Fair Value Measurements

FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into 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.

In January 2010, the FASB issued ASC Update No. 2010-06, “Improving Disclosures About Fair Value Measurements” (ASC Update 2010-06). Among other provisions which were adopted by the Corporation on March 31, 2010, ASC Update 2010-06 also requires companies to reconcile changes in Level 3 assets and liabilities by separately providing information about Level 3 purchases, sales, issuances and settlements on a gross basis. This provision of ASC Update 2010-06 was effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years, or March 31, 2011 for the Corporation. The adoption of this provision did not impact the Corporation’s fair value measurement disclosures.

Items Measured at Fair Value on a Recurring Basis

The Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets were as follows:



	September 30, 2011
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	63,554	$	—	$	63,554
Available for sale investment securities:
Equity securities	34,983		—		—		34,983
U.S. Government securities	—		1,325		—		1,325
U.S. Government sponsored agency securities	—		4,844		—		4,844
State and municipal securities	—		334,060		—		334,060
Corporate debt securities	—		110,577		11,858		122,435
Collateralized mortgage obligations	—		1,107,255		—		1,107,255
Mortgage-backed securities	—		838,836		—		838,836
Auction rate securities	—		—		240,702		240,702
Total available for sale investments	34,983		2,396,897		252,560		2,684,440
Other financial assets	12,892		6,952		—		19,844
Total assets	$	47,875	$	2,467,403	$	252,560	$	2,767,838
Other financial liabilities	$	12,892	$	5,669	$	—	$	18,561



	December 31, 2010
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage loans held for sale	$	—	$	83,940	$	—	$	83,940
Available for sale investment securities:
Equity securities	40,070		—		—		40,070
U.S. Government securities	—		1,649		—		1,649
U.S. Government sponsored agency securities	—		5,058		—		5,058
State and municipal securities	—		349,563		—		349,563
Corporate debt securities	—		111,675		13,111		124,786
Collateralized mortgage obligations	—		1,104,058		—		1,104,058
Mortgage-backed securities	—		871,472		—		871,472
Auction rate securities	—		—		260,679		260,679
Total available for sale investments	40,070		2,443,475		273,790		2,757,335
Other financial assets	13,582		9,256		—		22,838
Total assets	$	53,652	$	2,536,671	$	273,790	$	2,864,113
Other financial liabilities	$	13,582	$	760	$	—	$	14,342

The valuation techniques used to measure fair value for the items in the tables above 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, 2011 and December 31, 2010 were measured as the price that secondary market investors were offering for loans with similar characteristics.


•	Available for sale investment securities – Included within this asset category are both equity and debt securities:

▪

Equity securities – Equity securities consist of stocks of financial institutions ($27.9 million at September 30, 2011 and $33.1 million at December 31, 2010) and other equity investments ($7.1 million at September 30, 2011 and December 31, 2010). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets. Restricted equity securities issued by the FHLB and Federal Reserve Bank ($85.4 million at September 30, 2011 and $96.4 million at December 31, 2010) have been excluded from the above table.

▪

U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-backed securities – These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The pricing data and market quotes the Corporation obtains from outside sources are reviewed internally for reasonableness.

▪

Corporate debt securities – This category includes subordinated debt issued by financial institutions ($36.7 million at September 30, 2011 and $35.9 million at December 31, 2010), single-issuer trust preferred securities issued by financial institutions ($77.9 million at September 30, 2011 and $81.8 million at December 31, 2010), pooled trust preferred securities issued by financial institutions ($5.3 million at September 30, 2011 and $4.5 million at December 31, 2010) and other corporate debt issued by non-financial institutions ($2.5 million at September 30, 2011 and $2.6 million at December 31, 2010).

Classified as Level 2 investments are the Corporation’s subordinated debt, other corporate debt issued by non-financial institutions and $71.3 million and $73.2 million of single-issuer trust preferred securities held at September 30, 2011 and December 31, 2010, respectively. These corporate debt securities are measured at fair value by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. As with the debt securities described above, an active market presently exists for securities similar to these corporate debt security holdings.

Classified as Level 3 assets are the Corporation’s investments in pooled trust preferred securities and certain single-issuer trust preferred securities ($6.6 million at September 30, 2011 and $8.6 million at December 31, 2010). 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.

•

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 expected cash flows model the Corporation obtains from the outside source is reviewed internally for reasonableness.

•

Other financial assets – Included within this asset category are: Level 1 assets, consisting of mutual funds that are held in trust for employee deferred compensation plans and measured at fair value based on quoted prices for identical securities in active markets; and Level 2 assets, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors. The fair value of the Corporation’s interest rate locks and forward commitments are determined as the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See Note H, “Derivative Financial Instruments,” for additional information.


•	Other financial liabilities – Included within this category are: Level 1 employee deferred compensation liabilities which represent amounts due to employees under the deferred compensation plans described under the heading “Other financial assets” above and Level 2 mortgage banking derivatives, described under the heading “Other financial assets” above.

The following tables present the changes in the Corporation’s assets and liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three and nine months ended September 30, 2011 and 2010:



	Three months ended September 30, 2011
	Available for Sale Investment Securities
	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities			ARC Investments
	(in thousands)
Balance, June 30, 2011	$	5,433		$	7,819		$	255,142
Realized adjustment to fair value (2)	(53		)	—			(292		)
Unrealized adjustment to fair value (3)	12			(1,235		)	(14,660		)
Redemptions	(117		)	—			(318		)
(Premium amortization) discount accretion (4)	—			(1		)	830
Balance, September 30, 2011	$	5,275		$	6,583		$	240,702

	Three months ended September 30, 2010
Balance, June 30, 2010	$	4,279		$	8,085		$	276,539
Realized adjustment to fair value (2)	(2,335		)	—			—
Unrealized adjustment to fair value (3)	2,805			466			(704		)
Sales	—			—			(10,233		)
Redemptions	(328		)	—			(1,470		)
(Premium amortization) discount accretion (4)	20			—			1,163
Balance, September 30, 2010	$	4,441		$	8,551		$	265,295



	Nine months ended September 30, 2011
	Available for Sale Investment Securities
	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities			ARC Investments
	(in thousands)
Balance, December 31, 2010	$	4,528		$	8,583		$	260,679
Transfer from Level 3 to Level 2 (1)	—			(800		)	—
Realized adjustment to fair value (2)	(1,406		)	—			(292		)
Unrealized adjustment to fair value (3)	2,564			(1,197		)	(22,139		)
Redemptions	(409		)	—			(569		)
(Premium amortization) discount accretion (4)	(2		)	(3		)	3,023
Balance, September 30, 2011	$	5,275		$	6,583		$	240,702

	Nine months ended September 30, 2010
Balance, December 31, 2009	$	4,979		$	6,981		$	289,203
Transfer to Level 3 from Level 2 (1)	—			650			—
Realized adjustment to fair value (2)	(9,477		)	—			—
Unrealized adjustment to fair value (3)	9,258			919			(4,346		)
Sales	—			—			(15,266		)
Redemptions	(328		)	—			(7,852		)
(Premium amortization) discount accretion (4)	9			1			3,556
Balance, September 30, 2010	$	4,441		$	8,551		$	265,295

(1)

During the nine months ended September 30, 2011, one single-issuer trust preferred security with a fair value of $800,000 as of December 31, 2010 was reclassified as a Level 2 asset. As of September 30, 2011, the fair value of this security was measured by a third-party pricing service using both quoted prices for similar assets and model-based valuation techniques that derived fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. As of December 31, 2010, the fair value of this security was determined based on quotes provided by third-party brokers who determined its fair value based predominantly on an internal valuation model.


(2)	For pooled trust preferred securities and ARCs, realized adjustments to fair value represent credit related other-than-temporary impairment charges that were recorded as a reduction to investment securities gains (losses) on the consolidated statements of income.


(3)	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 sheet.


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

Items Measured at Fair Value on a Nonrecurring Basis

Certain financial assets and liabilities 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 Corporation’s assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets were as follows:



	September 30, 2011
	Level 1		Level 2		Level 3		Total
	(in thousands)
Net loans	$	—	$	—	$	219,526	$	219,526
Other financial assets	—		—		69,528		69,528
Total assets	$	—	$	—	$	289,054	$	289,054
Reserve for unfunded commitments	$	—	$	—	$	1,839	$	1,839



	December 31, 2010
	Level 1		Level 2		Level 3		Total
	(in thousands)
Net loans	$	—	$	—	$	457,678	$	457,678
Other financial assets	—		—		62,109		62,109
Total assets	$	—	$	—	$	519,787	$	519,787
Reserve for unfunded commitments	$	—	$	—	$	1,227	$	1,227

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


•	Net loans – This category consists of loans that were evaluated for impairment under FASB ASC Section 310-10-35 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 D, “Loans and Allowance for Credit Losses,” for additional details.


•	Other financial assets – This category includes OREO ($37.4 million at September 30, 2011 and $33.0 million at December 31, 2010) and MSRs, net of the MSR valuation reserve ($32.1 million at September 30, 2011 and $29.1 million at December 31, 2010), both 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 are initially recorded at fair value upon the sale of residential mortgage loans, which the Corporation continues to service, to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are evaluated for impairment by comparing the carrying amount to estimated fair value. Fair value is determined at the end of each quarter through a discounted cash flows valuation. Significant inputs to the valuation include expected net servicing income, the discount rate and the expected life of the underlying loans.


•	Reserve for unfunded commitments – This Level 3 liability represents management’s estimate of losses associated with unused commitments to extend credit. See Note D, “Loans and Allowance for Credit Losses,” for additional details.

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, 2011 and December 31, 2010. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.

Fair values of financial instruments are significantly affected by 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.



	September 30, 2011				December 31, 2010
	Book Value		Estimated Fair Value		Book Value		Estimated Fair Value
	(in thousands)
FINANCIAL ASSETS
Cash and due from banks	$	291,870	$	291,870	$	198,954	$	198,954
Interest-bearing deposits with other banks	256,360		256,360		33,297		33,297
Loans held for sale (1)	63,554		63,554		83,940		83,940
Securities held to maturity	6,734		6,774		7,751		7,818
Securities available for sale (1)	2,769,823		2,769,823		2,853,733		2,853,733
Loans, net of unearned income (1)	11,895,655		11,875,115		11,933,307		11,909,539
Accrued interest receivable	52,460		52,460		53,841		53,841
Other financial assets (1)	140,385		140,385		230,044		230,044
FINANCIAL LIABILITIES
Demand and savings deposits	$	8,487,266	$	8,487,266	$	7,758,613	$	7,758,613
Time deposits	4,150,358		4,198,043		4,629,968		4,677,494
Short-term borrowings	448,955		448,955		674,077		674,077
Accrued interest payable	27,678		27,678		33,333		33,333
Other financial liabilities (1)	86,649		86,649		80,551		80,551
Federal Home Loan Bank advances and long-term debt	1,025,505		965,389		1,119,450		1,077,724


(1)	Description of fair value determinations for these financial instruments, or certain financial instruments within these categories, measured at fair value on the Corporation’s consolidated balance sheets, are disclosed above.

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		Short-term borrowings
Federal funds sold		Accrued interest payable
Accrued interest receivable		Other financial liabilities

For those financial instruments within the above-listed categories with remaining maturities greater than 90 days, fair values were determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued as of the balance sheet date.

The estimated fair values of securities held to maturity as of September 30, 2011 and December 31, 2010 were based on quoted market prices, broker quotes or dealer quotes.

For short-term loans and variable rate loans that reprice within 90 days, book value was considered to be a reasonable estimate of fair value. For other types of loans and time deposits, fair value was estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities.

The fair value of FHLB advances and long-term debt was estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with a similar remaining maturity as of the balance sheet date. The fair values of commitments to extend credit and standby letters of credit, included within other financial liabilities above, are estimated to equal their carrying amounts.