FAIR VALUE MEASUREMENTS

The Corporation uses fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. Securities available for sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporation may be required to record at fair value other assets on a non-recurring basis, such as mortgage loans held for sale, certain impaired loans, OREO and certain other assets.

Fair value is defined as an exit price, representing 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. Fair value measurements are not adjusted for transaction costs. Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.

In determining fair value, the Corporation uses various valuation approaches, including market, income and cost approaches. ASC 820, Fair Value Measurements and Disclosures, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market data obtained from sources independent of the Corporation. Unobservable inputs reflect the Corporation’s assumptions about the assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:


Measurement Category		Definition
Level 1		valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.

Level 2		valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.

Level 3		valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies the Corporation uses for financial instruments recorded at fair value on either a recurring or non-recurring basis:

Securities Available For Sale

Securities available for sale consists of both debt and equity securities. These securities are recorded at fair value on a recurring basis. At September 30, 2013, 97% of these securities used valuation methodologies involving market-based or market-derived information, collectively Level 1 and Level 2 measurements, to measure fair value. The remaining 3% of these securities were measured using model-based techniques, with primarily unobservable (Level 3) inputs.

The Corporation closely monitors market conditions involving assets that have become less actively traded. If the fair value measurement is based upon recent observable market activity of such assets or comparable assets (other than forced or distressed transactions) that occur in sufficient volume, and do not require significant adjustment using unobservable inputs, those assets are classified as Level 1 or Level 2; if not, they are classified as Level 3. Making this assessment requires significant judgment.

The Corporation uses prices from independent pricing services and, to a lesser extent, indicative (non-binding) quotes from independent brokers, to measure the fair value of investment securities. The Corporation validates prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review of pricing by Corporate personnel familiar with market liquidity and other market-related conditions.

The Corporation determines the valuation of its investments in pooled TPS with the assistance of a third-party independent financial consulting firm that specializes in advisory services related to illiquid financial investments. The consulting firm provides the Corporation appropriate valuation methodology, performance assumptions, modeling techniques, discounted cash flows, discount rates using the underlying index plus 4.5-14%, and sensitivity analyses with respect to levels of defaults and deferrals necessary to produce losses.

Additionally, the Corporation utilizes the firm’s expertise to reassess assumptions to reflect actual conditions. See the Securities footnote in the Notes to Consolidated Financial Statements section of this Report for information on how the Corporation reassesses assumptions to determine the valuation of its pooled TPS. Accessing the services of a financial consulting firm with a focus on financial instruments assists the Corporation in accurately valuing these complex financial instruments and facilitates informed decision-making with respect to such instruments.

The Level 3 CDOs could be subject to sensitivities in market risks that may cause the discount rates on these instruments to vary from those currently utilized to determine fair value. These discount rates vary today, but typically range between 4.5-14% over the coupon rate of the specific security. The valuations are somewhat sensitive to changes in the discount rate. For example, each 1% change in the discount rate will alter the fair value of these debt obligations by approximately $3,000 or 7% of the total book value. Factors that could influence the discount rate include: the overall health of the economy, the current and projected health of the banking system and its impact upon banks’ capital strategies, access to capital markets for the underlying debt issuers and regulatory matters. Generally, in an improving economy the health of the banking system should be improving and capital market access would be open, thus reducing market risk premiums and therefore discount rates for these instruments. Conversely, the opposite is true, a weakening economy puts pressure on the banking system and the financial health of banks. The Corporation takes all these factors into consideration when establishing a fair value for these Level 3 obligations.

Derivative Financial Instruments

The Corporation determines its fair value for derivatives using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects contractual terms of the derivative, including the period to maturity and uses observable market based inputs, including interest rate curves and implied volatilities.

The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of non-performance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2013, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Residential Mortgage Loans Held For Sale

These loans are carried at the lower of cost or fair value. Under lower of cost or fair value accounting, periodically, it may be necessary to record non-recurring fair value adjustments. Fair value, when recorded, is based on independent quoted market prices and is classified as Level 2.

Impaired Loans

The Corporation reserves for commercial loan relationships greater than or equal to $500 that the Corporation considers impaired as defined in ASC 310 at the time the Corporation identifies the loan as impaired based upon the present value of expected future cash flows available to pay the loan, or based upon the fair value of the collateral less estimated selling costs where a loan is collateral dependent. Collateral may be real estate and/or business assets including equipment, inventory and accounts receivable.

The Corporation determines the value of real estate based on appraisals by licensed or certified appraisers. The value of business assets is generally based on amounts reported on the business’ financial statements. Management must rely on the financial statements prepared and certified by the borrower or its accountants in determining the value of these business assets on an ongoing basis which may be subject to significant change over time. Based on the quality of information or statements provided, management may require the use of business asset appraisals and site-inspections to better value these assets. The Corporation may discount appraised and reported values based on management’s historical knowledge, changes in market conditions from the time of valuation or management’s knowledge of the borrower and the borrower’s business. Since not all valuation inputs are observable, the Corporation classifies these non-recurring fair value determinations as Level 2 or Level 3 based on the lowest level of input that is significant to the fair value measurement.

The Corporation reviews and evaluates impaired loans no less frequently than quarterly for additional impairment based on the same factors identified above.

Other Real Estate Owned

OREO is comprised of commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations plus some bank owned real estate. OREO acquired in settlement of indebtedness is recorded at the lower of carrying amount of the loan or fair value less costs to sell. Subsequently, these assets are carried at the lower of carrying value or fair value less costs to sell. Accordingly, it may be necessary to record non-recurring fair value adjustments. Fair value is generally based upon appraisals by licensed or certified appraisers and other market information and is classified as Level 2 or Level 3.

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis:


	Level 1		Level 2		Level 3		Total
September 30, 2013
Assets measured at fair value
Available for sale debt securities
U.S. government-sponsored entities	$	—	$	332,152	$	—	$	332,152
Residential mortgage-backed securities
Agency mortgage-backed securities		—		227,638		—		227,638
Agency collateralized mortgage obligations		—		489,047		—		489,047
Non-agency collateralized mortgage obligations		—		19		1,827		1,846
States of the U.S. and political subdivisions		—		17,875		—		17,875
Collateralized debt obligations		—		—		28,704		28,704
Other debt securities		—		16,128		—		16,128

		—		1,082,859		30,531		1,113,390

Available for sale equity securities
Financial services industry		686		1,020		398		2,104
Insurance services industry		64		—		—		64

		750		1,020		398		2,168

		750		1,083,879		30,929		1,115,558
Derivative financial instruments
Trading		—		37,655		—		37,655
Not for trading		—		387		—		387

		—		38,042		—		38,042

	$	750	$	1,121,921	$	30,929	$	1,153,600


Liabilities measured at fair value
Derivative financial instruments
Trading		—	$	37,495		—	$	37,495
Not for trading		—		6,977		—		6,977

		—	$	44,472		—	$	44,472

December 31, 2012
Assets measured at fair value
Available for sale debt securities
U.S. government-sponsored entities	$	—	$	354,457	$	—	$	354,457
Residential mortgage-backed securities
Agency mortgage-backed securities		—		275,150		—		275,150
Agency collateralized mortgage obligations		—		469,547		—		469,547
Non-agency collateralized mortgage obligations		—		24		2,705		2,729
States of the U.S. and political subdivisions		—		24,824		—		24,824
Collateralized debt obligations		—		—		22,456		22,456
Other debt securities		—		14,621		6,892		21,513

		—		1,138,623		32,053		1,170,676

Available for sale equity securities
Financial services industry		351		1,099		512		1,962
Insurance services industry		45		—		—		45

		396		1,099		512		2,007

		396		1,139,722		32,565		1,172,683
Derivative financial instruments
Trading		—		58,008		—		58,008
Not for trading		—		—		—		—

		—		58,008		—		58,008

	$	396	$	1,197,730	$	32,565	$	1,230,691


Liabilities measured at fair value
Derivative financial instruments
Trading		—	$	58,150		—	$	58,150
Not for trading		—		—		—		—

		—	$	58,150		—	$	58,150

During 2013, the Corporation transferred out of Level 2 and Level 3 equity securities that now trade on NASDAQ. At September 30, 2013, the securities are classified as Level 1. Additionally during 2013, the Corporation transferred out of Level 3 and into Level 2 four single name TPS. There were no transfers of assets or liabilities between the hierarchy levels for the nine months ended September 30, 2012.

The following table presents additional information about assets measured at fair value on a recurring basis and for which the Corporation has utilized Level 3 inputs to determine fair value:


	Pooled Trust Preferred Collateralized Debt Obligations			Other Debt Securities			Equity Securities			Residential Non-Agency Collateralized Mortgage Obligations			Total
Nine Months Ended September 30, 2013
Balance at beginning of period	$	22,456		$	6,892		$	512		$	2,705		$	32,565
Total gains (losses) – realized/unrealized:
Included in earnings		—			78			—			—			78
Included in other comprehensive income		4,561			21			6			(21	)		4,567
Accretion included in earnings		2,311			4			—			11			2,326
Purchases, issuances, sales and settlements:
Purchases		—			—			—			—			—
Issuances		29			—			—			—			29
Sales/redemptions		—			(1,033	)		—			—			(1,033	)
Settlements		(653	)		—			—			(868	)		(1,521	)
Transfers from Level 3		—			(5,962	)		(120	)		—			(6,082	)
Transfers into Level 3		—			—			—			—			—

Balance at end of period	$	28,704		$	—		$	398		$	1,827		$	30,929


Year Ended December 31, 2012
Balance at beginning of period	$	5,998		$	5,197		$	408		$	—		$	11,603
Total gains (losses) – realized/unrealized:
Included in earnings		—			—			—			—			—
Included in other comprehensive income		917			732			104			49			1,802
Accretion included in earnings		2,515			9			—			20			2,544
Purchases, issuances, sales and settlements:
Purchases		16,569			954			—			4,230			21,753
Issuances		46			—			—			—			46
Sales/redemptions		(2,542	)		—			—			—			(2,542	)
Settlements		(1,047	)		—			—			(1,594	)		(2,641	)
Transfers from Level 3		—			—			—			—			—
Transfers into Level 3		—			—			—			—			—

Balance at end of period	$	22,456		$	6,892		$	512		$	2,705		$	32,565

The Corporation reviews fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out of Level 3 at fair value at the beginning of the period in which the changes occur. See the Securities footnote in the Notes to Consolidated Financial Statements section of this Report for information relating to significant unobservable inputs used in determining Level 3 fair values.

For the nine months ended September 30, 2013 and 2012, there were no gains or losses included in earnings attributable to the change in unrealized gains or losses relating to assets still held as of those dates.

In accordance with GAAP, from time to time, the Corporation measures certain assets at fair value on a non-recurring basis. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. Valuation methodologies used to measure these fair value adjustments were previously described. For assets measured at fair value on a non-recurring basis still held at the balance sheet date, the following table provides the hierarchy level and the fair value of the related assets or portfolios:


	Level 1		Level 2		Level 3		Total
September 30, 2013
Impaired loans		—	$	3,880	$	9,242	$	13,122
Other real estate owned		—		4,751		4,634		9,385

December 31, 2012
Impaired loans		—	$	14,325	$	3,171	$	17,496
Other real estate owned		—		5,771		13,540		19,311
Investment security, held-to-maturity:
Non-agency CMO		—		—		3,636		3,636

Impaired loans measured or re-measured at fair value on a non-recurring basis during the nine months ended September 30, 2013 had a carrying amount of $14,424 and an allocated allowance for loan losses of $2,906 at September 30, 2013. The allocated allowance is based on fair value of $13,122 less estimated costs to sell of $1,604. The allowance for loan losses includes a provision applicable to the current period fair value measurements of $771, which was included in the provision for loan losses for the nine months ended September 30, 2013.

OREO with a carrying amount of $10,738 was written down to $8,245 (fair value of $9,385 less estimated costs to sell of $1,140), resulting in a loss of $2,493, which was included in earnings for the nine months ended September 30, 2013.

The investment security held-to-maturity as of December 31, 2012 represented a non-agency CMO where OTTI had been identified and the investment had been adjusted to fair value. This security was sold during the first quarter of 2013.

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each financial instrument:

Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable. For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities. For both securities available for sale and securities held to maturity, fair value equals the quoted market price from an active market, if available, and is classified within Level 1. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or pricing models, and is classified as Level 2. Where there is limited market activity or significant valuation inputs are unobservable, securities are classified within Level 3. Under current market conditions, assumptions used to determine the fair value of Level 3 securities have greater subjectivity due to the lack of observable market transactions.

Loans. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities less an illiquidity discount. The fair value of variable and adjustable rate loans approximates the carrying amount. Due to the significant judgment involved in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.

Bank Owned Life Insurance. The Corporation owns general account, separate account and hybrid account bank owned life insurance (BOLI). The fair value of the general account BOLI is based on the insurance contract cash surrender value. The separate account BOLI has a stable value protection (SVP) component that mitigates the impact of market value fluctuations of the underlying account assets. The SVP component guarantees the book value, which is the insurance contract cash surrender value. The hybrid account BOLI also has a guaranteed book value, except it does not require a stable value protection component. Instead, the insurance carrier incurs the investment return risk, which is imbedded in their fee structure.

If the Corporation’s separate account and hybrid account BOLI book value exceeds the market value of the underlying securities, then the fair value of the separate account and hybrid account BOLI is the cash surrender value. If the Corporation’s separate account and hybrid account BOLI book value is less than the market value of the underlying securities, then the fair value of the separate account and hybrid account BOLI is the quoted market price of the underlying securities.

Derivative Assets and Liabilities. The Corporation determines its fair value for derivatives using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects contractual terms of the derivative, including the period to maturity and uses observable market based inputs, including interest rate curves and implied volatilities.

Deposits. The estimated fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date because of the customers’ ability to withdraw funds immediately. The fair value of fixed-maturity deposits is estimated by discounting future cash flows using rates currently offered for deposits of similar remaining maturities.

Short-Term Borrowings. The carrying amounts for short-term borrowings approximate fair value for amounts that mature in 90 days or less. The fair value of subordinated notes is estimated by discounting future cash flows using rates currently offered.

Long-Term and Junior Subordinated Debt. The fair value of long-term and junior subordinated debt is estimated by discounting future cash flows based on the market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities.

Loan Commitments and Standby Letters of Credit. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties. Also, unfunded loan commitments relate principally to variable rate commercial loans, typically are non-binding, and fees are not normally assessed on these balances.

Nature of Estimates. 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 to other financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Further, 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.

The fair values of the Corporation’s financial instruments are as follows:


					Fair Value Measurements
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2013
Financial Assets
Cash and cash equivalents	$	283,509	$	283,509	$	283,509	$	—	$	—
Securities available for sale		1,115,558		1,115,558		750		1,083,879		30,929
Securities held to maturity		1,180,992		1,181,652		—		1,174,282		7,370
Net loans, including loans held for sale		8,734,958		8,597,123		—		—		8,597,123
Bank owned life insurance		263,781		268,641		268,641		—		—
Derivative assets		38,042		38,042		—		38,042		—
Accrued interest receivable		33,025		33,025		33,025		—		—

Financial Liabilities
Deposits		9,723,371		9,736,492		7,375,322		2,361,170		—
Short-term borrowings		1,166,180		1,166,180		1,166,180		—		—
Long-term debt		91,807		94,670		—		—		94,670
Junior subordinated debt		194,213		190,150		—		—		190,150
Derivative liabilities		44,472		44,472		—		44,472		—
Accrued interest payable		6,368		6,368		6,368		—		—

December 31, 2012
Financial Assets
Cash and cash equivalents	$	239,044	$	239,044	$	239,044	$	—	$	—
Securities available for sale		1,172,683		1,172,683		396		1,139,722		32,565
Securities held to maturity		1,106,563		1,143,213		—		1,128,524		14,689
Net loans, including loans held for sale		8,061,096		7,996,554		—		—		7,966,554
Bank owned life insurance		246,088		257,060		257,060		—		—
Derivative assets		58,008		58,008		—		58,008		—
Accrued interest receivable		30,210		30,210		30,210		—		—

Financial Liabilities
Deposits		9,082,174		9,117,757		6,546,316		2,571,441		—
Short-term borrowings		1,083,138		1,083,138		1,083,138		—		—
Long-term debt		89,425		92,329		—		—		92,329
Junior subordinated debt		204,019		172,246		—		—		172,246
Derivative liabilities		58,150		58,150		—		58,150		—
Accrued interest payable		9,054		9,054		9,054		—		—