Fair Value Measurement

6 Months Ended

Jun. 30, 2011

Fair Value Measurement

Fair Value Measurement

Note 16 – Fair Value Measurement

The following table presents estimated fair values of the Company's financial instruments as of June 30, 2011 and December 31, 2010, whether or not recognized or recorded at fair value in the Condensed Consolidated Balance Sheets:

(in thousands)

	June 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
FINANCIAL ASSETS:
Cash and cash equivalents	$	615,882	$	615,882	$	1,004,125	$	1,004,125
Trading securities		2,522		2,522		3,024		3,024
Securities available for sale		3,177,460		3,177,460		2,919,180		2,919,180
Securities held to maturity		5,553		5,733		4,762		4,774
Loans held for sale		60,416		60,416		75,626		75,626
Non-covered loans and leases, net		5,637,758		5,691,957		5,557,066		5,767,506
Covered loans and leases, net		698,676		783,045		785,898		893,682
Restricted equity securities		32,839		32,839		34,475		34,475
Mortgage servicing rights		16,350		16,350		14,454		14,454
Bank owned life insurance assets		91,169		91,169		90,161		90,161
FDIC indemnification asset		116,928		63,211		146,413		90,011
Derivatives		1,979		1,979		1,060		1,060
Visa Class B common stock		-		311		-		15,987
FINANCIAL LIABILITIES:
Deposits	$	9,146,412	$	9,149,607	$	9,433,805	$	9,464,406
Securities sold under agreements to repurchase		120,889		120,889		73,759		73,759
Term debt		256,719		278,406		262,760		282,127
Junior subordinated debentures, at fair value		81,766		81,766		80,688		80,688
Junior subordinated debentures, at amortized cost		102,705		66,799		102,866		65,771
Derivatives		1,518		1,518		361		361

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:

(in thousands)

	Fair Value at June 30, 2011
Description	Total		Level 1		Level 2		Level 3
Trading securities
Obligations of states and political subdivisions	$	501	$	501	$	-	$	-
Equity securities		1,926		1,926		-		-
Other investments securities(1)		95		95		-		-
Available for sale securities
U.S. Treasury and agencies		118,953		-		118,953		-
Obligations of states and political subdivisions		222,898		-		222,898		-
Residential mortgage-backed securities and collateralized mortgage obligations		2,833,429		-		2,833,429		-
Other debt securities		150		-		150		-
Investments in mutual funds and other equity securities		2,030		-		2,030		-
Mortgage servicing rights, at fair value		16,350		-		-		16,350
Derivatives		1,979		-		1,979		-
Total assets measured at fair value	$	3,198,311	$	2,522	$	3,179,439	$	16,350
Junior subordinated debentures, at fair value		81,766		-		-		81,766
Derivatives		1,518		-		1,518		-
Total liabilities measured at fair value	$	83,284	$	-	$	1,518	$	81,766

(in thousands)

	Fair Value at December 31, 2010
Description	Total		Level 1		Level 2		Level 3
Trading securities
Obligations of states and political subdivisions	$	1,282	$	1,282	$	-	$	-
Equity securities		1,645		1,645		-		-
Other investments securities(1)		97		97		-		-
Available for sale securities
U.S. Treasury and agencies		118,789		-		118,789		-
Obligations of states and political subdivisions		216,726		-		216,726		-
Residential mortgage-backed securities and collateralized mortgage obligations		2,581,504		-		2,581,504		-
Other debt securities		152		-		152		-
Investments in mutual funds and other equity securities		2,009		-		2,009		-
Mortgage servicing rights, at fair value		14,454		-		-		14,454
Derivatives		1,060		-		1,060		-
Total assets measured at fair value	$	2,937,718	$	3,024	$	2,920,240	$	14,454
Junior subordinated debentures, at fair value	$	80,688	$	-	$	-	$	80,688
Derivatives		361		-		361		-
Total liabilities measured at fair value	$	81,049	$	-	$	361	$	80,688

(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. Effective in the second quarter of 2010, 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 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 as of June 30, 2011 and December 31, 2010. 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. 

Derivative Instruments - The fair value of the derivative instruments is 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 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, 2011 and 2010.

(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
2011
Mortgage servicing rights	$	15,605	$	(328	)	$	1,073	$	-		$	16,350	$	(45	)
Junior subordinated debentures		81,220		1,523			-		(977	)		81,766		1,523
2010
Mortgage servicing rights	$	13,628	$	(1,671	)	$	938	$	-		$	12,895	$	(1,368	)
Junior subordinated debentures		79,563		984			-		(957	)		79,590		984

(in thousands)

Six months ended June 30,	Beginning Balance		Change included in earnings			Purchases, issuances and settlements		Sales and settlements			Ending Balance		Net change in unrealized gains or (losses) relating to items held at end of period
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
2010
Mortgage servicing rights	$	12,625	$	(1,800	)	$	2,070	$	-		$	12,895	$	(1,263	)
Junior subordinated debentures		85,666		(4,150	)		-		(1,926	)		79,590		(4,150	)

Gains (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 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.

Management believes that the credit risk adjusted spread being utilized 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, 2011, 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. 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.

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. 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, 2011
Description	Total		Level 1		Level 2		Level 3
Investment securities, held to maturity
Residential mortgage-backed securities and collateralized mortgage obligations	$	217	$	-	$	-	$	217
Non-covered loans and leases		51,968		-		-		51,968
Non-covered other real estate owned		7,270		-		-		7,270
Covered other real estate owned		5,963		-		-		5,963
	$	65,418	$	-	$	-	$	65,418
	December 31, 2010
Description	Total		Level 1		Level 2		Level 3
Investment securities, held to maturity
Residential mortgage-backed securities and collateralized mortgage obligations	$	1,226	$	-	$	-	$	1,226
Non-covered loans and leases		74,639		-		-		74,639
Non-covered other real estate owned		7,958		-		-		7,958
Covered other real estate owned		8,708						8,708
	$	92,531	$	-	$	-	$	92,531

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and six months ended June 30, 2011 and 2010:

(in thousands)

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Investment securities, held to maturity
Residential mortgage-backed securities and collateralized mortgage obligations	$	47	$	-	$	72	$	289
Non-covered loans and leases		17,278		31,449		33,194		64,589
Non-covered other real estate owned		3,388		814		5,518		1,721
Covered other real estate owned		665		-		1,921		-
Total loss from nonrecurring measurements	$	21,378	$	32,263	$	40,705	$	66,599

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.