Fair Value Measurement

The following table presents estimated fair values of the Company’s financial instruments as of September 30, 2013 and December 31, 2012, whether or not recognized or recorded at fair value in the Condensed Consolidated Balance Sheets:

(in thousands)



	September 30, 2013				December 31, 2012
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
FINANCIAL ASSETS:
Cash and cash equivalents	$	697,091	$	697,091	$	543,787	$	543,787
Trading securities	4,012		4,012		3,747		3,747
Securities available for sale	1,910,082		1,910,082		2,625,229		2,625,229
Securities held to maturity	5,766		6,030		4,541		4,732
Loans held for sale	113,993		113,993		320,132		320,132
Non-covered loans and leases, net	7,144,210		7,110,101		6,595,689		6,652,179
Covered loans, net	397,083		449,239		477,078		543,628
Restricted equity securities	31,444		31,444		33,443		33,443
Mortgage servicing rights	41,853		41,853		27,428		27,428
Bank owned life insurance assets	94,637		94,637		93,831		93,831
FDIC indemnification asset	29,427		6,980		52,798		18,714
Derivatives	17,485		17,485		23,842		23,842
Visa Class B common stock	—		35,786		—		28,385
FINANCIAL LIABILITIES:
Deposits	$	9,067,240	$	9,077,231	$	9,379,275	$	9,396,646
Securities sold under agreements to repurchase	215,310		215,310		137,075		137,075
Term debt	252,017		279,183		253,605		289,404
Junior subordinated debentures, at fair value	86,718		86,718		85,081		85,081
Junior subordinated debentures, at amortized cost	101,979		71,553		110,985		78,529
Derivatives	16,995		16,995		22,971		22,971

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 September 30, 2013 and December 31, 2012:

(in thousands)



	September 30, 2013
Description	Total		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	697,091	$	697,091	$	—	$	—
Securities held to maturity	4,012		—		—		4,012
Non-covered loans and leases, net	7,110,101		—		—		7,110,101
Covered loans, net	449,239		—		—		449,239
Restricted equity securities	31,444		31,444		—		—
Bank owned life insurance assets	94,637		94,637		—		—
FDIC indemnification asset	6,980		—		—		6,980
Visa Class B common stock	35,786		—		—		35,786
LIABILITIES
Deposits
Non-maturity deposits	$	7,434,771	$	7,434,771	$	—	$	—
Deposits with stated maturities	1,642,460		—		1,642,460		—
Securities sold under agreements to repurchase	215,310		—		215,310		—
Term debt	279,183		—		279,183		—
Junior subordinated debentures, at amortized cost	71,553		—		—		71,553

(in thousands)



	December 31, 2012
Description	Total		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	543,787	$	543,787	$	—	$	—
Securities held to maturity	4,732		—		—		4,732
Non-covered loans and leases, net	6,652,179		—		—		6,652,179
Covered loans, net	543,628		—		—		543,628
Restricted equity securities	33,443		33,443		—		—
Bank owned life insurance assets	93,831		93,831		—		—
FDIC indemnification asset	18,714		—		—		18,714
Visa Class B common stock	28,385		—		—		28,385
LIABILITIES
Deposits
Non-maturity deposits	$	7,376,288	$	7,376,288	$	—	$	—
Deposits with stated maturities	2,020,358		—		2,020,358		—
Securities sold under agreements to repurchase	137,075		—		137,075		—
Term debt	289,404		—		289,404		—
Junior subordinated debentures, at amortized cost	78,529		—		—		78,529

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 September 30, 2013 and December 31, 2012:

(in thousands)



	September 30, 2013
Description	Total		Level 1		Level 2		Level 3
Trading securities
Obligations of states and political subdivisions	$	551	$	—	$	551	$	—
Equity securities	3,364		3,364		—		—
Other investments securities(1)	97		—		97		—
Available for sale securities
U.S. Treasury and agencies	278		—		278		—
Obligations of states and political subdivisions	240,531		—		240,531		—
Residential mortgage-backed securities and
collateralized mortgage obligations	1,667,144		—		1,667,144		—
Other debt securities	134		—		134		—
Investments in mutual funds and other equity securities	1,995		—		1,995		—
Loans held for sale, at fair value	113,993				113,993
Mortgage servicing rights, at fair value	41,853		—		—		41,853
Derivatives
Interest rate lock commitments	3,008		—		—		3,008
Interest rate forward sales commitments	—		—		—		—
Interest rate swaps	14,477		—		14,477		—
Total assets measured at fair value	$	2,087,425	$	3,364	$	2,039,200	$	44,861
Junior subordinated debentures, at fair value	$	86,718	$	—	$	—	$	86,718
Derivatives
Interest rate lock commitments	—		—		—		—
Interest rate forward sales commitments	3,784		—		3,784		—
Interest rate swaps	13,211		—		13,211		—
Total liabilities measured at fair value	$	103,713	$	—	$	16,995	$	86,718

(in thousands)



	December 31, 2012
Description	Total		Level 1		Level 2		Level 3
Trading securities
Obligations of states and political subdivisions	$	1,216	$	—	$	1,216	$	—
Equity securities	2,408		2,408		—		—
Other investments securities(1)	123		—		123		—
Available for sale securities
U.S. Treasury and agencies	45,820		—		45,820		—
Obligations of states and political subdivisions	263,725		—		263,725		—
Residential mortgage-backed securities and
collateralized mortgage obligations	2,313,376		—		2,313,376		—
Other debt securities	222		—		222		—
Investments in mutual funds and other equity securities	2,086		—		2,086		—
Loans held for sale, at fair value	320,132				320,132
Mortgage servicing rights, at fair value	27,428		—		—		27,428
Derivatives
Interest rate lock commitments	1,496		—		—		1,496
Interest rate forward sales commitments	133		—		133		—
Interest rate swaps	22,213		—		22,213		—
Total assets measured at fair value	$	3,000,378	$	2,408	$	2,969,046	$	28,924
Junior subordinated debentures, at fair value	$	85,081	$	—	$	—	$	85,081
Derivatives
Interest rate lock commitments	18		—		—		18
Interest rate forward sales commitments	905		—		905		—
Interest rate swaps	22,048		—		22,048		—
Total liabilities measured at fair value	$	108,052	$	—	$	22,953	$	85,099


(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— Fair value is determined based on quoted secondary market prices for similar loans, including the implicit fair value of embedded servicing rights.

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 – Covered loans are initially measured at their estimated fair value on their date of acquisition as described in Note 6. 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 9.

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 pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. 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. Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the CVA associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2013, the Bank has assessed the significance of the impact of the CVA on the overall valuation of its interest rate swap positions and has determined that the CVA are not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.

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 September 30, 2013:

(in thousands)



Financial Instrument	Valuation Technique	Unobservable Input	Weighted Average (Range)
Mortgage servicing rights	Discounted cash flow
		Constant Prepayment Rate	16.04%
		Discount Rate	8.69%
Interest rate lock commitment	Internal Pricing Model
		Pull-through rate	73.9%
Junior subordinated debentures	Discounted cash flow
		Credit Spread	6.21%

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 negative fair value adjustments (and a 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 pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments (and an increase in the fair value measurement.) Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement.)

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 September 30, 2013, 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 nine months ended September 30, 2013 and 2012.

(in thousands)



Three months ended September 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
2013
Mortgage servicing rights	$	38,192	$	(411	)	$	4,072	$	—		$	41,853	$	746
Interest rate lock commitment	638		(638		)	17,695		(14,687		)	3,008		3,008
Junior subordinated debentures	86,159		1,533			—		(974		)	86,718		1,533

2012
Mortgage servicing rights	$	22,513	$	(3,666	)	$	5,642	$	—		$	24,489	$	(2,720	)
Interest rate lock commitment	2,286		(2,286		)	37,494		(33,528		)	3,966		3,966
Junior subordinated debentures	83,993		1,592			—		(1,047		)	84,538		1,592

(in thousands)



Nine months ended September 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
2013
Mortgage servicing rights	$	27,428	$	(757	)	$	15,182	$	—		$	41,853	$	(755	)
Interest rate lock commitment	1,478		(1,478		)	52,192		(49,184		)	3,008		3,008
Junior subordinated debentures	85,081		4,563			—		(2,926		)	86,718		4,563

2012
Mortgage servicing rights	$	18,184	$	(5,618	)	$	11,923	$	—		$	24,489	$	(2,570	)
Interest rate lock commitment	1,749		(1,749		)	70,806		(66,840		)	3,966		3,966
Junior subordinated debentures	82,905		4,780			—		(3,147		)	84,538		4,780

Losses on mortgage servicing rights carried at fair value are recorded in mortgage banking revenue within other non-interest income. Gains (losses) on interest rate lock commitments 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)



	September 30, 2013
	Total		Level 1		Level 2		Level 3
Non-covered loans and leases	$	18,759	$	—	$	—	$	18,759
Non-covered other real estate owned	81		—		—		81
Covered other real estate owned	2,778		—		—		2,778
	$	21,618	$	—	$	—	$	21,618

(in thousands)



	December 31, 2012
	Total		Level 1		Level 2		Level 3
Investment securities, held to maturity
Residential mortgage-backed securities
and collateralized mortgage obligations	$	432	$	—	$	—	$	432
Non-covered loans and leases	34,007		—		—		34,007
Non-covered other real estate owned	4,671		—		—		4,671
Covered other real estate owned	8,957		—		—		8,957
	$	48,067	$	—	$	—	$	48,067

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and nine months ended September 30, 2013 and 2012:

(in thousands)



	Three months ended				Nine months ended
	September 30,				September 30,
	2013		2012		2013		2012
Non-covered loans and leases	$	5,663	$	6,390	$	18,126	$	29,230
Non-covered other real estate owned	11		1,044		448		5,763
Covered other real estate owned	24		769		704		4,115
Total loss from nonrecurring measurements	$	5,698	$	8,203	$	19,278	$	39,108

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.

Fair Value Option

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale accounted for under the fair value option as of September 30, 2013 and December 31, 2012:

(in thousands)

September 30, 2013

December 31, 2012

Fair Value

Aggregate

Less Aggregate

Aggregate

Less Aggregate

Unpaid

Fair

Principal

Fair

Principal

Value

Balance

Value

Balance

Loans held for sale

113,993

107,720

6,273

320,132

302,760

17,372

Loans held for sale accounted for under the fair value option are measured initially at fair value with subsequent changes in fair value recognized in earnings. Gains and losses from such changes in fair value are reported as a component of mortgage banking revenue, net in the Consolidated Statements of Income. For the three and nine months ended September 30, 2013 the Company recorded a net increase of $5.7 million and a net decrease of $11.1 million, and for the three and nine months ended September 30, 2012, the Company recorded a net increase of $5.3 million and $11.3 million, respectively, representing the change in fair value reflected in earnings.

There were no nonaccrual mortgage loans held for sale or mortgage loans held for sale 90 days or more past due and still accruing interest as of September 30, 2013 and December 31, 2012, respectively.