4. Fair Value

The Financial Accounting Standards Board (FASB) defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The FASB’s guidance also established a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value, giving preference to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs such as a reporting entity’s own data (level 3). Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, observable inputs other than quoted prices, such as interest rates and yield curves, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Fair Value of Assets and Liabilities Measured on a Recurring Basis

The following tables present for each of the fair value hierarchy levels the Company’s assets and liabilities that are measured at fair value (in thousands) on a recurring basis in the consolidated balance sheets.


	September 30, 2013
	Level 1		Level 2		Total
Assets
Available for sale debt securities:
U.S. Treasury and government agency securities	$	620	$	—	$	620
Municipal obligations		—		43,648		43,648
Corporate debt securities		3,500		—		3,500
Mortgage-backed securities		—		1,359,970		1,359,970
Collateralized mortgage obligations		—		45,032		45,032
Equity securities		5,350		—		5,350

Total available-for-sale securities		9,470		1,448,650		1,458,120

Derivative assets (1)		—		16,062		16,062

Total recurring fair value measurements—assets	$	9,470	$	1,464,712	$	1,474,182

Liabilities
Derivative liabilities (1)	$	—	$	15,929	$	15,929

Total recurring fair value measurements—liabilities	$	—	$	15,929	$	15,929

(1)	For further disaggregation of derivative assets and liabilities, see Note 5—Derivatives.


	December 31, 2012
	Level 1		Level 2		Total
Assets
Available for sale debt securities:
U.S. Treasury and government agency securities	$	18,265	$	—	$	18,265
Municipal obligations		—		50,165		50,165
Corporate debt securities		2,250		—		2,250
Mortgage-backed securities		—		1,774,406		1,774,406
Collateralized mortgage obligations		—		198,077		198,077
Equity securities		5,279		—		5,279

Total available-for-sale securities		25,794		2,022,648		2,048,442

Derivative assets (1)		—		20,093		20,093

Total recurring fair value measurements—assets	$	25,794	$	2,042,741	$	2,068,535

Liabilities
Derivative liabilities (1)	$	—	$	21,100	$	21,100

Total recurring fair value measurements—liabilities	$	—	$	21,100	$	21,100

(1)	For further disaggregation of derivative assets and liabilities, see Note 5—Derivatives.

Securities classified as level 1 within the valuation hierarchy include U.S. Treasury securities, obligations of U.S. Government-sponsored agencies, and certain other debt and equity securities. Level 2 classified securities include residential mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies, and state and municipal bonds. The level 2 fair value measurements for investment securities are obtained quarterly from a third-party pricing service that uses industry-standard pricing models. Substantially all of the model inputs are observable in the marketplace or can be supported by observable data. The Company invests only in high quality securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two to five years. Company policies limit investments to securities having a rating of not less than “Baa” or its equivalent by a nationally recognized statistical rating agency. There were no transfers between valuation hierarchy levels during the periods shown.

The fair value of derivative financial instruments, which are predominantly interest rate swaps, is obtained from a third-party pricing service that uses an industry-standard discounted cash flow model that relies on inputs, such as LIBOR swap curves and Overnight Index Swap rate (OIS) curves, observable in the marketplace. To comply with the accounting guidance, credit valuation adjustments are incorporated in the fair values to appropriately reflect nonperformance risk for both the Company and the counterparties. Although the Company has determined that the majority of the inputs used to value the derivative instruments fall within level 2 of the fair value hierarchy, the credit value adjustments utilize level 3 inputs, such as estimates of current credit spreads. The Company has determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives. As a result, the Company has classified its derivative valuations in their entirety in level 2 of the fair value hierarchy. The Company’s policy is to measure counterparty credit risk quarterly for all derivative instruments subject to master netting arrangements consistent with how market participants would price the net risk exposure at the measurement date.

The Company also has certain derivative instruments associated with the Banks’ mortgage-banking activities. These derivative instruments include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a best efforts delivery basis. The fair value of these derivative instruments is measured using observable market prices for similar instruments and classified as level 2 measurements.

Fair Value of Assets Measured on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis. Collateral-dependent impaired loans are level 2 assets measured at the fair value of the underlying collateral based on third-party appraisals that take into consideration market-based information such as recent sales activity for similar assets in the property’s market.

Other real estate owned, including both foreclosed property and surplus banking property, are level 3 assets that are adjusted to fair value, less estimated selling costs, upon transfer to other real estate owned. Subsequently, other real estate owned is carried at the lower of carrying value or fair value less estimated selling costs. Fair values are determined by sales agreement or third-party appraisals as discounted for estimated selling costs, information from comparable sales, and marketability of the property.

The following tables present for each of the fair value hierarchy levels the Company’s financial assets that are measured at fair value (in thousands) on a nonrecurring basis.


	September 30, 2013
	Level 1		Level 2		Level 3		Total
Collateral-dependent impaired loans	$	—	$	27,981	$	—	$	27,981
Other real estate owned		—		—		21,148		21,148

Total nonrecurring fair value measurements	$	—	$	27,981	$	21,148	$	49,129


	December 31, 2012
	Level 1		Level 2		Level 3		Total
Collateral-dependent impaired loans	$	—	$	72,694	$	—	$	72,694
Other real estate owned		—		—		43,803		43,803

Total nonrecurring fair value measurements	$	—	$	72,694	$	43,803	$	116,497

Accounting guidance from the FASB requires the disclosure of estimated fair value information about certain on- and off-balance sheet financial instruments, including those financial instruments that are not measured and reported at fair value on a recurring basis. The significant methods and assumptions used by the Company to estimate the fair value of financial instruments are discussed below.

Cash, Short-Term Investments and Federal Funds Sold - For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities – The fair value measurement for securities available for sale was discussed earlier. The same measurement techniques were applied to the valuation of securities held to maturity.

Loans, Net - The fair value measurement for certain impaired loans was discussed earlier. For the remaining portfolio, fair values were generally determined by discounting scheduled cash flows by discount rates determined with reference to current market rates at which loans with similar terms would be made to borrowers of similar credit quality.

Accrued Interest Receivable and Accrued Interest Payable - The carrying amounts are a reasonable estimate of fair value.

Deposits - The accounting guidance requires that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and savings accounts, be assigned fair values equal to amounts payable upon demand (carrying amounts). The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Securities Sold under Agreements to Repurchase and Federal Funds Purchased—For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.

Long-Term Debt—The fair value is estimated by discounting the future contractual cash flows using current market rates at which debt with similar terms could be obtained.

Derivative Financial Instruments – The fair value measurement for derivative financial instruments was discussed earlier.

The following tables present the estimated fair values of the Company’s financial instruments by fair value hierarchy levels and the corresponding carrying amount at September 30, 2013 and December 31, 2012 (in thousands):


	September 30, 2013
							Total		Carrying
	Level 1		Level 2		Level 3		Fair Value		Amount
Financial assets:
Cash, interest-bearing bank deposits, and federal funds sold	$	888,005	$	—	$	—	$	888,005	$	888,005
Available for sale securities		9,470		1,448,650		—		1,458,120		1,458,120
Held to maturity securities		100,688		2,553,179		—		2,653,867		2,666,082
Loans, net		—		27,981		11,528,860		11,556,841		11,596,250
Loans held for sale		—		18,444		—		18,444		18,444
Accrued interest receivable		42,039		—		—		42,039		42,039
Derivative financial instruments		—		16,062		—		16,062		16,062
Financial liabilities:
Deposits	$	—	$	—	$	15,017,314	$	15,017,314	$	15,054,871
Federal funds purchased		22,193		—		—		22,193		22,193
Securities sold under agreements to repurchase		760,586		—		—		760,586		760,586
Long-term debt		—		384,239		—		384,239		376,664
Accrued interest payable		5,694		—		—		5,694		5,694
Derivative financial instruments		—		15,929		—		15,929		15,929


	December 31, 2012
							Total		Carrying
	Level 1		Level 2		Level 3		Fair Value		Amount
Financial assets:
Cash, interest-bearing bank deposits, and federal funds sold	$	1,948,679	$	—	$	—	$	1,948,679	$	1,948,679
Available for sale securities		25,794		2,022,648		—		2,048,442		2,048,442
Held to maturity securities		—		1,710,465		—		1,710,465		1,668,018
Loans, net		—		72,694		11,494,409		11,567,103		11,441,631
Loans held for sale		—		50,605		—		50,605		50,605
Accrued interest receivable		45,616		—		—		45,616		45,616
Derivative financial instruments		—		20,093		—		20,093		20,093
Financial liabilities:
Deposits	$	—	$	—	$	15,757,044	$	15,757,044	$	15,744,188
Federal funds purchased		25,704		—		—		25,704		25,704
Securities sold under agreements to repurchase		613,429		—		—		613,429		613,429
Long-term debt		—		410,791		—		410,791		396,589
Accrued interest payable		4,814		—		—		4,814		4,814
Derivative financial instruments		—		21,100		—		21,100		21,100