The Company determines the fair values of its financial instruments based on the requirements established in Accounting Standards Codification Topic 820 (“Topic 820”), Fair Value Measurements, which provides a framework for measuring fair value under GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Topic 820 defines fair value as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.

Topic 820 establishes three levels of fair values based on the markets in which the assets or liabilities are traded and the reliability of the assumptions used to determine fair value. The levels are:

Topic 820 requires that the Company disclose estimated fair values for certain financial instruments. Financial instruments include such items as investment securities, loans, deposits, interest rate and foreign exchange contracts, swaps and other instruments as defined by the standard. The Company has an organized and established process for determining and reviewing the fair value of financial instruments reported in the Company’s financial statements. The fair value measurements are reviewed to ensure they are reasonable and in line with market experience in similar asset and liability classes.

Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as other real estate owned, other customer relationships, and other intangible assets. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-fair-value accounting or write-downs of individual assets.

Disclosure of fair values is not required for certain items such as lease financing, obligations for pension and other postretirement benefits, premises and equipment, prepaid expenses, deposit liabilities with no defined or contractual maturity, and income tax assets and liabilities.

Reasonable comparisons of fair value information with that of other financial institutions cannot necessarily be made because the standard permits many alternative calculation techniques, and numerous assumptions have been used to estimate the Company’s fair values.

Valuation Techniques Used in the Fair Value Measurement of Assets and Liabilities Carried at Fair Value

For the assets and liabilities measured at fair value on a recurring basis (categorized in the valuation hierarchy table below), the Company applies the following valuation techniques:

Available-for-sale debt securities are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, including estimates by third-party pricing services, if available. If quoted prices are not available, fair values are measured using proprietary valuation models that utilize market observable parameters from active market makers and inter-dealer brokers whereby securities are valued based upon available market data for securities with similar characteristics. Management reviews the pricing information received from the Company’s third-party pricing service to evaluate the inputs and valuation methodologies used to place securities into the appropriate level of the fair value hierarchy and transfers of securities within the fair value hierarchy are made if necessary. On a monthly basis, management reviews the pricing information received from the third-party pricing service which includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the third-party pricing service. Management also identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. As of September 30, 2019 and December 31, 2018, management did not make adjustments to prices provided by the third-party pricing services as a result of illiquid or inactive markets. The Company’s third-party pricing service has also established processes for the Company to submit inquiries regarding quoted prices. Periodically, the Company will challenge the quoted prices provided by the third-party pricing service. The Company’s third-party pricing service will review the inputs to the evaluation in light of the new market data presented by the Company. The Company’s third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis. The Company classifies all available-for-sale securities as Level 2.

Most of the Company’s derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value on a recurring basis using proprietary valuation models that primarily use market observable inputs, such as yield curves, and option volatilities. The fair value of derivatives includes values associated with counterparty credit risk and the Company’s own credit standing. The Company classifies these derivatives, included in other assets and other liabilities, as Level 2.

Concurrent with the sale of the Visa Class B restricted shares, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. On July 5, 2018, Visa announced a decrease in conversion rate from 1.6483 to 1.6298 effective June 28, 2018. On September 27, 2019, Visa additionally funded its litigation escrow account, thereby further reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on September 30, 2019, Visa announced a decrease in conversion rate from 1.6298 to 1.6228 effective September 27, 2019. The Visa derivative of $0.6 million and $2.6 million was included in the unaudited interim consolidated balance sheets at September 30, 2019 and December 31, 2018, respectively, to provide for the fair value of this liability. The potential liability related to this funding swap agreement was determined based on management’s estimate of the timing and the amount of Visa’s litigation settlement and the resulting payments due to the counterparty under the terms of the contract. As such, the funding swap agreement is classified as Level 3 in the fair value hierarchy. The significant unobservable inputs used in the fair value measurement of the Company’s funding swap agreement are the potential future changes in the conversion rate, expected term and growth rate of the market price of Visa Class A common shares. Material increases or (decreases) in any of those inputs may result in a significantly higher or (lower) fair value measurement.

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 are summarized below:

(1)	Backed by residential real estate.

(2)	Other assets include derivative assets.

(3)	Other liabilities include derivative liabilities.


	Fair Value Measurements as of December 31, 2018
	Quoted Prices in		Significant
	Active Markets for		Other		Significant
	Identical Assets		Observable		Unobservable
(dollars in thousands)	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
Assets
U.S. Treasury securities	$	—	$	389,470	$	—	$	389,470
Government-sponsored enterprises debt securities		—		241,594		—		241,594
Government agency mortgage-backed securities⁽¹⁾		—		411,536		—		411,536
Government-sponsored enterprises mortgage-backed securities⁽¹⁾		—		150,847		—		150,847
Collateralized mortgage obligations:
Government agency		—		2,682,449		—		2,682,449
Government-sponsored enterprises		—		602,592		—		602,592
Debt securities issued by states and political subdivisions		—		19,854		—		19,854
Total available-for-sale securities		—		4,498,342		—		4,498,342
Other assets⁽²⁾		—		12,336		—		12,336
Liabilities
Other liabilities⁽³⁾		—		(12,085)		(2,607)		(14,692)
Total	$	—	$	4,498,593	$	(2,607)	$	4,495,986

(1)	Backed by residential real estate.

(2)	Other assets include derivative assets.

(3)	Other liabilities include derivative liabilities.

Changes in Fair Value Levels

For the three and nine months ended September 30, 2019, there were no transfers between fair value hierarchy levels.

The changes in Level 3 liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2019 and 2018 are summarized below.


	Visa Derivative
(dollars in thousands)	2019		2018
Three Months Ended September 30,
Balance as of July 1,	$	(1,179)	$	(4,114)
Total net losses included in other noninterest income		(417)		(43)
Settlements		1,012		772
Balance as of September 30,	$	(584)	$	(3,385)
Total net losses included in net income attributable to the change in unrealized gains or losses related to liabilities still held as of September 30,	$	(417)	$	(43)

Nine Months Ended September 30,
Balance as of January 1,	$	(2,607)	$	(5,439)
Total net losses included in other noninterest income		(659)		(123)
Settlements		2,682		2,177
Balance as of September 30,	$	(584)	$	(3,385)
Total net losses included in net income attributable to the change in unrealized gains or losses related to liabilities still held as of September 30,	$	(659)	$	(123)

Assets and Liabilities Carried at Other Than Fair Value

The following tables summarize for the periods indicated the estimated fair value of the Company’s financial instruments that are not required to be carried at fair value on a recurring basis, excluding leases and deposit liabilities with no defined or contractual maturity.

September 30, 2019

Fair Value Measurements

Quoted Prices in

Significant

Active Markets

Other

Unobservable

for Identical

Observable

Inputs

(dollars in thousands)

Book Value

Assets (Level 1)

Inputs (Level 2)

(Level 3)

Total

Financial assets:

Cash and cash equivalents

1,344,017

358,863

985,154

—

1,344,017

Loans held for sale

1,594

—

1,594

—

1,594

Loans⁽¹⁾

12,675,522

—

12,844,384

Financial liabilities:

Time deposits⁽²⁾

2,707,593

—

2,699,798

—

2,699,798

Short-term borrowings

400,000

—

402,133

—

402,133

Long-term borrowings⁽³⁾

200,000

—

209,149

—

209,149


	December 31, 2018
			Fair Value Measurements
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Unobservable
			for Identical		Observable		Inputs
(dollars in thousands)	Book Value		Assets (Level 1)		Inputs (Level 2)		(Level 3)		Total
Financial assets:
Cash and cash equivalents	$	1,003,637	$	396,836	$	606,801	$	—	$	1,003,637
Loans held for sale		432		—		432		—		432
Loans⁽¹⁾		12,928,422		—		—		12,664,170		12,664,170

Financial liabilities:
Time deposits⁽²⁾	$	3,092,164	$	—	$	3,058,792	$	—	$	3,058,792
Long-term borrowings⁽³⁾		600,000		—		602,088		—		602,088

(1)	Excludes financing leases of $167.9 million at September 30, 2019 and $147.8 million at December 31, 2018.

(2)	Excludes deposit liabilities with no defined or contractual maturity of $14.1 billion as of both September 30, 2019 and December 31, 2018.

(3)	Excludes capital lease obligations of $18 thousand and $26 thousand at September 30, 2019 and December 31, 2018, respectively.

Unfunded loan and lease commitments and letters of credit are not included in the tables above. As of September 30, 2019 and December 31, 2018, the Company had $6.0 billion and $5.8 billion, respectively, of unfunded loan and lease commitments and letters of credit. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related reserve for unfunded commitments, which totaled $13.7 million and $14.2 million at September 30, 2019 and December 31, 2018, respectively. No active trading market exists for these instruments, and the estimated fair value does not include value associated with the borrower relationship. The Company does not estimate the fair values of certain unfunded loan and lease commitments that can be canceled by providing notice to the borrower. As Company-level data is incorporated into the fair value measurement, unfunded loan and lease commitments and letters of credit are classified as Level 3.

Valuation Techniques Used in the Fair Value Measurement of Assets and Liabilities Carried at the Lower of Cost or Fair Value

The Company applies the following valuation techniques to assets measured at the lower of cost or fair value:

Mortgage servicing rights

MSRs are carried at the lower of cost or fair value and are therefore subject to fair value measurements on a nonrecurring basis. The fair value of MSRs is determined using models which use significant unobservable inputs, such as estimates of prepayment rates, the resultant weighted average lives of the MSRs and the option-adjusted spread levels. Accordingly, the Company classifies MSRs as Level 3.

Impaired loans

A large portion of the Company’s impaired loans are collateral dependent and are measured at fair value on a nonrecurring basis using collateral values as a practical expedient. The fair values of collateral for impaired loans are primarily based on real estate appraisal reports prepared by third-party appraisers less disposition costs, present value of the expected future cash flows or the loan’s observable market price. Certain loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective rate, which is not a fair value measurement. The Company measures the impairment on certain loans and leases by performing a lower-of-cost-or-fair-value analysis. If impairment is determined by the value of the collateral or an observable market price, it is written down to fair value on a nonrecurring basis as Level 3.

Other real estate owned

The Company values these properties at fair value at the time the Company acquires them, which establishes their new cost basis. After acquisition, the Company carries such properties at the lower of cost or fair value less estimated selling costs on a nonrecurring basis. Fair value is measured on a nonrecurring basis using collateral values as a practical expedient. The fair values of collateral for other real estate owned are primarily based on real estate appraisal reports prepared by third-party appraisers less disposition costs, and are classified as Level 3.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required to record certain assets at fair value on a nonrecurring basis in accordance with GAAP. These assets are subject to fair value adjustments that result from the application of lower of cost or fair value accounting or write-downs of individual assets to fair value.

The following table provides the level of valuation inputs used to determine each fair value adjustment and the fair value of the related individual assets or portfolio of assets with fair value adjustments on a nonrecurring basis as of September 30, 2019 and December 31, 2018:


(dollars in thousands)	Level 1		Level 2		Level 3
September 30, 2019
Impaired loans	$	—	$	—	$	882
December 31, 2018
Impaired loans	$	—	$	—	$	402

Total losses on impaired loans were $0.5 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively and $0.5 million and $0.6 million for the nine months ended September 30, 2019 and 2018, respectively.

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:


	Quantitative Information about Level 3 Fair Value Measurements at September 30, 2019
				Significant	Range
(dollars in thousands)	Fair value		Valuation Technique	Unobservable Input	(Weighted Average)
Impaired loans	$	882	Appraisal Value	Appraisal Value	n/m⁽¹⁾
Visa derivative	$	(584)	Discounted Cash Flow	Expected Conversion Rate	1.6228
				Expected Term	4 years
				Growth Rate	15%


	Quantitative Information about Level 3 Fair Value Measurements at December 31, 2018
					Range
(dollars in thousands)	Fair value		Valuation Technique	Unobservable Input	(Weighted Average)
Impaired loans	$	402	Appraisal Value	Appraisal Value	n/m⁽¹⁾
Visa derivative	$	(2,607)	Discounted Cash Flow	Expected Conversion Rate	1.6298
				Expected Term	4 years
				Growth Rate	15%

(1)	The fair value of these assets is determined based on appraised values of collateral or broker price opinions, the range of which is not meaningful to disclose.