(11) Fair Value Measurements

Fair value is defined by applicable accounting guidance as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market for the given asset or liability. Certain assets and liabilities are recorded in the Company's financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis.

The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of June 30, 2011 (dollars in thousands):

				Range of			Average					Estimated
	Carrying			Contractual			Re-pricing		Discount			Fair
	Value			Yields			(in years)		Rate			Value
Cash and cash equivalents	$	1,110,761										$	1,110,761
Trading securities		99,846											99,846
Investment securities:
Municipal and other tax-exempt		160,870											165,449
Other debt securities		188,713											203,798
Total investment securities		349,583											369,247

Available for sale securities:
U.S. Treasury		1,003											1,003
Municipal and other tax-exempt		70,210											70,210
U.S. agency residential mortgage-backed securities		8,893,789											8,893,789
Private issue residential mortgage-backed securities		513,222											513,222
Other debt securities		5,893											5,893
Perpetual preferred stock		22,694											22,694
Equity securities and mutual funds		60,197											60,197
Total available for sale securities		9,567,008											9,567,008

Mortgage trading securities		553,231											553,231
Residential mortgage loans held for sale		169,609											169,609

Loans:
Commercial		6,178,596			0.25 – 18.00	%		0.60		0.72 – 4.50	%		6,085,941
Commercial real estate		2,183,715			0.38 – 18.00	%		1.18		0.28 – 3.66	%		2,134,950
Residential mortgage		1,867,997			0.38 – 18.00	%		3.32		0.74 – 4.31	%		1,915,710
Consumer		507,236			0.38 – 21.00	%		0.53		1.96 – 3.74	%		507,831
Total loans		10,737,544											10,644,432
Allowance for loan losses		(286,611	)										–
Net loans		10,450,933											10,644,432

Mortgage servicing rights		109,192											109,192
Derivative instruments with positive fair value, net of cash margin		229,887											229,887
Other assets – private equity funds		28,313											28,313
Deposits with no stated maturity		13,951,177											13,951,177
Time deposits		3,634,700			0.01 – 9.64	%		1.91		0.76 – 1.45	%		3,655,527
Other borrowings		2,962,759			0.07 – 6.58	%		0.00		0.07 – 2.65	%		2,962,773
Subordinated debentures		398,788			5.19 – 5.82	%		1.87		3.50	%		412,242
Derivative instruments with negative fair value, net of cash margin		173,917											173,917

				Range of			Average					Estimated
	Carrying			Contractual			Re-pricing		Discount			Fair
	Value			Yields			(in years)		Rate			Value
Cash and cash equivalents	$	1,269,404										$	1,269,404
Trading securities		55,467											55,467

Investment securities:
Municipal and other tax-exempt		184,898											188,577
Other debt securities		154,655											157,528
Total investment securities		339,553											346,105

Available for sale securities:
Municipal and other tax-exempt		72,942											72,942
U.S. agency residential mortgage-backed securities		8,446,908											8,446,908
Privately issued residential mortgage-backed securities		644,210											644,210
Other debt securities		6,401											6,401
Perpetual preferred stock		22,114											22,114
Equity securities and mutual funds		43,046											43,046
Total available for sale securities		9,235,621											9,235,621

Mortgage trading securities		428,021											428,021
Residential mortgage loans held for sale		263,413			–			–		–			263,413

Loans:
Commercial		5,933,996			0.25 –18.00	%		0.57		0.72 – 4.67	%		5,849,443
Commercial real estate		2,277,350			0.38 –18.00	%		1.17		0.29 – 3.81	%		2,221,443
Residential mortgage		1,828,248			0.38 –18.00	%		3.65		0.79 – 4.58	%		1,860,913
Consumer		603,442			0.38 –21.00	%		0.67		1.98 – 3.91	%		605,656
Total loans		10,643,036											10,537,455
Allowance for loan losses		(292,971	)										–
Net loans		10,350,065											10,537,455

Mortgage servicing rights		115,723											115,723
Derivative instruments with positive fair value, net of cash margin		270,445											270,445
Other assets – private equity funds		25,436											25,436
Deposits with no stated maturity		13,669,893											13,669,893
Time deposits		3,509,168			0.01 –9.64	%		1.85		0.82 – 1.56	%		2,979,505
Other borrowings		3,117,358			0.13 –6.58	%		0.02		0.13 – 2.73	%		2,982,460
Subordinated debentures		398,701			5.19 –5.82	%		2.30		3.72	%		413,328
Derivative instruments with negative fair value, net of cash margin		215,420											215,420

				Range of			Average					Estimated
	Carrying			Contractual			Re-pricing		Discount			Fair
	Value			Yields			(in years)		Rate			Value
Cash and cash equivalents	$	852,526										$	852,526
Trading securities		62,159											62,159
Investment securities:
Municipal and other tax-exempt		221,702											227,301
Other debt securities		131,575											136,585
Total investment securities		353,277											363,886

Available for sale securities:
Municipal and other tax-exempt		66,439											66,439
U.S. agency residential mortgage-backed securities		8,223,719											8,223,719
Private issue residential mortgage-backed securities		735,516											735,516
Other debt securities		13,064											13,064
Perpetual preferred stock		19,881											19,881
Equity securities and mutual funds		47,209											47,209
Total available for sale securities		9,105,828											9,105,828

Mortgage trading securities		534,641											534,641
Residential mortgage loans held for sale		227,574											227,574
Loans:
Commercial		6,011,528			0.25 – 18.00	%		0.54		0.72 – 4.61	%		5,915,895
Commercial real estate		2,340,909			0.38 – 18.00			1.08		0.30 – 3.91			2,291,533
Residential mortgage		1,834,246			0.38 – 18.00			3.12		1.16 – 4.17			1,912,579
Consumer		696,034			0.38 – 21.00			0.90		1.92 – 4.16			704,498
Total loans		10,882,717											10,824,505
Allowance for loan losses		(299,489	)										–
Net loans		10,583,228											10,824,505

Mortgage servicing rights		98,942											98,942
Derivative instruments with positive fair value, net of cash margin		334,576											334,576
Other assets – private equity funds		23,834											23,834
Deposits with no stated maturity		12,414,412											12,414,412
Time deposits		3,673,088			0.01 – 9.64			1.54		1.05 – 1.54			3,158,578
Other borrowings		3,970,770			0.14 – 6.58			0.37		0.18 – 2.81			3,834,960
Subordinated debentures		398,617			5.19 – 5.82			2.60		3.88			415,161
Derivative instruments with negative fair value, net of cash margin		299,851											299,851

Because no market exists for certain of these financial instruments and management does not intend to sell these financial instruments, the fair values shown in the tables above may not represent values at which the respective financial instruments could be sold individually or in the aggregate at the given reporting date.

The following methods and assumptions were used in estimating the fair value of these financial instruments:

Cash and Cash Equivalents

The book value reported in the consolidated balance sheet for cash and short-term instruments approximates those assets' fair values.

Securities

The fair values of securities are based on quoted prices for identical instruments in active markets, when available. If quoted prices for identical instruments are not available, fair values are based on significant other observable inputs such as quoted prices of comparable instruments or interest rates and credit spreads, yield curves, volatilities prepayment speeds and loss severities. Fair values for a portion of the securities portfolio are based on significant unobservable inputs, including projected cash flows discounted as rates indicated by comparison to securities with similar credit and liquidity risk.

Derivatives

All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, commodity and foreign exchange contracts are based on valuations provided either by third-party dealers in the contracts, quotes provided by independent pricing services, or a third-party provided pricing model that use significant other observable market inputs.

Credit risk is considered in determining the fair value of derivative instruments. Management determines fair value adjustments based on various risk factors including but not limited to counterparty credit rating or equivalent loan grading, derivative contract notional size, price volatility of the underlying commodity, duration of the derivative contracts and expected loss severity. Expected loss severity is based on historical losses for similarly risk-graded commercial loan customers. Decreases in counterparty credit rating or grading and increases in price volatility and expected loss severity all tend to increase the credit quality adjustment which reduces the fair value of asset contracts. The reduction in fair value is recognized in earnings during the current period.

We also consider our own credit risk in determining the fair value of derivative contracts. Changes in our credit rating would affect the fair value of our derivative liabilities. In the event of a credit downgrade, the fair value of our derivative liabilities would increase. The change in the fair value would be recognized in earnings in the current period.

Residential Mortgage Loans Held for Sale

Residential mortgage loans held for sale are carried on the balance sheet at fair value. The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments.

Loans

The fair value of loans, excluding loans held for sale, are based on discounted cash flow analyses using interest rates and credit and liquidity spreads currently being offered for loans with similar remaining terms to maturity and risk, adjusted for the impact of interest rate floors and ceilings. The fair values of loans were estimated to approximate their discounted cash flows less loan loss allowances allocated to these loans of $259 million at June 30, 2011, $266 million at December 31, 2010 and $280 million at June 30, 2010.

Other Assets – Private Equity Funds

The fair value of the portfolio investments of the Company's two private equity funds are based upon net asset value reported by the underlying funds, as adjusted by the general partner when necessary to represent the price that would be received to sell the assets. Private equity fund assets are long-term, illiquid investments. No secondary market exists for these assets. They may only be realized through cash distributions from the underlying funds.

Deposits

The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions. Estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, is equal to the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, adjusting fair value for the expected benefit of these deposits is prohibited. Accordingly, the positive effect of such deposits is not included in this table.

Other Borrowings and Subordinated Debentures

The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments.

Off-Balance Sheet Instruments

The fair values of commercial loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance sheet instruments were not significant at June 30, 2011, December 31, 2010 or June 30, 2010.

Assets and liabilities recorded at fair value in the financial statements on a recurring and non-recurring basis are grouped into three broad levels as follows:

Quoted Prices in active Markets for Identical Instruments – Fair value is based on unadjusted quoted prices in active markets for identical assets or liabilities.

Significant Other Observable Inputs – Fair value is based on significant other observable inputs are generally determined based on a single price for each financial instrument provided to us by an applicable third-party pricing service and are based on one or more of the following:

·	Quoted prices for similar, but not identical, assets or liabilities in active markets;

·	Quoted prices for identical or similar assets or liabilities in inactive markets;

·	Inputs other than quoted prices that are observable, such as interest rate and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates;

·	Other inputs derived from or corroborated by observable market inputs.

Significant Unobservable Inputs – Fair value is based upon model-based valuation techniques for which at least one significant assumption is not observable in the market.

The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. Management has evaluated the methodologies employed by the third-party pricing services by comparing the price provided by the pricing service with other sources, including brokers' quotes, sales or purchases of similar instruments and discounted cash flows to establish a basis for reliance on the pricing service values. Significant differences between the pricing service provided value and other sources are discussed with the pricing service to understand the basis for their values. Based on this evaluation, we determined that the results represent prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market.

Fair Value of Financial Instruments Measured on a Recurring Basis

The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of June 30, 2011 (in thousands):

	Total		Quoted Prices in Active Markets for Identical Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets:
Trading securities	$	$99,846	$	2,327	$	97,519	$	–

Available for sale securities:
U.S. Treasury		1,003		1,003		–		–
Municipal and other tax-exempt		70,210		–		26,552		43,658
U.S. agency residential mortgage-backed securities		8,893,789		–		8,893,789		–
Private issue residential mortgage-backed securities		513,222		–		513,222		–
Other debt securities		5,893		–		–		5,893
Perpetual preferred stock		22,694		–		22,694		–
Equity securities and mutual funds		60,197		41,557		18,640		–
Total available for sale securities		9,567,008		42,560		9,474,897		49,551

Mortgage trading securities		553,231		–		553,231		–
Residential mortgage loans held for sale		169,609		–		169,609		–
Mortgage servicing rights		109,192		–		–		109,192	1
Derivative contracts, net of cash margin2		229,887		–		229,887		–
Other assets – private equity funds		28,313		–		–		28,313

Liabilities:
Derivative contracts, net of cash margin2		173,917		–		173,917		–

A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 5, Mortgage Banking Activities.

See Note 3 for detail of fair value of derivative contracts by contract type.

The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of December 31, 2010 (in thousands):

	Total		Quoted Prices in Active Markets for Identical Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets:
Trading securities	$	55,467	$	877	$	54,590	$	–

Available for sale securities:
Municipal and other tax-exempt		72,942		–		25,849		47,093
U.S. agency residential mortgage-backed securities		8,446,908		–		8,446,908		–
Privately issued residential mortgage-backed securities		644,210		–		644,210		–
Other debt securities		6,401		–		1		6,400
Perpetual preferred stock		22,114		–		22,114		–
Equity securities and mutual funds		43,046		22,344		20,702		–
Total available for sale securities		9,235,621		22,344		9,159,784		53,493

Mortgage trading securities		428,021		–		428,021		–
Residential mortgage loans held for sale		263,413		–		263,413		–
Mortgage servicing rights		115,723		–		–		115,723	1
Derivative contracts, net of cash margin 2		270,445		–		270,445		–
Other assets – private equity funds		25,436		–		–		25,436

Liabilities:
Certificates of deposit		27,414		–		27,414		–
Derivative contracts, net of cash margin 2		215,420		–		215,420		–

See Note 3 for detail of fair value of derivative contracts by contract type.

The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of June 30, 2010 (in thousands):

	Total		Quoted Prices in Active Markets for Identical Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets:
Trading securities	$	62,159	$	4,030	$	58,129	$	–

Available for sale securities:
Municipal and other tax-exempt		66,439		–		26,613		39,826
U.S. agency residential mortgage-backed securities		8,223,719		–		8,223,719		–
Privately issued residential mortgage-backed securities		735,516		–		735,516		–
Other debt securities		13,064		–		29		13,035
Perpetual preferred stock		19,881		–		19,881		–
Equity securities and mutual funds		47,209		22,728		24,481		–
Total available for sale securities		9,105,828		22,728		9,030,239		52,861

Mortgage trading securities		534,641		–		534,641		–
Residential mortgage loans held for sale		227,574		–		227,574		–
Mortgage servicing rights		98,942		–		–		98,984	1
Derivative contracts, net of cash margin 2		334,576		16,991		317,585		–
Other assets – private equity funds		23,834		–		–		23,834

Liabilities:
Certificates of deposit		27,957		–		27,957		–
Derivative contracts, net of cash margin 2		299,851		–		299,851		–

See Note 3 for detail of fair value of derivative contracts by contract type.

The fair value of certain available for sale municipal and other debt securities may be based on significant unobservable inputs. These significant unobservable inputs include limited observed trades, projected cash flows, current credit rating of the issuers and, when applicable, the insurers of the debt and observed trades of similar debt. Discount rates are primarily based on reference to interest rate spreads on comparable securities of similar duration and credit rating as determined by the nationally recognized rating agencies adjusted for a lack of trading volume.

These securities may be either investment grade or below investment grade. As of June 30, 2011, taxable securities rated investment grade by all nationally recognized rating agencies are generally valued to yield 1.69% to 1.75%. Average yields on comparable short-term taxable securities are generally less than 1%. Tax-exempt securities rated investment grade by all nationally recognized rating agencies are generally valued to yield a range of 1.05% to 1.35%, which represents a spread of 75 to 80 basis points over average yields of comparable tax-exempt securities as of June 30, 2011. The resulting estimated fair value of securities rated investment grade ranges from 98.89% to 99.34% of par value at June 30, 2011.

After other-than-temporary impairment charges, approximately $14 million of our municipal and other tax-exempt securities are rated below investment grade by at least one of the three nationally recognized rating agencies. The fair value of these securities was determined based on yields ranging from 6.23% to 10.30%. These yields were determined using a spread of 600 basis points over comparable municipal securities of varying durations. Previously a spread of 525 basis points was used. The resulting estimated fair value of securities rated below investment grade ranges from 82.66% to 82.83% of par value as of June 30, 2011. All of these securities are currently paying contractual interest in accordance with their respective terms.

The following represents the changes for the three months ended June 30, 2011 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):

	Available for Sale Securities
	Municipal and other tax-exempt			Other debt securities			Other assets – private equity funds

Balance, March 31, 2011	$	43,767		$	5,899		$	25,046
Purchases and capital calls		–			–			746
Redemptions and distributions		–			–			(783	)
Gain (loss) recognized in earnings:
Gain on other assets, net		–			–			3,304
Other-than-temporary impairment losses		(521	)		–			–
Other comprehensive gain (loss)		412			(6	)		–
Balance, June 30, 2011	$	43,658		$	5,893		$	28,313

The following represents the changes for the six months ended June 30, 2011 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):

	Available for Sale Securities
	Municipal and other tax-exempt			Other debt securities			Other assets – private equity funds

Balance, December 31, 2010	$	47,093		$	6,400		$	25,436
Purchases and capital calls		7,520			–			1,652
Redemptions and distributions		(9,975	)		(500	)		(2,185	)
Gain (loss) recognized in earnings:
Brokerage and trading revenue		(576	)		–			–
Gain on other assets, net		–			–			3,410
Gain on securities, net		18			–			–
Other-than-temporary impairment losses		(521	)		–			–
Other comprehensive (loss)		99			(7	)		–
Balance, June 30, 2011	$	43,658		$	5,893		$	28,313

The following represents the changes for the three months ended June 30, 2010 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):

	Available for Sale Securities
	Municipal and other tax-exempt			Other debt securities			Other assets – private equity funds

Balance at March 31, 2010	$	38,004		$	17,150		$	22,825
Purchases, sales, issuances and settlements, net		1,775			(4,250	)		663
Gain (loss) recognized in earnings
Brokerage and trading revenue		(11	)		–			–
Gain (loss) on other assets, net		–			–			346
Gain on securities, net		–			–			–
Other comprehensive (loss)		58			135			–
Balance June 30, 2010	$	39,826		$	13,035		$	23,834

The following represents the changes for the six months ended June 30, 2010 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):

				Available for Sale Securities
	Trading Securities			Municipal and other tax-exempt			Other debt securities			Other assets – private equity funds

Balance, December 31, 2009	$	9,800		$	36,598		$	17,116		$	22,917
Purchases, sales, issuances and settlements, net		(9,800	)		4,133			(4,200	)		1
Gain (loss) recognized in earnings
Brokerage and trading revenue		–			(80	)		–			–
Gain (loss) on other assets, net		–			–			–			916
Gain on securities, net		–			–			–			–
Other comprehensive (loss)		–			(825	)		119			–
Balance, June 30, 2010	$	–		$	39,826		$	13,035		$	23,834

There were no transfers from quoted prices in active markets for identical instruments to significant other observable inputs during the six months ended June 30, 2011 or 2010, respectively.

Fair Value of Financial Instruments Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis include pension plan assets, which are based on quoted prices in active markets for identical instruments, collateral for certain impaired loans and real property and other assets acquired to satisfy loans, which are based primarily on comparisons to completed sales of similar assets. In addition, goodwill impairment is evaluated based on the fair value of the Company's reporting units.

The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets adjusted to fair value during the three months ended June 30, 2011:

Carrying Value at June 30, 2011

Fair Value Adjustments for the Three Months

Ended June 30, 2011 Recognized In:

Quoted Prices

in Active Markets for Identical Instruments

Significant

Other

Observable

Inputs

Significant

Unobservable

Inputs

Gross charge-offs against allowance for loan losses

Gross charge-offs against allowance for recourse loans

Net losses and expenses of repossessed assets, net

Impaired loans

–

17,949

–

4,071

146

–

Real estate and other repossessed assets

–

50,885

–

4,127

	Carrying Value at June 30, 2010						Fair Value Adjustments for the Three Months Ended June 30, 2010 Recognized In:
	Quoted Prices in Active Markets for Identical Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs		Gross charge-offs against allowance for loan losses		Net losses and expenses of repossessed assets, net
Impaired loans	$	–	$	55,893	$	–	$	28,243	$	–
Real estate and other repossessed assets		–		28,778		6,736		–		11,623

The fair value of collateral-dependent impaired loans and real estate and other repossessed assets and the related fair value adjustments are generally based on unadjusted third-party appraisals. Our appraisal review policies require appraised values to be supported by observed inputs derived principally from or corroborated by observable market data. Appraisals that are not based on observable inputs or that require significant adjustments or fair value measurements that are not based on third-party appraisals are considered to be based on significant unobservable inputs.

Fair Value Election

Certain certificates of deposit were designated as carried at fair value. This determination is made based on the Company's intent to convert these certificates from fixed interest rates to variable interest rates based on LIBOR with interest rate swaps that have not been designated as hedging instruments. The fair value election for these liabilities better represents the economic effect of these instruments on the Company. At June 30, 2011, there were no certificates of deposit that were designated as carried at fair value. At June 30, 2010, the fair value and contractual principal amount of these certificates was $28 million and $27 million, respectively. Change in the fair value of these certificate of deposit resulted in an unrealized gain during the three and six months ended June 30, 2010 of $201 thousand and $444 thousand, respectively, which is included in Gain (Loss) on Derivatives, net in the Consolidated Statement of Earnings.

As more fully disclosed in Note 2 and Note 5 to the Consolidated Financial Statements, the Company has elected to carry all mortgage-backed securities which have been designated as economic hedges against changes in the fair value of mortgage servicing rights and all residential mortgage loans originated for sale at fair value. Changes in the fair value of these financial instruments are recognized in earnings.