Fair Value Measurement

Fair value is defined 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. To measure fair value, a hierarchy has been established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities; includes U.S. Treasury and other U.S. Government and agency securities actively traded in over-the-counter markets; mutual funds and stock; securities sold, not yet purchased; and certain derivatives.

Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes U.S. Government and agency securities; municipal securities; CDO securities; mutual funds and stock; private equity investments; securities sold, not yet purchased; and derivatives.

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data. This category generally includes municipal securities; private equity investments; most CDO securities; and the total return swap.

We use fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting. This is done primarily for AFS and trading investment securities; private equity investments under the equity method of accounting; securities sold, not yet purchased; and derivatives. Fair value is used on a nonrecurring basis to measure certain assets when applying lower of cost or fair value accounting or when adjusting carrying values of certain assets or liabilities, including recognition of impairment on assets. This is done primarily for HTM securities; loans held for sale; impaired loans; other real estate owned (“OREO”); private equity investments carried at cost; goodwill; core deposit and other intangibles; other long-lived assets; and for disclosures of certain financial instruments. ASC 820 presupposes an orderly transaction and precludes the use of blockage factors or liquidity adjustments due to the quantity of securities held by an entity.

Level 3 Valuation Policies and Procedures

Our valuation policies and procedures for Level 3 securities are under the direction of the Securities Valuation and Securitization Oversight Committee (“SOC”) comprised of senior and executive members of management in our investment, financial and accounting operations. The SOC is chaired by our chief financial officer and reports to the Audit Committee of the Board of Directors. The major function of the SOC is to develop, review, and approve for use on a quarterly basis the key model inputs, critical valuation assumptions, and proposed discount rates utilized for the valuation of Level 3 securities. The sources of fair value changes are presented to the SOC and attribution analysis are completed when significant changes occur between quarters. SOC procedures require that back testing of certain significant assumptions be provided quarterly. Observers from Risk Management, Internal Audit and other areas attend SOC meetings.

The Model Control Committee (“MCC”) is responsible for model validation and related policies. The MCC is separate from the SOC and is part of the Corporate Risk Management department. MCC members are drawn from quantitative experts throughout the Company. The MCC conducts model validations, including the trust preferred CDO internal model discussed subsequently, and sets policies and procedures for revalidation timing.

Utilization of Third Party Service Providers

We use third party service providers and third party model outputs to estimate fair value for certain of our AFS securities as follows:

For AFS Level 2 securities, we use a third party pricing service to provide pricing, if available, for securities in the following reporting categories: U.S. Treasury, agencies and corporations (except Federal Agricultural Mortgage Corporation (“FAMC”) securities); municipal securities; trust preferred – banks and insurance; and other (including ABS CDOs). At June 30, 2013, the fair value of AFS Level 2 securities for which we obtained pricing from the third party pricing service in these reporting categories amounted to approximately $1.7 billion of the $1.8 billion total of AFS Level 2 securities.

For AFS Level 3 securities, we use other third party service providers to provide pricing, if available, for securities in the following reporting categories: municipal securities, trust preferred – banks and insurance, trust preferred – real estate investment trusts, auction rate, and other (including ABS CDOs). At June 30, 2013, the fair value of AFS Level 3 securities for which we obtained pricing from these third party service providers in these reporting categories amounted to approximately $80 million of the $1.1 billion total of AFS Level 3 securities. In addition, the fair values for approximately $1.0 billion at June 30, 2013 of our AFS Level 3 securities, while internally modeled, include information from third party models. See “Trust preferred CDO internal model” discussed subsequently.

Fair values of the remaining AFS Level 2 and Level 3 securities not valued by pricing from third party services were determined by us using market corroborative data. At June 30, 2013, the Level 2 securities for which we use market corroborative data consisted of approximately $104 million of FAMC securities, $53 million of municipal securities, and $6 million of mutual funds and stock, and the Level 3 securities consisted of $3 million of ABS CDOs. Estimation of the fair values of the FAMC securities included the use of a standard mortgage pass-through calculator that incorporates discounted cash flows, while the municipal securities included the use of a standard form discounted cash flow model with certain inputs adjusted for market conditions.

For AFS Level 2 securities, the third party pricing service provides documentation on an ongoing basis that includes, among other things, pricing information with respect to reference data, methodology, inputs summarized by asset class, pricing application, corroborative information, etc. The documentation includes benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Also included are data from the vendor trading platform. We review, test and validate this information as appropriate.

For AFS Level 3 securities, SOC procedures call for quarterly comparisons of relevant data assumptions used in the models of the other third party service providers. We evaluate these assumptions for reasonableness and compare them with those used in our internal models. These assumptions include, but are not limited to, discount rates, PDs, loss-given-default rates, over-collateralization levels, and rating transition probability matrices from rating agencies. We also compare the model results and valuations with our information about market trends and trading data. This includes information regarding trading prices, implied discounts, outlier information, valuation assumptions, etc.

Because of the timeliness of our involvement, the ongoing exchange of market information, and our agreement on input assumptions, we do not adjust prices from our third party service providers. The procedures discussed previously help ensure that the fair value information received was determined in accordance with applicable accounting guidance.

Available-for-Sale and Trading

AFS and trading investment securities are fair valued under Level 1 using quoted market prices when available for identical securities. When quoted prices are not available, fair values are determined under Level 2 using quoted prices for similar securities or independent pricing services that incorporate observable market data. The largest portion of Level 3 AFS securities include certain CDOs backed by trust preferred securities issued by banks and insurance companies and, to a lesser extent, by REITs.

U.S. Treasury, Agencies and Corporations

Valuation inputs under Level 2 utilized by the third party service provider are discussed previously.

Municipal Securities

Valuation inputs under Level 2 utilized by the third party service provider are discussed previously. We may also include reported trades and material event notices from the Municipal Securities Rulemaking Board, plus new issue data. Municipal securities under Level 3 are fair valued similar to the auction rate securities.

Trust Preferred Collateralized Debt Obligations

Substantially all of the CDO portfolio is fair valued using an income-based cash flow modeling approach incorporating several methodologies that primarily include internal and third party models.

Trust preferred CDO internal model: A licensed third party cash flow model, which requires the Company to input its own key valuation assumptions, is used to estimate fair values of bank and insurance trust preferred CDOs. We utilize a statistical regression of quarterly regulatory ratios that we have identified as predictive of future bank failures to create a credit-specific PD for each bank issuer. The inputs are updated quarterly to include the most recent available financial ratios and the regression formula is updated periodically to utilize those financial ratios that have best predicted bank failures during this credit cycle (“ratio-based approach”). Our ratio-based approach, while generally referencing trailing quarter regulatory data and ratios, seeks to incorporate the most recent available information.

Approximately 31% of the bank issuers are public companies included in a third party proprietary reduced form model. The model generates PDs using equity valuation-related inputs along with other macro and issuer-specific inputs. We use the higher of the PD from the third party proprietary reduced form model and the ratio-based approach.

For performing collateral, we use a floor PD of 30 basis points (“bps”) for year one for collateral where the higher of the one-year PDs from our ratio based approach and those from the third party proprietary reduced form model would be lower. The short-term 30 bps PD is similar to the PD we would apply if we had direct lending exposures to CDO pool collateral. We use a floor PD of 48 bps each year from years two to five smoothing the step-up to reach a 65 bps minimum PD for year six. We utilize a minimum PD for years six to maturity of 65 bps for bank collateral.

For deferring collateral, effective December 31, 2012 we added to our ratio-based approach a PD overlay model for deferrals. The deferral PD overlay model sorts all deferrals observed within our CDO pools into four “buckets” based on four factors indicative of bank holding company strength at the start of their deferral period. We then assume that the historical failure rate we have observed within our CDO pool for collateral in each bucket will be the future default rate of current deferrals in each bucket. Where the overlay PD of a deferral is higher than the PD identified by our traditional ratio-based PD model, we use the higher overlay PD.

The resulting five-year PDs at June 30, 2013, after adding the PD overlay model, ranged from 100% for the “worst” deferring banks to 11% for the “best” deferring banks. The weighted average assumed loss rate on deferring collateral was 53%. This loss rate is calculated as a percentage of the par amount of deferring collateral within a pool that is expected to default prior to the end of a five-year deferral period. The model includes the expectation that deferrals that do not default will pay their contractually required back interest and return to a current status at the end of five years. Estimates of expected loss for the individual pieces of underlying collateral are aggregated to arrive at a pool-level expected loss rate for each CDO. These loss assumptions are applied to the CDO’s structure to generate cash flow projections for each tranche of the CDO.

We utilize a present value technique to identify both the OTTI present in the CDO tranches and to estimate fair value. To determine the credit-related portion of OTTI in accordance with applicable accounting guidance, we use the security specific effective interest rate when estimating the present value of cash flows. We discount the credit-adjusted cash flow of each CDO tranche at a tranche-specific discount rate which reflects the risk that the actual cash flow may vary from the expected credit-adjusted cash flow for that CDO tranche. This rate is consistent with market participants’ assumptions, which include market illiquidity, and is applied to credit adjusted cash flows. We follow applicable guidance on illiquid markets such that risk premiums should be reflective of an orderly transaction between market participants under current market conditions. Because these securities are not traded on exchanges and trading prices are not posted on the TRACE^® system (Trade Reporting and Compliance Engine^®), we also seek information from market participants to obtain trade price information.

The discount rate assumption used for valuation purposes for each CDO tranche is derived from trading yields on publicly traded trust preferred securities and projected PDs on the underlying issuers as well as observed trades in our CDO tranches in accordance with applicable accounting guidance. The data set generally includes one or more publicly-traded trust preferred securities in deferral with regard to the payment of current interest and observed trades in our CDO tranches which appeared to be either orderly (that is, not distressed or forced); or whose orderliness could not be definitively refuted. Trading data is generally limited to a single transaction in each of several of our original AAA-rated tranches and several of our original A-rated tranches. The effective yields on the securities are then used to determine a relationship between the effective yield and expected loss. Expected loss for this purpose is a measure of the variability of cash flows from the mean estimate of cash flow across all Monte Carlo simulations. This relationship is then considered along with other third party or market data in order to identify appropriate discount rates to be applied to the CDOs.

Our June 30, 2013, valuations for bank and insurance tranches utilized a discount rate range of LIBOR + 3.75% for the highest quality/most over-collateralized insurance-only tranches and LIBOR + 21.0% for the lowest credit quality tranche, which included bank collateral, in order to reflect market level assumptions for structured finance securities. For tranches that include bank collateral, the discount rate was at least LIBOR + 5.6% for the highest quality/most over-collateralized tranches. These discount rates are applied to already credit-adjusted cash flows for each tranche.

CDO tranches with greater uncertainty in their cash flows are discounted at rates higher than those market participants would use for tranches with more stable expected cash flows (e.g., as a result of more subordination and/or better credit quality in the underlying collateral). The high end of the discount rate spectrum was applied to tranches in which minor changes in default assumption timing produced substantial deterioration in tranche cash flows. These discount rates are applied to credit-adjusted cash flows, which constitute each tranche’s expected cash flows; discount rates are not applied to a hypothetical contractual cash flow.

At June 30, 2013, the discount rates utilized for fair value purposes for tranches that include bank collateral were:

1)LIBOR + 5.6% for all first priority original AAA-rated bonds;

2)LIBOR + 5.6% to 6.3% and averaged LIBOR + 5.7% for lower priority original AAA-rated bonds;

3)LIBOR + 5.9% to 16.2% and averaged LIBOR + 8.7% for original A-rated bonds; and

4)LIBOR + 9.2% to 21.0% and averaged LIBOR + 16.3% for original BBB-rated bonds.

Accordingly, the wide difference between the effective interest rate used in the determination of the credit component of OTTI and the discount rate on the CDOs used in the determination of fair value results in the unrealized losses. The discount rate used for fair value purposes significantly exceeds the effective interest rate for the CDOs. The differences average approximately 5% for the original AAA-rated CDO tranches, 7% for the original A-rated CDO tranches, and 14% for the original BBB-rated CDO tranches. With the exception of certain of the most senior CDOs, most of the principal payments are not expected prior to the final maturity date, which is generally 2029 or later. High market discount rates and the long maturities of the CDO tranches result in full principal repayment contributing little to CDO tranche fair values.

REIT and ABS CDOs – third party models: Certain of these CDOs are fair valued by third party services using their proprietary models. See the previous discussion that describes the procedures we employ to evaluate the fair values from third party services for AFS Level 3 securities. Also see the subsequent discussion regarding key model inputs and assumptions.

Auction Rate Securities

Our market approach methodology includes various data inputs, including AAA municipal and corporate bond yield curves, credit ratings and leverage of each closed-end fund, and market yields for municipal bonds and commercial paper.

Private Equity Investments

Management who are familiar with our private equity investments, including investment officers, controllers, etc., review quarterly the financial statements and other information for each investment. The Other Equity Investments Committee, consisting of the chief executive officer, the chief financial officer, and the chief investment officer, review periodically for reasonableness the financial information for these investments. This includes oversight of the review of audited financial statements that are available for nearly all of the underlying investments. The amount of unfunded commitments to these partnerships is disclosed in Note 10. Generally, redemption is available annually.

Private equity investments valued under Level 2 on a recurring basis are investments in partnerships that invest in certain financial services and real estate companies, some of which are publicly traded. Fair values are determined from net asset values, or their equivalents, provided by the partnerships. These fair values are determined on the last business day of the month using values from the primary exchange. In the case of illiquid or nontraded assets, the partnerships obtain fair values from independent sources.

Private equity investments valued under Level 3 on a recurring basis are recorded initially at acquisition cost, which is considered the best indication of fair value unless there have been material subsequent positive or negative developments that justify an adjustment in the fair value estimate. Subsequent adjustments to recorded fair values are based as necessary on current and projected financial performance, recent financing activities, economic and market conditions, market comparables, market liquidity, sales restrictions, and other factors.

Derivatives

Derivatives are fair valued according to their classification as either exchange-traded or over-the-counter (“OTC”). Exchange-traded derivatives consist of forward currency exchange contracts that have been fair valued under Level 1 because they are traded in active markets. OTC derivatives, including those for customers, consist of interest rate swaps and options. These derivatives are fair valued under Level 2 using third party services. Observable market inputs include yield curves (the LIBOR swap curve and applicable basis swap curves), foreign exchange rates, commodity prices, option volatilities, counterparty credit risk, and other related data. Credit valuation adjustments are required to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These adjustments are determined generally by applying a credit spread for the counterparty or the Company as appropriate to the total expected exposure of the derivative. Amounts disclosed in the following schedules differ from the presentation in Note 6 in that they include the foreign currency exchange contracts. The estimation of fair value of the TRS is discussed in Note 6.

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased are fair valued under Level 1 when quoted prices are available for the securities involved. Any of these securities under Level 2 are fair valued similar to trading account investment securities.

Quantitative Disclosure of Fair Value Measurements

Assets and liabilities measured at fair value by class on a recurring basis are summarized as follows:



(In thousands)	June 30, 2013
	Level 1		Level 2		Level 3		Total
ASSETS
Investment securities:
Available-for-sale:
U.S. Treasury, agencies and corporations	$	38,498	$	1,744,132			$	1,782,630
Municipal securities			52,835		$	13,544	66,379
Asset-backed securities:
Trust preferred – banks and insurance					1,030,293		1,030,293
Trust preferred – real estate investment trusts					18,499		18,499
Auction rate					6,554		6,554
Other (including ABS CDOs)			3,147		17,324		20,471
Mutual funds and stock	262,816		5,753				268,569
	301,314		1,805,867		1,086,214		3,193,395
Trading account			26,385				26,385
Other noninterest-bearing investments:
Private equity			5,128		75,517		80,645
Other assets:
Derivatives:
Interest rate related and other			1,584				1,584
Interest rate swaps for customers			58,706				58,706
Foreign currency exchange contracts	12,227						12,227
	12,227		60,290				72,517
	$	313,541	$	1,897,670	$	1,161,731	$	3,372,942
LIABILITIES
Securities sold, not yet purchased	$	15,799					$	15,799
Other liabilities:
Derivatives:
Interest rate related and other			$	687			687
Interest rate swaps for customers			59,346				59,346
Foreign currency exchange contracts	10,648						10,648
Total return swap					$	4,829	4,829
	10,648		60,033		4,829		75,510
Other					289		289
	$	26,447	$	60,033	$	5,118	$	91,598



(In thousands)	December 31, 2012
	Level 1		Level 2		Level 3		Total
ASSETS
Investment securities:
Available-for-sale:
U.S. Treasury, agencies and corporations	$	102,982	$	1,692,637			$	1,795,619
Municipal securities			59,445		$	16,551	75,996
Asset-backed securities:
Trust preferred – banks and insurance			121		949,271		949,392
Trust preferred – real estate investment trusts					16,403		16,403
Auction rate					6,515		6,515
Other (including ABS CDOs)			4,214		15,160		19,374
Mutual funds and stock	219,214		8,797				228,011
	322,196		1,765,214		1,003,900		3,091,310
Trading account			28,290				28,290
Other noninterest-bearing investments:
Private equity			5,132		64,223		69,355
Other assets:
Derivatives:
Interest rate related and other			2,850				2,850
Interest rate swaps for customers			79,579				79,579
Foreign currency exchange contracts	4,404						4,404
	4,404		82,429				86,833
	$	326,600	$	1,881,065	$	1,068,123	$	3,275,788
LIABILITIES
Securities sold, not yet purchased	$	26,735					$	26,735
Other liabilities:
Derivatives:
Interest rate related and other			$	1,142			1,142
Interest rate swaps for customers			82,926				82,926
Foreign currency exchange contracts	3,159						3,159
Total return swap					$	5,127	5,127
	3,159		84,068		5,127		92,354
Other					124		124
	$	29,894	$	84,068	$	5,251	$	119,213

No transfers of assets and liabilities occurred among Levels 1, 2 or 3 for the three and six months ended June 30, 2013 and 2012.

Key Model Inputs and Assumptions

Key model unobservable input assumptions used to fair value certain asset-backed securities by class under Level 3 include the following at June 30, 2013:



(Dollars in thousands)	Fair value at June 30, 2013			Valuation approach	Constant default rate (“CDR”)	Loss severity	Prepayment rate
Asset-backed securities:
Trust preferred – predominantly banks	$	879,765		Income	Pool specific ³	100%	Pool specific ⁷
Trust preferred – predominantly insurance	279,678			Income	Pool specific ⁴	100%	5% per year
Trust preferred – individual banks	22,081			Market
	1,181,524		¹
Trust preferred – real estate investment trusts	18,499			Income	Pool specific ⁵	60-100%	0% per year
Other (including ABS CDOs)	29,126		²	Income	Collateral specific ⁶	70-100%	Collateral weighted average life

¹Includes $1,030.3 million of AFS securities and $151.2 million of HTM securities.

²Includes $17.3 million of AFS securities and $11.8 million of HTM securities.

³CDR ranges: yr 1 – 0.30% to 2.84%; yrs 2-5 – 0.49% to 1.02%; yrs 6 to maturity – 0.58% to 0.69%.

⁴CDR ranges: yr 1 – 0.30% to 0.32%; yrs 2-5 – 0.47% to 0.48%; yrs 6 to maturity – 0.50% to 0.54%.

⁵CDR ranges: yr 1 – 4.3% to 7.8%; yrs 2-3 – 4.7% to 5.6%; yrs 4-6 – 1.0%; yrs 6 to maturity – 0.50%.

⁶These are predominantly ABS CDOs whose collateral is rated. CDR and loss severities are built up from the loan level and vary by collateral ratings, asset class, and vintage.

⁷Constant Prepayment Rate (“CPR”) ranges: 9.0% to 21.67% annually until 2016; 2016 to maturity – 3.0% annually.

The fair value of the Level 3 bank and insurance CDO portfolio would generally be adversely affected by significant increases in the CDR for performing collateral, the loss percentage expected from deferring collateral, and the discount rate used. The fair value of the portfolio would generally be positively affected by increases in interest rates and prepayment rates. For a specific tranche within a CDO, the directionality of the fair value change for a given assumption change may differ depending on the seniority level of the tranche. For example, faster prepayment may increase the fair value of a senior most tranche of a CDO while decreasing the fair value of a more junior tranche.

The following presents the percentage of total fair value of predominantly bank trust preferred CDOs by vintage year (origination date) according to original rating:



(Dollars in thousands)
	Fair value at June 30, 2013		Percentage of total fair value according to original rating						Percentage of total fair value by vintage
Vintage year			Percentage of total fair value according to original rating
Vintage year			AAA		A		BBB

2001	$	38,859	3.3	%	1.1	%	0.1	%		4.5	%
2002	205,060		20.4		2.9		—			23.3
2003	324,921		22.8		14.1		—			36.9
2004	192,080		7.9		13.9		—			21.8
2005	17,453		1.1		0.9		—			2.0
2006	62,613		2.8		3.9		0.4			7.1
2007	38,779		4.4		—		—			4.4
	$	879,765	62.7	%	36.8	%	0.5	%		100.0	%

Reconciliation of Level 3 Fair Value Measurements

The following reconciles the beginning and ending balances of assets and liabilities that are measured at fair value by class on a recurring basis using Level 3 inputs:



	Level 3 Instruments
	Three Months Ended June 30, 2013
(In thousands)	Municipal securities			Trust preferred – banks and insurance			Trust preferred – REIT			Auction rate		Other asset-backed			Private equity investments			Derivatives			Other liabilities

Balance at March 31, 2013	$	17,043		$	1,003,102		$	17,306		$	6,524	$	15,393		$	69,706		$	(4,875	)	$	(195	)
Total net gains (losses) included in:
Statement of income:
Accretion of purchase discount on securities available-for-sale				797			63					9
Dividends and other investment income															2,160
Fair value and nonhedge derivative loss																		(5,450		)
Equity securities gains, net															1,340
Fixed income securities gains (losses), net	15			(1,190		)						14
Net impairment losses on investment securities				(4,047		)	(170		)
Other noninterest expense																					(94		)
Other comprehensive income	197			52,312			1,300			30		1,972
Purchases															2,882
Sales				(7,015		)									(387		)
Redemptions and paydowns	(3,711		)	(13,666		)						(64		)	(184		)	5,496
Balance at June 30, 2013	$	13,544		$	1,030,293		$	18,499		$	6,554	$	17,324		$	75,517		$	(4,829	)	$	(289	)



	Level 3 Instruments
	Six Months Ended June 30, 2013
(In thousands)	Municipal securities			Trust preferred – banks and insurance			Trust preferred – REIT			Auction rate		Other asset-backed			Private equity investments			Derivatives			Other liabilities

Balance at December 31, 2012	$	16,551		$	949,271		$	16,403		$	6,515	$	15,160		$	64,223		(5,127		)	$	(124	)
Total net gains (losses) included in:
Statement of income:
Accretion of purchase discount on securities available-for-sale	21			1,612			126			1		14
Dividends and other investment income															5,149
Fair value and nonhedge derivative loss																		(11,008		)
Equity securities gains, net															3,739
Fixed income securities gains, net	36			2,036								44
Net impairment losses on investment securities				(13,761		)	(170		)
Other noninterest expense																					(165		)
Other comprehensive income	922			130,962			2,140			38		4,623
Purchases															3,841
Sales				(7,015		)									(1,120		)
Redemptions and paydowns	(3,986		)	(32,812		)						(2,517		)	(315		)	11,306
Balance at June 30, 2013	$	13,544		$	1,030,293		$	18,499		$	6,554	$	17,324		$	75,517		$	(4,829	)	$	(289	)



	Level 3 Instruments
	Three Months Ended June 30, 2012
(In thousands)	Municipal securities			Trust preferred – banks and insurance			Trust preferred – REIT			Auction rate			Other asset-backed			Private equity investments			Derivatives			Other liabilities

Balance at March 31, 2012	$	17,109		$	935,870		$	16,000		$	40,873		$	40,322		$	134,746		$	(5,218	)	$	(205	)
Total net gains (losses) included in:
Statement of income:
Accretion of purchase discount on securities available-for-sale	21			2,475			61			1			80
Dividends and other investment income																6,820
Fair value and nonhedge derivative loss																			(5,450		)
Equity securities losses, net																(10,086		)
Fixed income securities gains, net				3,224						2,246
Net impairment losses on investment securities				(6,967		)
Other noninterest expense																						84
Other comprehensive income (loss)	(595		)	3,534			(1,630		)	546			569
Purchases																4,397
Sales																(9,064		)
Redemptions and paydowns	(175		)	(11,686		)				(36,500		)	(305		)	(5,325		)	5,331
Balance at June 30, 2012	$	16,360		$	926,450		$	14,431		$	7,166		$	40,666		$	121,488		$	(5,337	)	$	(121	)



	Level 3 Instruments
	Six Months Ended June 30, 2012
(In thousands)	Municipal securities			Trust preferred – banks and insurance			Trust preferred – REIT			Auction rate			Other asset-backed			Private equity investments			Derivatives			Other liabilities

Balance at December 31, 2011	$	17,381		$	929,356		$	18,645		$	70,020		$	43,546		$	128,348		$	(5,422	)	$	(86	)
Total net gains (losses) included in:
Statement of income:
Accretion of purchase discount on securities available-for-sale	64			5,028			101			2			160
Dividends and other investment income																8,559
Fair value and nonhedge derivative loss																			(10,900		)
Equity securities losses, net																(625		)
Fixed income securities gains, (losses), net				7,776						4,134			(5,773		)
Net impairment losses on investment securities				(17,176		)
Other noninterest expense																						(35		)
Other comprehensive income (loss)	(635		)	33,733			(4,315		)	1,335			5,883
Purchases																7,379
Sales																(14,718		)
Redemptions and paydowns	(450		)	(32,267		)				(68,325		)	(3,150		)	(7,455		)	10,985
Balance at June 30, 2012	$	16,360		$	926,450		$	14,431		$	7,166		$	40,666		$	121,488		$	(5,337	)	$	(121	)

The preceding reconciling amounts using Level 3 inputs include the following realized gains (losses):



(In thousands)	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012

Dividends and other investment income (loss)	$	(60	)	$	3,859	$	(45	)	$	4,516
Fixed income securities gains (losses), net	(1,161		)	5,470		2,116			6,137
Equity securities gains, net	—			10,417		—			10,359

Nonrecurring Fair Value Measurements

Included in the balance sheet amounts are the following amounts of assets that had fair value changes measured on a nonrecurring basis.



(In thousands)	Fair value at June 30, 2013								Fair value at December 31, 2012
(In thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
ASSETS
HTM securities adjusted for OTTI	$	—	$	—	$	—	$	—	$	—	$	—	$	23,524	$	23,524
Impaired loans	—		4,904		—		4,904		—		3,789		—		3,789
Private equity investments, carried at cost	—		—		5,092		5,092		—		—		13,520		13,520
Other real estate owned	—		57,502		—		57,502		—		58,954		—		58,954
	$	—	$	62,406	$	5,092	$	67,498	$	—	$	62,743	$	37,044	$	99,787



	Gains (losses) from fair value changes
(In thousands)	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2013			2012			2013			2012
ASSETS
HTM securities adjusted for OTTI	$	—		$	(341	)	$	(403	)	$	(341	)
Impaired loans	(832		)	(640		)	(1,566		)	(3,041		)
Private equity investments, carried at cost	(609		)	(170		)	(1,429		)	(1,752		)
Other real estate owned	(2,156		)	(6,429		)	(6,468		)	(12,416		)
	$	(3,597	)	$	(7,580	)	$	(9,866	)	$	(17,550	)

HTM securities adjusted for OTTI were fair valued according to the methodology discussed elsewhere herein. Private equity investments carried at cost were fair valued according to the methodology discussed previously under Private Equity Investments. In previous reporting periods, the disclosure of private equity investments carried at cost was included with the private equity investments under the equity method of accounting. This revised disclosure had no effect on the Company’s financial statements or results of operations in the prior year periods. The amounts of private equity investments carried at cost were $59.3 million at June 30, 2013 and $74.8 million at December 31, 2012. Additionally, the amounts of other noninterest-bearing investments carried at cost were $226.2 million at June 30, 2013 and $232.5 million at December 31, 2012, which were comprised of Federal Reserve and Federal Home Loan Bank stock.

During the three and six months ended June 30, we recognized net gains of $2.1 million and $6.3 million in 2013 and $2.9 million and $5.8 million in 2012, respectively, from the sale of OREO properties that had a carrying value at the time of sale of approximately $38.7 million and $84.7 million during the six months ended June 30, 2013 and 2012, respectively. Previous to their sale in these periods, we recognized impairment on these properties of $0.3 million and $0.4 million in 2013 and $3.2 million and $3.9 million in 2012, respectively.

Impaired (or nonperforming) loans that are collateral-dependent are fair valued under Level 2 based on the fair value of the collateral. OREO is fair valued under Level 2 at the lower of cost or fair value based on property appraisals at the time the property is recorded in OREO and as appropriate thereafter.

Measurement of impairment for collateral-dependent loans and OREO is based on third party appraisals that utilize one or more valuation techniques (income, market and/or cost approaches). Any adjustments to calculated fair value are made based on recently completed and validated third party appraisals, third party appraisal services, automated valuation services, or our informed judgment. Evaluations are made to determine that the appraisal process meets the relevant concepts and requirements of applicable accounting guidance.

Automated valuation services may be used primarily for residential properties when values from any of the previous methods were not available within 90 days of the balance sheet date. These services use models based on market, economic, and demographic values. The use of these models has only occurred in a very few instances and the related property valuations have not been sufficiently significant to consider disclosure under Level 3 rather than Level 2.

Impaired loans not collateral-dependent are fair valued based on the present value of future cash flows discounted at the expected coupon rates over the lives of the loans. Because the loans were not discounted at market interest rates, the valuations do not represent fair value and have been excluded from the nonrecurring fair value balance in the preceding schedules.

Fair Value of Certain Financial Instruments

Following is a summary of the carrying values and estimated fair values of certain financial instruments:



	June 30, 2013				December 31, 2012
(In thousands)	Carrying value		Estimated fair value		Carrying value		Estimated fair value
Financial assets:
HTM investment securities	$	783,371	$	734,292	$	756,909	$	674,741
Loans and leases (including loans held for sale), net of allowance	37,538,652		37,419,383		37,020,811		37,024,198
Financial liabilities:
Time deposits	2,810,431		2,825,093		2,962,931		2,988,714
Foreign deposits	1,514,270		1,513,920		1,804,060		1,803,625
Other short-term borrowings	—		—		5,409		5,421
Long-term debt (less fair value hedges)	2,166,932		2,405,548		2,329,323		2,636,422

This summary excludes financial assets and liabilities for which carrying value approximates fair value. For financial assets, these include cash and due from banks and money market investments. For financial liabilities, these include demand, savings and money market deposits, and federal funds purchased and security repurchase agreements. The estimated fair value of demand, savings and money market deposits is the amount payable on demand at the reporting date. Carrying value is used because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately. Also excluded from the summary are financial instruments recorded at fair value on a recurring basis, as previously described.

HTM investment securities primarily consist of municipal securities and bank and insurance trust preferred CDOs. HTM municipal securities are fair valued under Level 3 using a standard form discounted cash flow model as discussed previously and the valuation inputs described under auction rate securities. HTM bank and insurance trust preferred CDOs are fair valued using the internal model previously described.

The fair value of loans is estimated according to their status as nonimpaired or impaired. For nonimpaired loans, the fair value is estimated by discounting future cash flows using the LIBOR yield curve adjusted by a factor which reflects the credit and interest rate risk inherent in the loan. These future cash flows are then reduced by the estimated “life-of-the-loan” aggregate credit losses in the loan portfolio. These adjustments for lifetime future credit losses incorporate many of the inputs used to estimate the ALLL for our loan portfolio and are adjusted quarterly as necessary to reflect the most recent loss experience. Impaired loans are already considered to be held at fair value, except those whose fair value is determined by discounting cash flows, as discussed previously. See Impaired Loans in Note 5 for details on the impairment measurement method for impaired loans. Loans, other than those held for sale, are not normally purchased and sold by the Company, and there are no active trading markets for most of this portfolio. Accordingly, our estimates of fair value for loans are categorized as Level 3.

The fair values of time and foreign deposits, other short-term borrowings, and long-term debt are estimated under Level 2. Time and foreign deposits, and other short-term borrowings, are fair valued by discounting future cash flows using the LIBOR yield curve to the given maturity dates. Long-term debt is fair valued based on actual market trades (i.e., an asset value) when available, or discounting cash flows to maturity using the LIBOR yield curve adjusted for credit spreads.

These fair value disclosures represent our best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.

Further, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements. Therefore, the fair value amounts shown in the schedule do not, by themselves, represent the underlying value of the Company as a whole.