Fair Value Measurements

6 Months Ended

Jun. 30, 2022

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).

The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value Measurements note in the Corporation’s 2021 Annual Report on Form 10-K. There has been one significant change to the methodologies for assets and liabilities measured at fair value on a recurring basis:

Mortgage Servicing Rights: The Corporation sells residential mortgage loans in the secondary market and typically retains the rights to service the loans sold. Upon sale, a MSRs asset is capitalized, which represents the then current fair value of future net cash flows expected to be realized for performing servicing activities. On January 1, 2022, the Corporation made the irrevocable election to account for its MSRs asset under the fair value measurement method. Under this methodology, changes in the fair value are recognized in earnings as they occur through mortgage banking, net on the consolidated statements of income.

MSRs are not traded in active markets. A cash flow model is used to determine fair value. Key assumptions and estimates, including projected prepayment speeds, assumed servicing costs, ancillary income, costs to service delinquent loans, costs of foreclosure, and discount rates with option-adjusted spreads, used by this model are based on current market sources. Assumptions used to value MSRs are considered significant unobservable inputs. A separate third-party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. Fair value estimates from outside sources are received periodically to corroborate the results of the valuation model. Due to the nature of the valuation inputs, MSRs are classified within Level 3 of the fair value hierarchy. See Note 8 for additional disclosures about the Corporation's MSRs.

The table below presents the Corporation’s financial instruments measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021, aggregated by the level in the fair value hierarchy within which those measurements fall:


($ in Thousands)	Fair Value Hierarchy	Jun 30, 2022		Dec 31, 2021
Assets
AFS investment securities
U.S. Treasury securities	Level 1	$	113,109	$	122,957
Agency securities	Level 2	13,959		14,897
Obligations of state and political subdivisions (municipal securities)	Level 2	358,842		400,457
Residential mortgage-related securities
FNMA / FHLMC	Level 2	1,811,603		2,691,879
GNMA	Level 2	86,238		67,780
Private-label	Level 2	—		329,724
Commercial mortgage-related securities
FNMA / FHLMC	Level 2	18,606		350,623
GNMA	Level 2	105,680		166,799
Asset backed securities
FFELP	Level 2	161,264		177,325
SBA	Level 2	5,281		6,580
Other debt securities	Level 2	2,929		2,994

Total AFS investment securities	Level 1	$	113,109	$	122,957
Total AFS investment securities	Level 2	2,564,402		4,209,058

Equity securities with readily determinable fair values	Level 1	5,502		4,810
Residential loans held for sale	Level 2	42,676		136,638
Mortgage servicing rights, net(a)	Level 3	76,570		N/A
Interest rate-related instruments(b)	Level 2	34,184		83,626
Foreign currency exchange forwards(b)	Level 2	4,190		5,490

Commodity contracts(b)	Level 2	—		1,264


Interest rate lock commitments to originate residential mortgage loans held for sale	Level 3	986		2,617
Forward commitments on residential mortgage loans	Level 3	—		30
Forward commitments on TBA securities	Level 3	47		—
Liabilities
Interest rate-related instruments(b)	Level 2	$	173,955	$	26,231
Foreign currency exchange forwards(b)	Level 2	3,764		5,441
Commodity contracts(b)	Level 2	—		1,248




Forward commitments on residential mortgage loans	Level 3	113		—

(a) MSRs at December 31, 2021 were carried at LOCOM. On January 1, 2022, the Corporation made the irrevocable election to account for MSRs at fair value on a recurring basis.
(b) Figures are presented gross before netting. See Note 10 and Note 11 for information relating to the impact of offsetting derivative assets and liabilities and cash collateral with the
same counterparty where there is a legally enforceable master netting agreement in place.

The table below presents a rollforward of the consolidated balance sheets amounts for the six months ended June 30, 2022 and the year ended December 31, 2021, for the Corporation's mortgage derivatives measured on a recurring basis and classified within Level 3 of the fair value hierarchy:


($ in Thousands)	Interest rate lock commitments to originate residential mortgage loans held for sale		Forward commitments on residential mortgage loans and TBA securities		Total
Balance December 31, 2020	$	9,624	$	2,046	$	7,579
New production	53,686		(3,281)		56,966
Closed loans / settlements	(53,477)		3,740		(57,217)
Other	(7,216)		(2,535)		(4,680)
Change in mortgage derivative	(7,007)		(2,076)		(4,932)

Balance December 31, 2021	$	2,617	$	(30)	$	2,647
New production	$	7,237	$	(1,083)	$	8,320
Closed loans / settlements	637		20,035		(19,398)
Other	(9,505)		(18,856)		9,351
Change in mortgage derivative	(1,631)		96		(1,727)

Balance June 30, 2022	$	986	$	66	$	920

The following table presents the carrying value of equity securities without readily determinable fair values as of June 30, 2022 that are measured under the measurement alternative and the related adjustments recorded during the periods presented for those securities with observable price changes. These securities are included in the nonrecurring fair value tables when applicable price changes are observable. Also shown are the cumulative upward and downward adjustments for the Corporation's equity securities without readily determinable fair values as of June 30, 2022:


($ in Thousands)
Equity securities without readily determinable fair values
Carrying value as of December 31, 2021	$	13,542

Additions	4
Sales	(8)

Carrying value as of June 30, 2022	$	13,538

Cumulative upward carrying value changes between January 1, 2018 and June 30, 2022	$	13,444
Cumulative downward carrying value changes/impairment between January 1, 2018 and June 30, 2022	$	—

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

Consolidated Statements of Income Category of Adjustment Recognized in Income

Adjustment Recognized on the Consolidated Statements of Income(c)

June 30, 2022

Assets

Individually evaluated loans(a)

Level 3

35,906

Provision for credit losses

(2,260)

OREO(b)

Level 2

2,098

Other noninterest expense / provision for credit losses(d)

496

December 31, 2021

Assets

Individually evaluated loans(a)

Level 3

69,917

Provision for credit losses

(3,045)

OREO(b)

Level 2

21,299

Other noninterest expense / provision for credit losses(d)

7,345

Mortgage servicing rights(e)

Level 3

57,259

Mortgage banking, net

16,186

(a) Includes probable TDRs which are individually analyzed, net of the related ACLL, of which there were none at June 30, 2022.
(b) 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.
(c) Includes the full year impact on the consolidated statements of income.
(d) When a property's value is written down at the time it is transferred to OREO, the charge off is booked to the provision for credit losses. When a property is already in OREO and subsequently written down, the charge off is booked to other noninterest expense.
(e) MSRs at December 31, 2021 were carried at LOCOM. On January 1, 2022, the Corporation made the irrevocable election to account for MSRs at fair value on a recurring basis.

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

The table below presents the unobservable inputs that are readily quantifiable pertaining to Level 3 measurements:


June 30, 2022	Valuation Technique	Significant Unobservable Input	Range of Inputs			Weighted Average Input Applied
Mortgage servicing rights	Discounted cash flow	Option adjusted spread	8%	-	10%	8%
Mortgage servicing rights	Discounted cash flow	Constant prepayment rate	—%	-	100%	8%
Individually evaluated loans	Appraisals / Discounted cash flow	Collateral / Discount factor	27%	-	29%	27%
Interest rate lock commitments to originate residential mortgage loans held for sale	Discounted cash flow	Closing Ratio	32%	-	100%	86%

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:


		Jun 30, 2022				Dec 31, 2021
($ in Thousands)	Fair Value Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial assets
Cash and due from banks	Level 1	$	397,364	$	397,364	$	343,831	$	343,831
Interest-bearing deposits in other financial institutions	Level 1	436,887		436,887		681,684		681,684
Federal funds sold and securities purchased under agreements to resell	Level 1	32,820		32,820		—		—
AFS investment securities	Level 1	113,109		113,109		122,957		122,957
AFS investment securities	Level 2	2,564,402		2,564,402		4,209,058		4,209,058
HTM investment securities, net	Level 1	998		955		1,000		1,001
HTM investment securities, net	Level 2	3,944,208		3,533,175		2,237,947		2,347,608

Equity securities with readily determinable fair values	Level 1	5,502		5,502		4,810		4,810
Equity securities without readily determinable fair values	Level 3	13,538		13,538		13,542		13,542
FHLB and Federal Reserve Bank stocks	Level 2	237,616		237,616		168,281		168,281
Residential loans held for sale	Level 2	42,676		42,676		136,638		136,638
Commercial loans held for sale	Level 2	44,721		44,721		—		—
Loans, net	Level 3	26,213,927		25,322,573		23,944,934		23,980,330
Bank and corporate owned life insurance	Level 2	675,347		675,347		680,021		680,021

Mortgage servicing rights, net(a)	Level 3	76,570		76,570		54,862		57,259
Derivatives (other assets)(b)	Level 2	38,374		38,374		90,379		90,379
Interest rate lock commitments to originate residential mortgage loans held for sale (other assets)	Level 3	986		986		2,617		2,617
Forward commitments on residential mortgage loans (other assets)	Level 3	—		—		30		30
Forward commitments on TBA securities (other assets)	Level 3	47		47		—		—
Financial liabilities
Noninterest-bearing demand, savings, interest-bearing demand, and money market accounts	Level 3	$	27,352,996	$	27,352,996	$	27,119,167	$	27,119,167
Time deposits(c)	Level 2	1,223,581		1,223,581		1,347,262		1,347,262
Short-term funding	Level 2	705,620		705,216		354,262		354,248
FHLB advances	Level 2	3,258,039		3,250,216		1,621,047		1,680,814
Other long-term funding	Level 2	249,820		250,571		249,324		265,545

Standby letters of credit(d)	Level 2	2,617		2,617		2,367		2,367

Derivatives (accrued expenses and other liabilities)(b)	Level 2	177,720		177,720		32,921		32,921


Forward commitments on residential mortgage loans (accrued expenses and other liabilities)	Level 3	113		113		—		—

(a) MSRs at December 31, 2021 were carried at LOCOM. On January 1, 2022, the Corporation made the irrevocable election to account for MSRs at fair value.
(b) Figures are presented gross before netting. See Note 10 and Note 11 for information relating to the impact of offsetting derivative assets and liabilities and cash collateral with the
same counterparty where there is a legally enforceable master netting agreement in place.
(c) When the estimated fair value is less than the carrying value, the carrying value is reported as the fair value.
(d) The commitment on standby letters of credit was $274 million at June 30, 2022 and $248 million at December 31, 2021. See Note 12 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.

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