FAIR VALUE MEASUREMENTS

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. If there has been a significant decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Company uses prices and inputs that are current as of the measurement date. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another.

The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the Fair Value Measurements and Disclosures Topic of the FASB ASC are described below:

Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Valuation Techniques

There have been no changes in the valuation techniques used during the current period.

Securities:

Trading and Equity Securities

These equity securities are valued based on market quoted prices. These securities are categorized in Level 1 as they are actively traded and no valuation adjustments have been applied.

U.S. Government Agency Securities

Fair value is estimated using either multi-dimensional spread tables or benchmarks. The inputs used include benchmark yields, reported trades, and broker/dealer quotes. These securities are classified as Level 2.

Agency Mortgage-Backed Securities

Fair value is estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. These securities are categorized as Level 2.

Agency Collateralized Mortgage Obligations and Small Business Administration Pooled Securities

The valuation model for these securities is volatility-driven and ratings based, and uses multi-dimensional spread tables. The inputs used include benchmark yields, reported trades, new issue data, broker dealer quotes, and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are categorized as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.

State, County, and Municipal Securities

The fair value is estimated using a valuation matrix with inputs including bond interest rate tables, recent transaction, and yield relationships. These securities are categorized as Level 2.

Single and Pooled Issuer Trust Preferred Securities

The fair value of trust preferred securities, including pooled and single issuer preferred securities, is estimated using external pricing models, discounted cash flow methodologies or similar techniques. The inputs used in these valuations include benchmark yields, reported trades, new issue data, broker dealer quotes, and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are classified as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.

Loans Held for Sale

The Company has elected the fair value option to account for originated closed loans intended for sale. The fair value is measured on an individual loan basis using quoted market prices and when not available, comparable market value or discounted cash flow analysis may be utilized. These assets are typically classified as Level 2.

Derivative Instruments

Derivatives

The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect 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. Additionally, in conjunction with fair value measurement guidance, the Company has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. 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 the Company and its counterparties. However, as of December 31, 2017 and 2016, 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.

Mortgage Derivatives

The fair value of mortgage derivatives is determined based on current market prices for similar assets in the secondary market and, therefore, classified as Level 2 within the fair value hierarchy.

Impaired Loans

Collateral dependent loans that are deemed to be impaired are valued based upon the lower of cost or fair value of the underlying collateral less costs to sell. The inputs used in the appraisals of the collateral are not always observable, and therefore the loans may be classified as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.

Other Real Estate Owned and Other Foreclosed Assets

The fair values are generally estimated based upon recent appraisal values of the property less costs to sell the property, as Other Real Estate Owned ("OREO") and Other Foreclosed Assets are valued at the lower of cost or fair value of the property, less estimated costs to sell. Certain inputs used in appraisals are not always observable, and therefore OREO and Other Foreclosed Assets are classified as Level 3 within the fair value hierarchy.

Goodwill and Other Intangible Assets

Goodwill and identified intangible assets are subject to impairment testing. The Company conducts an annual impairment test of goodwill in the third quarter of each year, or more frequently if necessary, and other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. To estimate the fair value of goodwill and, if necessary, other intangible assets, the Company utilizes both a comparable analysis of relevant price multiples in recent market transactions and discounted cash flow analysis. Both valuation models require a significant degree of management judgment. In the event the fair value as determined by the valuation model is less than the carrying value, the intangibles may be impaired. If the impairment testing resulted in impairment, the Company would classify the impaired goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3.

Assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows as of the dates indicated:



			Fair Value Measurements at Reporting Date Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	December 31, 2017
	(Dollars in thousands)
Recurring fair value measurements
Assets
Trading securities	$	1,324	$	1,324	$	—	$	—
Securities available for sale
U.S. Government agency securities	35,430		—		35,430		—
Agency mortgage-backed securities	215,764		—		215,764		—
Agency collateralized mortgage obligations	122,012		—		122,012		—
State, county, and municipal securities	2,274		—		2,274		—
Single issuer trust preferred securities issued by banks and insurers	2,016		—		2,016		—
Pooled trust preferred securities issued by banks and insurers	1,640		—		—		1,640
Small business administration pooled securities	47,778		—		47,778		—
Equity securities	20,584		20,584		—		—
Loans held for sale	4,768		—		4,768		—
Derivative instruments	17,476		—		17,476		—
Liabilities
Derivative instruments	15,693		—		15,693		—
Total recurring fair value measurements	$	455,373	$	21,908	$	431,825	$	1,640

Nonrecurring fair value measurements
Assets
Collateral dependent impaired loans	$	33,567	$	—	$	—	$	33,567
Other real estate owned and other foreclosed assets	612		—		—		612
Total nonrecurring fair value measurements	$	34,179	$	—	$	—	$	34,179



			Fair Value Measurements at Reporting Date Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	December 31, 2016
	(Dollars in thousands)
Recurring fair value measurements
Assets
Trading securities	$	804	$	804	$	—	$	—
Securities available for sale
U.S. Government agency securities	24,244		$	—	24,244		—
Agency mortgage-backed securities	175,384		—		175,384		—
Agency collateralized mortgage obligations	99,868		—		99,868		—
State, county, and municipal securities	3,793		—		3,793		—
Single issuer trust preferred securities issued by banks and insurers	2,311		—		2,311		—
Pooled trust preferred securities issued by banks and insurers	1,584		—		—		1,584
Small business administration pooled securities	37,189		—		37,189		—
Equity securities	19,271		19,271		—		—
Loans held for sale	6,139		—		6,139		—
Derivative instruments	22,761		—		22,761		—
Liabilities
Derivative instruments	21,916		—		21,916		—
Total recurring fair value measurements	$	371,432	$	20,075	$	349,773	$	1,584

Nonrecurring fair value measurements:
Assets
Collateral dependent impaired loans	$	33,974	$	—	$	—	$	33,974
Other real estate owned and other foreclosed assets	4,173		—		—		4,173
Total nonrecurring fair value measurements	$	38,147	$	—	$	—	$	38,147

All assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) were valued using pricing models and discounted cash flow methodologies, as of December 31, 2017, 2016 and 2015. This reconciliation is presented in the table below, for the periods indicated:



	2017			2016			2015
	(Dollars in thousands)
Pooled Trust Preferred Securities
Beginning balance	$	1,584		$	1,572		$	6,321
Gain and (losses) (realized/unrealized)
Included in other comprehensive income	77			29			14
Sales	—			—			(4,679		)
Settlements	(21		)	(17		)	(84		)
Ending Balance	$	1,640		$	1,584		$	1,572

It is the Company’s policy to recognize the transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers between the levels of the fair value hierarchy for any assets or liabilities measured at fair value on a recurring basis during the years ended December 31, 2017, 2016 and 2015.

The following table sets forth certain unobservable inputs regarding the Company's financial instruments that are classified as Level 3 as of December 31st for the years indicated:



Valuation Technique	Fair Value				Unobservable Inputs	Range		Weighted Average
	2017		2016			2017	2016	2017	2016
	(Dollars in thousands)
Discounted cash flow methodology
Pooled trust preferred securities	$	1,640	$	1,584	Cumulative prepayment	0% - 61%	0% - 62%	2.5%	2.5%
					Cumulative default	5% - 100%	5% - 100%	12.4%	12.8%
					Loss given default	85% - 100%	85% - 100%	94.3%	94.2%
					Cure given default	0% - 75%	0% - 75%	60.9%	60.9%
Appraisals of collateral (1)
Collateral dependent impaired loans	$	33,567	$	33,974
Other real estate owned and foreclosed assets	$	612	$	4,173


(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary.

For the fair value measurements in the table above, which are classified as Level 3 within the fair value hierarchy, the Company’s Treasury and Finance groups determine the valuation policies and procedures. For the pricing of the securities, the Company uses third-party pricing information, without adjustment. Depending on the type of the security, management employs various techniques to analyze the pricing it receives from third parties, such as analyzing changes in market yields and in certain instances reviewing the underlying collateral of the security. Management reviews changes in fair value from period to period and performs testing to ensure that prices received from the third parties are consistent with their expectation of the market. For the securities whose market is deemed to be inactive and which are categorized as Level 3, the fair value models are calibrated and significant inputs are back tested on a quarterly basis, to the extent possible. This testing is done by the third party service provider, who performs this testing by comparing anticipated inputs to actual results. Significant changes in fair value from period to period are closely scrutinized to ensure fair value models are not flawed. The driver(s) of the respective change in fair value and the method for forecasting the driver(s) is closely considered by management.

The significant unobservable inputs used in the fair value measurement of the Company’s pooled trust preferred securities are cumulative prepayment rates, cumulative defaults, loss given defaults and cure given defaults. Significant increases (decreases) in deferrals or defaults, in isolation, would result in a significantly lower (higher) fair value measurement. Alternatively, significant increases (decreases) in cure rates, in isolation, would result in a significantly higher (lower) fair value measurement.

Additionally, the Company has certain assets which are marked to fair value on a nonrecurring basis which are categorized within Level 3. These assets include collateral dependent impaired loans and OREO. The determination of the fair value amount is derived from the use of independent third party real estate appraisals and evaluations. Real estate appraisals are prepared by firms from a predetermined list of qualified and approved appraisers or evaluators. Upon receipt of a real estate appraisal or evaluation, the Company's Commercial Real Estate Appraisal Department will review the report for compliance with regulatory and Company standards, as well as reasonableness and acceptance of the value conclusions. Any issues or concerns regarding compliance or value conclusions will be addressed with the engaged firm and the report may be adjusted or revised. If a disagreement cannot be resolved, the Company will either address the key issues and modify the report for acceptance or reject the report and re-order a new report. Ultimately, the Company will confirm the collateral value as part of its review process.

The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below as of the periods indicated:



					Fair Value Measurements at Reporting Date Using
	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	December 31, 2017
	(Dollars in thousands)
Financial assets
Securities held to maturity(a)
U.S. Treasury securities	$	1,006	$	1,035	$	—	$	1,035	$	—
Agency mortgage-backed securities	204,768		205,823		—		205,823		—
Agency collateralized mortgage obligations	262,998		258,408		—		258,408		—
Single issuer trust preferred securities issued by banks	1,500		1,529		—		1,529		—
Small business administration pooled securities	27,416		27,399		—		27,399		—
Loans, net of allowance for loan losses(b)	6,261,343		6,116,051		—		—		6,116,051
Federal Home Loan Bank stock(c)	11,597		11,597		—		11,597		—
Cash surrender value of life insurance policies(d)	151,528		151,528		—		151,528		—
Financial liabilities
Deposit liabilities, other than time deposits(e)	$	6,084,952	$	6,084,952	$	—	$	6,084,952	$	—
Time certificates of deposits(f)	644,301		639,060		—		639,060		$	—
Federal Home Loan Bank borrowings(f)	53,264		52,111		—		52,111		—
Customer repurchase agreements and other short-term borrowings(f)	162,679		162,679		—		—		162,679
Junior subordinated debentures(g)	73,073		74,680		—		74,680		—
Subordinated debentures(f)	34,682		32,707		—		—		32,707



					Fair Value Measurements at Reporting Date Using
	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	December 31, 2016
Financial assets	(Dollars in thousands)
Securities held to maturity(a)
U.S. Treasury securities	$	1,007	$	1,054	$	—	$	1,054	$	—
Agency mortgage-backed securities	156,088		157,504		—		157,504		—
Agency collateralized mortgage obligations	297,445		294,650		—		294,650		—
Single issuer trust preferred securities issued by banks	1,500		1,544		—		1,544		—
Small business administration pooled securities	31,036		30,898		—		30,898		—
Loans, net of allowance for loan losses(b)	5,904,065		5,784,778		—		—		5,784,778
Federal Home Loan Bank stock(c)	11,497		11,497		—		11,497		—
Cash surrender value of life insurance policies(d)	144,503		144,503		—		144,503		—
Financial liabilities
Deposit liabilities, other than time deposits(e)	$	5,763,101	$	5,763,101	$	—	$	5,763,101	$	—
Time certificates of deposits(f)	649,152		647,038		—		647,038		—
Federal Home Loan Bank borrowings(f)	50,819		50,898		—		50,898		—
Customer repurchase agreements and other short-term borrowings(f)	176,913		176,913		—		—		176,913
Junior subordinated debentures(g)	73,107		72,510		—		72,510		—
Subordinated debentures(f)	34,635		34,241		—		—		34,241


(a)	The fair values presented are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments and/or discounted cash flow analysis.


(b)	Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or cash flows. Additionally, this amount excludes collateral dependent impaired loans, which are deemed to be marked to fair value on a nonrecurring basis.


(c)	FHLB stock has no quoted market value and is carried at cost, therefore the carrying amount approximates fair value.


(d)	Cash surrender value of life insurance is recorded at its cash surrender value (or the amount that can be realized upon surrender of the policy), therefore carrying amount approximates fair value.


(e)	Fair value of demand deposits, savings and interest checking accounts and money market deposits is the amount payable on demand at the reporting date.


(f)	Fair value was determined by discounting anticipated future cash payments using rates currently available for instruments with similar remaining maturities.


(g)	Fair value was determined based upon market prices of securities with similar terms and maturities.

This summary excludes certain financial assets and liabilities for which the carrying value approximates fair value. For financial assets, these may include cash and due from banks, federal funds sold and short-term investments. For financial liabilities, these may include federal funds purchased. These instruments would all be considered to be classified as Level 1 within the fair value hierarchy. Also excluded from the summary are financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described.

The Company considers its financial instruments' current use to be the highest and best use of the instruments.