12. Fair Value Measurements

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of June 30, 2016, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets and liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Assets measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 (in thousands):


	Fair Value Measurement at June 30, 2016
Description	June 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
U.S. Treasury	$	400	$	400	$	—	$	—
U.S. Agencies		2,351		—		2,351		—
Mortgage-backed		6,569		—		6,569		—
State and political subdivisions		19,084		—		19,084		—
Trading - other		27,907		27,790		117		—

Trading securities		56,311		28,190		28,121		—

U.S. Treasury		363,337		363,337		—		—
U.S. Agencies		421,625		—		421,625		—
Mortgage-backed		3,600,175		—		3,600,175		—
State and political subdivisions		2,305,979		—		2,305,979		—
Corporates		80,063		80,063		—		—

Available for sale securities		6,771,179		443,400		6,327,779		—
Company-owned life insurance		36,479		—		36,479		—
Bank-owned life insurance		206,508		—		206,508		—
Derivatives		23,745		—		23,745		—

Total	$	7,094,222	$	471,590	$	6,622,632	$	—

Liabilities
Deferred compensation	$	37,715	$	37,715	$	—	$	—
Derivatives		31,858		—		31,858		—

Total	$	69,573	$	37,715	$	31,858	$	—


	Fair Value Measurement at December 31, 2015
Description	December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
U.S. Treasury	$	400	$	400	$	—	$	—
U.S. Agencies		1,309		—		1,309		—
State and political subdivisions		10,200		—		10,200		—
Trading - other		17,708		17,708		—		—

Trading securities		29,617		18,108		11,509		—

U.S. Treasury		349,779		349,779		—		—
U.S. Agencies		666,389		—		666,389		—
Mortgage-backed		3,572,446		—		3,572,446		—
State and political subdivisions		2,138,413		—		2,138,413		—
Corporates		79,922		79,922		—		—

Available for sale securities		6,806,949		429,701		6,377,248		—
Company-owned life insurance		31,205		—		31,205		—
Bank-owned life insurance		202,991		—		202,991		—
Derivatives		12,303		—		12,303		—

Total	$	7,083,065	$	447,809	$	6,635,256	$	—

Liabilities
Deferred compensation	$	32,937	$	32,937	$	—	$	—
Contingent consideration liability		17,718		—		—		17,718
Derivatives		12,258		—		12,258		—

Total	$	62,913	$	32,937	$	12,258	$	17,718

The following table reconciles the beginning and ending balances of the contingent consideration liability for the six months ended June 30, 2016 and 2015 (in thousands):


	Six Months Ended June 30,
	2016			2015
Beginning balance	$	17,718		$	53,411
Payment of contingent consideration on acquisitions		(17,784	)		(18,702	)
Fair value adjustments		66			(3,418	)

Ending balance	$	—		$	31,291

Valuation methods for instruments measured at fair value on a recurring basis

The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a recurring basis:

Trading Securities Fair values for trading securities (including financial futures), are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.

Securities Available for Sale Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Prices are provided by third-party pricing services and are based on observable market inputs. On an annual basis, the Company compares a sample of these prices to other independent sources for the same securities. Additionally, throughout the year if securities are sold, comparisons are made between the pricing services prices and the market prices at which the securities were sold. Variances are analyzed, and, if appropriate, additional research is conducted with the third-party pricing services. Based on this research, the pricing services may affirm or revise their quoted price. No significant adjustments have been made to the prices provided by the pricing services. The pricing services also provide documentation on an ongoing basis that includes reference data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy is appropriate.

Company-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies.

Bank-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies.

Derivatives Fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows from each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company 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 contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Deferred Compensation Fair values are based on quoted market prices.

Contingent Consideration The fair value of contingent consideration liabilities are derived from a discounted cash flow model of future contingent payments. The valuation of these liabilities are estimated by a collaborative effort of the Company’s mergers and acquisitions group, business unit management, and the corporate accounting group. These future contingent payments are calculated based on estimates of future income and expense from each acquisition. These estimated cash flows are projected by the business unit management and reviewed by the mergers and acquisitions group. To obtain a current valuation of these projected cash flows, an expected present value technique is utilized to calculate a discount rate. The cash flow projections and discount rates are reviewed quarterly and updated as market conditions necessitate. Potential valuation adjustments are made as future income and expense projections for each acquisition are made which affect the calculation of the related contingent consideration payment. These adjustments are recorded through noninterest expense.

Assets measured at fair value on a non-recurring basis as of June 30, 2016 and December 31, 2015 (in thousands):


	Fair Value Measurement at June 30, 2016 Using
Description	June 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) Recognized During the Six Months Ended June 30
Impaired loans	$	15,651	$	—	$	—	$	15,651	$	1,124
Other real estate owned		194		—		—		194		—

Total	$	15,845	$	—	$	—	$	15,845	$	1,124


	Fair Value Measurement at December 31, 2015 Using
Description	December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) Recognized During the Twelve Months Ended December 31
Impaired loans	$	22,885	$	—	$	—	$	22,885	$	(3,957	)
Other real estate owned		3,269		—		—		3,269		—

Total	$	26,154	$	—	$	—	$	26,154	$	(3,957	)

Valuation methods for instruments measured at fair value on a nonrecurring basis

The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a non-recurring basis:

Impaired loans While the overall loan portfolio is not carried at fair value, adjustments are recorded on certain loans to reflect write-downs that are based on the external appraised value of the underlying collateral. The external appraisals are generally based on recent sales of comparable properties which are then adjusted for the unique characteristics of the property being valued. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists within the Company’s property management group and the Company’s credit department. The valuation of the impaired loans is reviewed on a quarterly basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

Other real estate owned Other real estate owned consists of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including auto, recreational and marine vehicles. Other real estate owned is recorded as held for sale initially at the lower of the loan balance or fair value of the collateral. The initial valuation of the foreclosed property is obtained through an appraisal process similar to the process described in the impaired loans paragraph above. Subsequent to foreclosure, valuations are reviewed quarterly and updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods and those measurements are classified as Level 3.

Goodwill Valuation of goodwill to determine impairment is performed annually, or more frequently if there is an event or circumstance that would indicate impairment may have occurred. The process involves calculations to determine the fair value of each reporting unit on a stand-alone basis. A combination of formulas using current market multiples, based on recent sales of financial institutions within the Company’s geographic marketplace, is used to estimate the fair value of each reporting unit. That fair value is compared to the carrying amount of the reporting unit, including its recorded goodwill. Impairment is considered to have occurred if the fair value of the reporting unit is lower than the carrying amount of the reporting unit. The fair value of the Company’s common stock relative to its computed book value per share is also considered as part of the overall evaluation. These measurements are classified as Level 3.

Fair value disclosures require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value of the Company’s financial instruments at June 30, 2016 and December 31, 2015 are as follows (in millions):


	Fair Value Measurement at June 30, 2016 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
FINANCIAL ASSETS
Cash and short-term investments	$	931.6	$	744.9	$	186.7	$	—	$	931.6
Securities available for sale		6,771.2		443.4		6,327.8		—		6,771.2
Securities held to maturity		880.6				991.7		—		991.7
Trading securities		56.3		28.2		28.1		—		56.3
Other securities		66.3				66.3		—		66.3
Loans (exclusive of allowance for loan loss)		10,093.8				10,196.5		—		10,196.5
Derivatives		23.7				23.7		—		23.7
FINANCIAL LIABILITIES
Demand and savings deposits		14,503.9		14,503.9				—		14,503.9
Time deposits		1,144.8				1,144.8		—		1,144.8
Other borrowings		1,793.6		247.9		1,545.7		—		1,793.6
Long-term debt		85.3				85.9		—		85.9
Derivatives		31.9				31.9		—		31.9
OFF-BALANCE SHEET ARRANGEMENTS
Commitments to extend credit for loans										2.8
Commercial letters of credit										0.1
Standby letters of credit										1.2

	Fair Value Measurement at December 31, 2015 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
FINANCIAL ASSETS
Cash and short-term investments	$	1,154.7	$	997.0	$	157.7	$	—	$	1,154.7
Securities available for sale		6,806.9		429.7		6,377.2		—		6,806.9
Securities held to maturity		667.1		—		691.4		—		691.4
Trading securities		29.6		18.1		11.5		—		29.6
Other securities		65.2		—		65.2		—		65.2
Loans (exclusive of allowance for loan loss)		9,431.3		—		9,452.1		—		9,452.1
Derivatives		12.3		—		12.3		—		12.3
FINANCIAL LIABILITIES
Demand and savings deposits		13,836.9		13,836.9		—		—		13,836.9
Time deposits		1,255.9		—		1,255.9		—		1,255.9
Other borrowings		1,823.1		66.9		1,756.2		—		1,823.1
Long-term debt		86.1		—		86.4		—		86.4
Derivatives		12.3		—		12.3		—		12.3
OFF-BALANCE SHEET ARRANGEMENTS
Commitments to extend credit for loans										4.9
Commercial letters of credit										0.3
Standby letters of credit										2.6

Cash and short-term investments The carrying amounts of cash and due from banks, federal funds sold and resell agreements are reasonable estimates of their fair values.

Securities held to maturity Fair value of held-to-maturity securities are estimated by discounting the future cash flows using current market rates.

Other securities Amount consists of FRB and FHLB stock held by the Company, PCM equity-method investments, and other miscellaneous investments. The fair value of FRB and FHLB stock is considered to be the carrying value as no readily determinable market exists for these investments because they can only be redeemed with the FRB or FHLB. The fair value of PCM marketable equity-method investments are based on quoted market prices used to estimate the value of the underlying investment. For non-marketable equity-method investments, the Company’s proportionate share of the income or loss is recognized on a one-quarter lag based on the valuation of the underlying investment(s).

Loans Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, consumer, and credit card. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Demand and savings deposits The fair value of demand deposits and savings accounts is the amount payable on demand at June 30, 2016 and December 31, 2015.

Time deposits The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates that are currently offered for deposits of similar remaining maturities.

Other borrowings The carrying amounts of federal funds purchased, repurchase agreements and other short-term debt are reasonable estimates of their fair value because of the short-term nature of their maturities.

Long-term debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Other off-balance sheet instruments The fair value of loan commitments and letters of credit are determined based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. Neither the fees earned during the year on these instruments nor their fair value at year-end are significant to the Company’s consolidated financial position.