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Fair value measurements

6 Months Ended

Jun. 30, 2023

12. Fair value measurements

GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections at June 30, 2023.

Pursuant to GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy exists in GAAP for fair value measurements based upon the inputs to the valuation of an asset or liability.

•

Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.

•

Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.

•

Level 3 — Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company's own estimates about the assumptions that market participants would use to value the asset or liability.

12. Fair value measurements, continued

When available, the Company attempts to use quoted market prices in active markets to determine fair value and classifies such items as Level 1 or Level 2. If quoted market prices in active markets are not available, fair value is often determined using model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. The following is a description of the valuation methodologies used for the Company's assets and liabilities that are measured on a recurring basis at estimated fair value.

Trading account

Mutual funds held in connection with deferred compensation and other arrangements have been classified as Level 1 valuations. Valuations of investments in debt securities can generally be obtained through reference to quoted prices in less active markets for the same or similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2.

Investment securities available for sale and equity securities

The majority of the Company's available-for-sale investment securities have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2. Certain investments in mutual funds and equity securities are actively traded and, therefore, have been classified as Level 1 valuations.

Real estate loans held for sale

The Company utilizes commitments to sell real estate loans to hedge the exposure to changes in fair value of real estate loans held for sale. The carrying value of hedged real estate loans held for sale includes changes in estimated fair value during the hedge period. Typically, the Company attempts to hedge real estate loans held for sale from the date of close through the sale date. The fair value of hedged real estate loans held for sale is generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate loans with similar characteristics and, accordingly, such loans have been classified as a Level 2 valuation.

Commitments to originate real estate loans for sale and commitments to sell real estate loans

The Company enters into various commitments to originate real estate loans for sale and commitments to sell real estate loans. Such commitments are accounted for as derivative financial instruments and, therefore, are carried at estimated fair value on the Consolidated Balance Sheet. The estimated fair values of such commitments were generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate loans to certain government-sponsored entities and other parties. The fair valuations of commitments to sell real estate loans generally result in a Level 2 classification. The estimated fair value of commitments to originate real estate loans for sale are adjusted to reflect the Company's anticipated commitment expirations. The estimated commitment expirations are considered significant unobservable inputs contributing to the Level 3 classification of commitments to originate real estate loans for sale. Significant unobservable inputs used in the determination of estimated fair value of commitments to originate real estate loans for sale are included in the accompanying table of significant unobservable inputs to Level 3 measurements.

Interest rate swap agreements used for interest rate risk management

The Company utilizes interest rate swap agreements as part of the management of interest rate risk to modify the repricing characteristics of certain portions of its portfolios of earning assets and interest-bearing liabilities. The Company generally determines the fair value of its interest rate swap agreements using externally developed pricing models based on market observable inputs and, therefore, classifies such valuations as Level 2. The Company has considered counterparty credit risk in the valuation of its interest rate swap agreement assets and has considered its own credit risk in the valuation of its interest rate swap agreement liabilities.

12. Fair value measurements, continued

Other non-hedging derivatives

Other non-hedging derivatives consist primarily of interest rate contracts and foreign exchange contracts with customers who require such services with offsetting positions with third parties to minimize the Company's risk with respect to such transactions. The Company generally determines the fair value of its other non-hedging derivative assets and liabilities using externally developed pricing models based on market observable inputs and, therefore, classifies such valuations as Level 2.

The following tables present assets and liabilities at June 30, 2023 and December 31, 2022 measured at estimated fair value on a recurring basis:


	Fair Value Measurements		Level 1		Level 2		Level 3
	(In thousands)
June 30, 2023
Trading account	$	137,240	$	137,240	$	—	$	—
Investment securities available for sale:
U.S. Treasury and federal agencies		7,692,452		—		7,692,452		—
Mortgage-backed securities:
Government issued or guaranteed
Commercial		614,963		—		614,963		—
Residential		2,340,028		—		2,340,028		—
Other debt securities		160,216		—		160,216		—
		10,807,659		—		10,807,659		—
Equity securities		218,168		211,341		6,827		—
Real estate loans held for sale		538,306		—		538,306		—
Other assets (a)		374,790		—		371,653		3,137
Total assets	$	12,076,163	$	348,581	$	11,724,445	$	3,137
Other liabilities (a)		1,295,532		—		1,255,217		40,315
Total liabilities	$	1,295,532	$	—	$	1,255,217	$	40,315

December 31, 2022
Trading account	$	117,847	$	117,847	$	—	$	—
Investment securities available for sale:
U.S. Treasury and federal agencies		7,670,960		—		7,670,960		—
Mortgage-backed securities:
Government issued or guaranteed
Commercial		574,299		—		574,299		—
Residential		2,330,118		—		2,330,118		—
Other debt securities		173,584		—		173,584		—
		10,748,961		—		10,748,961		—
Equity securities		151,458		145,289		6,169		—
Real estate loans held for sale		162,393		—		162,393		—
Other assets (a)		435,969		—		435,517		452
Total assets	$	11,616,628	$	263,136	$	11,353,040	$	452
Other liabilities (a)		1,355,326		—		1,309,301		46,025
Total liabilities	$	1,355,326	$	—	$	1,309,301	$	46,025

(a)

Comprised predominantly of interest rate swap agreements used for interest rate risk management (Level 2), interest rate and foreign exchange contracts not designated as hedging instruments (Level 2), commitments to sell real estate loans (Level 2) and commitments to originate real estate loans to be held for sale (Level 3).

12. Fair value measurements, continued

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended June 30, 2023 and 2022 were as follows:


	Other Assets and Other Liabilities
2023	(In thousands)

Balance — April 1, 2023	$	(28,141	)
Total losses realized/unrealized:
Included in earnings		(895	)	(a)
Transfers out of Level 3		(8,142	)	(b)
Balance — June 30, 2023	$	(37,178	)
Changes in net unrealized gains (losses) included in earnings related to instruments still held at June 30, 2023	$	(2,102	)	(a)

2022

Balance — April 1, 2022	$	(15,428	)
Total losses realized/unrealized:
Included in earnings		(6,609	)	(a)
Transfers out of Level 3		(2,144	)	(b)
Balance — June 30, 2022	$	(24,181	)
Changes in net unrealized gains (losses) included in earnings related to instruments still held at June 30, 2022	$	(8,441	)	(a)

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the six months ended June 30, 2023 and 2022 were as follows:


	Other Assets and Other Liabilities
	(In thousands)
2023
Balance — January 1, 2023	$	(45,573	)
Total gains realized/unrealized:
Included in earnings		16,456		(a)
Transfers out of Level 3		(8,061	)	(b)
Balance — June 30, 2023	$	(37,178	)
Changes in net unrealized gains (losses) included in earnings related to instruments still held at June 30, 2023	$	10,543		(a)

2022
Balance — January 1, 2022	$	6,440
Total losses realized/unrealized:
Included in earnings		(25,309	)	(a)
Transfers out of Level 3		(5,312	)	(b)
Balance — June 30, 2022	$	(24,181	)
Changes in net unrealized gains (losses) included in earnings related to instruments still held at June 30, 2022	$	3,405		(a)

(a)

Reported as mortgage banking revenues in the Consolidated Statement of Income and includes the fair value of commitment issuances and expirations.

(b)

Transfers out of Level 3 consist of interest rate locks transferred to closed loans.

12. Fair value measurements, continued

The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements. The more significant of those assets follow.

Loans

Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectable portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have been classified as Level 2, unless significant adjustments have been made to the valuation that are not readily observable by market participants. Non-real estate collateral supporting commercial loans generally consists of business assets such as receivables, inventory and equipment. Fair value estimations are typically determined by discounting recorded values of those assets to reflect estimated net realizable value considering specific borrower facts and circumstances and the experience of credit personnel in their dealings with similar borrower collateral liquidations. Such discounts were in the range of 10% to 90% with a weighted-average of 47% at June 30, 2023. As these discounts are not readily observable and are considered significant, the valuations have been classified as Level 3. Automobile collateral is typically valued by reference to independent pricing sources based on recent sales transactions of similar vehicles and, accordingly, the related nonrecurring fair value measurement adjustments have been classified as Level 2. Collateral values for other consumer installment loans are generally estimated based on historical recovery rates for similar types of loans which at June 30, 2023 was 54%. As these recovery rates are not readily observable by market participants, such valuation adjustments have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $652 million at June 30, 2023 ($297 million and $355 million of which were classified as Level 2 and Level 3, respectively), $853 million at December 31, 2022 ($329 million and $524 million of which were classified as Level 2 and Level 3, respectively) and $761 million at June 30, 2022 ($424 million and $337 million of which were classified as Level 2 and Level 3, respectively). Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company on June 30, 2023 were decreases of $101 million and $177 million for the three-month and six-month periods ended June 30, 2023, respectively. Changes in the fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company on June 30, 2022 were decreases of $73 million and $117 million for the three-month and six-month periods ended June 30, 2022, respectively.

Assets taken in foreclosure of defaulted loans

Assets taken in foreclosure of defaulted loans are primarily comprised of commercial and residential real property and are generally measured at the lower of cost or fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2. Assets taken into foreclosure of defaulted loans subject to nonrecurring fair value measurement were not material at each of June 30, 2023 and 2022. Changes in fair value recognized for those foreclosed assets held by the Company were not material during the three-month and six-month periods ended June 30, 2023 and 2022.

12. Fair value measurements, continued

Capitalized servicing rights

Capitalized servicing rights are initially measured at fair value in the Company’s Consolidated Balance Sheet. The Company utilizes the amortization method to subsequently measure its capitalized servicing assets. In accordance with GAAP, the Company must record impairment charges, on a nonrecurring basis, when the carrying value of certain strata exceed their estimated fair value. To estimate the fair value of servicing rights, the Company considers market prices for similar assets, if available, and the present value of expected future cash flows associated with the servicing rights calculated using assumptions that market participants would use in estimating future servicing income and expense. Such assumptions include estimates of the cost of servicing loans, loan default rates, an appropriate discount rate, and prepayment speeds. For purposes of evaluating and measuring impairment of capitalized servicing rights, the Company stratifies such assets based on the predominant risk characteristics of the underlying financial instruments that are expected to have the most impact on projected prepayments, cost of servicing and other factors affecting future cash flows associated with the servicing rights. Such factors may include financial asset or loan type, note rate and term. The amount of impairment recognized is the amount by which the carrying value of the capitalized servicing rights for a stratum exceed estimated fair value. Impairment is recognized through a valuation allowance. The determination of fair value of capitalized servicing rights is considered a Level 3 valuation. Capitalized servicing rights related to residential mortgage loans required no valuation allowance at June 30, 2023 and December 31, 2022. A reduction of the valuation allowance of $11 million and $14 million was recognized for the three-month and six-month periods ended June 30, 2022, respectively.

Significant unobservable inputs to Level 3 measurements

The following table presents quantitative information about significant unobservable inputs used in the fair value measurements for certain Level 3 assets and liabilities at June 30, 2023 and December 31, 2022:


	Fair Value			Valuation Technique	Unobservable Inputs / Assumptions	Range (Weighted- Average)
	(In thousands)
June 30, 2023
Recurring fair value measurements
Net other assets (liabilities) (a)	$	(37,178	)	Discounted cash flow	Commitment expirations	0% - 97% (10%)

December 31, 2022
Recurring fair value measurements
Net other assets (liabilities) (a)	$	(45,573	)	Discounted cash flow	Commitment expirations	0% - 97% (3%)

(a)

Other Level 3 assets (liabilities) consist of commitments to originate real estate loans.

Sensitivity of fair value measurements to changes in unobservable inputs

An increase (decrease) in the estimate of expirations for commitments to originate real estate loans would generally result in a lower (higher) fair value measurement. Estimated commitment expirations are derived considering loan type, changes in interest rates and remaining length of time until closing.

12. Fair value measurements, continued

Disclosures of fair value of financial instruments

The carrying amounts and estimated fair value for financial instrument assets (liabilities) are presented in the following tables:


	June 30, 2023
	Carrying Amount			Estimated Fair Value			Level 1		Level 2			Level 3
	(In thousands)
Financial assets:
Cash and cash equivalents	$	1,848,386			1,848,386			1,780,005		68,381			—
Interest-bearing deposits at banks		27,106,899			27,106,899			—		27,106,899			—
Trading account		137,240			137,240			137,240		—			—
Investment securities		27,916,455			26,711,845			211,341		26,451,387			49,117
Loans and leases:
Commercial loans and leases		44,683,549			43,817,470			—		—			43,817,470
Commercial real estate loans		44,648,711			42,386,809			—		322,029			42,064,780
Residential real estate loans		23,762,217			21,800,553			—		7,256,914			14,543,639
Consumer loans		20,249,252			19,335,779			—		—			19,335,779
Allowance for credit losses		(1,998,366	)		—			—		—			—
Loans and leases, net		131,345,363			127,340,611			—		7,578,943			119,761,668
Accrued interest receivable		695,030			695,030			—		695,030			—
Financial liabilities:
Noninterest-bearing deposits	$	(54,937,913	)		(54,937,913	)		—		(54,937,913	)		—
Savings and interest-checking deposits		(88,046,247	)		(88,046,247	)		—		(88,046,247	)		—
Time deposits		(19,074,220	)		(18,968,171	)		—		(18,968,171	)		—
Short-term borrowings		(7,907,884	)		(7,907,884	)		—		(7,907,884	)		—
Long-term borrowings		(7,416,638	)		(7,091,668	)		—		(7,091,668	)		—
Accrued interest payable		(389,251	)		(389,251	)		—		(389,251	)		—
Other financial instruments:
Commitments to originate real estate loans for sale	$	(37,178	)		(37,178	)		—		—			(37,178	)
Commitments to sell real estate loans		54,533			54,533			—		54,533			—
Other credit-related commitments		(155,903	)		(155,903	)		—		—			(155,903	)
Interest rate swap agreements used for interest rate risk management		2,133			2,133			—		2,133			—
Interest rate and foreign exchange contracts not designated as hedging instruments		(940,230	)		(940,230	)		—		(940,230	)		—

12. Fair value measurements, continued


	December 31, 2022
	Carrying Amount			Estimated Fair Value			Level 1		Level 2			Level 3
				(In thousands)
Financial assets:
Cash and cash equivalents	$	1,517,244			1,517,244			1,371,688		145,556			—
Interest-bearing deposits at banks		24,958,719			24,958,719			—		24,958,719			—
Federal funds sold		3,000			3,000			—		3,000			—
Trading account		117,847			117,847			117,847		—			—
Investment securities		25,210,871			24,056,322			145,289		23,860,445			50,588
Loans and leases:
Commercial loans and leases		41,850,566			41,139,985			—		—			41,139,985
Commercial real estate loans		45,364,571			43,214,646			—		130,652			43,083,994
Residential real estate loans		23,755,947			21,780,214			—		7,049,540			14,730,674
Consumer loans		20,593,079			20,093,523			—		—			20,093,523
Allowance for credit losses		(1,925,331	)		—			—		—			—
Loans and leases, net		129,638,832			126,228,368			—		7,180,192			119,048,176
Accrued interest receivable		646,250			646,250			—		646,250			—
Financial liabilities:
Noninterest-bearing deposits	$	(65,501,860	)		(65,501,860	)		—		(65,501,860	)		—
Savings and interest-checking deposits		(87,911,463	)		(87,911,463	)		—		(87,911,463	)		—
Time deposits		(10,101,545	)		(10,143,110	)		—		(10,143,110	)		—
Short-term borrowings		(3,554,951	)		(3,554,951	)		—		(3,554,951	)		—
Long-term borrowings		(3,964,537	)		(3,926,489	)		—		(3,926,489	)		—
Accrued interest payable		(81,356	)		(81,356	)		—		(81,356	)		—
Other financial instruments:
Commitments to originate real estate loans for sale	$	(45,573	)		(45,573	)		—		—			(45,573	)
Commitments to sell real estate loans		54,424			54,424			—		54,424			—
Other credit-related commitments		(148,772	)		(148,772	)		—		—			(148,772	)
Interest rate swap agreements used for interest rate risk management		(7,892	)		(7,892	)		—		(7,892	)		—
Interest rate and foreign exchange contracts not designated as hedging instruments		(920,316	)		(920,316	)		—		(920,316	)		—

With the exception of marketable securities, certain off-balance sheet financial instruments and mortgage loans originated for sale, the Company’s financial instruments are not readily marketable and market prices do not exist. The Company, in attempting to comply with the provisions of GAAP that require disclosures of fair value of financial instruments, has not attempted to market its financial instruments to potential buyers, if any exist. Since negotiated prices in illiquid markets depend greatly upon the then present motivations of the buyer and seller, it is reasonable to assume that actual sales prices could vary widely from any estimate of fair value made without the benefit of negotiations. Additionally, changes in market interest rates can dramatically impact the value of financial instruments in a short period of time.

The Company does not believe that the estimated information presented herein is representative of the earnings power or value of the Company. The preceding analysis, which is inherently limited in depicting fair value, also does not consider any value associated with existing customer relationships nor the ability of the Company to create value through loan origination, deposit gathering or fee generating activities. Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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