Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements

Fair Value Measurements

Note 3. Fair Value Measurements

The following tables summarize assets and liabilities measured at fair value as of September 30, 2012 and December 31, 2011 by level in the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of September 30, 2012		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	$	20,355	$	20,355	$	—	$	—
Federal agency - Debt	1,547,300		—		1,547,300		—
Federal agency - MBS	657,935		—		657,935		—
CMOs - Federal agency	4,847,471		—		4,847,471		—
CMOs - Non-agency	64,489		—		64,489		—
State and municipal	425,169		—		378,072		47,097
Other debt securities	308,524		—		290,182		18,342
Equity securities and mutual funds	821		821		—		—
Trading securities	64,749		61,883		2,866		—
Mark-to-market derivatives (1)	70,878		3,068		67,810		—
Total assets at fair value	$	8,007,691	$	86,127	$	7,856,125	$	65,439
Liabilities
Mark-to-market derivatives	$	66,692	$	1,719	$	64,973	$	—
Contingent consideration liability	46,283		—		$	—	46,283
FDIC clawback liability	9,914		—		—		9,914
Other liabilities	393		—		393		—
Total liabilities at fair value (2)	$	123,282	$	1,719	$	65,366	$	56,197
Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3):
Commercial (4)	$	1,658	$	—	$	—	$	1,658
Commercial real estate mortgages	11,699		—		11,699		—
Residential mortgages	4,382		—		3,924		458
Real estate construction	7,208		—		7,208		—
Equity lines of credit	782		—		—		782
Installment	399		—		399		—
Other real estate owned (5)	55,321		—		49,579		5,742
Private equity and alternative investments	5,982		—		—		5,982
Total assets at fair value	$	87,431	$	—	$	72,809	$	14,622

(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 $110.7 million in the consolidated balance sheets includes $83.6 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, 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	$	19,182	$	19,182	$	—	$	—
Federal agency - Debt	1,973,862		—		1,973,862		—
Federal agency - MBS	681,044		—		681,044		—
CMOs - Federal agency	4,326,907		—		4,326,907		—
CMOs - Non-agency	69,001		—		69,001		—
State and municipal	401,604		—		401,604		—
Other debt securities	99,074		—		79,491		19,583
Equity securities and mutual funds	1,227		1,227		—		—
Trading securities	61,975		61,922		53		—
Mark-to-market derivatives (1)	62,230		2,552		59,678		—
Total assets at fair value	$	7,696,106	$	84,883	$	7,591,640	$	19,583
Liabilities
Mark-to-market derivatives	$	52,881	$	1,542	$	51,339	$	—
FDIC clawback liability	8,103		$	—	$	—	$	8,103
Other liabilities	263		—		263		—
Total liabilities at fair value (2)	$	61,247	$	1,542	$	51,602	$	8,103
Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3):
Commercial (4)	$	2,484	$	—	$	—	$	2,484
Commercial real estate mortgages	6,830		—		6,830		—
Residential mortgages	5,555		—		5,084		471
Real estate construction	18,528		—		9,680		8,848
Equity lines of credit	3,471		—		2,588		883
Installment	675		—		675		—
Collateral dependent impaired covered loans (3):
Commercial	422		—		—		422
Other real estate owned (5)	66,837		—		56,898		9,939
Private equity and alternative investments	6,558		—		—		6,558
Total assets at fair value	$	111,360	$	—	$	81,755	$	29,605

(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 $129.3 million in the consolidated balance sheets includes $98.6 million of covered OREO and is net of estimated disposal costs.

At September 30, 2012, $8.01 billion, or approximately 31 percent, of the Company’s total assets were recorded at fair value on a recurring basis, compared with $7.70 billion, or 33 percent, at December 31, 2011. The majority of these financial assets were valued using Level 1 or Level 2 inputs. Less than 1 percent of total assets were measured using Level 3 inputs. At September 30, 2012, $123.3 million of the Company’s total liabilities were recorded at fair value using Level 1, Level 2 or Level 3 inputs, compared with $61.2 million at December 31, 2011. There were no transfers between Level 1 and Level 2 of the fair value hierarchy for assets or liabilities measured on a recurring basis during the nine months ended September 30, 2012. At September 30, 2012, $87.4 million, or approximately 0.3 percent, of the Company’s total assets, were recorded at fair value on a nonrecurring basis, compared with $111.4 million, or approximately 0.5 percent, at December 31, 2011. These assets were measured using Level 2 and Level 3 inputs.

Recurring Fair Value Measurements

Assets and liabilities for which fair value measurement is based on significant unobservable inputs are classified as Level 3 in the fair value hierarchy. The following table provides a reconciliation of the beginning and ending balances for Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2012 and 2011.

Level 3 Assets and Liabilities Measured on a Recurring Basis

	For the nine months ended September 30, 2012									For the nine months ended September 30, 2011
(in thousands)	Securities Available-for- Sale			Contingent Consideration Liability			FDIC Clawback Liability			Securities Available-for- Sale			FDIC Clawback Liability
Balance, beginning of period	$	19,583		$	—		$	(8,103	)	$	20,982		$	(6,911	)
Total realized/unrealized gains (losses):
Included in earnings	—			—			(1,811		)	—			(1,131		)
Included in other comprehensive income	1,770			—			—			348			—
Additions	—			(45,768		)	—			—			—
Settlements	(3,152		)	—			—			(1,960		)	—
Transfers into Level 3	47,165			—			—			—			—
Other (1)	73			(515		)	—			(20		)	—
Balance, end of period	$	65,439		$	(46,283	)	$	(9,914	)	$	19,350		$	(8,042	)

(1)Other rollforward activity consists of amortization of premiums and accretion of discounts recognized on the initial purchase of the securities available-for-sale and accretion of discount related to the contingent consideration liability.

Level 3 assets measured at fair value on a recurring basis consist of municipal auction rate securities and collateralized debt obligation senior notes that are included in securities available-for-sale. During the nine months ended September 30, 2012, municipal auction rate securities totaling $47.2 million were transferred from Level 2 to Level 3 of the fair value hierarchy as a result of a change in the method used to value these securities. The valuation methodology was revised due to the prolonged period of inactivity in the market for auction rate securities. At September 30, 2012, these securities were valued using an average yield on California variable rate notes that were comparable in credit rating and maturity to the securities held, plus a liquidity premium. Senior notes totaling $18.3 million at September 30, 2012 were valued using the discounted cash flow method with the following unobservable inputs: (1) risk-adjusted discount rate consistent with similarly-rated securities, (2) prepayment rate of 2 percent, (3) default rate of 0.75 percent of performing collateral, and (4) 15 percent recovery rate with a 2-year lag.

Level 3 liabilities measured at fair value on a recurring basis consist of contingent consideration and an FDIC clawback liability that are included in other liabilities. Refer to Note 3, Business Combinations, for further discussion of the methodology used to value the contingent consideration liability. The FDIC clawback liability was valued using the discounted cash flow method based on the terms specified in loss-sharing agreements with the FDIC, the actual FDIC payments collected and the following unobservable inputs: (1) risk-adjusted discount rate reflecting the Bank’s credit risk, plus a liquidity premium, (2) prepayment assumptions and (3) credit assumptions.

There were no purchases, sales, or transfers out of Level 3 assets measured on a recurring basis during the nine months ended September 30, 2012 and 2011. Paydowns of $3.2 million and $2.0 million were received on Level 3 assets measured on a recurring basis for the nine months ended September 30, 2012 and 2011, respectively.

Nonrecurring Fair Value Measurements

Assets measured at fair value on a nonrecurring basis using significant unobservable inputs 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. 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.

The table below provides information about valuation method, inputs and assumptions for nonrecurring Level 3 fair value measurements. The weight assigned to each input is based on the facts and circumstances that exist at the date of measurement.

Information About Nonrecurring Level 3 Fair Value Measurements

(in thousands)	Fair Value at September 30, 2012		Valuation Method		Unobservable Inputs
Collateral dependent impaired loans	$	2,898	Market	-	Adjustments to external or internal appraised values (1)
				-	Probability weighting of broker price opinions
				-	Management assumptions regarding market trends or other relevant factors
Other real estate owned	$	5,742	Market	-	Adjustments to external or internal appraised values (1)
				-	Probability weighting of broker price opinions
				-	Management assumptions regarding market trends or other relevant factors
Private equity and alternative investments	$	5,982	Cost Recovery	-	Management’s assumptions regarding recoverability of investment based on fund financial performance, market conditions and other relevant factors

(1)Appraised values may be adjusted to reflect changes in market conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property sale. These adjustments are based on qualitative judgments made by management on a case-by-case basis.

Market-based valuation methods use prices and other relevant information generated by market transactions involving identical or comparable assets. Under the cost recovery approach, fair value represents an estimate of the amount of an asset expected to be recovered. The Company only employs the cost recovery approach for assets that are not readily marketable and for which minimal market-based information exists.

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 nine months ended September 30, 2012 and 2011:

	For the three months ended						For the nine months ended
	September 30,						September 30,
(in thousands)	2012			2011			2012			2011
Collateral dependent impaired loans:
Commercial	$	—		$	80		$	(368	)	$	(526	)
Commercial real estate mortgages	306			(1,643		)	(1,630		)	5,811
Residential mortgages	(31		)	(266		)	(1,152		)	(455		)
Real estate construction	130			(10,413		)	(6,623		)	(11,612		)
Equity lines of credit	16			(179		)	(47		)	(689		)
Installment	(101		)	(279		)	(208		)	(4,596		)
Collaterial dependent impaired covered loans:
Commercial	—			(325		)	—			(325		)
Other real estate owned (1)	(4,147		)	(6,585		)	(16,312		)	(32,575		)
Private equity and alternative investments	(2,477		)	(32		)	(2,938		)	(232		)
Total net losses recognized	$	(6,304	)	$	(19,642	)	$	(29,278	)	$	(45,199	)

(1) Net losses on OREO includes $3.6 million and $14.7 million of net losses related to covered OREO for the three and nine months ended September 30, 2012, respectively, and $6.7 million and $29.5 million of net losses for the three and nine months ended September 30, 2011, respectively. A significant portion of net losses on covered OREO is reimbursable by the FDIC.

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. Refer to Note 1, Summary of Significant Accounting Policies, in the Company’s 2011 Form 10-K for additional information on fair value measurements.

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, 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.

The following tables summarize the carrying amounts and estimated fair values of those financial instruments that are reported at amortized cost in the Company’s consolidated balance sheets. The tables also provide information on the level in the fair value hierarchy for inputs used in the fair value of those financial instruments. Most financial assets and financial liabilities for which carrying amount equals fair value are considered by the Company to be Level 1 measurements in the fair value hierarchy.

	September 30, 2012
	Carrying		Total		Fair Value Measurements Using
(in millions)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	235.0	$	235.0	$	235.0	$	—	$	—
Due from banks - interest bearing	335.3		335.3		335.3		—		—
Federal funds sold	19.5		19.5		19.5		—		—
Securities held-to-maturity	1,174.2		1,222.7		—		1,222.7		—
Loans and leases, net of allowance	13,456.2		13,903.0		—		—		13,903.0
Covered loans, net of allowance	1,099.4		1,173.8		—		—		1,173.8
FDIC indemnification asset	161.0		135.3		—		—		135.3
Investment in FHLB and FRB stock	96.1		96.1		—		96.1		—
Financial Liabilities:
Deposits	$	22,512.3	$	22,516.7	$	—	$	21,612.9	$	903.8
Other short-term borrowings	211.7		214.4		—		211.2		3.2
Long-term debt	706.0		773.0		—		697.4		75.6
	December 31, 2011
	Carrying		Total		Fair Value Measurements Using
(in millions)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	168.4	$	168.4	$	168.4	$	—	$	—
Due from banks - interest bearing	76.4		76.4		76.4		—		—
Securities held-to-maturity	467.7		473.9		—		473.9		—
Loans and leases, net of allowance	12,046.8		12,400.5		—		—		12,400.5
Covered loans, net of allowance	1,417.3		1,472.6		—		—		1,472.6
FDIC indemnification asset	204.3		184.3		—		—		184.3
Investment in FHLB and FRB stock	107.4		107.4		—		107.4		—
Financial Liabilities:
Deposits	$	20,387.6	$	20,392.3	$	—	$	19,476.2	$	916.1
Federal funds purchased and securities sold under repurchase agreements	50.0		50.0		50.0		—		—
Long-term debt	697.8		718.7		—		718.7		—

Following is a description of the methods and assumptions used in estimating the fair values of these financial instruments:

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 held-to-maturity — For securities held-to-maturity, the fair value is determined by quoted market prices, where available, or on observable market inputs appropriate for the type of security.

Loans and leases — Loans and leases, excluding covered 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 previous table. The fair value of loans is estimated by discounting future cash flows using discount rates that incorporate the Company’s assumptions for 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.

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 fair value of nonrecourse debt is determined by discounting estimated future cash flows based on estimated current market rates. The carrying amount of the remaining other short-term borrowings is a reasonable estimate of fair value.

Long-term debt — The fair value of long-term debt, excluding nonrecourse debt, is obtained through third-party pricing sources. The fair value of nonrecourse debt is determined by discounting estimated future cash flows based on estimated current market rates.

Off-balance sheet commitments, which include commitments to extend credit, are excluded from the table. A reasonable estimate of fair value for these instruments is the carrying amount of deferred fees and the reserve for any credit losses related to these off-balance sheet instruments. This estimate is not material to the Company’s financial position.