Fair Value Measurement

6 Months Ended

Jun. 30, 2011

Fair Value Disclosures [Abstract]

Fair Value Measurement

11. Fair Value Measurement

          As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market or most advantageous market for the asset or liability. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, Management determines the fair value of the Corporation’s assets and liabilities using valuation models or third-party pricing services. Both of these approaches rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on Management’s judgment, assumptions and estimates related to credit quality, liquidity, interest rates and other relevant inputs.

          U.S. GAAP establishes a three-level valuation hierarchy for determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy, highest ranking to lowest, are as follows:

• Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

• Level 2 — Valuations of assets and liabilities traded in less active dealer or broker markets. Valuations include quoted prices for similar assets and liabilities traded in the same market; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

• Level 3 — Valuations based on unobservable inputs significant to the overall fair value measurement.

          The level in the fair value hierarchy ascribed to a fair value measurement in its entirety is based on the lowest level input that is significant to the overall fair value measurement.

	Level 1		Level 2		Level 3		Total
Available-for-sale securities	$	3,752	$	3,349,950	$	144,570	$	3,498,272
Residential loans held for sale		—		22,951		—		22,951
Derivative assets		—		47,809		—		47,809
Total assets at fair value on a recurring basis	$	3,752	$	3,420,710	$	144,570	$	3,569,032
Derivative liabilities	$	—	$	72,037	$	—	$	72,037
True-up liability		—		—		12,196		12,196
Total liabilities at fair value on a recurring basis	$	—	$	72,037	$	12,196	$	84,233

Note: There were no transfers between Levels 1 and 2 of the fair value hierarchy during the quarter ended June 30, 2011.

          Available-for-sale securities. When quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1. The quoted prices are not adjusted. Level 1 instruments include money market mutual funds.

          For certain available-for sale securities, the Corporation obtains fair value measurements from an independent third party pricing service or independent brokers. The detail by level is shown in the table below.

	Level 2				Level 3
			Independent
			Pricing				Independent
	# Issues		Service		# Issues		Broker Quotes
U.S. government agency debentures		25	$	371,244		—	$	—
U.S States and political subdivisions		486		309,785		—		—
Residential mortgage-backed securities:
U.S. government agencies		208		1,588,971		—		—
Residential collateralized mortgage-backed securities:
U.S. government agencies		110		1,079,947		1		3
Non-agency		1		3		7		93,844
Corporate debt securities		—		—		8		50,723
		830	$	3,349,950		16	$	144,570

          Available-for-sale securities classified as Level 2 are valued using the prices obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry standard models to price U.S. Government agencies and MBSs that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. For collateralized mortgage securities, depending on the characteristics of a given tranche, a volatility driven multidimensional static model or Option-Adjusted Spread model is generally used. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. On a quarterly basis, the Corporation obtains from the independent pricing service the inputs used to value a sample of securities held in portfolio. The Corporation reviews these inputs to ensure the appropriate classification, within the fair value hierarchy, is ascribed to a fair value measurement in its entirety. In addition, all fair value measurement are reviewed to determine the reasonableness of the measurement relative to changes in observable market data and market information received from outside market participants and analysts.

          Available-for-sale securities classified as level 3 securities include mortgage-backed securities issued and guaranteed by the National Credit Union Administration and single issuer trust preferred securities. The fair value of these mortgage-backed securities is based on each security’s indicative market price obtained from a third-party vendor excluding accrued interest. Trust preferred securities, which represent less than 2% of the portfolio at fair value, are valued based on the average of two non-binding broker quotes. Since the trust preferred securities are thinly traded, the Corporation has determined that using an average of two non-binding broker quotes is a more conservative valuation methodology. The non-binding nature of the pricing results in a classification as Level 3. The Corporation uses various techniques to validate the fair values received from third-party vendors for accuracy and reasonableness.

          Loans held for sale. These loans are regularly traded in active markets through programs offered by the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal National Mortgage Association (“FNMA”), and observable pricing information is available from market participants. The prices are adjusted as necessary to include any embedded servicing value in the loans and to take into consideration the specific characteristics of certain loans. These adjustments represent unobservable inputs to the valuation but are not considered significant to the fair value of the loans. Accordingly, residential real estate loans held for sale are classified as Level 2.

          Derivatives. The Corporation’s derivatives include interest rate swaps and written loan commitments and forward sales contracts related to residential mortgage loan origination activity. Valuations for interest rate swaps are derived from third party models whose significant inputs are readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and credit risk. These fair value measurements are classified as Level 2. The fair values of written loan commitments and forward sales contracts on the associated loans are based on quoted prices for similar loans in the secondary market, consistent with the valuation of residential mortgage loans held for sale. Expected net future cash flows related to loan servicing activities are included in the fair value measurement of written loan commitments. A written loan commitment does not bind the potential borrower to entering into the loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when determining fair value, the Corporation makes estimates of expected “fallout” (locked pipeline loans not expected to close), using models, which consider cumulative historical fallout rates and other factors. Fallout can occur for a variety of reasons including falling rate environments when a borrower will abandon a fixed rate loan commitment at one lender and enter into a new lower fixed rate loan commitment at another, when a borrower is not approved as an acceptable credit by the lender, or for a variety of other non-economic reasons. Fallout is not a significant input to the fair value of the written loan commitments in their entirety. These measurements are classified as Level 2.

          Derivative assets are typically secured through securities with financial counterparties or cross collateralization with a borrowing customer. Derivative liabilities are typically secured through the Corporation pledging securities to financial counterparties or, in the case of a borrowing customer, by the right of setoff. The Corporation considers factors such as the likelihood of default by itself and its counterparties, right of setoff, and remaining maturities in determining the appropriate fair value adjustments. All derivative counterparties approved by the Corporation’s Asset and Liability Committee are regularly reviewed, and appropriate business action is taken to adjust the exposure to certain counterparties, as necessary. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of marketable collateral securing the position. This approach used to estimate impacted exposures to counterparties is also used by the Corporation to estimate its own credit risk on derivative liability positions. To date, no material losses due to counterparty’s inability to pay any uncollateralized position have been incurred. There was no significant change in value of derivative assets and liabilities attributed to credit risk for the quarter ended June 30, 2011.

          True-up liability. In connection with the George Washington and Midwest acquisitions, the Bank has agreed to pay the FDIC should the estimated losses on the acquired loan portfolios as well as servicing fees earned on the acquired loan portfolios not meet thresholds as stated in the purchase agreements. The determination of the true-up liability is specified in the purchase agreements and is payable to the FDIC on April 14, 2020 for the George Washington acquisition and on July 15, 2020 for the Midwest acquisition. The value of the true-up liability is discounted to reflect the uncertainty in the timing and payment of the true-up liability by the Bank. As of June 30, 2011, the estimated fair value of the George Washington true-up liability was $4.5 million and the Midwest true-up liability was $7.7 million.

          The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized follows:

						Total changes
			Total			in fair values								Fair value
	Fair Value		unrealized			included in current								quarter ended
	March 31, 2011		gains/losses (a)			period earnings		Purchases		Sales		Transfers		June 30, 2011
Available-for-sale securities	$	126,914	$	(2,344	)	$	—	$	20,000	$	—	$	—	$	144,570
True-up liability	$	11,601	$	—		$	595	$	—	$	—	$	—	$	12,196

(a) Reported in other comprehensive income (loss)

					Total changes
			Total		in fair values								Fair value
	Fair Value		unrealized		included in current								quarter ended
	January 1, 2011		gains/(losses) (a)		period earnings		Purchases		Sales		Transfers		June 30, 2011
Available-for-sale securities	$	60,344	$	350	$	—	$	83,876	$	—	$	—	$	144,570
True-up liability	$	12,061	$	—	$	135	$	—	$	—	$	—	$	12,196

(a) Reported in other comprehensive income (loss)

          Certain financial assets and liabilities are measured at fair value on a nonrecurring basis. Generally, nonrecurring valuations are the result of applying accounting standards that require assets or liabilities to be assessed for impairment, or recorded at the lower-of-cost or fair value.

	Level 1		Level 2		Level 3		Total
Mortgage servicing rights	$	—	$	—	$	20,766	$	20,766
Impaired and nonaccrual loans		—		—		114,975		114,975
Other property (1)		—		—		33,006		33,006
Other real estate covered by loss share		—		—		64,372		64,372
Total assets at fair value on a nonrecurring basis	$	—	$	—	$	233,119	$	233,119

(1) Represents the fair value, and related change in the value, of foreclosed real estate and other collateral owned by the Corporation during the period.

          Mortgage Servicing Rights. The Corporation carries its mortgage servicing rights at lower of cost or fair value, and therefore, can be subject to fair value measurements on a nonrecurring basis. Since sales of mortgage servicing rights tend to occur in private transactions and the precise terms and conditions of the sales are typically not readily available, there is a limited market to refer to in determining the fair value of mortgage servicing rights. As such, like other participants in the mortgage banking business, the Corporation relies primarily on a discounted cash flow model, incorporating assumptions about loan prepayment rates, discount rates, servicing costs and other economic factors, to estimate the fair value of its mortgage servicing rights. Since the valuation model uses significant unobservable inputs, the Corporation classifies mortgage servicing rights as Level 3.

          The Corporation utilizes a third party vendor to perform the modeling to estimate the fair value of its mortgage servicing rights. The Corporation reviews the estimated fair values and assumptions used by the third party in the model on a quarterly basis. The Corporation also compares the estimates of fair value and assumptions to recent market activity and against its own experience.

          Impaired and nonaccrual loans. Fair value adjustments for these items typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of Management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Corporation measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property including equipment and inventory. The vast majority of the collateral is real estate. The value of the collateral is determined based on internal estimates as well as third party appraisals or price opinions. These measurements were classified as Level 3.

          Other Property. Other property includes foreclosed assets and properties securing residential and commercial loans. Assets acquired through, or in lieu of, loan foreclosures are recorded initially at the lower of the loan balance or fair value, less estimated selling costs, upon the date of foreclosure. Fair value is based upon appraisals or third-party price opinions and, accordingly, considered a Level 3 classification. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting a new carrying amount.

Financial Instruments Recorded at Fair Value

           The Corporation has elected to fair value newly originated conforming fixed rate and adjustable rate first mortgage loans held for sale. The election of the fair value option aligns the accounting for these loans with the related hedges. It also eliminates the requirements of hedge accounting under GAAP.

          The following table reflects the differences, as of June 30, 2011, between the fair value carrying amount of residential mortgages held for sale and the aggregate unpaid principal amount the Corporation is contractually entitled to receive at maturity. None of these loans were 90 days or more past due, nor were any on nonaccrual status.

					Fair Value
					Carrying Amount
	Fair Value		Aggregate Unpaid		Less Aggregate
	Carrying Amount		Principal		Unpaid Principal
Loans held for sale reported at fair value	$	22,951	$	22,419	$	532

          Interest income on loans held for sale is accrued on the principal outstanding primarily using the “simple-interest” method.

          Loans held for sale are measured at fair value with changes in fair value recognized in current earnings. The changes in fair value for residential mortgage loans held for sale measured at fair value included in earnings for the quarters and six months ended June 30, 2011 and 2010 were not significant.

Disclosures about Fair Value of Financial Instruments

          The carrying amount and fair value of the Corporation’s financial instruments are shown below.

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	224,078	$	224,078	$	523,113	$	523,113
Investment securities		3,660,425		3,739,934		3,154,333		3,207,754
Loan held for sale		22,951		22,951		41,340		41,340
Net noncovered loans		7,299,032		6,929,941		7,087,398		6,716,214
Net covered loans and loss share receivable		1,721,747		1,721,747		1,963,021		1,963,021
Accrued interest receivable		42,276		42,276		41,830		41,830
Mortgage servicing rights		20,744		20,766		21,317		21,579
Derivative assets		47,809		47,809		47,764		47,764
Financial liabilities:
Deposits	$	11,340,939	$	11,359,102	$	11,268,006	$	11,275,440
Federal funds purchased and securities sold under agreements to repurchase		809,570		814,030		777,585		782,668
Wholesale borrowings		325,133		328,808		326,007		329,465
Accrued interest payable		5,851		5,851		6,560		6,560
Derivative liabilities		72,037		72,037		72,824		72,824
True up liability		12,196		12,196		12,061		12,061

          The following methods and assumptions were used to estimate the fair values of each class of financial instrument presented:

          Cash and due from banks — For these short-term instruments, the carrying amount is considered a reasonable estimate of fair value.

          Investment Securities — See Financial Instruments Measured at Fair Value above.

          Net noncovered loans — The loan portfolio was segmented based on loan type and repricing characteristics. Carrying values are used to estimate fair values of variable rate loans. A discounted cash flow method was used to estimate the fair value of fixed-rate loans. Discounting was based on the contractual cash flows, and discount rates are based on the year-end yield curve plus a spread that reflects current pricing on loans with similar characteristics. If applicable, prepayment assumptions are factored into the fair value determination based on historical experience and current economic conditions.

          Loans held for sale — The majority of loans held for sale are residential mortgage loans which are recorded at fair value. All other loans held for sale are recorded at the lower of cost or market, less costs to sell. See Financial Instruments Measured at Fair Value above.

          Covered loans — Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.

          Loss share receivable — This loss sharing asset is measured separately from the related covered assets as it is not contractually embedded in the covered assets and is not transferable with the covered assets should the Bank choose to dispose of them. Fair value was estimated using projected cash flows related to the Loss Share Agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These cash flows were discounted to reflect the uncertainty of the timing and receipt from the FDIC.

          Accrued interest receivable — The carrying amount is considered a reasonable estimate of fair value.

          Mortgage servicing rights — See Financial Instruments Measured at Fair Value above.

          Deposits — The estimated fair value of deposits with no stated maturity, which includes demand deposits, money market accounts and other savings accounts, are established at carrying value because of the customers’ ability to withdraw funds immediately. A discounted cash flow method is used to estimate the fair value of fixed rate time deposits. Discounting was based on the contractual cash flows and the current rates at which similar deposits with similar remaining maturities would be issued.

          Federal funds purchased and securities sold under agreements to repurchase and wholesale borrowings — The carrying amount of variable rate borrowings including federal funds purchased is considered to be their fair value. Quoted market prices or the discounted cash flow method was used to estimate the fair value of the Corporation’s long-term debt. Discounting was based on the contractual cash flows and the current rate at which debt with similar terms could be issued.

          Accrued interest payable — The carrying amount is considered a reasonable estimate of fair value.

          Derivative assets and liabilities — See Financial Instruments Measured at Fair Value above.

          True-up liability — See Financial Instruments Measured at Fair Value above.