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Fair Value Measurements
6 Months Ended
Jun. 30, 2018
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, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Mortgage loans held for sale
$

 
$
35,898

 
$

 
$
35,898

Available for sale investment securities:
 
 
 
 
 
 
 
U.S. Government sponsored agency securities

 
26,526

 

 
26,526

State and municipal securities

 
407,696

 

 
407,696

Corporate debt securities

 
87,795

 
4,075

 
91,870

Collateralized mortgage obligations

 
724,322

 

 
724,322

Residential mortgage-backed securities

 
1,000,964

 

 
1,000,964

Commercial mortgage-backed securities

 
238,783

 

 
238,783

Auction rate securities

 

 
103,122

 
103,122

Total available for sale investment securities

 
2,486,086

 
107,197

 
2,593,283

Investments held in Rabbi Trust
19,510

 

 

 
19,510

Other assets
639

 
57,851

 

 
58,490

Total assets
$
20,149

 
$
2,579,835

 
$
107,197

 
$
2,707,181

Other liabilities
$
20,034

 
$
62,673

 
$

 
$
82,707


 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Mortgage loans held for sale
$

 
$
31,530

 
$

 
$
31,530

Available for sale investment securities:
 
 
 
 
 
 
 
Equity securities
918

 

 

 
918

U.S. Government sponsored agency securities

 
5,938

 

 
5,938

State and municipal securities

 
408,949

 

 
408,949

Corporate debt securities

 
93,552

 
3,757

 
97,309

Collateralized mortgage obligations

 
602,623

 

 
602,623

Residential mortgage-backed securities

 
1,120,796

 

 
1,120,796

Commercial mortgage-backed securities

 
212,755

 

 
212,755

Auction rate securities

 

 
98,668

 
98,668

Total available for sale investment securities
918

 
2,444,613

 
102,425

 
2,547,956

Investments held in Rabbi Trust
18,982

 

 

 
18,982

Other assets
469

 
44,539

 

 
45,008

Total assets
$
20,369

 
$
2,520,682

 
$
102,425

 
$
2,643,476

Other liabilities
$
19,357

 
$
39,014

 
$

 
$
58,371


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, 2018 and December 31, 2017 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 performed 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 – As of June 30, 2018, the Corporation did not hold any equity securities. Equity securities held as of December 31, 2017 consisted of common stocks of financial institutions and other equity investments. These Level 1 investments were 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 and senior debt issued by financial institutions ($66.6 million at June 30, 2018 and $61.9 million at December 31, 2017), single-issuer trust preferred securities issued by financial institutions ($20.4 million at June 30, 2018 and $30.7 million at December 31, 2017), pooled trust preferred securities issued by financial institutions ($875,000 at June 30, 2018 and $707,000 at December 31, 2017) and other corporate debt issued by non-financial institutions ($4.0 million at both June 30, 2018 and December 31, 2017).
Level 2 investments include the Corporation’s holdings of subordinated debt and senior debt, other corporate debt issued by non-financial institutions and $17.2 million and $27.7 million of single-issuer trust preferred securities held at June 30, 2018 and December 31, 2017, 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 ($875,000 at June 30, 2018 and $707,000 at December 31, 2017) and certain single-issuer trust preferred securities ($3.2 million at June 30, 2018 and $3.1 million at December 31, 2017). 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.

Investments held in Rabbi Trust - This category consists of mutual funds that are held in trust for employee deferred compensation plans that the Corporation has elected to measure at fair value. Shares of mutual funds are valued based on net asset value, which represent quoted market prices for the underlying shares held in the mutual funds, and as such, are classified as Level 1 and are included in "other assets" on the consolidated balance sheet.
Other assets – Included in this category are the following:
Level 1 assets include the fair value of foreign currency exchange contracts ($631,000 at June 30, 2018 and $460,000 at December 31, 2017). 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 ($1.4 million at June 30, 2018 and $1.1 million at December 31, 2017) and the fair value of interest rate swaps ($56.4 million at June 30, 2018 and $43.4 million at December 31, 2017). 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 ($19.5 million at June 30, 2018 and $19.0 million at December 31, 2017) and the fair value of foreign currency exchange contracts ($523,000 at June 30, 2018 and $374,000 at December 31, 2017). 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 ($564,000 at June 30, 2018 and $272,000 at December 31, 2017) and the fair value of interest rate swaps ($62.1 million at June 30, 2018 and $38.7 million at December 31, 2017). 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, 2018
 
Pooled Trust
Preferred
Securities
 
Single-issuer
Trust Preferred
Securities
 
ARCs
 
(in thousands)
Balance at March 31, 2018
$
865

 
$
3,095

 
$
103,049

Unrealized adjustment to fair value (1)
10

 
102

 
73

Discount accretion (2)

 
3

 

Balance at June 30, 2018
$
875

 
$
3,200

 
$
103,122

 
 
 
 
 
 
 
Three months ended June 30, 2017
Balance at March 31, 2017
$
422

 
$
2,750

 
$
97,439

Unrealized adjustment to fair value (1)

 
22

 
386

Discount accretion (2)

 
3

 
98

Balance at June 30, 2017
$
422

 
$
2,775

 
$
97,923

 
 
 
 
 
 
 
Six months ended June 30, 2018
 
Pooled Trust
Preferred
Securities
 
Single-issuer
Trust Preferred
Securities
 
ARCs
 
(in thousands)
Balance at December 31, 2017
$
707

 
$
3,050

 
$
98,668

Unrealized adjustment to fair value (1)
168

 
144

 
4,454

Discount accretion (2)

 
6

 

Balance at June 30, 2018
$
875

 
$
3,200

 
$
103,122

 
 
 
 
 
 
 
Six months ended June 30, 2017
Balance at December 31, 2016
$
422

 
$
2,450

 
$
97,256

Unrealized adjustment to fair value (1)

 
319

 
472

Discount accretion (2)

 
6

 
195

Balance at June 30, 2017
$
422

 
$
2,775

 
$
97,923

 
 
 
 
 
 


(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:
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Net loans
$
141,072

 
$
149,608

OREO
11,181

 
9,823

MSRs
37,894

 
37,663

Total assets
$
190,147

 
$
197,094

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 collectively evaluated for impairment 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, 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, 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 June 30, 2018 valuation were 9.2% and 9.0%, 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, 2018 and December 31, 2017. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
 
June 30, 2018
 
Amortized Cost
Level 1
Level 2
Level 3
Estimated
Fair Value
 
(in thousands)
FINANCIAL ASSETS
 
 
 
 
 
Cash and due from banks
$
99,742

$
99,742

$

$

$
99,742

Interest-bearing deposits with other banks
298,087

298,087



298,087

Federal Reserve Bank and Federal Home Loan Bank stock
66,715


66,715


66,715

Loans held for sale
35,898


35,898


35,898

Available for sale investment securities
2,593,283


2,486,086

107,197

2,593,283

Net Loans
15,636,919



14,996,906

14,996,906

Accrued interest receivable
55,208

55,208



55,208

Other financial assets
229,475

122,547

57,851

49,077

229,475

FINANCIAL LIABILITIES
 
 
 
 
 

Demand and savings deposits
$
12,776,849

$
12,776,849

$

$

$
12,776,849

Brokered deposits
161,447

161,447



161,447

Time deposits
2,661,503


2,656,421


2,656,421

Short-term borrowings
983,833

983,833



983,833

Accrued interest payable
8,293

8,293



8,293

Other financial liabilities
251,170

188,497

62,673


251,170

Federal Home Loan Bank advances and long-term debt
991,948


964,318


964,318

 
 
 
 
 
 
 
December 31, 2017
 
Book Value
Level 1
Level 2
Level 3
Estimated
Fair Value
 
(in thousands)
FINANCIAL ASSETS
 
 
 
 
 
Cash and due from banks
$
108,291

$
108,291

$

$

$
108,291

Interest-bearing deposits with other banks
293,805

293,805



293,805

Federal Reserve Bank and Federal Home Loan Bank stock
60,761


60,761


60,761

Loans held for sale
31,530


31,530


31,530

Available for sale investment securities
2,547,956

918

2,444,613

102,425

2,547,956

Net Loans
15,598,337



15,380,974

15,380,974

Accrued interest receivable
52,910

52,910



52,910

Other financial assets
215,464

123,439

44,539

47,486

215,464

FINANCIAL LIABILITIES
 
 
 
 
 
Demand and savings deposits
$
13,042,147

$
13,042,147

$

$

$
13,042,147

Brokered deposits
90,473

90,473



90,473

Time deposits
2,664,912


2,664,912


2,664,912

Short-term borrowings
617,524

617,524



617,524

Accrued interest payable
9,317

9,317



9,317

Other financial liabilities
227,569

188,555

39,014


227,569

Federal Home Loan Bank advances and long-term debt
1,038,346


1,038,346


1,038,346

 
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.

As of June 30, 2018, fair values for loans and time deposits were estimated by discounting future cash flows using the current rates, as adjusted for liquidity considerations, at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values of loans also include estimated credit losses that would be assumed in a market transaction. Beginning in 2018, fair values estimated in this manner are considered to represent estimated exit prices, required by ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities". As of December 31, 2017, loan fair values do not fully incorporate an exit price approach to fair value.

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.