FAIR VALUE MEASUREMENTS

When determining the fair value measurements for assets and liabilities and the related fair value hierarchy, the Company considers the principal or most advantageous market in which it would transact and the assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets and liabilities. It is the Company’s policy to maximize the use of observable inputs, minimize the use of unobservable inputs and use unobservable inputs to measure fair value to the extent that observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity, resulting in diminished observability of both actual trades and assumptions that would otherwise be available to value instruments, or the value of underlying collateral is not market observable. Although third party price indications may be available for an asset or liability, limited trading activity would make it difficult to support the observability of these quotations.

Financial Instruments Carried at Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the general classification of each instrument under the valuation hierarchy.

Investment Securities—Investment securities available for sale are carried at fair value on a recurring basis. When available, fair value is based on quoted prices for the identical security in an active market and as such, would be classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted prices of securities with similar characteristics, discounted cash flows or matrix pricing models. Investment securities available for sale for which Level 1 valuations are not available are classified as Level 2 if the valuation incorporates primarily observable inputs. Level 2 securities include U.S. Government agencies and sponsored enterprises obligations and agency mortgage-backed securities; state and municipal obligations; asset-backed securities; and corporate debt and other securities. Pricing of these securities is generally spread driven.

Observable inputs that may impact the valuation of these securities include benchmark yield curves, credit spreads, reported trades, dealer quotes, bids, issuer spreads, current rating, historical constant prepayment rates, historical voluntary prepayment rates, structural and waterfall features of individual securities, published collateral data, and for certain securities, historical constant default rates and default severities.

Interest Rate Derivatives—Interest rate derivatives are reported at estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities and consist of interest rate swaps and caps where there is no significant deterioration in the counterparties (loan customers) credit risk since origination of the interest rate swap or cap. The Company values its interest rate swap and cap positions using market prices provided by a third party which uses primarily observable market inputs. Interest rate derivatives are further described in Note 7 “Derivatives.”

For purposes of potential valuation adjustments to our derivative positions, the Company evaluates the credit risk of its counterparties as well as its own credit risk. Accordingly, the Company has considered factors such as the likelihood of default, expected loss given default, net exposures and remaining contractual life, among other things, in determining if any estimated fair value adjustments related to credit risk are required. The Company reviews counterparty exposure quarterly, and when necessary, appropriate adjustments are made to reflect the exposure.

For the three months ended March 31, 2018 and 2017, the Company has not realized any losses due to a counterparty’s inability to pay any net uncollateralized position. As of March 31, 2018, there were no interest rate derivatives classified as Level 3.

The following tables present the assets and liabilities measured at fair value on a recurring basis:



March 31, 2018	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
U.S. Government agencies and sponsored enterprises obligations	$	—	$	90,010	$	—	$	90,010
U.S. Government agencies and sponsored enterprises mortgage-backed securities	—		596,436		—		596,436
State and municipal obligations	—		25,036		—		25,036
Asset-backed securities	—		671,609		—		671,609
Corporate bonds and other debt securities	56,321		741,158		—		797,479
Preferred stocks and other equity securities	12,754		75,722		—		88,476
Derivative assets - Interest rate contracts	—		15,352		—		15,352
Total	$	69,075	$	2,215,323	$	—	$	2,284,398
Liabilities:
Derivative liabilities - Interest rate contracts	$	—	$	16,839	$	—	$	16,839
Total	$	—	$	16,839	$	—	$	16,839



December 31, 2017	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
U.S. Government agencies and sponsored enterprises obligations	$	—	$	42,838	$	—	$	42,838
U.S. Government agencies and sponsored enterprises mortgage-backed securities	—		595,237		—		595,237
State and municipal obligations	—		26,172		—		26,172
Asset-backed securities	—		610,546		—		610,546
Corporate bonds and other debt securities	55,970		699,933		—		755,903
Preferred stocks and other equity securities	12,954		77,153		—		90,107
Derivative assets - Interest rate contracts	—		11,833		—		11,833
Total	$	68,924	$	2,063,712	$	—	$	2,132,636
Liabilities:
Derivative liabilities - Interest rate contracts	$	—	$	11,833	$	—	$	11,833
Total	$	—	$	11,833	$	—	$	11,833

The Company's policy is to recognize transfers into or out of a level of the fair value hierarchy as of the end of the reporting period. There were no transfers of financial assets between levels of the fair value hierarchy during the three months ended March 31, 2018.

The inputs used to determine the estimated fair value of loans include market conditions, loan term, underlying collateral characteristics and discount rates. The inputs used to determine fair value of OREO include market conditions, estimated marketing period or holding period, underlying collateral characteristics and discount rates.

For the three months ended March 31, 2018, there was not a change in the methods or significant assumptions used to estimate fair value.

Financial Instruments Measured at Fair Value on a Non-Recurring Basis

The following is a description of the methodologies used to estimate the fair values of assets and liabilities measured at fair value on a non-recurring basis, and the level within the fair value hierarchy in which those measurements are typically classified.

Impaired loans and OREO—The carrying amount of collateral dependent impaired loans is typically based on the fair value of the underlying collateral, which may be real estate or other business assets, less estimated costs to sell. The carrying value of OREO is initially measured based on the fair value, less estimated cost to sell, of the real estate acquired in foreclosure and subsequently adjusted to the lower of cost or estimated fair value, less estimated cost to sell. Fair values of real estate collateral are typically based on real estate appraisals which utilize market and income valuation techniques incorporating both observable and unobservable inputs. When current appraisals are not available, the Company may use brokers’ price opinions, home price indices, or other available information about changes in real estate market conditions to adjust the latest appraised value available. These adjustments to appraised values may be subjective and involve significant management judgment. The fair value of collateral consisting of other business assets is generally based on appraisals that use market approaches to valuation, incorporating primarily unobservable inputs. Fair value measurements related to collateral dependent impaired loans and OREO are classified within level 3 of the fair value hierarchy.

The following table shows significant unobservable inputs used in the non-recurring fair value measurement of level 3 assets and liabilities:



Level 3 Assets:	March 31, 2018		December 31, 2017		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
(Dollars in thousands)
Impaired loans	$	5,533	$	6,153	Third party appraisals and discounted cash flows	Collateral discounts and discount rates	0% - 100% (8.5%)
Other real estate owned	14,072		14,906		Third party appraisals	Collateral discounts and estimated cost to sell	10	%

Impairment charges resulting from the non-recurring changes in fair value of the underlying collateral of impaired loans are included in the provision for loan losses in the Consolidated Statements of Income. Impairment charges resulting from the non-recurring changes in fair value of OREO are included in loan and other real estate related expenses in the Consolidated Statements of Income.

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company’s financial instruments are as follows:



March 31, 2018	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	149,025	$	149,025	$	149,025	$	—	$	—
Available for sale debt securities	2,180,570		2,180,570		56,321		2,124,249		—
Preferred stocks and other equity securities	88,476		88,476		12,754		75,722		—
FHLB and other bank stock	58,184		58,184		—		58,184		—
Loans, net	8,655,179		8,584,396		—		—		8,584,396
Loans held for sale	4,167		4,167		—		4,167		—
Bank-owned life insurance	212,925		212,925		—		212,925		—
Derivative assets	15,352		15,352		—		15,352		—

Financial Liabilities:
Deposits	$	9,486,276	$	9,471,692	$	—	$	9,471,692	$	—
Advances from the FHLB and other borrowings	753,921		744,342		—		744,342		—
Derivative liabilities	16,839		16,839		—		16,839		—



December 31, 2017	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	115,921	$	115,921	$	115,921	$	—	$	—
Available for sale debt securities	2,030,696		2,130,696		55,970		1,974,726		—
Preferred stocks and other equity securities	90,107		90,107		12,954		77,153		—
FHLB and other bank stock	56,881		56,881		—		56,881		—
Loans, net	7,930,639		7,877,094		—		—		7,877,094
Loans held for sale	12,736		12,736		—		12,736		—
Bank-owned life insurance	201,069		201,069		—		201,069		—
Derivative assets	11,833		11,833		—		11,833		—

Financial Liabilities:
Deposits	$	8,673,927	$	8,664,125	$	—	$	8,664,125	$	—
Advances from the FHLB and other borrowings	749,113		740,941		—		740,941		—
Derivative liabilities	11,833		11,833		—		11,833		—

Certain financial instruments are carried at amounts that approximate fair value due to their short-term nature and generally negligible credit risk. Financial instruments for which fair value approximates the carrying amount at March 31, 2018 and December 31, 2017, include cash and cash equivalents.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments. Estimates may differ from actual exit value as defined by ASC 820.

FHLB and Other Bank Stock:

FHLB and other bank stock can be liquidated only by redemption by the issuer, as there is no market for these securities. These securities are carried at par, which has historically represented the redemption price and is therefore considered to approximate fair value.

Loans:

Fair values for loans are based on a discounted cash flow methodology that considers various factors, including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, whether or not the loan was amortizing and current discount rates. Loans are grouped together according to similar characteristics and are treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable credit risk and include adjustments for liquidity concerns. The ALL is considered a reasonable estimate of the required adjustment to fair value to reflect the impact of credit risk.

Loans Held for Sale:

Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

Bank-owned Life Insurance:

The Company holds life insurance policies on certain officers. The carrying value of these policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are probable at settlement.

Deposits:

The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analysis and using the rates currently offered for deposits of similar remaining maturities.

Advances from the FHLB and Other Borrowings:

The fair value of advances from the FHLB and other borrowings are estimated by discounting the future cash flows using the current rate at which similar borrowings with similar remaining maturities could be obtained.