,796	$	6,974,796	$	-	$	-
Deposits with stated maturities		2,176,606		-		2,176,606		-
Securities sold under agreements to repurchase		149,341		149,341		-		-
Term debt		283,244		-		283,244		-
Junior subordinated debentures, at amortized cost		69,089		-		-		69,089

Fair Value of Assets and Liabilities Measured on a Recurring Basis

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011:


(in thousands)
	Fair Value at June 30, 2012
Description	Total		Level 1		Level 2		Level 3
Trading securities
Obligations of states and political subdivisions	$	950	$	-	$	950	$	-
Equity securities		121		121		-		-
Other investments securities⁽¹⁾		2,230		2,230		-		-
Available for sale securities
U.S. Treasury and agencies		46,118		-		46,118		-
Obligations of states and political subdivisions		264,509		-		264,509		-
Residential mortgage-backed securities and
collateralized mortgage obligations		2,521,211		-		2,521,211		-
Other debt securities		144		-		144		-
Investments in mutual funds and
other equity securities		2,094		-		2,094		-
Mortgage servicing rights, at fair value		22,513		-		-		22,513
Derivatives
Interest rate lock commitments		2,701		-		2,701		-
Interest rate forward sales commitments		2		-		2		-
Interest rate swaps		17,225		-		17,225		-
Total assets measured at fair value	$	2,879,818	$	2,351	$	2,854,954	$	22,513

Junior subordinated debentures, at fair value	$	83,993	$	-	$	-	$	83,993
Derivatives
Interest rate lock commitments		415		-		415		-
Interest rate forward sales commitments		2,280		-		2,280		-
Interest rate swaps		17,512		-		17,512		-
Total liabilities measured at fair value	$	104,200	$	-	$	20,207	$	83,993


(in thousands)
	Fair Value at December 31, 2011
Description	Total		Level 1		Level 2		Level 3
Trading securities
Obligations of states and political subdivisions	$	296	$	-	$	296	$	-
Equity securities		1,918		1,918		-		-
Other investments securities⁽¹⁾		95		95		-		-
Available for sale securities
U.S. Treasury and agencies		118,465		-		118,465		-
Obligations of states and political subdivisions		253,553		-		253,553		-
Residential mortgage-backed securities and
collateralized mortgage obligations		2,794,355		-		2,794,355		-
Other debt securities		134		-		134		-
Investments in mutual funds and
other equity securities		2,071		-		2,071		-
Mortgage servicing rights, at fair value		18,184		-		-		18,184
Derivatives
Interest rate lock commitments		1,752		-		1,752		-
Interest rate forward sales commitments		-		-		-		-
Interest rate swaps		6,203		-		6,203		-
Total assets measured at fair value	$	3,197,026	$	2,013	$	3,176,829	$	18,184

Junior subordinated debentures, at fair value	$	82,905	$	-	$	-	$	82,905
Derivatives
Interest rate lock commitments		3		-		3		-
Interest rate forward sales commitments		90		-		90		-
Interest rate swaps		6,416		-		6,416		-
Total liabilities measured at fair value	$	89,414	$	-	$	6,509	$	82,905

(1) Principally represents U.S. Treasury and agencies or residential mortgage-backed securities issued or guaranteed by governmental agencies.

The following methods were used to estimate the fair value of each class of financial instrument above:

Cash and Cash Equivalents—For short-term instruments, including cash and due from banks, and interest bearing deposits with banks, the carrying amount is a reasonable estimate of fair value.

Securities— Fair values for investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available.

Loans Held For Sale— For loans held for sale, carrying value approximates fair value.

Non-covered Loans and Leases - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, including commercial, real estate and consumer loans. Each loan category is further segregated by fixed and variable rate. For variable rate loans, carrying value approximates fair value. The fair value of fixed rate loans is calculated by discounting contractual cash flows at rates which similar loans are currently being made. These amounts are discounted further by embedded probable losses expected to be realized in the portfolio.

Covered Loans and Leases – Covered loans are initially measured at their estimated fair value on their date of acquisition as described in Note 5. Subsequent to acquisition, the fair value of covered loans is measured using the same methodology as that of non-covered loans.

Restricted Equity Securities – The carrying value of restricted equity securities approximates fair value as the shares can only be redeemed by the issuing institution at par.

Mortgage Servicing Rights - The fair value of mortgage servicing rights is estimated using a discounted cash flow model. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income. This model is periodically validated by an independent external model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. Management believes the significant inputs utilized are indicative of those that would be used by market participants.

Bank Owned Life Insurance Assets – Fair values of insurance policies owned are based on the insurance contract’s cash surrender value.

FDIC Indemnification Asset - The FDIC indemnification asset is calculated as the expected future cash flows under the loss-share agreement discounted by a rate reflective of the creditworthiness of the FDIC as would be required from the market.

Visa Class B Common Stock - The fair value of Visa Class B common stock is estimated by applying a 5% discount to the value of the unredeemed Class A equivalent shares. The discount primarily represents the risk related to the further potential reduction of the conversion ratio between Class B and Class A shares and a liquidity risk premium.

Deposits—The fair value of deposits with no stated maturity, such as non-interest bearing deposits, savings and interest checking accounts, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Securities Sold under Agreements to Repurchase and Federal Funds Purchased - For short-term instruments, including securities sold under agreements to repurchase and federal funds purchased, the carrying amount is a reasonable estimate of fair value.

Term Debt—The fair value of medium term notes is calculated based on the discounted value of the contractual cash flows using current rates at which such borrowings can currently be obtained.

Junior Subordinated Debentures - The fair value of junior subordinated debentures is estimated using an income approach valuation technique. The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads, we have classified this as a Level 3 fair value measure. For further discussion of the valuation technique and inputs, see Note 8.

Derivative Instruments - The fair value of the interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The fair value of the interest rate swaps is determined using a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. For further discussion of the valuation technique and inputs, see Note 10. The Company has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at June 30, 2012:


(in thousands)
Financial Instrument	Valuation Technique	Unobservable Input	Weighted Average (Range)
Mortgage servicing rights	Discounted cash flow
		Constant Prepayment Rate	19.25%
		Discount Rate	8.58%
Junior subordinated debentures	Discounted cash flow
		Credit Spread	5.7% (5.4% - 6.7%)

Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustments (and decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). An increase in the weighted average life assumptions will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted average life will result in an increase of the constant prepayment rate.

Management believes that the credit risk adjusted spread utilized in the fair value measurement of the junior subordinated debentures carried at fair value is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, that is, the inactive market. Management attributes the change in fair value of the junior subordinated debentures during the period to market changes in the nonperformance expectations and pricing of this type of debt, and not as a result of changes to our entity-specific credit risk. The widening of the credit risk adjusted spread above the Company’s contractual spreads has primarily contributed to the positive fair value adjustments. Future contractions in the credit risk adjusted spread relative to the spread currently utilized to measure the Company’s junior subordinated debentures at fair value as of June 30, 2012, or the passage of time, will result in negative fair value adjustments. Generally, an increase in the credit risk adjusted spread and/or a decrease in the three month LIBOR swap curve will result in positive fair value adjustments (and decrease the fair value measurement). Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR swap curve will result in negative fair value adjustments (and increase the fair value measurement).

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and six months ended June 30, 2012 and 2011.


(in thousands)
Three months ended June 30,		Beginning Balance		Change included in earnings		Purchases and issuances		Sales and settlements		Ending Balance		Net change in unrealized gains or (losses) relating to items held at end of period
2012
Mortgage servicing rights	$	20,210	$	(1,030)	$	3,333	$	-	$	22,513	$	(84)
Junior subordinated debentures		83,453		1,587		-		(1,047)		83,993		1,587

2011
Mortgage servicing rights	$	15,605	$	(328)	$	1,073	$	-	$	16,350	$	(45)
Junior subordinated debentures		81,220		1,523		-		(977)		81,766		1,523


(in thousands)
Six months ended June 30,		Beginning Balance		Change included in earnings		Purchases and issuances		Sales and settlements		Ending Balance		Net change in unrealized gains or (losses) relating to items held at end of period
2012
Mortgage servicing rights	$	18,184	$	(1,952)	$	6,281	$	-	$	22,513	$	(197)
Junior subordinated debentures		82,905		3,188		-		(2,100)		83,993		3,188

2011
Mortgage servicing rights	$	14,454	$	(511)	$	2,407	$	-	$	16,350	$	79
Junior subordinated debentures		80,688		3,033		-		(1,955)		81,766		3,033

Losses on mortgage servicing rights carried at fair value are recorded in mortgage banking revenue within other non-interest income. Gains (losses) on junior subordinated debentures carried at fair value are recorded within other non-interest income. The contractual interest expense on the junior subordinated debentures is recorded on an accrual basis as interest on junior subordinated debentures within interest expense. Settlements related to the junior subordinated debentures represent the payment of accrued interest that is embedded in the fair value of these liabilities.

Additionally, from time to time, certain assets are measured at fair value on a nonrecurring basis. These adjustments to fair value generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment.

Fair Value of Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The following table presents information about the Company’s assets and liabilities measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported upon.


(in thousands)
	June 30, 2012
Description	Total		Level 1		Level 2		Level 3
Non-covered loans and leases	$	30,243	$	-	$	-	$	30,243
Non-covered other real estate owned		12,193		-		-		12,193
Covered other real estate owned		8,363		-		-		8,363
	$	50,799	$	-	$	-	$	50,799

	December 31, 2011
Description	Total		Level 1		Level 2		Level 3
Investment securities, held to maturity
Residential mortgage-backed securities
and collateralized mortgage obligations	$	487	$	-	$	-	$	487
Non-covered loans and leases		53,847		-		-		53,847
Non-covered other real estate owned		11,321		-		-		11,321
Covered other real estate owned		12,561						12,561
	$	78,216	$	-	$	-	$	78,216

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and six months ended June 30, 2012 and 2011:


(in thousands)
	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011
Investment securities, held to maturity
Residential mortgage-backed securities
and collateralized mortgage obligations	$	-	$	47	$	-	$	72
Non-covered loans and leases		11,047		17,278		22,841		33,194
Non-covered other real estate owned		1,196		3,388		4,719		5,518
Covered other real estate owned		440		665		3,346		1,921
Total loss from nonrecurring measurements	$	12,683	$	21,378	$	30,906	$	40,705

The investment securities held to maturity above relate to non-agency collateralized mortgage obligations where other-than-temporary impairment (“OTTI”) has been identified and the investments have been adjusted to fair value. The fair value of these investments securities were obtained from third-party pricing services using matrix or model pricing methodologies and were corroborated by broker indicative bids. While we do not expect to recover the entire amortized cost basis of these securities, as we as we do not intend to sell these securities and it is not likely that we will be required to sell these securities before maturity, only the credit loss component of the impairment is recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. The remaining impairment loss related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to a separate component other comprehensive income (“OCI”). We estimate the cash flows of the underlying collateral within each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity. Assumptions utilized vary from security to security, and are influenced by factors such as loan interest rates, geographic location, borrower characteristics and vintage, and historical experience. We then use a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure. These cash flows are then discounted at the interest rate used to recognize interest income on each security.

The non-covered loans and leases amount above represents impaired, collateral dependent loans that have been adjusted to fair value. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero.

The non-covered and covered other real estate owned amount above represents impaired real estate that has been adjusted to fair value. Non-covered other real estate owned represents real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property's new basis. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on non-covered other real estate owned for fair value adjustments based on the fair value of the real estate.

During the three and six months ended June 30, 2012, the Bank transferred none and $767,000 of trading securities from Level 1 to Level 2 under the fair value hierarchy due to a refinement in the fair value methodology.