Fair Value Measurements

FASB ASC Topic 820 establishes a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority):


•	Level 1 – Inputs that represent quoted prices for identical instruments in active markets.


•	Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.


•	Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.

The Corporation has categorized all assets and liabilities measured at fair value on both a recurring and nonrecurring basis into the above three levels.

The following tables present summaries of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:



	September 30, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Loans held for sale	$	—	$	27,525	$	—	$	27,525
Available for sale investment securities:
U.S. Government sponsored agency securities	—		31,091		—		31,091
State and municipal securities	—		261,140		—		261,140
Corporate debt securities	—		88,940		3,350		92,290
Collateralized mortgage obligations	—		797,234		—		797,234
Residential mortgage-backed securities	—		478,177		—		478,177
Commercial mortgage-backed securities	—		245,751		—		245,751
Auction rate securities	—		—		103,133		103,133
Total available for sale investment securities	—		1,902,333		106,483		2,008,816
Investments held in Rabbi Trust	20,038		—		—		20,038
Other assets	530		67,079		—		67,609
Total assets	$	20,568	$	1,996,937	$	106,483	$	2,123,988
Other liabilities	$	20,509	$	75,031	$	—	$	95,540



	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Loans held for sale	$	—	$	31,530	$	—	$	31,530
Available for sale investment securities:
Equity securities	918		—		—		918
U.S. Government sponsored agency securities	—		5,938		—		5,938
State and municipal securities	—		408,949		—		408,949
Corporate debt securities	—		93,552		3,757		97,309
Collateralized mortgage obligations	—		602,623		—		602,623
Residential mortgage-backed securities	—		1,120,796		—		1,120,796
Commercial mortgage-backed securities	—		212,755		—		212,755
Auction rate securities	—		—		98,668		98,668
Total available for sale investment securities	918		2,444,613		102,425		2,547,956
Investments held in Rabbi Trust	18,982		—		—		18,982
Other assets	469		44,539		—		45,008
Total assets	$	20,369	$	2,520,682	$	102,425	$	2,643,476
Other liabilities	$	19,357	$	39,014	$	—	$	58,371

The valuation techniques used to measure fair value for the items in the preceding tables are as follows:

•

Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of September 30, 2018 and December 31, 2017 were measured based on the price that secondary market investors were offering for loans with similar characteristics. See Note 9, "Derivative Financial Instruments" for details related to the Corporation’s election to measure assets and liabilities at fair value.

•

Available for sale investment securities – Included in this asset category are both equity and debt securities. Level 2 available for sale debt securities are valued by a third-party pricing service commonly used in the banking industry. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings, and matrix pricing.

Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.

Management tests the values provided by the pricing service by obtaining securities prices from an alternative third-party source and comparing the results. This test is performed for at least 80% of the securities valued by the pricing service. Generally, differences by security in excess of 5% are researched to reconcile the difference.


•	Equity securities – As of September 30, 2018, the Corporation did not hold any equity securities. Equity securities held as of December 31, 2017 consisted of common stocks of financial institutions and other equity investments. These Level 1 investments were measured at fair value based on quoted prices for identical securities in active markets.


•	U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Residential mortgage-backed securities/Commercial mortgage-backed securities – These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service, as detailed above.

•

Corporate debt securities – This category consists of subordinated debt and senior debt issued by financial institutions ($67.9 million at September 30, 2018 and $61.9 million at December 31, 2017), single-issuer trust preferred securities issued by financial institutions ($19.6 million at September 30, 2018 and $30.7 million at December 31, 2017), pooled trust preferred securities issued by financial institutions ($875,000 at September 30, 2018 and $707,000 at December 31, 2017) and other corporate debt issued by non-financial institutions ($4.0 million at both September 30, 2018 and December 31, 2017).

Level 2 investments include the Corporation’s holdings of subordinated debt and senior debt, other corporate debt issued by non-financial institutions and $17.0 million and $27.7 million of single-issuer trust preferred securities held at September 30, 2018 and December 31, 2017, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.

Level 3 investments include the Corporation’s investments in pooled trust preferred securities ($875,000 at September 30, 2018 and $707,000 at December 31, 2017) and certain single-issuer trust preferred securities ($2.5 million at September 30, 2018 and $3.1 million at December 31, 2017). The fair values of these securities were determined based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers. The Corporation’s third-party pricing service cannot derive fair values for these securities primarily due to inactive markets for similar investments. Level 3 values are tested by management primarily through trend analysis, by comparing current values to those reported at the end of the preceding calendar quarter, and determining if they are reasonable based on price and spread movements for this asset class.

•

Auction rate securities – Due to their illiquidity, ARCs are classified as Level 3 investments and are valued through the use of an expected cash flows model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates for coupon rates, time to maturity and market rates of return. The most significant unobservable input to the expected cash flows model is an assumed return to market liquidity sometime in the next five years. If the assumed return to market liquidity was lengthened beyond the next five years, this would result in a decrease in the fair value of these ARCs. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid. Level 3 fair values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels.

Investments held in Rabbi Trust - This category consists of mutual funds that are held in trust for employee deferred compensation plans that the Corporation has elected to measure at fair value. Shares of mutual funds are valued based on net asset value, which represent quoted market prices for the underlying shares held in the mutual funds, and as such, are classified as Level 1 and are included in "other assets" on the consolidated balance sheet.

Other assets – Included in this category are the following:


•	Level 1 assets include the fair value of foreign currency exchange contracts ($529,000 at September 30, 2018 and $460,000 at December 31, 2017). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.

•

Level 2 assets include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($1.4 million at September 30, 2018 and $1.1 million at December 31, 2017) and the fair value of interest rate swaps ($65.7 million at September 30, 2018 and $43.4 million at December 31, 2017). The fair values of the Corporation’s interest rate locks, forward commitments and interest rate swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See Note 9, "Derivative Financial Instruments," for additional information.

Other liabilities – Included in this category are the following:

•

Level 1 liabilities include employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans ($20.0 million at September 30, 2018 and $19.0 million at December 31, 2017) and the fair value of foreign currency exchange contracts ($471,000 at September 30, 2018 and $374,000 at December 31, 2017). The fair value of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

•

Level 2 liabilities include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($77,000 at September 30, 2018 and $272,000 at December 31, 2017) and the fair value of interest rate swaps ($75.0 million at September 30, 2018 and $38.7 million at December 31, 2017). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.

The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):



	Pooled Trust Preferred Securities		Single-issuer Trust Preferred Securities			ARCs
Three months ended September 30, 2018	(in thousands)
Balance at June 30, 2018	$	875	$	3,200		$	103,122
Realized adjustment to fair value	—		71			—
Unrealized adjustment to fair value ⁽¹⁾	—		153			11
Settlements - calls	—		(950		)	—
Discount accretion ⁽²⁾	—		1			—
Balance at September 30, 2018	$	875	$	2,475		$	103,133

Three months ended September 30, 2017
Balance at June 30, 2017	$	422	$	2,775		$	97,923
Unrealized adjustment to fair value ⁽¹⁾	—		(28		)	233
Discount accretion ⁽²⁾	—		3			—
Balance at September 30, 2017	$	422	$	2,750		$	98,156

Nine months ended September 30, 2018
Balance at December 31, 2017	$	707	$	3,050		$	98,668
Realized adjustment to fair value			71
Unrealized adjustment to fair value ⁽¹⁾	168		297			4,465
Settlements - calls	—		(950		)	—
Discount accretion ⁽²⁾	—		7			—
Balance at September 30, 2018	$	875	$	2,475		$	103,133

Nine months ended September 30, 2017
Balance at December 31, 2017	$	422	$	2,450		$	97,256
Unrealized adjustment to fair value ⁽¹⁾	—		291			705
Discount accretion ⁽²⁾	—		9			195
Balance at September 30, 2017	$	422	$	2,750		$	98,156


(1)	Pooled trust preferred securities, single-issuer trust preferred securities and ARCs are classified as available for sale investment securities; as such, the unrealized adjustment to fair value was recorded as an unrealized holding gain (loss) and included as a component of "available for sale investment securities" on the consolidated balance sheets.


(2)	Included as a component of "net interest income" on the consolidated statements of income.

Certain assets are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation’s Level 3 financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:



	September 30, 2018		December 31, 2017
	(in thousands)
Net loans	$	136,024	$	149,608
OREO	10,684		9,823
MSRs	38,228		37,663
Total assets	$	184,936	$	197,094

The valuation techniques used to measure fair value for the items in the table above are as follows:


•	Net loans – This category consists of loans that were collectively evaluated for impairment and have been classified as Level 3 assets. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See Note 5, "Loans and Allowance for Credit Losses," for additional details.


•	OREO – This category includes OREO, classified as Level 3 assets. Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.

•

MSRs – This category includes MSRs, classified as Level 3 assets. MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the September 30, 2018 valuation were 8.8% and 9.0%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data.

As required by FASB ASC Section 825-10-50, the following table details the book values and estimated fair values of the Corporation’s financial instruments as of September 30, 2018 and December 31, 2017. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.



	September 30, 2018
	Amortized Cost		Level 1		Level 2		Level 3		Estimated Fair Value
	(in thousands)
FINANCIAL ASSETS
Cash and due from banks	$	90,361	$	90,361	$	—	$	—	$	90,361
Interest-bearing deposits with other banks	322,330		322,330		—		—		322,330
Federal Reserve Bank and Federal Home Loan Bank stock	65,926		—		65,926		—		65,926
Loans held for sale	27,525		—		27,525		—		27,525
Securities held to maturity	626,597		622,852		—		—		622,852
Available for sale investment securities	2,008,816		—		1,902,333		106,483		2,008,816
Net Loans	15,767,283		—		—		15,124,455		15,124,455
Accrued interest receivable	58,584		58,584		—		—		58,584
Other financial assets	242,140		126,148		67,079		48,912		242,139
FINANCIAL LIABILITIES
Demand and savings deposits	$	13,384,227	$	13,384,227	$	—	$	—	$	13,384,227
Brokered deposits	164,601		164,601		—		—		164,601
Time deposits	2,700,186		—		2,684,783		—		2,684,783
Short-term borrowings	485,565		485,565		—		—		485,565
Accrued interest payable	11,151		11,151		—		—		11,151
Other financial liabilities	251,460		176,429		75,031		—		251,460
Federal Home Loan Bank advances and long-term debt	992,115		—		960,168		—		960,168
	December 31, 2017
	Amortized Cost		Level 1		Level 2		Level 3		Estimated Fair Value
	(in thousands)
FINANCIAL ASSETS
Cash and due from banks	$	108,291	$	108,291	$	—	$	—	$	108,291
Interest-bearing deposits with other banks	293,805		293,805		—		—		293,805
Federal Reserve Bank and Federal Home Loan Bank stock	60,761		—		60,761		—		60,761
Loans held for sale	31,530		—		31,530		—		31,530
Available for sale investment securities	2,547,956		918		2,444,613		102,425		2,547,956
Net Loans	15,598,337		—		—		15,380,974		15,380,974
Accrued interest receivable	52,910		52,910		—		—		52,910
Other financial assets	215,464		123,439		44,539		47,486		215,464
FINANCIAL LIABILITIES
Demand and savings deposits	$	13,042,147	$	13,042,147	$	—	$	—	$	13,042,147
Brokered deposits	90,473		90,473		—		—		90,473
Time deposits	2,664,912		—		2,664,912		—		2,664,912
Short-term borrowings	617,524		617,524		—		—		617,524
Accrued interest payable	9,317		9,317		—		—		9,317
Other financial liabilities	227,569		188,555		39,014		—		227,569
Federal Home Loan Bank advances and long-term debt	1,038,346		—		1,038,346		—		1,038,346

Fair values of financial instruments are significantly affected by the assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.

For short-term financial instruments, defined as those with remaining maturities of 90 days or less, and excluding those recorded at fair value on the Corporation’s consolidated balance sheets, book value was considered to be a reasonable estimate of fair value.

The following instruments are predominantly short-term:



Assets		Liabilities
Cash and due from banks		Demand and savings deposits
Interest-bearing deposits with other banks		Short-term borrowings
Accrued interest receivable		Accrued interest payable

Federal Reserve Bank and Federal Home Loan Bank ("FHLB") stock represent restricted investments and are carried at cost on the consolidated balance sheets.

As of September 30, 2018, fair values for loans and time deposits were estimated by discounting future cash flows using the current rates, as adjusted for liquidity considerations, at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values of loans also include estimated credit losses that would be assumed in a market transaction. Beginning in 2018, fair values estimated in this manner are considered to represent estimated exit prices, required by ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities". As of December 31, 2017, loan fair values do not fully incorporate an exit price approach to fair value.

The fair values of FHLB advances and long-term debt were estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with similar remaining maturities as of the balance sheet date. These borrowings would be categorized in Level 2 liabilities under FASB ASC Topic 820.