NOTE 20.FAIR VALUE MEASUREMENTS

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value.

Recurring Fair Value Measurements of Financial Instruments

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of year-end 2014 and 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

	December 31, 2014
	Level 1		Level 2		Level 3		Total
(In thousands)	Inputs		Inputs		Inputs		Fair Value

Trading security	$	—	$	—	$	14,909	$	14,909
Available-for-sale securities:
Municipal bonds and obligations	—		133,699		—		133,699
Government guaranteed residential mortgage-backed securities	—		69,468		—		69,468
Government-sponsored residential mortgage-backed securities	—		760,184		—		760,184
Corporate bonds	—		54,151		—		54,151
Trust preferred securities	—		14,667		1,548		16,215
Other bonds and obligations	—		3,159		—		3,159
Marketable equity securities	53,806		358		778		54,942
Loans held for sale	—		19,493		—		19,493
Derivative assets	—		12,328		625		12,953
Derivative liabilities	417		18,259		93		18,769

	December 31, 2013
	Level 1		Level 2		Level 3		Total
(In thousands)	Inputs		Inputs		Inputs		Fair Value

Trading security	$	—	$	—	$	14,840	$	14,840
Available-for-sale securities:
Municipal bonds and obligations	—		77,671		—		77,671
Government guaranteed residential mortgage-backed securities	—		78,771		—		78,771
Government-sponsored residential mortgage-backed securities	—		522,658		—		522,658
Corporate bonds	—		39,280		—		39,280
Trust preferred securities	—		15,372		1,239		16,611
Other bonds and obligations	—		3,084		—		3,084
Marketable equity securities	20,891		357		725		21,973
Loans held for sale	—		15,840		—		15,840
Derivative assets	242		7,799		277		8,318
Derivative liabilities	—		11,964		—		11,964

There were no transfers between Level 1, 2, and 3 during the years ended December 31, 2014 and 2013.

Trading Security at Fair Value. The Company holds one security designated as a trading security. It is a tax advantaged economic development bond issued to the Company by a local nonprofit which provides wellness and health programs. The determination of the fair value for this security is determined based on a discounted cash flow methodology. Certain inputs to the fair value calculation are unobservable and there is little to no market activity in the security; therefore, the security meets the definition of a Level 3 security. The discount rate used in the valuation of the security is sensitive to movements in the 3-month LIBOR rate.

Securities Available for Sale. AFS securities classified as Level 1 consist of publicly-traded equity securities for which the fair values can be obtained through quoted market prices in active exchange markets. AFS securities classified as Level 2 include most of the Company’s debt securities quoted on stock exchange prices. The pricing on Level 2 was primarily sourced from third party pricing services, overseen by management, and is based on models that consider standard input factors such as dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and condition, among other things. The Company holds one pooled trust preferred security and one privately owned equity security. Both securities fair values are based on unobservable issuer-provided financial information and the pooled security also utilizes discounted cash flow models derived from the underlying structured pool, therefore both are classified as Level 3.

Loans held for sale. The Company elected the fair value option for all loans held for sale (HFS) that were originated on or after May 1, 2012. Loans HFS are classified as Level 2 as the fair value is based on input factors such as quoted prices for similar loans in active markets.

					Aggregate Fair Value
	Aggregate		Aggregate		Less Aggregate
December 31, 2014 (In thousands)	Fair Value		Unpaid Principal		Unpaid Principal
Loans Held for Sale	$	19,493	$	18,885	$	608

					Aggregate Fair Value
	Aggregate		Aggregate		Less Aggregate
December 31, 2013 (In thousands)	Fair Value		Unpaid Principal		Unpaid Principal
Loans Held for Sale	$	15,840	$	15,641	$	199

The changes in fair value of loans held for sale for years ended December 31, 2014 and 2013 were losses of $409 thousand and gains of $2.6 million, respectively. The changes in fair value are included in mortgage banking income in the Consolidated Statements of Income.

Derivative Assets and Liabilities.

Interest Rate Swap. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings.

Although the Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of year-end 2014, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Interest Rate Lock Commitments. The Company enters into IRLCs for residential mortgage loans intended for sale, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood that the loan in a lock position will ultimately close, and by the non-refundable costs of originating the loan. The closing ratio is derived from the Bank’s internal data and is adjusted using significant management judgment. The costs to originate are primarily based on the Company’s internal commission rates that are not observable. As such, IRLCs are classified as Level 3 measurements.

Forward Sale Commitments. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the IRLCs and loans held for sale. To be announced (TBA) mortgage-backed securities forward commitment sales are used as hedging instruments, are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of the Company’s best efforts and mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable. However, costs to originate and closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are considered factors that are not observable. As such, best efforts and mandatory forward sale commitments are classified as Level 3 measurements.

The table below presents the changes in Level 3 assets that were measured at fair value on a recurring basis at year-end 2014 and 2013.

	Assets (Liabilities)
				Securities			Interest Rate
	Trading			Available			Lock			Forward
(In thousands)	Security			for Sale			Commitments			Commitments

Balance as of December 31, 2012	$	16,893		$	885		$	6,258		$	(1,055	)
Purchase of marketable equity security	—			770			—			—
Unrealized (loss) gain, net recognized in other non-interest income	(1,539		)	—			8,722			1,074
Unrealized gain included in accumulated other comprehensive loss	—			309			—			—
Paydown of trading security	(514		)	—			—			—
Transfers to held for sale loans	—			—			(14,722		)	—
Balance as of December 31, 2013	$	14,840		$	1,964		$	258		$	19
Purchase of marketable equity security	—			—			—			—
Unrealized (loss) gain, net recognized in other non-interest income	610			—			3,804			(112		)
Unrealized gain included in accumulated other comprehensive loss	—			362			—			—
Paydown of trading security	(541		)	—			—			—
Transfers to held for sale loans	—			—			(3,437		)	—
Balance as of December 31, 2014	$	14,909		$	2,326		$	625		$	(93	)

Unrealized gains (losses) relating to instruments still held at December 31, 2014	$	2,355		$	(999	)	$	625		$	(93	)
Unrealized gains (losses) relating to instruments still held at December 31, 2013	$	1,745		$	(1,410	)	$	258		$	19

Quantitative information about the significant unobservable inputs within Level 3 recurring assets/(liabilities) as of December 31, 2014 and 2013 are as follows:

	Fair Value					Significant Unobservable Input
(In thousands)	December 31, 2014			Valuation Techniques	Unobservable Inputs	Value
Assets

Trading Security	$	14,909		Discounted Cash Flow	Discount Rate	2.60	%

Securities Available for Sale	2,326			Discounted Cash Flow	Discount Rate	13.74	%
					Credit Spread	11.06	%

Forward Commitments	(93		)	Historical Trend	Closing Ratio	91.07	%
				Pricing Model	Origination Costs, per loan	2,500

Interest Rate Lock Commitment	625			Historical Trend	Closing Ratio	91.07	%
				Pricing Model	Origination Costs, per loan	2,500
Total	$	17,767

	Fair Value				Significant Unobservable Input
(In thousands)	December 31, 2013		Valuation Techniques	Unobservable Inputs	Value
Assets

Trading Security	$	14,840	Discounted Cash Flow	Discount Rate	3.39	%

Securities Available for Sale	1,964		Discounted Cash Flow	Discount Rate	13.17	%
				Credit Spread	9.45	%

Forward Commitments	19		Historical Trend	Closing Ratio	94.83	%
			Pricing Model	Origination Costs, per loan	2,500

Interest Rate Lock Commitment	258		Historical Trend	Closing Ratio	94.83	%
			Pricing Model	Origination Costs, per loan	2,500
Total	$	17,081

Non-Recurring Fair Value Measurements

The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements. There are no liabilities measured on a non-recurring basis.

	December 31, 2014		Year ended December 31, 2014
	Level 3		Total
(In thousands)	Inputs		Losses (Gains)
Assets
Impaired loans	$	5,820	$	278
Capitalized mortgage servicing rights	3,757		—
Other real estate owned	2,049		231

Total	$	11,626	$	509

	December 31, 2013		Year ended December 31, 2013
	Level 3		Total
(In thousands)	Inputs		Losses
Assets
Impaired loans	$	5,542	$	(562	)
Capitalized mortgage servicing rights	4,112		(773		)
Other real estate owned	2,995		2

Total	$	12,649	$	(1,333	)

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets as of December 31, 2014 and 2013 are as follows:

(in thousands)	December 31, 2014		Valuation Techniques	Unobservable Inputs	Range (Weighted Average) (a)
Assets

Impaired loans	$	5,820	Fair value of collateral	Loss severity	.31% to 38.7% (12.65%)
				Appraised value	$5 to $1,600.0 ($912.7)

Capitalized mortgage servicing rights	3,757		Discounted cash flow	Constant prepayment rate (CPR)	7.83% to 19.00% (9.92%)
				Discount rate	10.00% to 13.00% (10.43%)

Other real estate owned	2,049		Fair value of collateral	Appraised value	$57 to $700.0 ($462.6)
Total	$	11,626

(a)Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.

(in thousands)	December 31, 2013		Valuation Techniques	Unobservable Inputs	Range (Weighted Average) (a)
Assets

Impaired loans	$	5,542	Fair value of collateral	Loss severity	4.2% to 100.0% (57.41%)
				Appraised value	$0 to $900.0 ($505.4)

Capitalized mortgage servicing rights	4,112		Discounted cash flow	Constant prepayment rate (CPR)	6.96% to 15.97% (8.58%)
				Discount rate	10.00% to 13.00% (10.34%)

Other real estate owned	2,995		Fair value of collateral	Appraised value	$0 to $774.0 ($413.4)
Total Assets	$	12,649

There were no Level 1 or Level 2 nonrecurring fair value measurements for year-end 2014 and 2013.

Impaired Loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, real estate collateral related nonrecurring fair value measurement adjustments have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.

Capitalized mortgage loan servicing rights. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Bank. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

Summary of Estimated Fair Values of Financial Instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments follow. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

	December 31, 2014
	Carrying		Fair
(In thousands)	Amount		Value		Level 1		Level 2		Level 3

Financial Assets

Cash and cash equivalents	$	71,754	$	71,754	$	71,754	$	—	$	—
Trading security	14,909		14,909		—		—		14,909
Securities available for sale	1,091,818		1,091,818		53,806		1,035,686		2,326
Securities held to maturity	43,347		44,997		—		—		44,997
Restricted equity securities	55,720		55,720		—		55,720		—
Net loans	4,644,938		4,695,256		—		—		4,695,256
Loans held for sale	19,493		19,493		—		19,493		—
Accrued interest receivable	17,274		17,274		—		17,274		—
Cash surrender value of bank-owned life insurance policies	104,588		104,588		—		104,588		—
Derivative assets	12,953		12,953		—		12,328		625
Assets held for sale	1,280		1,280		—		1,280		—

Financial Liabilities

Total deposits	4,654,679		4,655,234		—		4,655,234		—
Short-term debt	900,900		900,983		—		900,983		—
Long-term Federal Home Loan Bank advances	61,676		63,283		—		63,283		—
Subordinated notes	89,747		93,441		—		93,441		—
Derivative liabilities	18,769		18,769		417		18,259		93
Liabilities held for sale	—		—		—		—		—

	December 31, 2013
	Carrying		Fair
(In thousands)	Amount		Value		Level 1		Level 2		Level 3

Financial Assets

Cash and cash equivalents	$	75,539	$	75,539	$	75,539	$	—	$	—
Trading security	14,840		14,840		—		—		14,840
Securities available for sale	760,048		760,048		20,891		737,193		1,964
Securities held to maturity	44,921		45,764		—		—		45,764
Restricted equity securities	50,282		50,282		—		50,282		—
Net loans	4,147,200		4,154,663		—		—		4,154,663
Loans held for sale	15,840		15,840		—		15,840		—
Accrued interest receivable	15,072		15,072		—		15,072		—
Cash surrender value of bank-owned life insurance policies	101,530		101,530		—		101,530		—
Derivative assets	8,318		8,318		242		7,799		277
Assets held for sale	3,969		3,969		—		3,969		—

Financial Liabilities

Total deposits	$	3,848,529	$	3,848,926	$	—	$	3,848,926	$	—
Short-term debt	872,510		872,545		—		872,545		—
Long-term Federal Home Loan Bank advances	101,918		103,660		—		103,660		—
Subordinated notes	89,679		87,882		—		87,882		—
Derivative liabilities	11,964		11,964		—		11,964		—
Liabilities held for sale	24,834		24,834		—		24,834		—

Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which it is practicable to estimate that value.

Cash and cash equivalents. Carrying value is assumed to represent fair value for cash and cash equivalents that have original maturities of ninety days or less.

Restricted equity securities. Carrying value approximates fair value based on the redemption provisions of the issuers.

Cash surrender value of life insurance policies. Carrying value approximates fair value.

Loans, net. The carrying value of the loans in the loan portfolio is based on their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, the unamortized balance of any deferred fees or costs on originated loans and the unamortized balance of any premiums or discounts on loans purchased or acquired through mergers. The fair value of the loans is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.

Accrued interest receivable. Carrying value approximates fair value.

Deposits. The fair value of demand, non-interest bearing checking, savings and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.

Borrowed funds. The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings. Such funds include all categories of debt and debentures in the table above.

Subordinated notes. The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every ninety days.

Off-balance-sheet financial instruments. Off-balance-sheet financial instruments include standby letters of credit and other financial guarantees and commitments considered immaterial to the Company’s financial statements.