Fair Value Measurements

FASB ASC Topic 820 establishes a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority):


•	Level 1 – Inputs that represent quoted prices for identical instruments in active markets.


•	Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.


•	Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.

The Corporation has categorized all assets and liabilities measured at fair value on both a recurring and nonrecurring basis into the above three levels.

The following tables present summaries of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:



	March 31, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	24,417	$	—	$	24,417
Available for sale investment securities:
Equity securities	45,734		—		—		45,734
U.S. Government securities	—		526		—		526
U.S. Government sponsored agency securities	—		280		—		280
State and municipal securities	—		283,453		—		283,453
Corporate debt securities	—		91,073		9,479		100,552
Collateralized mortgage obligations	—		1,006,737		—		1,006,737
Mortgage-backed securities	—		916,203		—		916,203
Auction rate securities	—		—		147,713		147,713
Total available for sale investments	45,734		2,298,272		157,192		2,501,198
Other assets	15,943		7,798		—		23,741
Total assets	$	61,677	$	2,330,487	$	157,192	$	2,549,356
Other liabilities	$	15,886	$	6,841	$	—	$	22,727



	December 31, 2013
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	21,351	$	—	$	21,351
Available for sale investment securities:
Equity securities	46,201		—		—		46,201
U.S. Government securities	—		525		—		525
U.S. Government sponsored agency securities	—		726		—		726
State and municipal securities	—		284,849		—		284,849
Corporate debt securities	—		89,662		9,087		98,749
Collateralized mortgage obligations	—		1,032,398		—		1,032,398
Mortgage-backed securities	—		945,712		—		945,712
Auction rate securities	—		—		159,274		159,274
Total available for sale investments	46,201		2,353,872		168,361		2,568,434
Other assets	15,779		7,227		—		23,006
Total assets	$	61,980	$	2,382,450	$	168,361	$	2,612,791
Other liabilities	$	15,648	$	5,161	$	—	$	20,809

The valuation techniques used to measure fair value for the items in the preceding tables 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 March 31, 2014 and December 31, 2013 were measured based on the price that secondary market investors were offering for loans with similar characteristics.

•

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 pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield 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 75% 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 ($39.8 million at March 31, 2014 and $40.6 million at December 31, 2013) and other equity investments ($5.9 million at March 31, 2014 and $5.6 million at December 31, 2013). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets.


•	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 ($50.4 million at March 31, 2014 and $50.3 million at December 31, 2013), single-issuer trust preferred securities issued by financial institutions ($41.9 million at March 31, 2014 and $40.5 million at December 31, 2013), pooled trust preferred securities issued by financial institutions ($5.7 million at March 31, 2014 and $5.3 million at December 31, 2013) and other corporate debt issued by non-financial institutions ($2.6 million at March 31, 2014 and December 31, 2013).

Level 2 investments include the Corporation’s subordinated debt, other corporate debt issued by non-financial institutions and $38.1 million and $36.7 million of single-issuer trust preferred securities held at March 31, 2014 and December 31, 2013, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.

Level 3 investments include the Corporation’s investments in pooled trust preferred securities and certain single-issuer trust preferred securities ($3.8 million at March 31, 2014 and December 31, 2013). 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. The most significant unobservable input to the expected cash flows model is an assumed return to market liquidity sometime within the next five years. If the assumed return to market liquidity was lengthened beyond the next five years, this would result in a decrease in the fair value of these ARCs. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid. Level 3 values are tested by management through the performance of 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.


•	Other assets – Included within this category are the following:

•

Level 1 assets include mutual funds that are held in trust for employee deferred compensation plans ($15.7 million at March 31, 2014 and $15.3 million at December 31, 2013) and the fair value of foreign currency exchange contracts ($257,000 at March 31, 2014 and $522,000 at December 31, 2013). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.

•

Level 2 assets include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($1.2 million at March 31, 2014 and $2.1 million at December 31, 2013) and the fair value of interest rate swaps ($6.6 million at March 31, 2014 and $5.1 million at December 31, 2013). The fair values of the Corporation’s interest rate locks, forward commitments and interest rate swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See Note I, "Derivative Financial Instruments," for additional information.


•	Other liabilities – Included within this category are the following:

•

Level 1 liabilities include employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans ($15.7 million at March 31, 2014 and $15.3 million at December 31, 2013) and the fair value of foreign currency exchange contracts ($199,000 at March 31, 2014 and $391,000 at December 31, 2013). The fair value of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

•

Level 2 liabilities include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($247,000 at March 31, 2014 and $64,000 at December 31, 2013) and the fair value of interest rate swaps ($6.6 million at March 31, 2014 and $5.1 million at December 31, 2013). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):



	Three months ended March 31, 2014
	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities		ARCs
	(in thousands)
Balance at December 31, 2013	$	5,306		$	3,781	$	159,274
Sales	—			—		(11,912		)
Unrealized adjustment to fair value (1)	521			38		124
Settlements - calls	(172		)	—		—
Discount accretion (2)	4			1		227
Balance at March 31, 2014	$	5,659		$	3,820	$	147,713

	Three months ended March 31, 2013
Balance at December 31, 2012	$	6,927		$	3,360	$	149,339
Unrealized adjustment to fair value (1)	1,429			7		5,360
Settlements - calls	—			—		(342		)
Discount accretion (2)	—			3		282
Balance at March 31, 2013	$	8,356		$	3,370	$	154,639


(1)	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 and included as a component of available for sale investment securities on the consolidated balance sheets.


(2)	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 table presents the Corporation’s financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:



	March 31, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Net loans	$	—	$	—	$	137,488	$	137,488
Other financial assets	—		—		56,968		56,968
Total assets	$	—	$	—	$	194,456	$	194,456



	December 31, 2013
	Level 1		Level 2		Level 3		Total
	(in thousands)
Net loans	$	—	$	—	$	138,666	$	138,666
Other financial assets	—		—		57,504		57,504
Total assets	$	—	$	—	$	196,170	$	196,170

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 E, "Loans and Allowance for Credit Losses," for additional details.


•	Other financial assets – This category includes OREO ($15.3 million at March 31, 2014 and $15.1 million at December 31, 2013) and MSRs ($41.7 million at March 31, 2014 and $42.5 million at December 31, 2013), 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 to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the March 31, 2014 valuation were 11.2% and 9.1%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data.

As required by FASB ASC Section 825-10-50, the following table details the book values and estimated fair values of the Corporation’s financial instruments as of March 31, 2014 and December 31, 2013. 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 the 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.



	March 31, 2014				December 31, 2013
	Book Value		Estimated Fair Value		Book Value		Estimated Fair Value
	(in thousands)
FINANCIAL ASSETS
Cash and due from banks	$	260,389	$	260,389	$	218,540	$	218,540
Interest-bearing deposits with other banks	225,428		225,428		163,988		163,988
Federal Reserve Bank and Federal Home Loan Bank stock	81,634		81,634		84,173		84,173
Loans held for sale (1)	24,417		24,417		21,351		21,351
Available for sale investment securities (1)	2,501,198		2,501,198		2,568,434		2,568,434
Loans, net of unearned income (1)	12,733,792		12,628,983		12,782,220		12,688,774
Accrued interest receivable	43,376		43,376		44,037		44,037
Other financial assets (1)	149,453		149,453		146,933		146,933
FINANCIAL LIABILITIES
Demand and savings deposits	$	9,667,357	$	9,667,357	$	9,573,264	$	9,573,264
Time deposits	3,002,560		3,011,698		2,917,922		2,927,374
Short-term borrowings	1,069,684		1,069,684		1,258,629		1,258,629
Accrued interest payable	16,972		16,972		15,218		15,218
Other financial liabilities (1)	133,848		133,848		124,440		124,440
FHLB advances and long-term debt	883,461		881,197		883,584		875,984


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

For short-term financial instruments, defined as those with remaining maturities of 90 days or less, and excluding those recorded at fair value on the Corporation’s consolidated balance sheets, 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
Accrued interest receivable		Accrued interest payable

Federal Reserve Bank and FHLB stock represent restricted investments and are carried at cost on the consolidated balance sheets.

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 and similar deposits would be issued to customers 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 values of FHLB advances and long-term debt were estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with similar remaining maturities as of the balance sheet date. These borrowings would be categorized within Level 2 liabilities under FASB ASC Topic 820.