Fair Value Measurements

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

FAIR VALUE MEASUREMENTS

We use fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. Securities AFS, mortgage loans held for sale accounted for under FVO and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a non-recurring basis, such as certain impaired loans, OREO and certain other assets.

Fair value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.

In determining fair value, we use various valuation approaches, including market, income and cost approaches. ASC 820, Fair Value Measurements and Disclosures, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market data obtained from independent sources. Unobservable inputs reflect our assumptions about the assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

TABLE 24.1

Measurement Category	Definition
Level 1	valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
Level 2	valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.
Level 3	valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies we use for financial instruments recorded at fair value on either a recurring or non-recurring basis:

Securities Available For Sale

These securities are recorded at fair value on a recurring basis. At December 31, 2019, 100.0% of AFS securities used valuation methodologies involving market-based or market-derived information, collectively Level 1 and Level 2 measurements, to measure fair value.

We closely monitor market conditions involving assets that have become less actively traded. If the fair value measurement is based upon recent observable market activity of such assets or comparable assets (other than forced or distressed transactions) that occur in sufficient volume, and do not require significant adjustment using unobservable inputs, those assets are classified as Level 1 or Level 2; if not, they are classified as Level 3. Making this assessment requires significant judgment.

We use prices from independent pricing services and, to a lesser extent, indicative (non-binding) quotes from independent brokers, to measure the fair value of AFS securities. We validate prices received from pricing services or brokers using a

variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review of pricing information by corporate personnel familiar with market liquidity and other market-related conditions.

Derivative Financial Instruments

We determine fair value for derivatives using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects contractual terms of the derivative, including the period to maturity and uses observable market based inputs, including interest rate curves and implied volatilities.

We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we consider the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives and IRLCs utilize Level 3 inputs. Credit valuation estimates of current credit spreads are used to evaluate the likelihood of our default and the default of our counterparties. However, as of December 31, 2019 and 2018, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our non-IRLC derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The fair value of IRLCs is based upon the estimated fair value of the underlying mortgage loan, including the expected cash flows related to MSRs and the estimated percentage of IRLCs that will result in a closed mortgage loan, and is classified as Level 3.

Loans Held For Sale

Residential mortgage loans held for sale are carried at fair value under the FVO. Fair value for residential mortgage loans held for sale, when recorded, is based on independent quoted market prices and is classified as Level 2.

SBA loans held for sale are carried under lower of cost or fair value, for which, periodically, it may be necessary to record non-recurring fair value adjustments. Fair value for SBA loans held for sale, when recorded, is based on independent quoted market prices and is classified as Level 2.

Impaired Loans

We reserve for commercial loan relationships greater than or equal to $1.0 million that we consider impaired as defined in ASC 310 at the time we identify the loan as impaired based upon the present value of expected future cash flows available to pay the loan, or based upon the fair value of the collateral less estimated selling costs where a loan is collateral dependent. Collateral may be real estate and/or business assets including equipment, inventory and accounts receivable.

We determine the fair value of real estate based on appraisals by licensed or certified appraisers. The value of business assets is generally based on amounts reported on the business’ financial statements. Management must rely on the financial statements prepared and certified by the borrower or their accountants in determining the value of these business assets on an ongoing basis, which may be subject to significant change over time. Based on the quality of information or statements provided, management may require the use of business asset appraisals and site-inspections to better value these assets. We may discount appraised and reported values based on management’s historical knowledge, changes in market conditions from the time of valuation or management’s knowledge of the borrower and the borrower’s business. Since not all valuation inputs are observable, we classify these non-recurring fair value determinations as Level 2 or Level 3 based on the lowest level of input that is significant to the fair value measurement.

We review and evaluate impaired loans no less frequently than quarterly for additional impairment based on the same factors identified above.

Other Real Estate Owned

OREO is comprised principally of commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations. OREO acquired in settlement of indebtedness is recorded at the lower of carrying amount of the loan or fair value less costs to sell. Subsequently, these assets are carried at the lower of carrying value or fair value less costs to sell. Accordingly, it may be necessary to record non-recurring fair value adjustments. Fair value is generally based upon appraisals by licensed or certified appraisers and other market information and is classified as Level 3.

Other Assets - MSRs and SBA Servicing Assets

We carry MSRs at the lower of cost or fair value, and therefore, they are subject to fair value measurements on a non-recurring basis. Since sales of MSRs 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 MSRs. As such we rely 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 our MSRs. We utilize a third-party vendor to perform the modeling to estimate the fair value of our MSRs. Since the valuation model uses significant unobservable inputs, we classify MSRs within Level 3.

We retain the servicing rights on SBA-guaranteed loans sold to investors. The standard sale structure under the SBA Secondary Participation Guaranty Agreement provides for us to retain a portion of the cash flow from the interest payment received on the SBA guaranteed portion of the loan, which is commonly known as a servicing spread. We utilize a third-party vendor to perform the modeling to estimate the fair value of our SBA servicing asset. Since the valuation model uses significant unobservable inputs, we classify SBA servicing assets within Level 3.

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis:

TABLE 24.2

(in millions)	Level 1		Level 2		Level 3		Total
December 31, 2019
Assets Measured at Fair Value
Debt securities available for sale
U.S. government agencies	$	—	$	151	$	—	$	151
U.S. government-sponsored entities	—		226		—		226
Residential mortgage-backed securities
Agency mortgage-backed securities	—		1,314		—		1,314
Agency collateralized mortgage obligations	—		1,240		—		1,240
Commercial mortgage-backed securities	—		345		—		345
States of the U.S. and political subdivisions	—		11		—		11
Other debt securities	—		2		—		2
Total debt securities available for sale	—		3,289		—		3,289
Loans held for sale	—		41		—		41
Derivative financial instruments
Trading	—		149		—		149
Not for trading	—		2		3		5
Total derivative financial instruments	—		151		3		154
Total assets measured at fair value on a recurring basis	$	—	$	3,481	$	3	$	3,484
Liabilities Measured at Fair Value
Derivative financial instruments
Trading	$	—	$	24	$	—	$	24
Not for trading	—		1		—		1
Total derivative financial instruments	—		25		—		25
Total liabilities measured at fair value on a recurring basis	$	—	$	25	$	—	$	25

(in millions)	Level 1		Level 2		Level 3		Total
December 31, 2018
Assets Measured at Fair Value
Debt securities available for sale
U.S. government agencies	$	—	$	187	$	—	$	187
U.S. government-sponsored entities	—		313		—		313
Residential mortgage-backed securities
Agency mortgage-backed securities	—		1,429		—		1,429
Agency collateralized mortgage obligations	—		1,161		—		1,161
Commercial mortgage-backed securities	—		228		—		228
States of the U.S. and political subdivisions	—		21		—		21
Other debt securities	—		2		—		2
Total debt securities available for sale	—		3,341		—		3,341
Loans held for sale	—		14		—		14
Derivative financial instruments
Trading	—		42		1		43
Total derivative financial instruments	—		42		1		43
Total assets measured at fair value on a recurring basis	$	—	$	3,397	$	1	$	3,398
Liabilities Measured at Fair Value
Derivative financial instruments
Trading	$	—	$	36	$	—	$	36
Not for trading	—		3		—		3
Total derivative financial instruments	—		39		—		39
Total liabilities measured at fair value on a recurring basis	$	—	$	39	$	—	$	39

The following table presents additional information about assets measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value:

TABLE 24.3

(in millions)	Interest Rate Lock Commitments			Total
Year Ended December 31, 2019
Balance at beginning of period	$	1		$	1
Purchases, issuances, sales and settlements:
Issuances	3			3
Settlements	(1		)	(1		)
Balance at end of period	$	3		$	3
Year Ended December 31, 2018
Balance at beginning of period	$	2		$	2
Purchases, issuances, sales and settlements:
Issuances	5			5
Settlements	(6		)	(6		)
Balance at end of period	$	1		$	1

We review fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out of Level 3 at fair value at the beginning of the period in which the changes occur. See the “Securities Available for Sale” discussion within

this footnote for information relating to determining Level 3 fair values. There were no transfers of assets or liabilities between the hierarchy levels during 2019 or 2018.

For the year ended December 31, 2018, we recorded in earnings $0.6 million of unrealized gains relating to the adoption of ASU 2016-01 and market value adjustments on marketable equity securities. These unrealized gains included in earnings are in the other non-interest income line item in the Consolidated Statement of Income.

From time to time, we measure certain assets at fair value on a non-recurring basis. These adjustments to fair value usually result from the application of the lower of cost or fair value accounting or write-downs of individual assets. Valuation methodologies used to measure these fair value adjustments were previously described. For assets measured at fair value on a non-recurring basis still held at the Balance Sheet date, the following table provides the hierarchy level and the fair value of the related assets or portfolios:

TABLE 24.4

(in millions)	Level 1		Level 2		Level 3		Total
December 31, 2019
Impaired loans	$	—	$	—	$	5	$	5
Other real estate owned	—		—		4		4
Other assets - SBA servicing asset	—		—		3		3
Other assets - MSRs	—		—		30		30
December 31, 2018
Impaired loans	$	—	$	—	$	15	$	15
Other real estate owned	—		—		5		5
Other assets - SBA servicing asset	—		—		4		4

Substantially all of the fair value amounts in the table above were estimated at a date during the twelve months ended December 31, 2019 and 2018. Consequently, the fair value information presented is not necessarily as of the period’s end. MSRs measured at fair value on a non-recurring basis of $31.4 million had a valuation allowance of $1.5 million, bringing the December 31, 2019 carrying value to $29.9 million. The valuation allowance includes a provision expense included in 2019 earnings of $1.0 million.

Impaired loans measured or re-measured at fair value on a non-recurring basis during 2019 had a carrying amount of $4.8 million which includes an allocated allowance for credit losses of $3.7 million. The allowance for credit losses includes a provision applicable to the current period fair value measurements of $6.2 million, which was included in the provision for credit losses for 2019.

OREO with a carrying amount of $3.6 million was written down to $2.2 million, resulting in a loss of $1.4 million, which was included in earnings for 2019.

Fair Value of Financial Instruments

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

Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable.    For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities.    For both securities AFS and securities HTM, fair value equals the quoted market price from an active market, if available, and is classified within Level 1. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or pricing models, and is classified as Level 2. Where there is limited market activity or significant valuation inputs are unobservable, securities are classified within Level 3. Under current market conditions, assumptions used to determine the fair value of Level 3 securities have greater subjectivity due to the lack of observable market transactions.

Loans and Leases.    The fair value of fixed rate loans and leases is estimated by discounting the future cash flows using the current rates at which similar loans and leases would be made to borrowers with similar credit ratings and for the same remaining maturities less an illiquidity discount, as the fair value measurement represents an exit price from a market

participants' viewpoint. The fair value of variable and adjustable rate loans and leases approximates the carrying amount. Due to the significant judgment involved in evaluating credit quality, loans and leases are classified within Level 3 of the fair value hierarchy.

Loan Servicing Rights. For both MSRs and SBA servicing rights, both classified as Level 3 assets, fair value is determined using a discounted cash flow valuation method. These models use significant unobservable inputs including discount rates, prepayment rates and cost to service which have greater subjectivity due to the lack of observable market transactions.

Derivative Assets and Liabilities.    See the “Derivative Financial Instruments” discussion included within this footnote.

Deposits.    The estimated fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date because of the customers’ ability to withdraw funds immediately. The fair value of fixed-maturity deposits is estimated by discounting future cash flows using rates currently offered for deposits of similar remaining maturities.

Short-Term Borrowings.    The carrying amounts for short-term borrowings approximate fair value for amounts that mature in 90 days or less. The fair value of subordinated notes is estimated by discounting future cash flows using rates currently offered.

Long-Term Borrowings.    The fair value of long-term borrowings is estimated by discounting future cash flows based on the market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities.

Loan Commitments and Standby Letters of Credit.    Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties. Also, unfunded loan commitments relate principally to variable rate commercial loans, typically are non-binding, and fees are not normally assessed on these balances.

Nature of Estimates.    Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable to other financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Further, because the disclosed fair value amounts were estimated as of the Balance Sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.

The fair values of our financial instruments are as follows:

TABLE 24.5

					Fair Value Measurements
(in millions)	Carrying Amount		Fair  Value		Level 1		Level 2		Level 3
December 31, 2019
Financial Assets
Cash and cash equivalents	$	599	$	599	$	599	$	—	$	—
Debt securities available for sale	3,289		3,289		—		3,289		—
Debt securities held to maturity	3,275		3,305		—		3,305		—
Net loans and leases, including loans held for sale	23,144		22,930		—		41		22,889
Loan servicing rights	46		48		—		—		48
Derivative assets	154		154		—		151		3
Accrued interest receivable	109		109		109		—		—
Financial Liabilities
Deposits	24,786		24,797		20,058		4,739		—
Short-term borrowings	3,216		3,219		3,219		—		—
Long-term borrowings	1,340		1,355		—		—		1,355
Derivative liabilities	25		25		—		25		—
Accrued interest payable	21		21		21		—		—
December 31, 2018
Financial Assets
Cash and cash equivalents	$	488	$	488	$	488	$	—	$	—
Debt securities available for sale	3,341		3,341		—		3,341		—
Debt securities held to maturity	3,254		3,155		—		3,155		—
Net loans and leases, including loans held for sale	21,995		21,742		—		14		21,728
Loan servicing rights	41		45		—		—		45
Derivative assets	43		43		—		42		1
Accrued interest receivable	101		101		101		—		—
Financial Liabilities
Deposits	23,455		23,411		18,142		5,269		—
Short-term borrowings	4,129		4,130		4,130		—		—
Long-term borrowings	627		618		—		—		618
Derivative liabilities	39		39		—		39		—
Accrued interest payable	20		20		20		—		—