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Fair Value Measurements
6 Months Ended
Jun. 30, 2016
Fair Value Disclosures [Abstract]  
Fair Value Measurements
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:
 
June 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Mortgage loans held for sale
$

 
$
34,330

 
$

 
$
34,330

Available for sale investment securities:
 
 
 
 
 
 
 
Equity securities
20,689

 

 

 
20,689

U.S. Government sponsored agency securities

 
146

 

 
146

State and municipal securities

 
345,347

 

 
345,347

Corporate debt securities

 
88,416

 
3,131

 
91,547

Collateralized mortgage obligations

 
706,346

 

 
706,346

Mortgage-backed securities

 
1,267,763

 

 
1,267,763

Auction rate securities

 

 
97,886

 
97,886

Total available for sale investment securities
20,689

 
2,408,018

 
101,017

 
2,529,724

Other assets
16,873

 
85,911

 

 
102,784

Total assets
$
37,562

 
$
2,528,259

 
$
101,017

 
$
2,666,838

Other liabilities
$
16,541

 
$
84,722

 
$

 
$
101,263

 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Mortgage loans held for sale
$

 
$
16,886

 
$

 
$
16,886

Available for sale investment securities:
 
 
 
 
 
 
 
Equity securities
21,514

 

 

 
21,514

U.S. Government sponsored agency securities

 
25,136

 

 
25,136

State and municipal securities

 
262,765

 

 
262,765

Corporate debt securities

 
93,619

 
3,336

 
96,955

Collateralized mortgage obligations

 
821,509

 

 
821,509

Mortgage-backed securities

 
1,158,835

 

 
1,158,835

Auction rate securities

 

 
98,059

 
98,059

Total available for sale investment securities
21,514

 
2,361,864

 
101,395

 
2,484,773

Other assets
16,129

 
34,465

 

 
50,594

Total assets
$
37,643

 
$
2,413,215

 
$
101,395

 
$
2,552,253

Other liabilities
$
15,914

 
$
33,010

 
$

 
$
48,924


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 June 30, 2016 and December 31, 2015 were measured based on the price that secondary market investors were offering for loans with similar characteristics. See Note 9, "Derivative Financial Instruments" for details related to the Corporation’s election to measure assets and liabilities at fair value.
Available for sale investment securities – Included in 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 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 common stocks of financial institutions ($19.8 million at June 30, 2016 and $20.6 million at December 31, 2015) and other equity investments ($895,000 at June 30, 2016 and $914,000 at December 31, 2015). 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 ($30.7 million at June 30, 2016 and $40.8 million at December 31, 2015), senior debt ($18.7 million at June 30, 2016 and $12.3 million at December 31, 2015), single-issuer trust preferred securities issued by financial institutions ($37.4 million at June 30, 2016 and $39.1 million at December 31, 2015), pooled trust preferred securities issued by financial institutions ($706,000 at both June 30, 2016 and December 31, 2015) and other corporate debt issued by non-financial institutions ($4.0 million at both June 30, 2016 and December 31, 2015).
Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and $35.0 million and $36.5 million of single-issuer trust preferred securities held at June 30, 2016 and December 31, 2015, 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 ($706,000 at both June 30, 2016 and December 31, 2015) and certain single-issuer trust preferred securities ($2.4 million at June 30, 2016 and $2.6 million at December 31, 2015). 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 in 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 fair 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 in this category are the following:
Level 1 assets include mutual funds that are held in trust for employee deferred compensation plans ($16.0 million at June 30, 2016 and $15.6 million at December 31, 2015) and the fair value of foreign currency exchange contracts ($868,000 at June 30, 2016 and $547,000 at December 31, 2015). 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 ($3.0 million at June 30, 2016 and $1.5 million at December 31, 2015) and the fair value of interest rate swaps ($82.9 million at June 30, 2016 and $33.0 million at December 31, 2015). 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 9, "Derivative Financial Instruments," for additional information.

Other liabilities – Included in this category are the following:

Level 1 liabilities include employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans ($16.0 million at June 30, 2016 and $15.6 million at December 31, 2015) and the fair value of foreign currency exchange contracts ($537,000 at June 30, 2016 and $331,000 at December 31, 2015). 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 ($1.8 million at June 30, 2016 and $40,000 at December 31, 2015) and the fair value of interest rate swaps ($82.9 million at June 30, 2016 and $33.0 million at December 31, 2015). 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 June 30, 2016
 
Pooled Trust
Preferred
Securities
 
Single-issuer
Trust Preferred
Securities
 
ARCs
 
(in thousands)
Balance at March 31, 2016
$
706

 
$
2,400

 
$
97,326

Unrealized adjustment to fair value (1)

 
22

 
482

Discount accretion (2)

 
3

 
78

Balance at June 30, 2016
$
706

 
$
2,425

 
$
97,886

 
 
 
 
 
 
 
Three months ended June 30, 2015
Balance at March 31, 2015
$
1,084

 
$
3,820

 
$
98,932

Sales
(554
)
 

 

Unrealized adjustment to fair value (1)

 
(2
)
 
(420
)
Discount accretion (2)

 
2

 
94

Balance at June 30, 2015
$
530

 
$
3,820

 
$
98,606

 
 
 
 
 
 
 
Six months ended June 30, 2016
 
Pooled Trust
Preferred
Securities
 
Single-issuer
Trust Preferred
Securities
 
ARCs
 
(in thousands)
Balance at December 31, 2015
$
706

 
$
2,630

 
$
98,059

Unrealized adjustment to fair value (1)

 
(211
)
 
(350
)
Discount accretion (2)

 
6

 
177

Balance at June 30, 2016
$
706

 
$
2,425

 
$
97,886

 
 
 
 
 
 
 
Six months ended June 30, 2015
Balance at December 31, 2014
$
4,088

 
$
3,820

 
$
100,941

Sales
(3,633
)
 

 

Unrealized adjustment to fair value (1)
190

 
(4
)
 
(88
)
Settlements - calls
(117
)
 

 
(2,446
)
Discount accretion (2)
2

 
4

 
199

Balance at June 30, 2015
$
530

 
$
3,820

 
$
98,606

 
 
 
 
 
 


(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 (loss) 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:
 
June 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Net loans
$

 
$

 
$
128,174

 
$
128,174

Other financial assets

 

 
50,071

 
50,071

Total assets
$

 
$

 
$
178,245

 
$
178,245

 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Net loans
$

 
$

 
$
138,491

 
$
138,491

Other financial assets

 

 
52,043

 
52,043

Total assets
$

 
$

 
$
190,534

 
$
190,534


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 5, "Loans and Allowance for Credit Losses," for additional details.
Other financial assets – This category includes OREO ($11.9 million at June 30, 2016 and $11.1 million at December 31, 2015) and MSRs ($38.2 million at June 30, 2016 and $40.9 million at December 31, 2015), 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 June 30, 2016 valuation were 13.7% and 10.1%, 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 June 30, 2016 and December 31, 2015. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
 
June 30, 2016
 
December 31, 2015
 
Book Value
 
Estimated
Fair Value
 
Book Value
 
Estimated
Fair Value
 
(in thousands)
FINANCIAL ASSETS
 
 
 
 
 
 
 
Cash and due from banks
$
84,647

 
$
84,647

 
$
101,120

 
$
101,120

Interest-bearing deposits with other banks
348,232

 
348,232

 
230,300

 
230,300

Federal Reserve Bank and Federal Home Loan Bank stock
59,854

 
59,854

 
62,216

 
62,216

Loans held for sale (1)
34,330

 
34,330

 
16,886

 
16,886

Available for sale investment securities (1)
2,529,724

 
2,529,724

 
2,484,773

 
2,484,773

Net Loans (1)
13,992,613

 
13,950,868

 
13,669,548

 
13,540,903

Accrued interest receivable
43,316

 
43,316

 
42,767

 
42,767

Other financial assets (1)
226,808

 
226,808

 
166,920

 
166,920

FINANCIAL LIABILITIES
 
 
 
 
 
 
 
Demand and savings deposits
$
11,469,919

 
$
11,469,919

 
$
11,267,367

 
$
11,267,367

Time deposits
2,822,645

 
2,973,640

 
2,864,950

 
2,862,868

Short-term borrowings
722,214

 
722,214

 
497,663

 
497,663

Accrued interest payable
8,336

 
8,336

 
10,724

 
10,724

Other financial liabilities (1)
274,104

 
274,104

 
190,927

 
190,927

Federal Home Loan Bank advances and long-term debt
965,552

 
993,194

 
949,542

 
959,315

 
(1)
These financial instruments, or certain financial instruments in 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.
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.
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 with other banks
  
Short-term borrowings
Accrued interest receivable
  
Accrued interest payable


Federal Reserve Bank and Federal Home Loan Bank ("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 in Level 2 liabilities under FASB ASC Topic 820.