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 in active markets that the Company has the ability to access;

Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in less active markets, observable inputs other than quoted prices that are used in the valuation of an asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined by 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.

The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measure in its entirety. Market activity is presumed to be orderly in the absence of evidence of forced or disorderly sales, although such sales may still be indicative of fair value. Applicable accounting guidance precludes the use of blockage factors or liquidity adjustments due to the quantity of securities held by an entity.

We use fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting. Fair value is used on a nonrecurring basis to measure certain assets when adjusting carrying values, such as the application of lower of cost or fair value accounting, including recognition of impairment on assets. Fair value is also used when providing required disclosures for certain financial instruments.

Fair Value Policies and Procedures

We have various policies, processes and controls in place to ensure that fair values are reasonably developed, reviewed and approved for use. These include a Securities Valuation Committee (“SVC”) comprised of executive management appointed by the Board of Directors. The SVC reviews and approves on a quarterly basis the key components of fair value estimation, including critical valuation assumptions for Level 3 modeling. Attribution analyses are completed when significant changes occur between quarters. The SVC also requires quarterly back testing of certain significant assumptions. A Model Risk Management Group conducts model validations, including internal models, and sets policies and procedures for revalidation, including the timing of revalidation.

Third Party Service Providers

We use a third party pricing service to provide pricing for approximately 90% of our AFS Level 2 securities, and an internal model to estimate fair value for approximately 98% of our AFS Level 3 securities. Fair values for the remaining AFS Level 2 and Level 3 securities generally use standard form discounted cash flow modeling with certain inputs corroborated by market data.

For Level 2 securities, the third party pricing service provides documentation on an ongoing basis that presents market corroborative data, including detail pricing information and market reference data. The documentation includes benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data, including information from the vendor trading platform. We review, test and validate this information as appropriate. Absent observable trade data, we do not adjust prices from our third party sources.

For Level 3 securities, we review and evaluate on a quarterly basis the relevant modeling assumptions. These include PDs, LGD rates, over-collateralization levels, and rating transition probability matrices from ratings agencies. In addition, we also compare the results and valuation with our information about market trends and trading data. This includes information regarding trading prices, implied discounts, outlier information, valuation assumptions, etc.

The following describes the hierarchy designations, valuation methodologies, and key inputs to measure fair value on a recurring basis for designated financial instruments:

Available-for-Sale and Trading

U.S. Treasury, Agencies and Corporations

U.S. Treasury securities are measured under Level 1 using quoted market prices. U.S. agencies and corporations are measured under Level 2 generally using the previously discussed third party pricing service.

Municipal Securities

Municipal securities are measured under Level 2 using the third party pricing service, or under Level 3 using a discounted cash flow approach. Valuation inputs include Baa municipal curves, as well as FHLB and London Interbank Offered Rate (“LIBOR”) swap curves. Additional valuation inputs include internal credit scoring, and security- and client-type groupings.

Asset-Backed Securities: Trust Preferred Collateralized Debt Obligations

The majority of the CDO portfolio is measured under Level 3 primarily with the internal model using an income-based cash flow modeling approach incorporating several methodologies. The Company inputs its own key valuation assumptions:

Trust preferred – banks and insurance: We primarily use an internal model for our bank and insurance CDO securities. Our “ratio-based approach” utilizes a statistical regression of regulatory ratios we have identified as predictive of future bank failures and bank holding company defaults to create a credit-specific PD for each bank issuer. The approach generally references trailing quarter regulatory data, financial ratios and macroeconomic factors.

The PDs used depend on whether the collateral is performing or deferring. Deferring PDs increase, all else being equal, as the deferral ages and approaches the end of its allowable five-year deferral period. The internal 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 loss for the individual pieces of underlying collateral are aggregated to arrive at a pool-level 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 estimate fair value, we discount the credit-adjusted cash flows of each CDO tranche at a tranche-specific discount rate derived from trading data and a measure of the credit risk in the CDO tranche. Because these securities are not traded on exchanges and trading prices are not posted on the TRACE^® system (Trade Reporting and Compliance Engine^®), we seek information from market participants to obtain trade price information.

Trading data is generally limited and may include trades of tranches within our same CDO. We use this limited trade data along with our modeled expected credit-adjusted cash flows to determine a relationship between the market required yield and the downside variability of the returns of each CDO security. The downside variability for this purpose is a measure of the downside variability of cash flows from the mean estimate of cash flow.

In addition to the trust preferred CDOs, we hold two single-name bank trust preferred securities, which were both transferred to Level 2 from Level 3 during the first quarter of 2014.

Mutual funds and other

Mutual funds and other securities are measured under Level 1 or Level 2. For Level 1, quoted market prices are used which may include net asset values or their equivalents. Level 2 valuations generally use quoted prices for similar securities.

Trading account

Securities in the trading account are measured under Level 1 using quoted market prices. If not available, quoted prices under Level 2 for similar securities are used.

Bank-Owned Life Insurance

Bank-owned life insurance is measured under Level 2 according to cash surrender values (“CSVs”) of the insurance policies that are provided by a third party service. Nearly all policies are general account policies with CSVs based on the Company’s claims on the assets of the insurance companies. The insurances companies’ investments include predominantly fixed income securities consisting of investment-grade corporate bonds and various types of mortgage instruments. Average duration ranges from five to eight years. Management regularly reviews investment performance, including concentrations of investments and regulatory restrictions.

Private Equity Investments

Private equity investments are measured under Level 3. The Equity Investments Committee, consisting of executives familiar with the investments, reviews periodic financial information, including audited financial statements when available. Certain analytics may be employed that include current and projected financial performance, recent financing activities, economic and market conditions, market comparables, market liquidity, sales restrictions, and other factors. The amount of unfunded commitments to invest is disclosed in Note 11. Certain restrictions apply for the redemption of these investments and certain investments are prohibited by the Volcker Rule. See discussions in Notes 5 and 11.

Agriculture Loan Servicing

This asset results from our servicing of agriculture loans approved and funded by FAMC. We provide this servicing under an agreement with Farmer Mac for loans they own. The asset’s fair value represents our projection of the present value of future cash flows measured under Level 3 using discounted cash flow methodologies.

Interest-Only Strips

Interest-only strips are created as a by-product of the securitization process. When the guaranteed portions of SBA 7(a) loans are pooled, interest-only strips may be created in the pooling process. The asset’s fair value represents our projection of the present value of future cash flows measured under Level 3 using discounted cash flow methodologies.

Deferred Compensation Plan Assets and Obligations

Invested assets in the deferred compensation plan consist of shares of registered investment companies. These mutual funds are valued under Level 1 at quoted market prices, which represents the NAV of shares held by the plan at the end of the period.

Derivatives

Derivatives are measured according to their classification as either exchange-traded or over-the-counter (“OTC”). Exchange-traded derivatives consist of forward currency exchange contracts measured 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 measured under Level 2 using third party services. Observable market inputs include yield curves (the LIBOR swap curve and relevant overnight index swap curves), foreign exchange rates, commodity prices, option volatilities, counterparty credit risk, and other related data. Credit valuation adjustments are required to reflect nonperformance risk for both the Company and the respective counterparty. These adjustments are determined generally by applying a credit spread to the total expected exposure of the derivative.

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased, included in “Federal funds and other short-term borrowings” on the balance sheet, are measured under Level 1 using quoted market prices. If not available, quoted prices under Level 2 for similar securities are used.

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)	March 31, 2015
	Level 1		Level 2		Level 3		Total
ASSETS
Investment securities:
Available-for-sale:
U.S. Treasury, agencies and corporations	$	—	$	3,655,221	$	—	$	3,655,221
Municipal securities			173,145		2,465		175,610
Asset-backed securities:
Trust preferred – banks and insurance			23,179		438,338		461,517
Other			638		4,826		5,464
Mutual funds and other	124,443		28,247				152,690
	124,443		3,880,430		445,629		4,450,502
Trading account			71,392				71,392
Other noninterest-bearing investments:
Bank-owned life insurance			478,926				478,926
Private equity					107,448		107,448
Other assets:
Agriculture loan servicing and interest-only strips					12,001		12,001
Deferred compensation plan assets	91,368						91,368
Derivatives:
Interest rate related and other			5,408				5,408
Interest rate swaps for customers			58,982				58,982
Foreign currency exchange contracts	20,373						20,373
	20,373		64,390		—		84,763
	$	236,184	$	4,495,138	$	565,078	$	5,296,400
LIABILITIES
Securities sold, not yet purchased	$	6,749	$	—	$	—	$	6,749
Other liabilities:
Deferred compensation plan obligations	91,368						91,368
Derivatives:
Interest rate related and other			176				176
Interest rate swaps for customers			62,452				62,452
Foreign currency exchange contracts	18,671						18,671
	18,671		62,628		—		81,299
	$	116,788	$	62,628	$	—	$	179,416



(In thousands)	December 31, 2014
	Level 1		Level 2		Level 3		Total
ASSETS
Investment securities:
Available-for-sale:
U.S. Treasury, agencies and corporations	$	—	$	3,098,208	$	—	$	3,098,208
Municipal securities			185,093		4,164		189,257
Asset-backed securities:
Trust preferred – banks and insurance			22,701		393,007		415,708
Auction rate					4,761		4,761
Other			666		25		691
Mutual funds and other	105,348		30,275				135,623
	105,348		3,336,943		401,957		3,844,248
Trading account			70,601				70,601
Other noninterest-bearing investments:
Bank-owned life insurance			476,290				476,290
Private equity					99,865		99,865
Other assets:
Agriculture loan servicing and interest-only strips					12,227		12,227
Deferred compensation plan assets	88,878						88,878
Derivatives:
Interest rate related and other			1,508				1,508
Interest rate swaps for customers			48,287				48,287
Foreign currency exchange contracts	16,625						16,625
	16,625		49,795		—		66,420
	$	210,851	$	3,933,629	$	514,049	$	4,658,529
LIABILITIES
Securities sold, not yet purchased	$	24,230	$	—	$	—	$	24,230
Other liabilities:
Deferred compensation plan obligations	88,878						88,878
Derivatives:
Interest rate related and other			297				297
Interest rate swaps for customers			50,669				50,669
Foreign currency exchange contracts	15,272						15,272
	15,272		50,966		—		66,238
Other					13		13
	$	128,380	$	50,966	$	13	$	179,359

The fair value of the Level 3 bank and insurance CDO portfolio would generally be adversely affected by significant increases in the constant default rate (“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.

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 March 31, 2015
(In thousands)	Municipal securities			Trust preferred – banks and insurance			Trust preferred – REIT		Other			Private equity investments			Ag loan svcg and int-only strips			Derivatives and other liabilities

Balance at December 31, 2014	$	4,164		$	393,007		$	—	$	4,786		$	99,865		$	12,227		$	(13	)
Net gains (losses) included in:
Statement of income:
Accretion of purchase discount on securities available-for-sale	2			257
Dividends and other investment income												1,074
Equity securities losses, net												3,253
Fixed income securities gains (losses), net	31			(323		)
Other noninterest income															4
Other noninterest expense																		13
Other comprehensive income (loss)	127			(6,949		)			42
Fair value of HTM securities reclassified as AFS				57,308
Purchases												5,052			171
Sales				(2,613		)						(1,517		)
Redemptions and paydowns	(1,859		)	(2,349		)			(2		)	(279		)	(401		)
Balance at March 31, 2015	$	2,465		$	438,338		$	—	$	4,826		$	107,448		$	12,001		$	—



	Level 3 Instruments
	Three Months Ended March 31, 2014
(In thousands)	Municipal securities			Trust preferred – banks and insurance			Trust preferred – REIT			Auction rate			Other asset-backed			Private equity investments			Ag loan svcg and int-only strips			Derivatives and other liabilities

Balance at December 31, 2013	$	10,662		$	1,238,820		$	22,996		$	6,599		$	25,800		$	82,410		$	8,852		$	(4,303	)
Net gains (losses) included in:
Statement of income:
Accretion of purchase discount on securities available-for-sale	10			720						1
Dividends and other investment income																(1,695		)
Fair value and nonhedge derivative loss																						(7,427		)
Fixed income securities gains, net	16			18,582			1,399						10,917
Other noninterest income																			481
Other noninterest expense																						8
Other comprehensive income (loss)	(274		)	94,462						(40		)	(15		)
Purchases																1,356			2,077
Sales				(546,388		)	(24,395		)				(36,669		)	(824		)
Redemptions and paydowns	(230		)	(46,786		)							(3		)	(195		)	(203		)	6,090
Transfers to Level 2				(69,193		)
Balance at March 31, 2014	$	10,184		$	690,217		$	—		$	6,560		$	30		$	81,052		$	11,207		$	(5,632	)

The preceding reconciling amounts using Level 3 inputs include the following realized amounts in the statement of income:



(In thousands)	Three Months Ended March 31,
	Three Months Ended March 31,
	2015			2014

Dividends and other investment income	$	—		$	34
Fixed income securities gains (losses), net	(292		)	30,914

Except as previously discussed, no other transfers of assets or liabilities occurred among Levels 1, 2 or 3 for the three months ended March 31, 2015 and 2014. Transfers are considered to have occurred as of the end of the reporting period.

Following is a summary of quantitative information relating to the principal valuation techniques and significant unobservable inputs for Level 3 instruments measured on a recurring and nonrecurring basis:



	Level 3 Instruments
	Quantitative information at March 31, 2015
(Dollar amounts in thousands)	Fair value		Principal valuation techniques	Significant unobservable inputs	Range of inputs (% annually)
Asset-backed securities:
Trust preferred – predominantly banks	$	438,338	Discounted cash flow Market comparables	Constant prepayment rate	until maturity – 2.0%
				Constant default rate	yr 1 – 0.3% to 0.5%
					yrs 2-5 – 0.5% to 0.7%
					yrs 6 to maturity – 0.6% to 0.7%
				Loss given default	100%
				Loss given deferral	11.9% to 100%
				Discount rate (spread over forward LIBOR)	3.7% to 5.4%



	Level 3 Instruments
	Quantitative information at December 31, 2014
(Dollar amounts in thousands)	Fair value		Principal valuation techniques	Significant unobservable inputs	Range of inputs (% annually)
Asset-backed securities:
Trust preferred – predominantly banks	$	393,007	Discounted cash flow Market comparables	Constant prepayment rate	until maturity – 2.0%
				Constant default rate	yr 1 – 0.3% to 0.8%
					yrs 2-5 – 0.5% to 0.9%
					yrs 6 to maturity – 0.6% to 0.7%
				Loss given default	100%
				Loss given deferral	14.5% to 100%
				Discount rate (spread over forward LIBOR)	3.4% to 5.6%

Nonrecurring Fair Value Measurements

Included in the balance sheet amounts are the following amounts of assets that had fair value changes during the year-to-date period measured on a nonrecurring basis.



(In thousands)	Fair value at March 31, 2015								Fair value at December 31, 2014
(In thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
ASSETS
Private equity investments, carried at cost	$	—	$	—	$	1,997	$	1,997	$	—	$	—	$	23,454	$	23,454
Impaired loans	—		9,793		—		9,793		—		20,494		—		20,494
Other real estate owned	—		2,886		—		2,886		—		8,034		—		8,034
	$	—	$	12,679	$	1,997	$	14,676	$	—	$	28,528	$	23,454	$	51,982

The previous fair values may not be current as of the dates indicated, but rather as of the date the fair value change occurred, such as a charge for impairment. Accordingly, carrying values may not equal current fair value.



	Gains (losses) from fair value changes
(In thousands)	Three Months Ended March 31,
(In thousands)	2015			2014
ASSETS
HTM securities adjusted for OTTI	$	—		$	(27	)
Private equity investments, carried at cost	(1,153		)	—
Impaired loans	(4,487		)	(2,177		)
Other real estate owned	(1,008		)	(2,234		)
	$	(6,648	)	$	(4,438	)

During the three months ended March 31, we recognized net gains of $0.7 million in 2015 and $1.0 million in 2014 from the sale of other real estate owned (“OREO”) properties that had a carrying value at the time of sale of approximately $4.1 million and $10.0 million, respectively. Previous to their sale in these periods, we recognized impairment on these properties of an insignificant amount in 2015 and $0.2 million in 2014.

HTM securities adjusted for OTTI were measured at fair value using the same methodology for trust preferred CDO securities.

Private equity investments carried at cost were measured at fair value for impairment purposes according to the methodology previously discussed for these investments. Amounts of private equity investments carried at cost were $33.3 million at March 31, 2015 and $39.1 million at December 31, 2014. Amounts of other noninterest-bearing investments carried at cost were $250.5 million at March 31, 2015 and $250.7 million at December 31, 2014, which were comprised of Federal Reserve, Federal Home Loan Bank, and Farmer Mac stock.

Impaired (or nonperforming) loans that are collateral-dependent were measured at fair value based on the fair value of the collateral. OREO was measured initially at fair value based on property appraisals at the time of transfer and subsequently at the lower of cost or fair value.

Measurement of fair value for collateral-dependent loans and OREO was based on third party appraisals that utilize one or more valuation techniques (income, market and/or cost approaches). Any adjustments to calculated fair value were made based on recently completed and validated third party appraisals, third party appraisal services, automated valuation services, or our informed judgment. Evaluations were made to determine that the appraisal process met 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 significant to consider disclosure under Level 3 rather than Level 2.

Impaired loans not collateral-dependent were measured at 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:



	March 31, 2015					December 31, 2014
(In thousands)	Carrying value		Estimated fair value		Level	Carrying value		Estimated fair value		Level
Financial assets:
HTM investment securities	$	590,950	$	602,355	3	$	647,252	$	677,196	3
Loans and leases (including loans held for sale), net of allowance	39,689,047		39,573,365		3	39,591,499		39,426,498		3
Financial liabilities:
Time deposits	2,344,818		2,349,454		2	2,406,924		2,408,550		2
Foreign deposits	382,985		382,873		2	328,391		328,447		2
Long-term debt (less fair value hedges)	1,088,285		1,149,869		2	1,090,778		1,159,287		2

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, through December 31, 2014, bank and insurance trust preferred CDOs. They were measured at fair value according to the methodologies previously discussed for these investment types.

Loans are measured at fair value according to their status as nonimpaired or impaired. For nonimpaired loans, 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 are derived from the methods 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 6 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.

Time and foreign deposits, and any other short-term borrowings, are measured at fair value by discounting future cash flows using the LIBOR yield curve to the given maturity dates.

Long-term debt is measured at fair value 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 current economic conditions, future expected loss experience, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and cannot be determined with precision. Changes in these methodologies and assumptions could significantly affect the estimates.