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:



	September 30, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	23,049	$	—	$	23,049
Available for sale investment securities:
Equity securities	13,059		—		—		13,059
U.S. Government sponsored agency securities	—		6,015		—		6,015
State and municipal securities	—		413,913		—		413,913
Corporate debt securities	—		89,755		3,222		92,977
Collateralized mortgage obligations	—		593,678		—		593,678
Residential mortgage-backed securities	—		1,182,086		—		1,182,086
Commercial mortgage-backed securities	—		161,632		—		161,632
Auction rate securities	—		—		98,156		98,156
Total available for sale investment securities	13,059		2,447,079		101,378		2,561,516
Other assets	18,742		49,041		—		67,783
Total assets	$	31,801	$	2,519,169	$	101,378	$	2,652,348
Other liabilities	$	18,607	$	41,569	$	—	$	60,176



	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	28,697	$	—	$	28,697
Available for sale investment securities:
Equity securities	24,526		—		—		24,526
U.S. Government sponsored agency securities	—		134		—		134
State and municipal securities	—		391,641		—		391,641
Corporate debt securities	—		106,537		2,872		109,409
Collateralized mortgage obligations	—		593,860		—		593,860
Residential mortgage-backed securities	—		1,317,838		—		1,317,838
Commercial mortgage-backed securities	—		24,563		—		24,563
Auction rate securities	—		—		97,256		97,256
Total available for sale investment securities	24,526		2,434,573		100,128		2,559,227
Other assets	17,111		44,481		—		61,592
Total assets	$	41,637	$	2,507,751	$	100,128	$	2,649,516
Other liabilities	$	17,032	$	41,734	$	—	$	58,766

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 September 30, 2017 and December 31, 2016 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 at least 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 ($12.1 million at September 30, 2017 and $23.5 million at December 31, 2016) and other equity investments ($1.0 million at September 30, 2017 and December 31, 2016). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets.


•	U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Residential mortgage-backed securities/Commercial 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 ($50.3 million at September 30, 2017 and $65.2 million at December 31, 2016), single-issuer trust preferred securities issued by financial institutions ($38.3 million at September 30, 2017 and $39.8 million at December 31, 2016), pooled trust preferred securities issued by financial institutions ($422,000 at both September 30, 2017 and December 31, 2016) and other corporate debt issued by non-financial institutions ($4.0 million at both September 30, 2017 and December 31, 2016).

Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and $35.5 million and $37.3 million of single-issuer trust preferred securities held at September 30, 2017 and December 31, 2016, 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 ($422,000 at both September 30, 2017 and December 31, 2016) and certain single-issuer trust preferred securities ($2.8 million at September 30, 2017 and $2.5 million at December 31, 2016). 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 ($18.1 million at September 30, 2017 and $16.4 million at December 31, 2016) and the fair value of foreign currency exchange contracts ($625,000 at September 30, 2017 and $745,000 at December 31, 2016). 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 ($1.3 million at September 30, 2017 and $3.1 million at December 31, 2016) and the fair value of interest rate swaps ($47.7 million at September 30, 2017 and $41.4 million at December 31, 2016). 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 ($18.1 million at September 30, 2017 and $16.4 million at December 31, 2016) and the fair value of foreign currency exchange contracts ($506,000 at September 30, 2017 and $668,000 at December 31, 2016). 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 ($223,000 at September 30, 2017 and $339,000 at December 31, 2016) and the fair value of interest rate swaps ($41.3 million at September 30, 2017 and $41.4 million at December 31, 2016). 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 September 30, 2017
	Pooled Trust Preferred Securities		Single-issuer Trust Preferred Securities			ARCs
	(in thousands)
Balance at June 30, 2017	$	422	$	2,775		$	97,923
Unrealized adjustment to fair value ⁽¹⁾	—		(28		)	233
Discount accretion ⁽²⁾	—		3			—
Balance at September 30, 2017	$	422	$	2,750		$	98,156

	Three months ended September 30, 2016
Balance at June 30, 2016	$	706	$	2,425		$	97,886
Unrealized adjustment to fair value ⁽¹⁾	—		7			(318		)
Discount accretion ⁽²⁾	—		3			158
Balance at September 30, 2016	$	706	$	2,435		$	97,726

	Nine months ended September 30, 2017
	Pooled Trust Preferred Securities		Single-issuer Trust Preferred Securities			ARCs
	(in thousands)
Balance at December 31, 2016	$	422	$	2,450		$	97,256
Unrealized adjustment to fair value ⁽¹⁾	—		291			705
Discount accretion ⁽²⁾	—		9			195
Balance at September 30, 2017	$	422	$	2,750		$	98,156

	Nine months ended September 30, 2016
Balance at December 31, 2015	$	706	$	2,630		$	98,059
Unrealized adjustment to fair value ⁽¹⁾	—		(204		)	(668		)
Discount accretion ⁽²⁾	—		9			335
Balance at September 30, 2016	$	706	$	2,435		$	97,726


(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 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 Level 3 financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:



	September 30, 2017		December 31, 2016
	(in thousands)
Net loans	$	140,779	$	132,576
OREO	10,542		12,815
MSRs	37,874		37,532
Total assets	$	189,195	$	182,923

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 measured 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.


•	OREO – This category includes OREO ($10.5 million at September 30, 2017 and $12.8 million at December 31, 2016) 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 – This category includes MSRs ($37.9 million at September 30, 2017 and $37.5 million at December 31, 2016), classified as Level 3 assets. 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 September 30, 2017 valuation were 12.4% and 9.5%, 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 September 30, 2017 and December 31, 2016. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.



	September 30, 2017				December 31, 2016
	Book Value		Estimated Fair Value		Book Value		Estimated Fair Value
	(in thousands)
FINANCIAL ASSETS
Cash and due from banks	$	99,803	$	99,803	$	118,763	$	118,763
Interest-bearing deposits with other banks	582,845		582,845		233,763		233,763
Federal Reserve Bank and Federal Home Loan Bank stock	62,951		62,951		57,489		57,489
Loans held for sale ⁽¹⁾	23,049		23,049		28,697		28,697
Available for sale investment securities ⁽¹⁾	2,561,516		2,561,516		2,559,227		2,559,227
Net Loans ⁽¹⁾	15,314,654		15,086,654		14,530,593		14,387,454
Accrued interest receivable	50,082		50,082		46,294		46,294
Other financial assets ⁽¹⁾	219,434		219,434		206,132		206,132
FINANCIAL LIABILITIES
Demand and savings deposits	$	13,274,319	$	13,274,319	$	12,259,622	$	12,259,622
Brokered Deposits	109,936		109,936		—		—
Time deposits	2,757,525		2,759,913		2,753,242		2,769,757
Short-term borrowings	298,751		298,751		541,317		541,317
Accrued interest payable	10,568		10,568		9,632		9,632
Other financial liabilities ⁽¹⁾	234,160		234,160		216,080		216,080
Federal Home Loan Bank advances and other long-term debt	1,038,159		1,035,053		929,403		928,167


(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.