Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements

Fair Value Measurements

Note 3. Fair Value Measurements

Accounting guidance defines fair value for financial reporting purposes as the price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction between market participants at the measurement date (reporting date). Fair value is based on an exit price in the principal market or most advantageous market in which the reporting entity could transact.

For each asset and liability required to be reported at fair value, management has identified the unit of account and valuation premise to be applied for purposes of measuring fair value. The unit of account is the level at which an asset or liability is aggregated or disaggregated for purposes of applying fair value measurement. The valuation premise is a concept that determines whether an asset is measured on a standalone basis or in combination with other assets. The Company measures its assets and liabilities on a standalone basis then aggregates assets and liabilities with similar characteristics for disclosure purposes.

Fair Value Hierarchy

Management employs market standard valuation techniques in determining the fair value of assets and liabilities. Inputs used in valuation techniques are based on assumptions that market participants would use in pricing an asset or liability. The inputs used in valuation techniques are prioritized as follows:

Level 1—Quoted market prices in an active market for identical assets and liabilities.

Level 2—Observable inputs including quoted prices (other than Level 1) in active markets for similar assets or

liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability such as interest rates, yield curves, volatilities and default rates, and inputs that are derived principally from or corroborated by observable market data.

Level 3—Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available.

If the determination of fair value measurement for a particular asset or liability is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability measured.

The Company records securities available-for-sale, trading securities and derivative contracts at fair value on a recurring basis.  Certain other assets such as impaired loans, OREO, goodwill, customer-relationship intangibles and investments carried at cost are recorded at fair value on a nonrecurring basis.  Nonrecurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the remeasurement is performed.

The following tables summarize assets and liabilities measured at fair value as of June 30, 2011, December 31, 2010 and June 30, 2010 by level in the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of June 30, 2011		Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Measured on a Recurring Basis
Assets
Securities available-for-sale
U.S. Treasury	$	13,076	$	13,076	$	—	$	—
Federal agency - Debt	1,847,232		—		1,847,232		—
Federal agency - MBS	534,726		—		534,726		—
CMOs - Federal agency	3,453,901		—		3,453,901		—
CMOs - Non-agency	91,083		—		91,083		—
State and municipal	357,804		—		357,804		—
Other debt securities	44,121		—		23,315		20,806
Equity securities and mutual funds	6,112		6,112		—		—
Trading securities	125,829		121,141		4,688		—
Mark-to-market derivatives (1)	44,488		3,308		41,180		—
Total assets at fair value	$	6,518,372	$	143,637	$	6,353,929	$	20,806
Liabilities
Mark-to-market derivatives (2)	$	29,501	$	1,226	$	28,275	$	—
Other liabilities	161		—		161		—
Total liabilities at fair value	$	29,662	$	1,226	$	28,436	$	—
Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3)
Commercial (4)	$	3,822	$	—	$	3,822	$	—
Commercial real estate mortgages	2,505		—		2,505		—
Residential mortgages	4,656		—		4,175		481
Real estate construction	10,136		—		1,610		8,526
Equity lines of credit	2,064		—		1,178		886
Other real estate owned (5)	61,103		—		41,264		19,839
Private equity investments	7,293		—		—		7,293
Total assets at fair value	$	91,579	$	—	$	54,554	$	37,025

(1)	Reported in Other assets in the consolidated balance sheets.
(2)	Reported in Other liabilities in the consolidated balance sheets.
(3)	Impaired loans for which fair value was calculated using the collateral valuation method.
(4)	Includes lease financing.
(5)	Other real estate owned balance of $162.5 million in the consolidated balance sheets includes $114.9 million of covered OREO and is net of estimated disposal costs.

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of December 31, 2010		Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Measured on a Recurring Basis
Assets
Securities available-for-sale
U.S. Treasury	$	14,113	$	14,113	$	—	$	—
Federal agency - Debt	1,142,328		—		1,142,328		—
Federal agency - MBS	551,346		—		551,346		—
CMOs - Federal agency	3,497,147		—		3,497,147		—
CMOs - Non-agency	118,295		—		118,295		—
State and municipal	343,380		—		343,380		—
Other debt securities	43,630		—		22,648		20,982
Equity securities and mutual funds	10,436		10,436		—		—
Trading securities	255,397		249,861		5,536		—
Mark-to-market derivatives (1)	46,712		3,258		43,454		—
Total assets at fair value	$	6,022,784	$	277,668	$	5,724,134	$	20,982
Liabilities
Mark-to-market derivatives (2)	$	26,437	$	1,215	$	25,222	$	—
Other liabilities	160		—		160		—
Total liabilities at fair value	$	26,597	$	1,215	$	25,382	$	—
Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3)
Commercial (4)	$	1,528	$	—	$	1,528	$	—
Commercial real estate mortgages	31,684		—		21,236		10,448
Residential mortgages	9,061		—		8,210		851
Real estate construction	98,059		—		98,059		—
Equity lines of credit	3,092				2,224		868
Collateral dependent impaired covered loans (3)
Commercial	2,557		—		—		2,557
Other real estate owned (5)	88,993		—		65,605		23,388
Private equity investments	10,804		—		—		10,804
Total assets at fair value	$	245,778	$	—	$	196,862	$	48,916

(1)	Reported in Other assets in the consolidated balance sheets.
(2)	Reported in Other liabilities in the consolidated balance sheets.
(3)	Impaired loans for which fair value was calculated using the collateral valuation method.
(4)	Includes lease financing.
(5)	Other real estate owned balance of $178.2 million in the consolidated balance sheets includes $120.9 million of covered OREO and is net of estimated disposal costs.

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of June 30, 2010		Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Measured on a Recurring Basis
Assets
Securities available-for-sale
U.S. Treasury	$	19,145	$	19,145	$	—	$	—
Federal agency - Debt	1,090,846		—		1,090,846		—
Federal agency - MBS	466,713		—		466,713		—
CMOs - Federal agency	2,528,237		—		2,528,237		—
CMOs - Non-agency	217,078		—		217,078		—
State and municipal	360,422		—		360,422		—
Other debt securities	67,147		—		42,003		25,144
Equity securities and mutual funds	11,555		11,555		—		—
Trading securities	129,287		113,483		15,804		—
Mark-to-market derivatives (1)	60,619		4,976		55,643		—
Total assets at fair value	$	4,951,049	$	149,159	$	4,776,746	$	25,144
Liabilities
Mark-to-market derivatives (2)	$	31,736	$	1,629	$	30,107	$	—
Total liabilities at fair value	$	31,736	$	1,629	$	30,107	$	—
Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3)
Commercial (4)	$	2,996	$	—	$	2,746	$	250
Commercial real estate mortgages	35,656		—		21,243		14,413
Residential mortgages	7,364		—		6,985		379
Real estate construction	111,339		—		85,460		25,879
Other real estate owned (5)	50,797		—		43,592		7,205
Private equity investments	4,427		—		—		4,427
Total assets at fair value	$	212,579	$	—	$	160,026	$	52,553

(1)	Reported in Other assets in the consolidated balance sheets.
(2)	Reported in Other liabilities in the consolidated balance sheets.
(3)	Impaired loans for which fair value was calculated using the collateral valuation method.
(4)	Includes lease financing.
(5)	Other real estate owned balance of $153.3 million in the consolidated balance sheets includes $98.8 million of covered OREO and is net of estimated disposal costs.

At June 30, 2011, $6.52 billion, or approximately 29 percent, of the Company’s total assets were recorded at fair value on a recurring basis, compared with $6.02 billion or approximately 28 percent at December 31, 2010, and $4.95 billion or approximately 23 percent at June 30, 2010. The majority of these financial assets were valued using Level 1 or Level 2 inputs.  Less than 1 percent of total assets was measured using Level 3 inputs.  Approximately $29.7 million, $26.6 million and $31.7 million of the Company’s total liabilities at June 30, 2011, December 31, 2010 and June 30, 2010, respectively, were recorded at fair value on a recurring basis using Level 1 or Level 2 inputs.  At June 30, 2011, $91.6 million, or less than 1 percent of the Company’s total assets, were recorded at fair value on a nonrecurring basis, compared with $245.8 million, or 1 percent, at December 31, 2010, and $212.6 million, or 1 percent, at June 30, 2010.  These assets were measured using Level 2 and Level 3 inputs.  There were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2011.

For assets measured at fair value on a nonrecurring basis, the following table presents the total net losses (gains), which include charge-offs, recoveries, specific reserves, OREO valuation write-downs and write-ups, gains and losses on sales of OREO, and impairment write-downs on private equity investments, recognized in the three and six months ended June 30, 2011 and 2010:

	For the three months ended June 30,						For the six months ended June 30,
(in thousands)	2011			2010			2011			2010
Collateral dependent impaired loans
Commercial	$	—		$	4,279		$	606		$	6,896
Commercial real estate mortgages	(340		)	141			(7,454		)	17,448
Residential mortgages	47			353			189			1,206
Real estate construction	3,417			(125		)	1,199			10,120
Equity lines of credit	546			51			510			51
Installment	(197		)	—			4,317			—
Other real estate owned	16,869			10,068			25,991			22,616
Private equity investments	200			30			200			428
Total net losses recognized	$	20,542		$	14,797		$	25,558		$	58,765

(1) Net losses on OREO includes $14.6 million and $22.8 million of net losses related to covered OREO for the three and six months ended June 30, 2011, respectively, a significant portion of which is reimbursable by the FDIC.

Level 3 assets measured at fair value on a recurring basis consist of collateralized debt obligation senior notes.  The fair value of these securities is determined using an internal cash flow model that incorporates management’s assumptions about risk-adjusted discount rates, prepayment expectations, projected cash flows and collateral performance. These assumptions are not directly observable in the market. Unrealized gains and losses on securities available-for-sale are reported as a component of Accumulated other comprehensive income (“AOCI”) in the consolidated balance sheets.  Activity in Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2011 and 2010 is summarized in the following table:

Level 3 Assets Measured on a Recurring Basis

	For the six months ended
	June 30, 2011			June 30, 2010
(in thousands)	Securities Available-for-Sale			Securities Available-for-Sale
Balance, beginning of period	$	20,982		$	26,779
Total realized/unrealized gains (losses):
Included in other comprehensive income	1,585			(1,358		)
Settlements	(1,728		)	(221		)
Other (1)	(33		)	(56		)
Balance, end of period	$	20,806		$	25,144

(1) Other rollforward activity consists of amortization of premiums recognized on the initial purchase of the securities available-for-sale.

There were no purchases, sales or issuances of Level 3 assets measured on a recurring basis during the six months ended June 30, 2011 and 2010.  Paydowns of $1.7 million and $0.2 million were received on Level 3 assets measured on a recurring basis for the six months ended June 30, 2011 and 2010, respectively. There were no gains or losses for the six months ended June 30, 2011 and 2010 included in earnings that were attributable to the change in unrealized gains or losses relating to assets still held as of June 30, 2011 and 2010.

Level 3 assets measured at fair value on a nonrecurring basis include certain collateral dependent impaired loans, OREO for which fair value is not solely based on market observable inputs, and certain private equity and alternative investments.  Non-observable inputs related to valuing loans and OREO may include adjustments to external appraised values based on an internally generated discounted cash flow analysis or management’s assumptions about market trends or other factors that are not directly observable. Private equity and alternative investments do not have readily determinable fair values. These investments are carried at cost and evaluated for impairment on a quarterly basis.  Due to the lack of readily determinable fair values for these investments, the impairment assessment is based primarily on a review of investment performance and the likelihood that the capital invested would be recovered.

Fair Value of Financial Instruments

A financial instrument is broadly defined as cash, evidence of an ownership interest in another entity, or a contract that imposes a contractual obligation on one entity and conveys a corresponding right to a second entity to require delivery or exchange of a financial instrument. The table below summarizes the estimated fair values for the Company’s financial instruments as of June 30, 2011 and June 30, 2010.  The disclosure does not include estimated fair value amounts for assets and liabilities which are not defined as financial instruments but which have significant value. These assets and liabilities include the value of customer-relationship intangibles, goodwill, and affordable housing investments carried at cost, other assets, deferred taxes and other liabilities. Accordingly, the total of the fair values presented does not represent the underlying value of the Company.

Following is a description of the methods and assumptions used in estimating the fair values for each class of financial instrument:

Cash and due from banks, Due from banks—interest bearing and Federal funds sold — For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities available-for-sale and Trading securities — For securities held as available-for-sale, the fair value is determined by quoted market prices, where available, or on observable market inputs appropriate for the type of security. If quoted market prices or observable market inputs are not available, discounted cash flows may be used to determine an appropriate fair value. Fair values for trading securities are based on quoted market prices or dealer quotes.  The fair value of trading securities for which quoted prices are not available is based on observable market inputs.

Loans and leases — Loans are not recorded at fair value on a recurring basis. Nonrecurring fair value adjustments are periodically recorded on impaired loans that are measured for impairment based on the fair value of collateral. Due to the lack of activity in the secondary market for the types of loans in the Company’s portfolio, a model-based approach is used for determining the fair value of loans for purposes of the disclosures in the following table. The fair value of loans is estimated by discounting future cash flows using discount rates that incorporate the Company’s assumptions concerning current market yields, credit risk and liquidity premiums. Loan cash flow projections are based on contractual loan terms adjusted for the impact of current interest rate levels on borrower behavior, including prepayments. Loan prepayment assumptions are based on industry standards for the type of loans being valued. Projected cash flows are discounted using yield curves based on current market conditions. Yield curves are constructed by product type using the Bank’s loan pricing model for like-quality credits.  The discount rates used in the Company’s model represent the rates the Bank would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans.

Covered loans — The fair value of covered loans is based on estimates of future loan cash flows and appropriate discount rates, which incorporate the Company’s assumptions about market funding cost and liquidity premium. The estimates of future loan cash flows are determined using the Company’s assumptions concerning the amount and timing of principal and interest payments, prepayments and credit losses.

FDIC indemnification asset — The fair value of the FDIC indemnification asset is estimated by discounting estimated future cash flows based on estimated current market rates.

Investment in FHLB and FRB stock — Investments in government agency stock are recorded at cost.  Ownership of these securities is restricted to member banks and the securities do not have a readily determinable market value.  Purchases and sales of these securities are at par value with the issuer.  The fair value of investments in FRB and FHLB stock is equal to the carrying amount.

Derivative contracts — The fair value of non-exchange traded (over-the-counter) derivatives is obtained from third party market sources.  The Company provides client data to the third party source for purposes of calculating the credit valuation component of the fair value measurement of client derivative contracts. The fair values of interest rate contracts include interest receivable and payable and cash collateral, if any.

Deposits — The fair value of demand and interest checking deposits, savings deposits, and certain money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit (“CD”) is determined by discounting expected future cash flows using the rates offered by the Bank for deposits of similar type and remaining maturity at the measurement date.  This value is compared to the termination value of each CD given the bank’s standard early withdrawal penalties. The fair value reported is the higher of the discounted present value of each CD and the termination value after the recovery of prepayment penalties. The Bank reviews pricing for its CD products weekly. This review gives consideration to market pricing for products of similar type and maturity offered by other financial institutions.

Federal funds purchased and Securities sold under repurchase agreements — The carrying amount is a reasonable estimate of fair value.

Other short-term borrowings — The fair value of the current portion of long-term debt classified in short-term borrowings is obtained through third-party pricing sources.  The carrying amount of the remaining other short-term borrowings is a reasonable estimate of fair value.

Structured securities sold under repurchase agreements — The fair value of structured repurchase agreements is based on market pricing for synthetic instruments with the same term and structure.  These values are validated against dealer quotes for similar instruments.

Long-term debt — The fair value of long-term debt is obtained through third-party pricing sources.

FDIC clawback liability — The FDIC clawback liability represents an estimated payment by the Company to the FDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition. The fair value of the FDIC clawback liability is estimated by discounting estimated future cash flows based on estimated current market rates.

Commitments to extend credit — The fair value of these commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties, or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The Company does not make fixed-rate loan commitments.

Commitments to affordable housing funds, private equity funds and alternative investments — The fair value of commitments to invest in affordable housing funds, private equity funds and alternative investments is based on the estimated cost to terminate them or otherwise settle the obligation.

The carrying amounts and fair values of the Company’s financial instruments as of June 30, 2011 and June 30, 2010 were as follows:

	June 30, 2011				June 30, 2010
	Carrying		Fair		Carrying		Fair
(in millions)	Amount		Value		Amount		Value
Financial Assets:
Cash and due from banks	$	181.2	$	181.2	$	184.3	$	184.3
Due from banks - interest bearing	725.3		725.3		336.2		336.2
Federal funds sold	123.0		123.0		404.8		404.8
Securities available-for-sale	6,348.1		6,348.1		4,761.1		4,761.1
Trading securities	125.8		125.8		129.3		129.3
Loans and leases, net of allowance	11,397.2		11,719.2		11,192.6		11,494.6
Covered loans, net of allowance	1,657.0		1,660.7		2,034.6		2,027.6
FDIC indemnification asset	261.7		232.1		394.0		389.0
Investment in FHLB and FRB stock	114.9		114.9		128.1		128.1
Derivative assets	44.5		44.5		60.6		60.6
Financial Liabilities:
Deposits	$	19,265.1	$	19,269.4	$	17,972.9	$	17,977.1
Federal funds purchased and securities sold under repurchase agreements	—		—		2.7		2.7
Structured securities sold under repurchase agreements	—		—		175.0		185.3
Other short-term borrowings	149.8		151.1		0.7		0.7
Long-term debt	701.8		744.2		811.0		842.7
Derivative liabilities	29.5		29.5		31.7		31.7
FDIC clawback liability	7.7		7.7		3.8		3.8
Commitments to extend credit	4.9		19.3		7.1		21.0
Commitments to affordable housing funds, private equity funds and alternative investments	32.1		43.6		22.2		40.0