XML 58 R25.htm IDEA: XBRL DOCUMENT

Fair Value Measurements

12 Months Ended

Dec. 31, 2018

Fair value represents the estimated price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept). See Note 1 for the Corporation’s accounting policy for fair value measurements.

Following is a description of the valuation methodologies used for the Corporation’s more significant instruments measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment Securities Available For Sale: Where quoted prices are available in an active market, investment securities are classified in Level 1 of the fair value hierarchy. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows, with consideration given to the nature of the quote and the relationship of recently evidenced market activity to the fair value estimate, and are classified in Level 2 of the fair value hierarchy. Lastly, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, securities are classified within Level 3 of the fair value hierarchy. To validate the fair value estimates, assumptions, and controls, the Corporation looks to transactions for similar instruments and utilizes independent pricing provided by third party vendors or brokers and relevant market indices. While none of these sources are solely indicative of fair value, they serve as directional indicators for the appropriateness of the Corporation’s fair value estimates. The Corporation has determined that the fair value measures of its investment securities are classified predominantly within Level 1 or 2 of the fair value hierarchy. See Note 3 for additional disclosure regarding the Corporation’s investment securities.

Residential Loans Held For Sale: Residential loans held for sale, which consist generally of current production of certain fixed-rate, first-lien residential mortgage loans, are carried at estimated fair value. Management has elected the fair value option to account for all newly originated mortgage loans held for sale, which results in the financial impact of changing market conditions being reflected currently in earnings as opposed to being dependent upon the timing of sales. Therefore, the continually adjusted values better reflect the price the Corporation expects to receive from the sale of such loans. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics, which the Corporation classifies as a Level 2 fair value measurement.

Derivative Financial Instruments (Interest Rate-Related Instruments): The Corporation utilizes interest rate swaps to hedge exposure to interest rate risk and variability of fair value related to changes in the underlying interest rate of the hedged item. These hedged interest rate swaps are classified as fair value hedges. See Note 13 for additional disclosure regarding the Corporation's fair value hedges.

In addition, the Corporation offers interest rate-related instruments (swaps and caps) to service its customers’ needs, for which the Corporation simultaneously enters into offsetting derivative financial instruments (i.e., mirror interest rate-related instruments) with third parties to manage its interest rate risk associated with these financial instruments. The valuation of the Corporation’s derivative financial instruments is determined using discounted cash flow analysis on the expected cash flows of each derivative and also includes a nonperformance / credit risk component (credit valuation adjustment). See Note 13 for additional disclosure regarding the Corporation’s interest rate-related instruments.

The discounted cash flow analysis component in the fair value measurement reflects the contractual terms of the derivative financial instruments, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. More specifically, the fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) with the variable cash payments (or receipts) based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Likewise, the fair values of interest rate options (i.e., interest rate caps) are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below (or rise above) the strike rate of the floors (or caps), with the variable interest rates used in the calculation of projected receipts on the floor (or cap) based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.

The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative financial instruments for the effect of nonperformance risk, the Corporation has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

of the credit valuation adjustments on the overall valuation of its derivative positions as of December 31, 2018 and 2017, and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. Therefore, the Corporation has determined that the fair value measures of its derivative financial instruments in their entirety are classified within Level 2 of the fair value hierarchy.

Derivative Financial Instruments (Foreign Currency Exchange Forwards): The Corporation provides foreign currency exchange services to customers. In addition, the Corporation may enter into a foreign currency exchange forward to mitigate the exchange rate risk attached to the cash flows of a loan or as an offsetting contract to a forward entered into as a service to its customer. The valuation of the Corporation’s foreign currency exchange forwards is determined using quoted prices of foreign currency exchange forwards with similar characteristics, with consideration given to the nature of the quote and the relationship of recently evidenced market activity to the fair value estimate, and are classified in Level 2 of the fair value hierarchy. See Note 13 for additional disclosures regarding the Corporation’s foreign currency exchange forwards.

Derivative Financial Instruments (Commodity Contracts): The Corporation enters into commodity contracts to manage commercial customers' exposure to fluctuating commodity prices, for which the Corporation simultaneously enters into offsetting derivative financial instruments (i.e., mirror commodity contracts) with third parties to manage its risk associated with these financial instruments. The valuation of the Corporation’s commodity contracts is determined using quoted prices of the underlying instruments, which are classified in Level 2 of the fair value hierarchy. See Note 13 for additional disclosures regarding the Corporation’s commodity contracts.

The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative financial instruments for the effect of nonperformance risk, the Corporation has considered the impact of netting and any applicable credit enhancements, such as collateral postings.

While the Corporation has determined that the majority of the inputs used to value its derivative financial instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. The Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions as of December 31, 2018 and 2017, and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. Therefore, the Corporation has determined that the fair value measures of its derivative financial instruments in their entirety are classified within Level 2 of the fair value hierarchy.

The table below presents the Corporation’s financial instruments measured at fair value on a recurring basis as of December 31, 2018 and 2017, aggregated by the level in the fair value hierarchy within which those measurements fall:



	Fair Value Hierarchy	December 31, 2018		December 31, 2017
		($ in Thousands)
Assets
Investment securities available for sale
U.S. Treasury securities	Level 1	$	999	$	996
Residential mortgage-related securities
FNMA / FHLMC	Level 2	295,252		464,768
GNMA	Level 2	2,128,531		1,913,350
Private-label	Level 2	1,003		1,059
GNMA commercial mortgage-related securities	Level 2	1,220,797		1,513,277
FFELP asset backed securities	Level 2	297,360		145,176
Other equity securities	Level 1	1,568		1,632
Other debt securities	Level 2	3,000		3,188
Total investment securities available for sale	Level 1	2,567		2,628
Total investment securities available for sale	Level 2	3,945,943		4,040,818
Residential loans held for sale	Level 2	64,321		85,544
Commercial loans held for sale	Level 2	14,943		—
Interest rate-related instruments	Level 2	52,796		28,494
Foreign currency exchange forwards	Level 2	721		2,495
Interest rate lock commitments to originate residential mortgage loans held for sale	Level 3	2,208		1,538
Commodity contracts	Level 2	35,426		38,686
Purchased options (time deposit)	Level 2	109		1,175
Liabilities
Interest rate-related instruments	Level 2	$	52,653	$	28,035
Foreign currency exchange forwards	Level 2	675		2,339
Forward commitments to sell residential mortgage loans	Level 3	2,072		313
Commodity contracts	Level 2	34,340		37,286
Written options (time deposit)	Level 2	109		1,175
Interest rate products (designated as hedging instruments)	Level 2	40		—

The table below presents a rollforward of the balance sheet amounts for the years ended December 31, 2018 and 2017, for financial instruments measured on a recurring basis and classified within Level 3 of the fair value hierarchy:



	Investment Securities Available for Sale			Derivative Financial Instruments
	($ in Thousands)
Balance December 31, 2016	$	200		$	3,114
Total net gains (losses) included in income
Mortgage derivative gain (loss)	—			(1,889		)
Transfer out of level 3 securities ^(a)	(200		)	—
Balance December 31, 2017	$	—		$	1,225
Total net gains (losses) included in income
Mortgage derivative gain (loss)	—			(1,085		)
Balance December 31, 2018	$	—		$	140

(a) During the first quarter of 2017, the $200,000 level 3 investment security was transferred to level 2 based upon new pricing information.

For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2018, the Corporation utilized the following valuation techniques and significant unobservable inputs.

Derivative Financial Instruments (Mortgage Derivative — Interest Rate Lock Commitments to Originate Residential Mortgage Loans Held For Sale): The fair value is determined by the change in value from each loan's rate lock date to the expected rate lock expiration date based on the underlying loan attributes, estimated closing ratios, and investor price matrix determined to be reasonably applicable to each loan commitment. The closing ratio calculation takes into consideration historical experience and loan-level attributes, particularly the change in the current interest rates from the time of initial rate lock. The closing ratio is periodically reviewed for reasonableness and reported to the Associated Mortgage Risk Management Committee. At December 31, 2018, the closing ratio was 84%.

Derivative Financial Instruments (Mortgage Derivative—Forward Commitments to Sell Mortgage Loans): Mortgage derivatives include forward commitments to deliver closed-end residential mortgage loans into conforming Agency Mortgage-Backed Securities (To be Announced, "TBA") or conforming Cash Forward sales. The fair value of such instruments is determined by the difference of current market prices for such traded instruments or available from forward cash delivery commitments and the original traded price for such commitments.

The Corporation also relies on an internal valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Corporation would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. While there are Level 2 and 3 inputs used in the valuation models, the Corporation has determined that the majority of the inputs significant in the valuation of both of the mortgage derivatives fall within Level 3 of the fair value hierarchy. See Note 13 for additional disclosure regarding the Corporation’s mortgage derivatives.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Following is a description of the valuation methodologies used for the Corporation’s more significant instruments measured on a nonrecurring basis at the lower of amortized cost or estimated fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

Commercial Loans Held For Sale: Commercial loans held for sale are carried at the lower of cost or estimated fair value. The estimated fair value is based on a discounted cash flow analysis, which the Corporation classifies as a Level 2 nonrecurring fair value measurement.

Other Real Estate Owned: Certain other real estate owned, upon initial recognition, was re-measured and reported at fair value through a charge off to the allowance for loan losses based upon the estimated fair value of the other real estate owned, less estimated selling costs. The fair value of other real estate owned, upon initial recognition or subsequent impairment, was estimated using appraised values, which the Corporation classifies as a Level 2 nonrecurring fair value measurement.

For Level 3 assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2018, the Corporation utilized the following valuation techniques and significant unobservable inputs.

Impaired Loans: The Corporation considers a loan impaired when it is probable that the Corporation will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management has determined that commercial and consumer loan relationships that have nonaccrual status or have had their terms restructured in a troubled debt restructuring meet this impaired loan definition. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. See Note 4 for additional information regarding the Corporation’s impaired loans.

Mortgage Servicing Rights: Mortgage servicing rights do not trade in an active, open market with readily observable prices. While sales of mortgage servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its mortgage servicing rights. The valuation model incorporates prepayment assumptions to project mortgage servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The valuation model considers portfolio characteristics of the underlying mortgages, contractually specified servicing fees, prepayment assumptions, discount rate assumptions, delinquency rates, late charges, other ancillary revenue, costs to service, and other economic factors. The Corporation periodically reviews and assesses the underlying inputs and assumptions used in the model. In addition, the Corporation compares its fair value estimates and assumptions to observable market data for mortgage servicing rights, where available, and to recent market activity and actual portfolio experience. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the fair value hierarchy. The Corporation uses the amortization method (i.e., lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, for its mortgage servicing rights assets.

The discounted cash flow analyses that generate expected market prices utilize the observable characteristics of the mortgage servicing rights portfolio, as well as certain unobservable valuation parameters. The significant unobservable inputs used in the fair value measurement of the Corporation’s mortgage servicing rights are the weighted average constant prepayment rate and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.

These parameter assumptions fall within a range that the Corporation, in consultation with an independent third party, believes purchasers of servicing would apply to such portfolios sold into the current secondary servicing market. Discussions are held with members from Treasury and the Community, Consumer, and Business segment to reconcile the fair value estimates and the key assumptions used by the respective parties in arriving at those estimates. The Associated Mortgage Risk Management Committee is responsible for providing control over the valuation methodology and key assumptions. To assess the reasonableness of the fair value measurement, the Corporation also compares the fair value and constant prepayment rate to a value calculated by an independent third party on an annual basis. See Note 5 for additional disclosure regarding the Corporation’s mortgage servicing rights.

The table below presents the Corporation’s assets measured at fair value on a nonrecurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall:



($ in Thousands)	Fair Value Hierarchy	Fair Value		Income Statement Category of Adjustment Recognized in Income	Adjustment Recognized in Income
December 31, 2018
Assets
Impaired loans ^(a)	Level 3	$	26,191	Provision for credit losses ^(b)	$	(14,521	)
Other real estate owned^(c)	Level 2	2,200		Foreclosure / OREO expense, net	(1,545		)
Mortgage servicing rights	Level 3	81,012		Mortgage banking, net	545

December 31, 2017
Assets
Impaired loans ^(a)	Level 3	$	92,534	Provision for credit losses ^(b)	$	(32,159	)
Other real estate owned^(c)	Level 2	2,604		Foreclosure / OREO expense, net	(939		)
Mortgage servicing rights	Level 3	64,387		Mortgage banking, net	(175		)


(a)	Represents individually evaluated impaired loans, net of the related allowance for loan losses.


(b)	Represents provision for credit losses on individually evaluated impaired loans.


(c)	If the fair value of the collateral exceeds the carrying amount of the asset, no charge off or adjustment is necessary, the asset is not considered to be carried at fair value, and is therefore not included in the table.

Certain nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis include the fair value analysis in the second step of a goodwill impairment test, and intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment.

The Corporation's significant Level 3 measurements which employ unobservable inputs that are readily quantifiable pertain to mortgage servicing rights and impaired loans.

The table below presents information about these inputs and further discussion is found above:



December 31, 2018	Valuation Technique	Significant Unobservable Input	Weighted Average Input Applied
Mortgage servicing rights	Discounted cash flow	Discount rate	11%
Mortgage servicing rights	Discounted cash flow	Constant prepayment rate	11%
Impaired loans	Appraisals / Discounted cash flow	Collateral / Discount factor	40%

Fair Value of Financial Instruments

The Corporation is required to disclose estimated fair values for its financial instruments.

Fair value estimates are set forth below for the Corporation’s financial instruments:



		December 31, 2018				December 31, 2017
	Fair Value Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	Fair Value Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
		($ in Thousands)
Financial assets
Cash and due from banks	Level 1	$	507,187	$	507,187	$	483,666	$	483,666
Interest-bearing deposits in other financial institutions	Level 1	221,226		221,226		199,702		199,702
Federal funds sold and securities purchased under agreements to resell	Level 1	148,285		148,285		32,650		32,650
Investment securities held to maturity	Level 2	2,740,511		2,710,271		2,282,853		2,283,574
Investment securities available for sale	Level 1	2,567		2,567		2,628		2,628
Investment securities available for sale	Level 2	3,945,943		3,945,943		4,040,818		4,040,818
FHLB and Federal Reserve Bank stocks	Level 2	250,534		250,534		165,331		165,331
Residential loans held for sale	Level 2	64,321		64,321		85,544		85,544
Commercial loans held for sale	Level 2	14,943		14,943		—		—
Loans, net	Level 3	22,702,406		22,317,395		20,519,111		20,314,984
Bank and corporate owned life insurance	Level 2	663,203		663,203		591,057		591,057
Derivatives (trading and other assets)	Level 2	89,052		89,052		70,850		70,850
Derivatives (trading and other assets)	Level 3	2,208		2,208		1,538		1,538
Financial liabilities
Noninterest-bearing demand, savings, interest-bearing demand, and money market accounts	Level 3	$	22,081,992	$	22,081,992	$	20,436,893	$	20,436,893
Brokered CDs and other time deposits ^(a)	Level 2	2,815,401		2,815,401		2,349,069		2,349,069
Short-term funding^(b)	Level 2	1,057,074		1,057,074		676,282		676,282
Long-term funding	Level 2	3,469,982		3,492,174		3,397,450		3,411,368
Standby letters of credit ^(c)	Level 2	2,482		2,482		2,402		2,402
Derivatives (trading and other liabilities)	Level 2	87,817		87,817		68,835		68,835
Derivatives (trading and other liabilities)	Level 3	2,072		2,072		313		313

(a) When the estimated fair value is less than the carrying value, the carrying value is reported as the fair value.

(b) The carrying amount is a reasonable estimate of fair value for existing short-term funding.

(c) The commitment on standby letters of credit was $256 million and $235 million at December 31, 2018 and 2017, respectively. See Note 15 for additional information on the standby letters of credit and for information on the fair value of lending-related commitments.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details