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Fair Value Measurements
3 Months Ended
Mar. 31, 2016
Fair Value Disclosures [Abstract]  
Fair Value Measurements

16. 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 March 31, 2016, 99.9% 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 0.1% 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 information by Corporate personnel familiar with market liquidity and other market-related conditions.

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 March 31, 2016, 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 fair 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  

March 31, 2016

           

Assets Measured at Fair Value

           

Available for sale debt securities:

           

U.S. Treasury

   $ —         $ 29,994       $ —         $ 29,994   

U.S. government-sponsored entities

     —           401,078         —           401,078   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     —           1,087,865         —           1,087,865   

Agency collateralized mortgage obligations

     —           525,630         —           525,630   

Non-agency collateralized mortgage obligations

     —           5         1,091         1,096   

Commercial mortgage-backed securities

     —           3,673         —           3,673   

States of the U.S. and political subdivisions

     —           39,804         —           39,804   

Other debt securities

     —           8,908         —           8,908   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —           2,096,957         1,091         2,098,048   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale equity securities:

           

Financial services industry

     102         636         424         1,162   

Insurance services industry

     133         —           —           133   
  

 

 

    

 

 

    

 

 

    

 

 

 
     235         636         424         1,295   
  

 

 

    

 

 

    

 

 

    

 

 

 
     235         2,097,593         1,515         2,099,343   

Derivative financial instruments:

           

Trading

     —           80,125         —           80,125   

Not for trading

     —           7,881         —           7,881   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —           88,006         —           88,006   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 235       $ 2,185,599       $ 1,515       $ 2,187,349   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities Measured at Fair Value

           

Derivative financial instruments:

           

Trading

     —         $ 80,659         —         $ 80,659   

Not for trading

     —           1,560         —           1,560   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —         $ 82,219         —         $ 82,219   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Level 1      Level 2      Level 3      Total  

December 31, 2015

           

Assets Measured at Fair Value

           

Available for sale debt securities:

           

U.S. Treasury

   $ —         $ 29,796       $ —         $ 29,796   

U.S. government-sponsored entities

     —           367,994         —           367,994   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     —           704,831         —           704,831   

Agency collateralized mortgage obligations

     —           495,830         —           495,830   

Non-agency collateralized mortgage obligations

     —           6         1,184         1,190   

Commercial mortgage-backed securities

     —           4,287         —           4,287   

States of the U.S. and political subdivisions

     —           11,057         —           11,057   

Other debt securities

     —           14,286         —           14,286   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —           1,628,087         1,184         1,629,271   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale equity securities:

           

Financial services industry

     97         632         439         1,168   

Insurance services industry

     128         —           —           128   
  

 

 

    

 

 

    

 

 

    

 

 

 
     225         632         439         1,296   
  

 

 

    

 

 

    

 

 

    

 

 

 
     225         1,628,719         1,623         1,630,567   

Derivative financial instruments:

           

Trading

     —           50,017         —           50,017   

Not for trading

     —           3,185         —           3,185   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —           53,202         —           53,202   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 225       $ 1,681,921       $ 1,623       $ 1,683,769   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities Measured at Fair Value

           

Derivative financial instruments:

           

Trading

     —         $ 50,510         —         $ 50,510   

Not for trading

     —           1,095         —           1,095   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —         $ 51,605         —         $ 51,605   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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:

 

     Equity
Securities
     Residential
Non-Agency
Collateralized
Mortgage
Obligations
     Total  

Three Months Ended March 31, 2016

        

Balance at beginning of period

   $ 439       $ 1,184       $ 1,623   

Total gains (losses) – realized/unrealized:

        

Included in earnings

     —           —           —     

Included in other comprehensive income

     (15      (28      (43

Accretion included in earnings

     —           2         2   

Purchases, issuances, sales and settlements:

        

Purchases

     —           —           —     

Issuances

     —           —           —     

Sales/redemptions

     —           —           —     

Settlements

     —           (67      (67

Transfers from Level 3

     —           —           —     

Transfers into Level 3

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 424       $ 1,091       $ 1,515   
  

 

 

    

 

 

    

 

 

 

Year Ended December 31, 2015

        

Balance at beginning of period

   $ 475       $ 1,420       $ 1,895   

Total gains (losses) – realized/unrealized:

        

Included in earnings

     —           —           —     

Included in other comprehensive income

     20         (4      16   

Accretion included in earnings

     —           5         5   

Purchases, issuances, sales and settlements:

        

Purchases

     —           —           —     

Issuances

     —           —           —     

Sales/redemptions

     —           —           —     

Settlements

     —           (237      (237

Transfers from Level 3

     (56      —           (56

Transfers into Level 3

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 439       $ 1,184       $ 1,623   
  

 

 

    

 

 

    

 

 

 

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 Available for Sale footnote in this section of this Report for information relating to determining Level 3 fair values. There were no transfers of assets or liabilities between the hierarchy levels during the first three months of 2016. During 2015, the Corporation transferred an equity security totaling $56 to non-marketable equity securities, reflected in other assets on the Consolidated Balance Sheet.

For the three months ended March 31, 2016 and 2015, 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. The total (losses) gains included in earnings are in the net securities (losses) gains line item in the Consolidated Statements of Comprehensive Income.

 

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 the 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  

March 31, 2016

           

Impaired loans

     —         $ 957       $ 7,257       $ 8,214   

Other real estate owned

     —           1,148         868         2,016   

December 31, 2015

           

Impaired loans

     —           124         3,704         3,828   

Other real estate owned

     —           5,705         2,126         7,831   

Substantially all of the fair value amounts in the table above were estimated at a date during the three months or twelve months ended March 31, 2016 and December 31, 2015, respectively. Consequently, the fair value information presented is not as of the period’s end.

Impaired loans measured or re-measured at fair value on a non-recurring basis during the three months ended March 31, 2016 had a carrying amount of $14,064 and an allocated allowance for credit losses of $6,012. The allocated allowance is based on fair value of $8,214 less estimated costs to sell of $162. The allowance for credit losses includes a provision applicable to the current period fair value measurements of $3,362, which was included in the provision for credit losses for the three months ended March 31, 2016.

OREO with a carrying amount of $2,616 was written down to $1,803 (fair value of $2,016 less estimated costs to sell of $213), resulting in a loss of $813, which was included in earnings for the three months ended March 31, 2016.

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 and Leases. The fair value of fixed rate loans and leases is estimated by discounting the future cash flows using the current rates at which similar loans and leases 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 and leases approximates the carrying amount. Due to the significant judgment involved in evaluating credit quality, loans and leases are classified within Level 3 of the fair value hierarchy.

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.

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 March 31, 2016, 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.

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 Borrowings. The fair value of long-term borrowings 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:

 

     Carrying             Fair Value Measurements  
     Amount      Fair Value      Level 1      Level 2      Level 3  

March 31, 2016

              

Financial Assets

              

Cash and cash equivalents

   $ 345,945       $ 345,945       $ 345,945       $ —         $ —     

Securities available for sale

     2,099,343         2,099,343         235         2,097,593         1,515   

Securities held to maturity

     1,776,020         1,803,453         —           1,801,022         2,431   

Net loans and leases, including loans held for sale

     14,025,482         13,969,315         —           —           13,969,315   

Derivative assets

     88,006         88,006         —           88,006         —     

Accrued interest receivable

     53,609         53,609         53,609         —           —     

Financial Liabilities

              

Deposits

     15,390,483         15,397,218         12,700,899         2,696,319         —     

Short-term borrowings

     1,563,888         1,563,947         1,563,947         —           —     

Long-term borrowings

     657,445         656,929         —           —           656,929   

Derivative liabilities

     82,219         82,219         —           82,219         —     

Accrued interest payable

     9,063         9,063         9,063         —           —     

 

     Carrying             Fair Value Measurements  
     Amount      Fair Value      Level 1      Level 2      Level 3  

December 31, 2015

              

Financial Assets

              

Cash and cash equivalents

   $ 489,119       $ 489,119       $ 489,119       $ —         $ —     

Securities available for sale

     1,630,567         1,630,567         225         1,628,719         1,623   

Securities held to maturity

     1,637,061         1,643,416         —           1,640,721         2,695   

Net loans and leases, including loans held for sale

     12,053,209         11,863,882         —           —           11,863,882   

Derivative assets

     53,202         53,202         —           53,202         —     

Accrued interest receivable

     44,920         44,920         44,920         —           —     

Financial Liabilities

              

Deposits

     12,623,463         12,610,914         10,157,997         2,452,917         —     

Short-term borrowings

     2,048,896         2,048,943         2,048,943         —           —     

Long-term borrowings

     641,480         637,935         —           —           637,935   

Derivative liabilities

     51,605         51,605         —           51,605         —     

Accrued interest payable

     7,457         7,457         7,457         —           —