Fair Value of Financial Instruments | 3 Months Ended |
Mar. 31, 2015 |
Fair Value Disclosures [Abstract] | |
Fair Value of Financial Instruments | Fair Value of Financial Instruments |
The Company applies the fair value accounting guidance required under ASC Topic 820 which establishes a framework for measuring fair value. This guidance defines fair value as the exchange price that would be received for 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 at the measurement date. This guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within this fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows. |
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• | Level 1 – Fair value is based on quoted prices in an active market for identical assets or liabilities. | | | | | | | | | | | | | | | | | | |
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• | Level 2 – Fair value is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market. | | | | | | | | | | | | | | | | | | |
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• | Level 3 – Fair value is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities would include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar pricing techniques based on the Company’s own assumptions about what market participants would use to price the asset or liability. | | | | | | | | | | | | | | | | | | |
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the fair value hierarchy, is set forth below. These valuation methodologies were applied to the Company’s financial assets and financial liabilities carried at fair value. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use observable market based parameters as inputs. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as other unobservable parameters. Any such valuation adjustments are applied consistently over time. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and, therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. |
Financial Instruments Measured at Fair Value on a Recurring Basis |
Trading account assets and liabilities, securities available for sale, certain mortgage loans held for sale, derivative assets and liabilities, and mortgage servicing rights are recorded at fair value on a recurring basis. The following is a description of the valuation methodologies for these assets and liabilities. |
Trading account assets and liabilities and investment securities available for sale – Trading account assets and liabilities and investment securities available for sale consist of U.S. Treasury and other U.S. government agencies securities, mortgage-backed securities, collateralized mortgage obligations, debt obligations of state and political subdivisions, other debt and equity securities, and derivative contracts. |
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• | U.S. Treasury and other U.S. government agencies securities are valued based on quoted market prices of identical assets on active exchanges (Level 1 measurements) or are valued based on a market approach using observable inputs such as benchmark yields, reported trades, broker/dealer quotes, benchmark securities, and bids/offers of government-sponsored enterprise securities (Level 2 measurements). | | | | | | | | | | | | | | | | | | |
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• | Mortgage-backed securities are primarily valued using market-based pricing matrices that are based on observable inputs including benchmark To Be Announced security prices, U.S. Treasury yields, U.S. dollar swap yields, and benchmark floating-rate indices. Mortgage-backed securities pricing may also give consideration to pool-specific data such as prepayment history and collateral characteristics. Valuations for mortgage-backed securities are therefore classified as Level 2 measurements. | | | | | | | | | | | | | | | | | | |
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• | Collateralized mortgage obligations are valued using market-based pricing matrices that are based on observable inputs including reported trades, bids, offers, dealer quotes, U.S. Treasury yields, U.S. dollar swap yields, market convention prepayment speeds, tranche-specific characteristics, prepayment history, and collateral characteristics. Fair value measurements for collateralized mortgage obligations are classified as Level 2. | | | | | | | | | | | | | | | | | | |
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• | Debt obligations of states and political subdivisions are primarily valued using market-based pricing matrices that are based on observable inputs including Municipal Securities Rulemaking Board reported trades, issuer spreads, material event notices, and benchmark yield curves. These valuations are Level 2 measurements. | | | | | | | | | | | | | | | | | | |
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• | Other debt and equity securities consist of mutual funds, foreign and corporate debt, and U.S. government agencies equity securities. Mutual funds are valued based on quoted market prices of identical assets trading on active exchanges. These valuations are Level 1 measurements. Foreign and corporate debt valuations are based on information and assumptions that are observable in the market place. The valuations for these securities are therefore classified as Level 2. U.S. government agency equity securities are valued based on quoted market prices of identical assets trading on active exchanges. These valuations thus qualify as Level 1 measurements. | | | | | | | | | | | | | | | | | | |
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• | Other derivative assets and liabilities consist primarily of interest rate and commodity contracts. The Company’s interest rate contracts are valued utilizing Level 2 observable inputs (yield curves and volatilities) to determine a current market price for each interest rate contract. Commodity contracts are priced using raw market data, primarily in the form of quotes for fixed and basis swaps with monthly, quarterly, seasonal or calendar-year terms. Proprietary models provided by a third party are used to generate forward curves and volatility surfaces. As a result of the valuation process and observable inputs used, commodity contracts are classified as Level 2 measurements. To validate the reasonableness of these calculations, management compares the assumptions with market information. | | | | | | | | | | | | | | | | | | |
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• | Other trading assets primarily consist of interest-only strips which are valued by an independent third-party. The independent third-party values the assets on a loan-by-loan basis using a discounted cash flow analysis that employs prepayment assumptions, discount rate assumptions, and default curves. The prepayment assumptions are created from actual SBA pool prepayment history. The discount rates are derived from actual SBA loan secondary market transactions. The default curves are created using historical observable and unobservable inputs. As such, interest-only strips are classified as Level 3 measurements. The Company’s SBA department is responsible for ensuring the appropriate application of the valuation, capitalization, and amortization policies of the Company’s interest-only strips. The department performs independent, internal valuations of the interest-only strips on a quarterly basis, which are then reconciled to the third-party valuations to ensure their validity. | | | | | | | | | | | | | | | | | | |
Loans held for sale – The Company has elected to apply the fair value option for single family real estate mortgage loans originated for resale in the secondary market. The election allows for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. The Company has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments. |
The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for sale. Both the mortgage loans held for sale and the related forward contracts are classified as Level 2. |
At both March 31, 2015 and December 31, 2014, no material loans held for sale for which the fair value option was elected were 90 days or more past due or were in nonaccrual. Interest income on mortgage loans held for sale is recognized based on contractual rates and is reflected in interest and fees on loans in the Company's Unaudited Condensed Consolidated Statements of Income. Net gains of $548 thousand and $690 thousand resulting from changes in fair value of these loans were recorded in noninterest income during the three months ended March 31, 2015 and 2014, respectively. |
The Company also had fair value changes on forward contracts related to residential mortgage loans held for sale of approximately $(400) thousand and $(1.6) million for the three months ended March 31, 2015 and 2014, respectively. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk. |
The following tables summarize the difference between the aggregate fair value and the aggregate unpaid principal balance for residential mortgage loans measured at fair value. |
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| Aggregate Fair Value | | Aggregate Unpaid Principal Balance | | Difference | | | | | | | | |
| (In Thousands) | | | | | | | | |
March 31, 2015 | | | | | | | | | | | | | |
Residential mortgage loans held for sale | $ | 198,488 | | | $ | 191,687 | | | $ | 6,801 | | | | | | | | | |
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December 31, 2014 | | | | | | | | | | | | | |
Residential mortgage loans held for sale | $ | 154,816 | | | $ | 148,564 | | | $ | 6,252 | | | | | | | | | |
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Derivative assets and liabilities – Derivative assets and liabilities are measured using models that primarily use market observable inputs, such as quoted security prices, and are accordingly classified as Level 2. The derivative assets and liabilities classified within Level 3 of the fair value hierarchy were comprised of interest rate lock commitments that are valued using third-party software that calculates fair market value considering current quoted TBA and other market based prices and then applies closing ratio assumptions based on software-produced pull through ratios that are generated using the Company’s historical fallout activity. Based upon this process, the fair value measurement obtained for these financial instruments is deemed a Level 3 classification. The Company's Secondary Marketing Committee is responsible for the appropriate application of the valuation policies and procedures surrounding the Company’s interest rate lock commitments. Policies established to govern mortgage pipeline risk management activities must be approved by the Company’s Asset/Liability Committee on an annual basis. |
Other assets – Other assets measured at fair value on a recurring basis and classified within Level 3 of the fair value hierarchy were comprised of MSRs that are valued through a discounted cash flow analysis using a third-party commercial valuation system. The valuation takes into consideration the objective characteristics of the MSR portfolio, such as loan amount, note rate, service fee, loan term, and common industry assumptions, such as servicing costs, ancillary income, prepayment estimates, earning rates, cost of fund rates, discount rates, etc. The Company’s portfolio-specific factors are also considered in calculating the fair value of MSRs to the extent one can reasonably assume a buyer would also incorporate these factors. Examples of such factors are geographical concentrations of the portfolio, liquidity considerations such as housing authority loans which have a limited number of approved servicers, or additional views of risk not inherently accounted for in prepayment assumptions. Product liquidity and these other risks are generally incorporated through adjustment of discount factors applied to forecasted cash flows. Based on this method of pricing MSRs, the fair value measurement obtained for these financial instruments is deemed a Level 3 classification. The value of the MSR is calculated by a third-party firm that specializes in the MSR market and valuation services. Additionally, the Company obtains a valuation from an independent party to compare for reasonableness. The Company’s Secondary Marketing Committee is responsible for ensuring the appropriate application of valuation, capitalization, and fair value decay policies for the MSR portfolio. The Committee meets at least monthly to review the MSR portfolio. |
The following tables summarize the financial assets and liabilities measured at fair value on a recurring basis. |
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| | | Fair Value Measurements at the End of the Reporting Period Using | | | | |
| Fair Value | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | |
| March 31, 2015 | | (Level 1) | | (Level 2) | | (Level 3) | | | | |
| (In Thousands) | | | | |
Recurring fair value measurements | | | | | | | | | | | |
Assets: | | | | | | | | | | | |
Trading account assets: | | | | | | | | | | | |
U.S. Treasury and other U.S. government agencies | $ | 3,267,024 | | | $ | 3,267,024 | | | $ | — | | | $ | — | | | | | |
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State and political subdivisions | 1,030 | | | — | | | 1,030 | | | — | | | | | |
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Other debt securities | 3,972 | | | — | | | 3,972 | | | — | | | | | |
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Other equity securities | 166 | | | — | | | 166 | | | — | | | | | |
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Interest rate contracts | 369,042 | | | — | | | 369,042 | | | — | | | | | |
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Commodity contracts | 21,568 | | | — | | | 21,568 | | | — | | | | | |
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Foreign exchange contracts | 14,607 | | | — | | | 14,607 | | | — | | | | | |
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Other trading assets | 3,018 | | | — | | | 1,582 | | | 1,436 | | | | | |
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Total trading account assets | 3,680,427 | | | 3,267,024 | | | 411,967 | | | 1,436 | | | | | |
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Loans held for sale | 198,488 | | | — | | | 198,488 | | | — | | | | | |
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Investment securities available for sale: | | | | | | | | | | | |
U.S. Treasury and other U.S. government agencies | 2,536,770 | | | 1,367,699 | | | 1,169,071 | | | — | | | | | |
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Mortgage-backed securities | 4,187,487 | | | — | | | 4,187,487 | | | — | | | | | |
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Collateralized mortgage obligations | 2,445,069 | | | — | | | 2,445,069 | | | — | | | | | |
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States and political subdivisions | 416,042 | | | — | | | 416,042 | | | — | | | | | |
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Other debt securities | 17,767 | | | 17,767 | | | — | | | — | | | | | |
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Equity securities (1) | 126 | | | 46 | | | — | | | 80 | | | | | |
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Total investment securities available for sale | 9,603,261 | | | 1,385,512 | | | 8,217,669 | | | 80 | | | | | |
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Derivative assets: | | | | | | | | | | | |
Interest rate contracts | 90,686 | | | — | | | 85,698 | | | 4,988 | | | | | |
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Equity contracts | 70,199 | | | — | | | 70,199 | | | — | | | | | |
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Foreign exchange contracts | 8,957 | | | — | | | 8,957 | | | — | | | | | |
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Total derivative assets | 169,842 | | | — | | | 164,854 | | | 4,988 | | | | | |
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Other assets | 35,213 | | | — | | | — | | | 35,213 | | | | | |
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Liabilities: | | | | | | | | | | | |
Trading account liabilities: | | | | | | | | | | | |
U.S. Treasury and other U.S. government agencies | $ | 3,368,354 | | | $ | 3,368,354 | | | $ | — | | | $ | — | | | | | |
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Interest rate contracts | 310,602 | | | — | | | 310,602 | | | — | | | | | |
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Commodity contracts | 21,471 | | | — | | | 21,471 | | | — | | | | | |
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Foreign exchange contracts | 13,883 | | | — | | | 13,883 | | | — | | | | | |
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Other debt securities | 7,756 | | | — | | | 7,756 | | | — | | | | | |
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Other trading liabilities | 1,584 | | | — | | | 1,584 | | | — | | | | | |
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Total trading account liabilities | 3,723,650 | | | 3,368,354 | | | 355,296 | | | — | | | | | |
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Derivative liabilities: | | | | | | | | | | | |
Interest rate contracts | 16,903 | | | — | | | 16,902 | | | 1 | | | | | |
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Equity contracts | 67,959 | | | — | | | 67,959 | | | — | | | | | |
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Foreign exchange contracts | 929 | | | — | | | 929 | | | — | | | | | |
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Total derivative liabilities | 85,791 | | | — | | | 85,790 | | | 1 | | | | | |
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-1 | Excludes $499 million of FHLB and Federal Reserve stock required to be owned by the Company at March 31, 2015. These securities are carried at par. | | | | | | | | | | | | | | | | | | |
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| | | Fair Value Measurements at the End of the Reporting Period Using | | | | |
| Fair Value | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | |
| December 31, 2014 | | (Level 1) | | (Level 2) | | (Level 3) | | | | |
| (In Thousands) | | | | |
Recurring fair value measurements | | | | | | | | | | | |
Assets: | | | | | | | | | | | |
Trading account assets: | | | | | | | | | | | |
U.S. Treasury and other U.S. government agencies | $ | 2,502,308 | | | $ | 2,502,308 | | | $ | — | | | $ | — | | | | | |
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Interest rate contracts | 296,239 | | | — | | | 296,239 | | | — | | | | | |
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Commodity contracts | 25,569 | | | — | | | 25,569 | | | — | | | | | |
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Foreign exchange contracts | 8,268 | | | — | | | 8,268 | | | — | | | | | |
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Other trading assets | 2,013 | | | — | | | 423 | | | 1,590 | | | | | |
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Total trading account assets | 2,834,397 | | | 2,502,308 | | | 330,499 | | | 1,590 | | | | | |
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Loans held for sale | 154,816 | | | — | | | 154,816 | | | — | | | | | |
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Investment securities available for sale: | | | | | | | | | | | |
U.S. Treasury and other U.S. government agencies | 2,313,542 | | | 1,298,040 | | | 1,015,502 | | | — | | | | | |
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Mortgage-backed securities | 4,423,835 | | | — | | | 4,423,835 | | | — | | | | | |
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Collateralized mortgage obligations | 2,488,579 | | | — | | | 2,488,579 | | | — | | | | | |
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States and political subdivisions | 467,315 | | | — | | | 467,315 | | | — | | | | | |
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Other debt securities | 44,441 | | | 44,441 | | | — | | | — | | | | | |
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Equity securities (1) | 48 | | | 44 | | | — | | | 4 | | | | | |
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Total investment securities available for sale | 9,737,760 | | | 1,342,525 | | | 8,395,231 | | | 4 | | | | | |
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Derivative assets: | | | | | | | | | | | |
Interest rate contracts | 73,830 | | | — | | | 71,511 | | | 2,319 | | | | | |
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Equity contracts | 76,487 | | | — | | | 76,487 | | | — | | | | | |
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Foreign exchange contracts | 5,570 | | | — | | | 5,570 | | | — | | | | | |
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Total derivative assets | 155,887 | | | — | | | 153,568 | | | 2,319 | | | | | |
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Other assets | 35,488 | | | — | | | — | | | 35,488 | | | | | |
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Liabilities: | | | | | | | | | | | |
Trading account liabilities: | | | | | | | | | | | |
U.S. Treasury and other U.S. government agencies | $ | 2,545,299 | | | $ | 2,545,299 | | | $ | — | | | $ | — | | | | | |
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Interest rate contracts | 236,763 | | | — | | | 236,763 | | | — | | | | | |
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Commodity contracts | 25,448 | | | — | | | 25,448 | | | — | | | | | |
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Foreign exchange contracts | 7,527 | | | — | | | 7,527 | | | — | | | | | |
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Other trading liabilities | 425 | | | — | | | 425 | | | — | | | | | |
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Total trading account liabilities | 2,815,462 | | | 2,545,299 | | | 270,163 | | | — | | | | | |
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Derivative liabilities: | | | | | | | | | | | |
Interest rate contracts | 16,074 | | | — | | | 16,073 | | | 1 | | | | | |
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Equity contracts | 74,319 | | | — | | | 74,319 | | | — | | | | | |
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Foreign exchange contracts | 692 | | | — | | | 692 | | | — | | | | | |
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Total derivative liabilities | 91,085 | | | — | | | 91,084 | | | 1 | | | | | |
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-1 | Excludes $500 million of FHLB and Federal Reserve stock required to be owned by the Company at December 31, 2014. These securities are carried at par. | | | | | | | | | | | | | | | | | | |
There were no transfers between Levels 1 or 2 of the fair value hierarchy for the three months ended March 31, 2015 and 2014. It is the Company’s policy to value any transfers between levels of the fair value hierarchy based on end of period fair values. |
The following table reconciles the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3). |
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| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | |
Three Months Ended March 31, | Other Trading Assets | | Equity Securities | | Interest Rate Contracts, net | | Other Assets | | | | |
| (In Thousands) | | | | |
Balance, January 1, 2014 | $ | 1,645 | | | $ | 6 | | | $ | 890 | | | $ | 30,065 | | | | | |
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Transfers into Level 3 | — | | | — | | | — | | | — | | | | | |
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Transfers out of Level 3 | — | | | — | | | — | | | — | | | | | |
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Total gains or losses (realized/unrealized): | | | | | | | | | | | |
Included in earnings (1) | 47 | | | — | | | 792 | | | (320 | ) | | | | |
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Included in other comprehensive income | — | | | — | | | — | | | — | | | | | |
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Purchases, issuances, sales and settlements: | | | | | | | | | | | |
Purchases | — | | | — | | | — | | | — | | | | | |
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Issuances | — | | | — | | | — | | | 2,083 | | | | | |
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Sales | — | | | — | | | — | | | — | | | | | |
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Settlements | — | | | — | | | — | | | — | | | | | |
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Balance, March 31, 2014 | $ | 1,692 | | | $ | 6 | | | $ | 1,682 | | | $ | 31,828 | | | | | |
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Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at March 31, 2014 | $ | 47 | | | $ | — | | | $ | 792 | | | $ | (320 | ) | | | | |
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Balance, January 1, 2015 | $ | 1,590 | | | $ | 4 | | | $ | 2,318 | | | $ | 35,488 | | | | | |
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Transfers into Level 3 | — | | | — | | | — | | | — | | | | | |
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Transfers out of Level 3 | — | | | — | | | — | | | — | | | | | |
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Total gains or losses (realized/unrealized): | | | | | | | | | | | |
Included in earnings (1) | (154 | ) | | — | | | 2,669 | | | (3,034 | ) | | | | |
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Included in other comprehensive income | — | | | — | | | — | | | — | | | | | |
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Purchases, issuances, sales and settlements: | | | | | | | | | | | |
Purchases | — | | | 76 | | | — | | | — | | | | | |
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Issuances | — | | | — | | | — | | | 2,759 | | | | | |
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Sales | — | | | — | | | — | | | — | | | | | |
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Settlements | — | | | — | | | — | | | — | | | | | |
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Balance, March 31, 2015 | $ | 1,436 | | | $ | 80 | | | $ | 4,987 | | | $ | 35,213 | | | | | |
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Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at March 31, 2015 | $ | (154 | ) | | $ | — | | | $ | 2,669 | | | $ | (3,034 | ) | | | | |
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-1 | Included in noninterest income in the Unaudited Condensed Consolidated Statements of Income. | | | | | | | | | | | | | | | | | | |
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Assets Measured at Fair Value on a Nonrecurring Basis |
Periodically, certain assets may be recorded at fair value on a non-recurring basis. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets due to impairment. The following table represents those assets that were subject to fair value adjustments during the three months ended March 31, 2015 and 2014 and still held as of the end of the period, and the related gains and losses from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period. |
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| | | Fair Value Measurements at the End of the Reporting Period Using | | |
| Fair Value | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | Total Gains (Losses) |
| March 31, 2015 | | (Level 1) | | (Level 2) | | (Level 3) | | Three Months Ended March 31, 2015 |
| (In Thousands) |
Nonrecurring fair value measurements | | | | | | |
Assets: | | | | | | | | | |
Investment securities held to maturity | $ | 3,205 | | | $ | — | | | $ | — | | | $ | 3,205 | | | $ | (285 | ) |
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Impaired loans (1) | 132,336 | | | — | | | — | | | 132,336 | | | (3,304 | ) |
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OREO | 17,764 | | | — | | | — | | | 17,764 | | | (1,259 | ) |
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| | | Fair Value Measurements at the End of the Reporting Period Using | | |
| Fair Value | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | Total Gains (Losses) |
| March 31, 2014 | | (Level 1) | | (Level 2) | | (Level 3) | | Three Months Ended March 31, 2014 |
| (In Thousands) |
Nonrecurring fair value measurements | | | | | | |
Assets: | | | | | | | | | |
Investment securities held to maturity | $ | 3,462 | | | $ | — | | | $ | — | | | $ | 3,462 | | | $ | (146 | ) |
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Impaired loans (1) | 169,546 | | | — | | | — | | | 169,546 | | | (4,344 | ) |
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OREO | 25,817 | | | — | | | — | | | 25,817 | | | 577 | |
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-1 | Total gains (losses) represent charge-offs on impaired loans for which adjustments are based on the appraised value of the collateral. | | | | | | | | | | | | | | | | | | |
The following is a description of the methodologies applied for valuing these assets: |
Investment securities held to maturity – Nonrecurring fair value adjustments on investment securities held to maturity reflect impairment write-downs which the Company believes are other than temporary. For analyzing these securities, the Company has retained a third party valuation firm. Impairment is determined through the use of cash flow models that estimate cash flows on the underlying mortgages using security-specific collateral and the transaction structure. The cash flow models incorporate the remaining cash flows which are adjusted for future expected credit losses. Future expected credit losses are determined by using various assumptions such as current default rates, prepayment rates, and loss severities. The Company develops these assumptions through the use of market data published by third party sources in addition to historical analysis which includes actual delinquency and default information through the current period. The expected cash flows are then discounted at the interest rate used to recognize interest income on the security to arrive at a present value amount. As the fair value measurements are derived using a discounted cash flow modeling approach, the nonrecurring fair value measurements are classified as Level 3. |
Impaired Loans – Impaired loans measured at fair value on a non-recurring basis represent the carrying value of impaired loans for which adjustments are based on the appraised value of the collateral. Nonrecurring fair value adjustments to impaired loans reflect full or partial write-downs that are generally based on the fair value of the underlying collateral supporting the loan. Loans subjected to nonrecurring fair value measurements based on the current estimated fair value of the collateral are classified as Level 3. |
OREO – OREO is recorded on the Company's Unaudited Condensed Consolidated Balance Sheets at the lower of recorded balance or fair value, which is based on appraisals and third-party price opinions, less estimated costs to sell. The fair value is classified as Level 3. |
The table below presents quantitative information about the significant unobservable inputs for material assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring and nonrecurring basis. |
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| | | Quantitative Information about Level 3 Fair Value Measurements | | | | | | | | | | |
| Fair Value at | | | | | | Range of Unobservable Inputs | | | | | | | | | | |
| March 31, 2015 | | Valuation Technique | | Unobservable Input(s) | | (Weighted Average) | | | | | | | | | | |
| (In Thousands) | | | | | | | | | | | | | | | | |
Recurring fair value measurements: | | | | | | | | | | | | | | | | |
Other trading assets | $ | 1,436 | | | Discounted cash flow | | Default rate | | 8.90% | | | | | | | | | | |
| | | | | | | | | |
| | | | | Prepayment rate | | 5.4% - 9.8% (7.3%) | | | | | | | | | | |
Interest rate contracts | 4,987 | | | Discounted cash flow | | Closing ratios (pull-through) | | 6.4% - 98.7% (59.6%) | | | | | | | | | | |
| | | | | | | | | |
| | | | | Cap grids | | 0.3% - 2.5% (1.1%) | | | | | | | | | | |
Other assets - MSRs | 35,213 | | | Discounted cash flow | | Discount rate | | 10.0% - 11.0% (10.1%) | | | | | | | | | | |
| | | | | | | | | |
| | | | | Constant prepayment rate or life speed | | 6.1% - 49.5% (11.2%) | | | | | | | | | | |
| | | | | Cost to service | | $57 - $566 ($67) | | | | | | | | | | |
Nonrecurring fair value measurements: | | | | | | | | | | | | | | | | |
Investment securities held to maturity | $ | 3,205 | | | Discounted cash flow | | Prepayment rate | | 9.60% | | | | | | | | | | |
| | | | | | | | | |
| | | | | Default rate | | 7.50% | | | | | | | | | | |
| | | | | Loss severity | | 61.20% | | | | | | | | | | |
Impaired loans | 132,336 | | | Appraised value | | Appraised value | | 0.0% - 100.0% (26.8%) | | | | | | | | | | |
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OREO | 17,764 | | | Appraised value | | Appraised value | | 8.00% | | | | | | | | | | |
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The following provides a description of the sensitivity of the valuation technique to changes in unobservable inputs for recurring fair value measurements. |
Recurring Fair Value Measurements Using Significant Unobservable Inputs |
Other Trading Assets – Interest-Only Strips |
Significant unobservable inputs used in the valuation of the Company’s interest-only strips include default rates and prepayment assumptions. Significant increases in either of these inputs in isolation would result in significantly lower fair value measurements. Generally, a change in the assumption used for the probability of default is accompanied by a directionally opposite change in the assumption used for prepayment rates. |
Interest Rate Contracts - Interest Rate Lock Commitments |
Significant unobservable inputs used in the valuation of interest rate lock commitments are pull-through and cap grids. Increases or decreases in the pull-through or cap grids will have a corresponding impact in the value of interest rate contracts. |
Other Assets - MSRs |
The significant unobservable inputs used in the fair value measurement of MSRs are discount rates, constant prepayment rate or life speed, and cost to service assumptions. The impact of prepayments and changes in the discount rate are based on a variety of underlying inputs. Increases or decreases to the underlying cash flow inputs will have a corresponding impact on the value of the MSR asset. The impact of the costs to service assumption will have a directionally opposite change in the fair value of the MSR asset. |
Fair Value of Financial Instruments |
The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company’s financial instruments, excluding financial instruments measured at fair value on a recurring basis, are as follows: |
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| March 31, 2015 |
| Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
| (In Thousands) |
Financial Instruments: | | | | | | | | | |
Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 3,964,357 | | | $ | 3,964,357 | | | $ | 3,964,357 | | | $ | — | | | $ | — | |
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Investment securities held to maturity | 1,373,542 | | | 1,297,565 | | | — | | | — | | | 1,297,565 | |
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Loans, net | 57,856,599 | | | 55,263,025 | | | — | | | — | | | 55,263,025 | |
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Liabilities: | | | | | | | | | |
Deposits | $ | 62,900,681 | | | $ | 63,012,674 | | | $ | — | | | $ | 63,012,674 | | | $ | — | |
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FHLB and other borrowings | 4,919,141 | | | 4,925,458 | | | — | | | 4,925,458 | | | — | |
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Federal funds purchased and securities sold under agreements to repurchase | 909,683 | | | 909,683 | | | — | | | 909,683 | | | — | |
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| December 31, 2014 |
| Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
| (In Thousands) |
Financial Instruments: | | | | | | | | | |
Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 3,388,405 | | | $ | 3,388,405 | | | $ | 3,388,405 | | | $ | — | | | $ | — | |
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Investment securities held to maturity | 1,348,354 | | | 1,275,963 | | | — | | | — | | | 1,275,963 | |
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Loans, net | 56,686,743 | | | 54,551,442 | | | — | | | — | | | 54,551,442 | |
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Liabilities: | | | | | | | | | |
Deposits | $ | 61,189,716 | | | $ | 61,263,812 | | | $ | — | | | $ | 61,263,812 | | | $ | — | |
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FHLB and other borrowings | 4,809,843 | | | 4,786,152 | | | — | | | 4,786,152 | | | — | |
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Federal funds purchased and securities sold under agreements to repurchase | 1,129,503 | | | 1,129,503 | | | — | | | 1,129,503 | | | — | |
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The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments not carried at fair value: |
Cash and cash equivalents: Cash and cash equivalents have maturities of three months or less. Accordingly, the carrying amount approximates fair value. Because these amounts generally relate to either currency or highly liquid assets, these are considered a Level 1 measurement. |
Investment securities held to maturity: The fair values of securities held to maturity are estimated using a discounted cash flow approach. The discounted cash flow model uses inputs such as estimated prepayment speed, loss rates, and default rates. They are considered a Level 3 measurement as the valuation employs significant unobservable inputs. |
Loans: Loans are presented net of the allowance for loan losses and are valued using discounted cash flows. The discount rates used to determine the present value of these loans are based on current market interest rates for loans with similar credit risk and term. They are considered a Level 3 measurement as the valuation employs significant unobservable inputs. |
Deposits: The fair values of demand deposits are equal to the carrying amounts. Demand deposits include noninterest bearing demand deposits, savings accounts, NOW accounts and money market demand accounts. Discounted cash flows have been used to value fixed rate term deposits. The discount rate used is based on interest rates currently being offered by the Company on comparable deposits as to amount and term. They are considered a Level 2 measurement as the valuation primarily employs observable inputs for similar instruments. |
Federal funds purchased and securities sold under agreements to repurchase: The carrying amounts of federal funds purchased and securities sold under agreements to repurchase approximate fair value. They are therefore considered a Level 2 measurement. |
FHLB and other borrowings: The fair value of the Company’s fixed rate borrowings, which includes the Company’s Capital Securities, are estimated using discounted cash flows, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of the Company’s variable rate borrowings approximates fair value. As such, these borrowings are considered a Level 2 measurement as the valuation primarily employs observable inputs for similar instruments. |