Fair value measurements

6 Months Ended

Jun. 30, 2012

Fair value measurements [Abstract]

Fair value measurements

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, 2012.

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.

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 assets and liabilities

Trading account assets and liabilities consist primarily of interest rate swap agreements 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 derivative trading account assets and liabilities using externally developed pricing models based on market observable inputs and, therefore, classifies such valuations as Level 2. Mutual funds held in connection with deferred compensation arrangements have been classified as Level 1 valuations. Valuations of investments in municipal and other bonds 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

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.

The markets for privately issued mortgage-backed securities have experienced a sharp reduction of non-agency mortgage-backed securities issuances, a significant reduction in trading volumes and wide bid-ask spreads. Although estimated prices were generally obtained for such securities, the Company was significantly restricted in the level of market observable assumptions used in the valuation of its privately issued mortgage-backed securities portfolio. Specifically, market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual bond level. Because of the inactivity in the markets and the lack of observable valuation inputs, the Company has classified the valuation of privately issued mortgage-backed securities as Level 3.

The Company supplemented its determination of fair value for many of its privately issued mortgage-backed securities by obtaining pricing indications from two independent sources at June 30, 2012 and December 31, 2011. However, the Company could not readily ascertain that the basis of such valuations could be ascribed to orderly and observable trades in the market for privately issued residential mortgage-backed securities. As a result, the Company also performed internal modeling to estimate the cash flows and fair value of privately issued residential mortgage-backed securities with an amortized cost basis of $1.2 billion at June 30, 2012 and $1.3 billion at December 31, 2011. The Company’s internal modeling techniques included discounting estimated bond-specific cash flows using assumptions about cash flows associated with loans underlying each of the bonds, including estimates about the timing and amount of credit losses and prepayments. In estimating those cash flows, the Company used assumptions as to future delinquency, defaults, collateral valuation and loss rates. Differences between internal model valuations and external pricing indications were generally considered to be reflective of the lack of liquidity in the market for privately issued mortgage-backed securities given the nature of the cash flow modeling performed in the Company’s assessment of value. To determine the point within the range of potential values that was most representative of fair value under current market conditions for each of the bonds, the Company averaged the internal model valuations and the indications obtained from the two independent pricing sources, such that at June 30, 2012, the weighted-average reliance on internal model pricing for the bonds modeled was 33% with a 67% average weighting placed on the values provided by the independent sources. Significant unobservable inputs used in the Company’s modeling of fair value for residential mortgage-backed securities are included in the accompanying table of significant unobservable inputs to Level 3 measurements. The Company concluded its estimate of fair value for the $1.2 billion of privately issued residential mortgage-backed securities to approximate $1.1 billion, which reflects a market yield based on reasonably likely cash flows of 7.3%. The Company determined the fair value of its privately issued commercial mortgage-backed securities held in its available-for-sale portfolio using quoted market prices obtained from third party pricing services without adjustment. Similar to privately-issued residential mortgage-backed securities, the market for commercial mortgage-backed securities has experienced significant declines in the level of market activity, resulting in the classification of such bonds as Level 3.

Included in collateralized debt obligations are securities backed by trust preferred securities issued by financial institutions and other entities. Given the severe disruption in the credit markets and the wide disparity in observable trade information, the Company could not obtain pricing indications for many of these securities from its two primary independent pricing sources. The Company, therefore, performed internal modeling to estimate the cash flows and fair value of its portfolio of securities backed by trust preferred securities at June 30, 2012 and December 31, 2011. The modeling techniques included estimating cash flows using bond-specific assumptions about future collateral defaults and related loss severities. The resulting cash flows were then discounted by reference to market yields observed in the single-name trust preferred securities market. In determining a market yield applicable to the estimated cash flows, a margin over LIBOR, ranging from 5% to 10% with a weighted-average of 8% was used. Significant unobservable inputs used in the determination of estimated fair value of collateralized debt obligations are included in the accompanying table of significant unobservable inputs to Level 3 measurements. At June 30, 2012, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $44 million and $55 million, respectively, and at December 31, 2011 were $44 million and $53 million, respectively. Privately issued mortgage-backed securities and securities backed by trust preferred securities issued by financial institutions and other entities constituted all of the available-for-sale investment securities classified as Level 3 valuations as of June 30, 2012 and December 31, 2011.

The Company ensures an appropriate control framework is in place over the valuation processes and techniques used for Level 3 fair value measurements. Specifically, the Company attempts to obtain the market observable inputs used by third party pricing sources on a sample of bonds each quarter. Analytical procedures are performed to understand changes in fair value from period to period. Internal pricing models are subject to validation procedures including testing of mathematical constructs, review of valuation methodology and significant assumptions used.

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 considered to be 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.

The following tables present assets and liabilities at June 30, 2012 and December 31, 2011 measured at estimated fair value on a recurring basis:

	Fair value measurements at June 30, 2012		Level 1 (a)		Level 2 (a)		Level 3
	(in thousands)
Trading account assets	$	544,938		53,472		491,466		—
Investment securities available for sale:
U.S. Treasury and federal agencies		56,599		—		56,599		—
Obligations of states and political subdivisions		34,568		—		34,568		—
Mortgage-backed securities:
Government issued or guaranteed		4,058,500		—		4,058,500		—
Privately issued residential		1,068,392		—		—		1,068,392
Privately issued commercial		12,127		—		—		12,127
Collateralized debt obligations		55,098		—		—		55,098
Other debt securities		128,929		—		128,929		—
Equity securities		119,841		108,172		11,669		—
		5,534,054		108,172		4,290,265		1,135,617
Real estate loans held for sale		442,664		—		442,664		—
Other assets (b)		185,496		—		151,385		34,111
Total assets	$	6,707,152		161,644		5,375,780		1,169,728
Trading account liabilities	$	430,101		—		430,101		—
Other liabilities (b)		14,355		—		14,295		60
Total liabilities	$	444,456		—		444,396		60

	Fair value measurements at December 31, 2011		Level 1 (a)		Level 2 (a)		Level 3
	(in thousands)
Trading account assets	$	561,834		53,165		508,669		—
Investment securities available for sale:
U.S. Treasury and federal agencies		70,723		—		70,723		—
Obligations of states and political subdivisions		40,269		—		40,269		—
Mortgage-backed securities:
Government issued or guaranteed		4,521,233		—		4,521,233		—
Privately issued residential		1,136,256		—		—		1,136,256
Privately issued commercial		15,029		—		—		15,029
Collateralized debt obligations		52,500		—		—		52,500
Other debt securities		176,845		—		176,845		—
Equity securities		215,705		205,587		10,118		—
		6,228,560		205,587		4,819,188		1,203,785
Real estate loans held for sale		371,437		—		371,437		—
Other assets (b)		156,853		—		148,862		7,991
Total assets	$	7,318,684		258,752		5,848,156		1,211,776
Trading account liabilities	$	434,559		—		434,559		—
Other liabilities (b)		6,126		—		5,058		1,068
Total liabilities	$	440,685		—		439,617		1,068

(a) There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the three months and six months ended June 30, 2012 and 2011.

(b) Comprised predominantly of interest rate swap agreements used for interest rate risk management (Level 2), commitments to sell real estate loans (Level 2) and commitments to originate real estate loans to be held for sale (Level 3).

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended June 30, 2012 were as follows:

	Investment securities available for sale
	Privately issued residential mortgage-backed securities			Privately issued commercial mortgage-backed securities			Collateralized debt obligations			Other assets and other liabilities
	(in thousands)
Balance – March 31, 2012	$	1,110,695		$	13,435		$	58,184		$	20,435
Total gains (losses) realized/unrealized:
Included in earnings		(14,627	)(a)		—			—			45,486	(b)
Included in other comprehensive income		22,613	(e)		763	(e)		(2,712	)(e)		—
Settlements		(50,289	)		(2,071	)		(374	)		—
Transfers in and/or out of Level 3 (c)		—			—			—			(31,870	)(d)
Balance – June 30, 2012	$	1,068,392		$	12,127		$	55,098		$	34,051
Changes in unrealized gains (losses) included in earnings related to assets still held at June 30, 2012	$	(14,627	)(a)	$	—		$	—		$	28,904	(b)

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended June 30, 2011 were as follows:

	Investment securities available for sale
	Privately issued residential mortgage-backed securities			Privately issued commercial mortgage-backed securities			Collateralized debt obligations			Other assets and other liabilities
	(in thousands)
Balance – March 31, 2011	$	1,391,878		$	20,467		$	114,265		$	16,147
Total gains (losses) realized/unrealized:
Included in earnings		(24,530	)(a)		—			—			22,800	(b)
Included in other comprehensive income		38,471	(e)		(1,400	)(e)		3,372	(e)		—
Purchases		—			—			50,790			—
Sales		—			—			(105,643	)		—
Settlements		(99,617	)		(1,834	)		(1,183	)		—
Transfers in and/or out of Level 3 (c)		—			—			—			(25,776	)(d)
Balance – June 30, 2011	$	1,306,202		$	17,233		$	61,601		$	13,171
Changes in unrealized gains (losses) included in earnings related to assets still held at June 30, 2011	$	(24,530	)(a)	$	—		$	—		$	10,252	(b)

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the six months ended June 30, 2012 were as follows:

	Investment securities available for sale
	Privately issued residential mortgage-backed securities			Privately issued commercial mortgage-backed securities			Collateralized debt obligations			Other assets  and other liabilities
	(in thousands)
Balance – January 1, 2012	$	1,136,256		$	15,029		$	52,500		$	6,923
Total gains (losses) realized/unrealized:
Included in earnings		(22,304	)(a)		—			—			72,517	(b)
Included in other comprehensive income		47,683	(e)		1,111	(e)		3,711	(e)		—
Settlements		(93,243	)		(4,013	)		(1,113	)		—
Transfers in and/or out of Level 3 (c)		—			—			—			(45,389	)(d)
Balance – June 30, 2012	$	1,068,392		$	12,127		$	55,098		$	34,051
Changes in unrealized gains (losses) included in earnings related to assets still held at June 30, 2012	$	(22,304	)(a)	$	—		$	—		$	33,647	(b)

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the six months ended June 30, 2011 were as follows:

	Investment securities available for sale
	Privately issued residential mortgage-backed securities			Privately issued commercial mortgage-backed securities			Collateralized debt obligations			Other assets  and other liabilities
	(in thousands)
Balance – January 1, 2011	$	1,435,561		$	22,407		$	110,756		$	2,244
Total gains (losses) realized/unrealized:
Included in earnings		(32,071	)(a)		—			—			43,244	(b)
Included in other comprehensive income		99,556	(e)		(1,482	)(e)		7,206	(e)		—
Purchases		—			—			50,790			—
Sales		—			—			(105,643	)		—
Settlements		(196,844	)		(3,692	)		(1,508	)		—
Transfers in and/or out of Level 3 (c)		—			—			—			(32,317	)(d)
Balance – June 30, 2011	$	1,306,202		$	17,233		$	61,601		$	13,171
Changes in unrealized gains (losses) included in earnings related to assets still held at June 30, 2011	$	(32,071	)(a)	$	—		$	—		$	13,139	(b)

(a) Reported as an other-than-temporary impairment loss in the consolidated statement of income or as gain (loss) on bank investment securities.

(b) Reported as mortgage banking revenues in the consolidated statement of income and includes the fair value of commitment issuances and expirations.

(c) The Company’s policy for transfers between fair value levels is to recognize the transfer as of the actual date of the event or change in circumstances that caused the transfer.

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

(e) Reported as net unrealized gains on investment securities in the consolidated statement of comprehensive income.

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.

Investment securities held to maturity

During the three-month periods ended June 30, 2012 and 2011, the Company recognized other-than-temporary impairment losses related to certain collateralized mortgage obligations of $1 million and $2 million, respectively, and during the six-month periods ended June 30, 2012 and 2011, similar other-than-temporary losses of $5 million and $11 million, respectively, were recorded. In accordance with GAAP, the carrying value of such securities was reduced to fair value, with estimated credit losses recognized in earnings and any remaining unrealized loss recognized in accumulated other comprehensive income. The determination of fair value includes use of external and internal valuation sources that, as in the case of privately issued residential mortgage-backed securities, are weighted and averaged when estimating fair value. Due to the presence of significant unobservable inputs that valuation is classified as Level 3. The amortized cost, fair value and impact on the Company’s financial statements of the modeling described herein were not material.

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 uncollectible 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 generally been classified as Level 2, unless significant adjustments have been made to the valuation that are not readily observable by market participants. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and, therefore, such valuations have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $344 million at June 30, 2012 ($234 million and $110 million of which were classified as Level 2 and Level 3, respectively) and $478 million at June 30, 2011 ($324 million and $154 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, 2012 were decreases of $21 million and $34 million for the three- and six-month periods ended June 30, 2012, 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, 2011 were decreases of $61 million and $91 million for the three- and six-month periods ended June 30, 2011, 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 in foreclosure of defaulted loans subject to nonrecurring fair value measurement were not material at June 30, 2012 and 2011.

Significant unobservable inputs to level 3 measurements

The following table presents quantitative information about the significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities at June 30, 2012:

	Fair value at June 30, 2012		Valuation technique	Unobservable input/assumptions	Range (weighted- average)
Recurring fair value measurements
Privately issued mortgage–backed securities	$	1,080,519	Discounted cash flow	Probability of default	1%-49% (18%)
				Loss severity	32%-75% (49%)
Colateralized debt obligations		55,098	Discounted cash flow	Probability of default	3%-65% (14%)
				Loss severity	100%
Net other assets (liabilities)(a)		34,051	Discounted cash flow	Commitment expirations	0%-69% (18%)
Total level 3 assets, net of liabilities	$	1,169,668

(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 probability of default and loss severity for mortgage-backed securities and collateralized debt obligations backed by trust preferred securities would generally result in a lower (higher) fair value measurement.

An increase (decrease) in the estimate of expirations for commitments to originate residential mortgage 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.

Disclosures of fair value of financial instruments

With the exception of marketable securities, certain off-balance sheet financial instruments and one-to-four family residential 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. Additional information about the assumptions and calculations utilized follows.

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

	June 30, 2012
	Carrying amount			Estimated fair value			Level 1		Level 2			Level 3
	(in thousands)
Financial assets:
Cash and cash equivalents	$	1,422,831		$	1,422,831		$	1,343,415	$	79,416		$	—
Interest-bearing deposits at banks		1,069,717			1,069,717			—		1,069,717			—
Trading account assets		544,938			544,938			53,472		491,466			—
Investment securities		7,057,300			7,000,671			108,172		5,598,494			1,294,005
Loans and leases:
Commercial loans and leases		16,395,587			16,146,408			—		—			16,146,408
Commercial real estate loans		24,898,707			24,687,443			—		109,645			24,577,798
Residential real estate loans		9,811,525			9,843,421			—		6,617,925			3,225,496
Consumer loans		11,745,453			11,605,448			—		—			11,605,448
Allowance for credit losses		(917,028	)		—			—		—			—
Loans and leases, net		61,934,244			62,282,720			—		6,727,570			55,555,150
Accrued interest receivable		220,510			220,510			—		220,510			—
Financial liabilities:
Noninterest-bearing deposits	$	(22,854,794	)	$	(22,854,794	)	$	—	$	(22,854,794	)	$	—
Savings deposits and NOW accounts		(33,997,610	)		(33,997,610	)		—		(33,997,610	)		—
Time deposits		(5,330,239	)		(5,360,561	)		—		(5,360,561	)		—
Deposits at Cayman Islands office		(366,164	)		(366,164	)		—		(366,164	)		—
Short-term borrowings		(975,575	)		(975,575	)		—		(975,575	)		—
Long-term borrowings		(5,687,868	)		(5,784,700	)		—		(5,784,700	)		—
Accrued interest payable		(67,523	)		(67,523	)		—		(67,523	)		—
Trading account liabilities		(430,101	)		(430,101	)		—		(430,101	)		—
Other financial instruments:
Commitments to originate real estate loans for sale	$	34,051		$	34,051		$	—	$	—		$	34,051
Commitments to sell real estate loans		(12,857	)		(12,857	)		—		(12,857	)		—
Other credit-related commitments		(127,616	)		(127,616	)		—		—			(127,616	)
Interest rate swap agreements used for interest rate risk management		149,947			149,947			—		149,947			—

	December 31, 2011
	Carrying amount			Estimated fair value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	1,452,397		$	1,452,397
Interest-bearing deposits at banks		154,960			154,960
Trading account assets		561,834			561,834
Investment securities		7,673,154			7,608,008
Loans and leases:
Commercial loans and leases		15,734,436			15,507,342
Commercial real estate loans		24,411,114			24,024,585
Residential real estate loans		7,923,165			7,782,935
Consumer loans		12,027,290			11,869,813
Allowance for credit losses		(908,290	)		—
Loans and leases, net		59,187,715			59,184,675
Accrued interest receivable		222,618			222,618
Financial liabilities:
Noninterest-bearing deposits	$	(20,017,883	)	$	(20,017,883	)
Savings deposits and NOW accounts		(32,913,309	)		(32,913,309	)
Time deposits		(6,107,530	)		(6,133,806	)
Deposits at Cayman Islands office		(355,927	)		(355,927	)
Short-term borrowings		(782,082	)		(782,082	)
Long-term borrowings		(6,686,226	)		(6,720,174	)
Accrued interest payable		(67,900	)		(67,900	)
Trading account liabilities		(434,559	)		(434,559	)
Other financial instruments:
Commitments to originate real estate loans for sale	$	6,923		$	6,923
Commitments to sell real estate loans		(3,498	)		(3,498	)
Other credit-related commitments		(109,828	)		(109,828	)
Interest rate swap agreements used for interest rate risk management		147,302			147,302

The following assumptions, methods and calculations were used in determining the estimated fair value of financial instruments not measured at fair value in the consolidated balance sheet.

Cash and cash equivalents, interest-bearing deposits at banks, agreements to resell securities, short-term borrowings, accrued interest receivable and accrued interest payable

Due to the nature of cash and cash equivalents and the near maturity of interest-bearing deposits at banks, agreements to resell securities, short-term borrowings, accrued interest receivable and accrued interest payable, the Company estimated that the carrying amount of such instruments approximated estimated fair value.

Investment securities

Estimated fair values of investments in readily marketable securities were generally based on quoted market prices. Investment securities that were not readily marketable were assigned amounts based on estimates provided by outside parties or modeling techniques that relied upon discounted calculations of projected cash flows or, in the case of other investment securities, which include capital stock of the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York, at an amount equal to the carrying amount.

Loans and leases

In general, discount rates used to calculate values for loan products were based on the Company’s pricing at the respective period end. A higher discount rate was assumed with respect to estimated cash flows associated with nonaccrual loans. Projected loan cash flows were adjusted for estimated credit losses. However, such estimates made by the Company may not be indicative of assumptions and adjustments that a purchaser of the Company’s loans and leases would seek.

Deposits

Pursuant to GAAP, the estimated fair value ascribed to noninterest-bearing deposits, savings deposits and NOW accounts must be established at carrying value because of the customers’ ability to withdraw funds immediately. Time deposit accounts are required to be revalued based upon prevailing market interest rates for similar maturity instruments. As a result, amounts assigned to time deposits were based on discounted cash flow calculations using prevailing market interest rates based on the Company’s pricing at the respective date for deposits with comparable remaining terms to maturity.

The Company believes that deposit accounts have a value greater than that prescribed by GAAP. The Company feels, however, that the value associated with these deposits is greatly influenced by characteristics of the buyer, such as the ability to reduce the costs of servicing the deposits and deposit attrition which often occurs following an acquisition.

Long-term borrowings

The amounts assigned to long-term borrowings were based on quoted market prices, when available, or were based on discounted cash flow calculations using prevailing market interest rates for borrowings of similar terms and credit risk.

Other credit-related commitments

As described in note 13, in the normal course of business, various commitments and contingent liabilities are outstanding, such as loan commitments, credit guarantees and letters of credit. The Company’s pricing of such financial instruments is based largely on credit quality and relationship, probability of funding and other requirements. Loan commitments often have fixed expiration dates and contain termination and other clauses which provide for relief from funding in the event of significant deterioration in the credit quality of the customer. The rates and terms of the Company’s loan commitments, credit guarantees and letters of credit are competitive with other financial institutions operating in markets served by the Company. The Company believes that the carrying amounts, which are included in other liabilities, are reasonable estimates of the fair value of these financial instruments.

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.