

NOTE P – FAIR VALUE MEASUREMENTS

As required by FASB ASC Topic 820, all assets and liabilities required to be measured at fair value both on a recurring and non-recurring basis have been categorized based on the method of their fair value determination.

Following is a summary of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets at December 31:



	2011
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	47,009	$	—	$	47,009
Available for sale investment securities:
Equity securities	34,586		—		—		34,586
U.S. Government securities	—		334		—		334
U.S. Government sponsored agency securities	—		4,073		—		4,073
State and municipal securities	—		322,018		—		322,018
Corporate debt securities	—		114,017		9,289		123,306
Collateralized mortgage obligations	—		1,001,209		—		1,001,209
Mortgage-backed securities	—		880,097		—		880,097
Auction rate securities	—		—		225,211		225,211
Total available for sale investment securities	34,586		2,321,748		234,500		2,590,834
Other financial assets	13,130		3,901		—		17,031
Total assets	$	47,716	$	2,372,658	$	234,500	$	2,654,874
Other financial liabilities	$	13,130	$	2,734	$	—	$	15,864

	2010
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	83,940	$	—	$	83,940
Available for sale investment securities:
Equity securities	40,070		—		—		40,070
U.S. Government securities	—		1,649		—		1,649
U.S. Government sponsored agency securities	—		5,058		—		5,058
State and municipal securities	—		349,563		—		349,563
Corporate debt securities	—		111,675		13,111		124,786
Collateralized mortgage obligations	—		1,104,058		—		1,104,058
Mortgage-backed securities	—		871,472		—		871,472
Auction rate securities	—		—		260,679		260,679
Total available for sale investment securities	40,070		2,443,475		273,790		2,757,335
Other financial assets	13,582		9,256		—		22,838
Total assets	$	53,652	$	2,536,671	$	273,790	$	2,864,113
Other financial liabilities	$	13,582	$	760	$	—	$	14,342

The valuation techniques used to measure fair value for the items in the table above are as follows:

•

Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of December 31, 2011 and December 31, 2010 were measured as the price that secondary market investors were offering for loans with similar characteristics. See Note A, “Summary of Significant Accounting Policies” for details related to the Corporation’s election to measure assets and liabilities at fair value.

•

Available for sale investment securities – Included within this asset category are both equity and debt securities. Level 2 available for sale debt securities are valued by a third-party pricing service commonly used in the banking industry. The pricing service uses evaluated pricing models that vary based on asset class and incorporate available market information including quoted prices of investments securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, evaluated pricing models use available information, as applicable, through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing

Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.

Management tests the values provided by the pricing service by obtaining securities prices from an alternative third party source and comparing the results. This test is done for approximately 80% of the securities valued by the pricing service. Generally, differences by security in excess of 5% are researched to reconcile the difference.

•

Equity securities – Equity securities consist of stocks of financial institutions ($27.9 million at December 31, 2011 and $33.1 million at December 31, 2010) and other equity investments ($6.7 million at December 31, 2011 and $7.0 million at December 31, 2010). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets. Restricted equity securities issued by the FHLB and Federal Reserve Bank ($82.5 million at December 31, 2011 and $96.4 million at December 31, 2010) have been excluded from the above table.


•	U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-backed securities – These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service, as detailed above.

•

Corporate debt securities – This category consists of subordinated debt issued by financial institutions ($41.3 million at December 31, 2011 and $35.9 million at December 31, 2010), single-issuer trust preferred securities issued by financial institutions ($74.4 million at December 31, 2011 and $81.8 million at December 31, 2010), pooled trust preferred securities issued by financial institutions ($5.1 million at December 31, 2011 and $4.5 million at December 31, 2010) and other corporate debt issued by non-financial institutions ($2.5 million at December 31, 2011 and $2.6 million at December 31, 2010).

Classified as Level 2 investments are the subordinated debt, other corporate debt issued by non-financial institutions and $70.2 million and $73.2 million of single-issuer trust preferred securities held at December 31, 2011 and December 31, 2010, respectively. These corporate debt securities are measured at fair value by a third-party pricing service, as detailed above.

Classified as Level 3 assets are the Corporation’s investments in pooled trust preferred securities and certain single-issuer trust preferred securities ($4.2 million at December 31, 2011 and $8.6 million at December 31, 2010). The fair values of these securities were determined based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers. The Corporation’s third-party pricing service cannot derive fair values for these securities primarily due to inactive markets for similar investments. Level 3 values are tested by management primarily through trend analysis, by comparing current values to those reported at the end of the preceding calendar quarter, and determining if they are reasonable based on price and spread movements for this asset class.

•

Auction rate securities – Due to their illiquidity, ARCs are classified as Level 3 investments and are valued through the use of an expected cash flows model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates for coupon rates, time to maturity and market rates of return. Management tests Level 3 valuations for ARCs by performing a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels. Any inconsistencies are reconciled through discussions with the third-party valuation expert.

•

Other financial assets – Included within this asset category are: Level 1 assets, consisting of mutual funds that are held in trust for employee deferred compensation plans and measured at fair value based on quoted prices for identical securities in active markets; and Level 2 assets representing the fair values of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors. The fair values of the Corporation’s interest rate locks and forward commitments are determined as the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See Note A, Summary of Significant Accounting Policies” for additional information.


•	Other financial liabilities – Included within this category are: Level 1 employee deferred compensation liabilities which represent amounts due to employees under the deferred compensation plans, described under the heading “Other financial assets” above and Level 2 mortgage banking derivatives, described under the heading “Other financial assets” above.

The following tables present the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the years ended December 31:



	2011
	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities			Auction Rate Securities (ARCs)
	(in thousands)
Balance, December 31, 2010	$	4,528		$	8,583		$	260,679
Transfer from Level 3 to Level 2 (1)	—			(800		)	—
Realized adjustments to fair value (2)	(1,406		)	—			(292		)
Unrealized adjustments to fair value (3)	2,465			28			(4,383		)
Sales (4)	—			—			—
Settlements - maturities	—			(1,650		)
Settlements - calls	(476		)	(1,980		)	(34,844		)
(Premium amortization) discount accretion (5)	(2		)	(1		)	4,051
Balance, December 31, 2011	$	5,109		$	4,180		$	225,211



	2010
	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities		Auction Rate Securities (ARCs)
	(in thousands)
Balance, December 31, 2009	$	4,979		$	6,981	$	289,203
Transfer from Level 2 to Level 3	—			650
Realized adjustments to fair value (2)	(11,969		)	—		—
Unrealized adjustments to fair value (3)	11,842			951		(10,850		)
Sales	—			—		(15,266		)
Settlements - calls	(328		)	—		(8,969		)
Discount accretion (4)	4			1		6,561
Balance, December 31, 2010	$	4,528		$	8,583	$	260,679

(1)

During the year ended December 31, 2011, one single-issuer trust preferred security with a fair value of $800,000 as of December 31, 2010 was reclassified as a Level 2 asset. As of December 31, 2011, the fair value of this security was measured by a third-party pricing service using both quoted prices for similar assets and model-based valuation techniques that derived fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. As of December 31, 2010, the fair value of this security was determined based on quotes provided by third-party brokers who determined its fair value based predominantly on an internal valuation model.


(2)	For pooled trust preferred securities and ARCs, realized adjustments to fair value represent credit related other-than-temporary impairment charges that were recorded as a reduction to investment securities gains on the consolidated statements of income.


(3)	Pooled trust preferred securities, single-issuer trust preferred securities and ARCs are classified as available for sale investment securities; as such, the unrealized adjustment to fair value was recorded as an unrealized holding gain (loss) and included as a component of available for sale investment securities on the consolidated balance sheet.


(4)	During the year ended December 31, 2011, the Corporation sold one pooled trust preferred security with a par value of $6.4 million and a book value of zero for no gain or loss. This security had a book value of zero as a result of prior year other-than-temporary impairment charges.


(5)	Included as a component of net interest income on the consolidated statements of income.

Certain financial assets are not measured at fair value on an ongoing basis but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following tables present the Corporation’s financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets at December 31:



	2011
	Level 1		Level 2		Level 3		Total
	(in thousands)
Net loans	$	—	$	—	$	216,812	$	216,812
Other financial assets	—		—		63,919		63,919
Total assets	$	—	$	—	$	280,731	$	280,731
Reserve for unfunded commitments	$	—	$	—	$	1,706	$	1,706

	2010
	Level 1		Level 2		Level 3		Total
	(in thousands)
Net loans	—		—		457,678		457,678
Other financial assets	—		—		62,109		62,109
Total assets	$	—	$	—	$	519,787	$	519,787
Reserve for unfunded commitments	$	—	$	—	$	1,227	$	1,227

The valuation techniques used to measure fair value for the items in the table above are as follows:


•	Net loans – This category consists of loans that were evaluated for impairment under FASB ASC Section 310-10-35 and have been classified as Level 3 assets. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See Note D, "Loans and Allowance for Credit Losses," for additional details.


•	Other financial assets – This category includes OREO ($30.8 million at December 31, 2011 and $33.0 million at December 31, 2010) and MSRs net of the MSR valuation allowance ($33.1 million at December 31, 2011 and $29.1 million at December 31, 2010), both classified as Level 3 assets.

Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.

MSRs are initially recorded at fair value upon the sale of residential mortgage loans, which the Corporation continues to service, to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are evaluated quarterly for impairment by comparing the carrying amount to estimated fair value. Fair value is determined at the end of each quarter through a discounted cash flows valuation. Significant inputs to the valuation include expected net servicing income, the discount rate and the expected life of the underlying loans.


•	Reserve for unfunded commitments – This Level 3 liability represents the estimate of losses associated with unused commitments to extend credit.

As required by FASB ASC Section 825-10-50, the following table details the book values and the estimated fair values of the Corporation’s financial instruments as of December 31, 2011 and December 31, 2010. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.

Fair values of financial instruments are significantly affected by assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.



	2011				2010
	Book Value		Estimated Fair Value		Book Value		Estimated Fair Value
FINANCIAL ASSETS	(in thousands)
Cash and due from banks	$	292,598	$	292,598	$	198,954	$	198,954
Interest-bearing deposits with other banks	175,336		175,336		33,297		33,297
Loans held for sale (1)	47,009		47,009		83,940		83,940
Securities held to maturity	6,669		6,699		7,751		7,818
Securities available for sale (1)	2,673,298		2,673,298		2,853,733		2,853,733
Loans, net of unearned income (1)	11,968,970		11,992,586		11,933,307		11,909,539
Accrued interest receivable	51,098		51,098		53,841		53,841
Other financial assets (1)	315,952		315,952		282,174		282,174
FINANCIAL LIABILITIES
Demand and savings deposits	$	8,511,789	$	8,511,789	$	7,758,613	$	7,758,613
Time deposits	4,013,950		4,056,247		4,629,968		4,677,494
Short-term borrowings	597,033		597,033		674,077		674,077
Accrued interest payable	25,686		25,686		33,333		33,333
Other financial liabilities (1)	69,816		69,816		80,250		80,250
FHLB advances and long-term debt	1,040,149		982,010		1,119,450		1,077,724


(1)	Description of fair value determinations for these financial instruments, or certain financial instruments within these categories, measured at fair value on the Corporation’s consolidated balance sheets, are disclosed above.

For short-term financial instruments defined as those with remaining maturities of 90 days or less, excluding those recorded at fair value on the Corporation’s consolidated balance sheets, the book value was considered to be a reasonable estimate of fair value.

The following instruments are predominantly short-term:



Assets		Liabilities
Cash and due from banks		Demand and savings deposits
Interest bearing deposits		Short-term borrowings
Federal funds sold		Accrued interest payable
Accrued interest receivable		Other financial liabilities

For those financial instruments within the above-listed categories with remaining maturities greater than 90 days, fair values were determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued as of the balance sheet date.

The estimated fair values of securities held to maturity as of December 31, 2011 and December 31, 2010 were generally based on quoted market prices, broker quotes or dealer quotes.

Estimated fair values for loans and time deposits were estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities. Fair values estimated in this manner do not fully incorporate an exit price approach to fair value, as defined in FASB ASC Topic 820.

The fair value of FHLB advances and long-term debt was estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with a similar remaining maturity as of the balance sheet date. The fair values of commitments to extend credit and standby letters of credit are estimated to equal their carrying amounts.