FAIR VALUE DISCLOSURES

Fair Value of Financial Assets and Liabilities

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

•Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

•Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

•Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The following tables present financial instruments carried at fair value as of December 31, 2017 and December 31, 2016 by valuation hierarchy (as described above):



	December 31, 2017
(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets measured at fair value on a recurring basis:
Available-for-sale securities:
CMO	$	—	$	246,539	$	—	$	246,539
FNMA MBS	—		473,987		—		473,987
FHLMC MBS	—		87,875		—		87,875
GNMA MBS	—		29,098		—		29,098
GSE	—		—		—		—
Other investments	623		—		—		623
Other assets	—		747		—		747
Total assets measured at fair value on a recurring basis	$	623	$	838,246	$	—	$	838,869
Liabilities measured at fair value on a recurring basis:
Other liabilities	$	—	$	3,225	$	—	$	3,225
Assets measured at fair value on a nonrecurring basis:
Other real estate owned	$	—	$	—	$	2,503	$	2,503
Loans held for sale	—		31,055		—		31,055
Impaired loans	—		—		57,089		57,089
Total assets measured at fair value on a nonrecurring basis	$	—	$	31,055	$	59,592	$	90,647



	December 31, 2016
(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets measured at fair value on a recurring basis:
Available-for-sale securities:
CMO	$	—	$	261,215	$	—	$	261,215
FNMA MBS	—		405,764		—		405,764
FHLMC MBS	—		63,515		—		63,515
GNMA MBS	—		28,416		—		28,416
GSE	—		35,010		—		35,010
Other investments	623		—		—		623
Other assets	—		1,508		—		1,508
Total assets measured at fair value on a recurring basis	$	623	$	795,428	$	—	$	796,051
Liabilities measured at fair value on a recurring basis:
Other liabilities	$	—	$	3,380	$	—	$	3,380
Assets measured at fair value on a nonrecurring basis:
Other real estate owned	$	—	$	—	$	3,591	$	3,591
Loans held for sale	—		54,782		—		54,782
Impaired loans	—		—		46,499		46,499
Total assets measured at fair value on a nonrecurring basis	$	—	$	54,782	$	50,090	$	104,872

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during 2017 and 2016.

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 or obtained from third parties that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include unobservable parameters. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe our 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.

Available-for-sale securities

As of December 31, 2017 securities classified as available-for-sale are reported at fair value using Level 2 inputs. Included in the Level 2 total are $837.5 million in U.S. government and Agency MBS. We believe that this Level 2 designation is appropriate for these securities under ASC 820-10 because, as is the case for almost all fixed income securities, none are exchange traded, and all are priced by correlation to observed market data. To price these securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors.

Other Assets

Other assets include the fair value of derivatives on the residential mortgage HFS loan pipeline. The derivatives represent the amounts that would be required to settle our derivative financial instruments at the balance sheet date.

Other Liabilities

Other liabilities include the fair value of interest rate swaps and derivatives on the residential mortgage HFS loan pipeline. The fair value of our derivatives represents the amounts that would be required to settle our derivative financial instruments at the balance sheet date.

Other real estate owned

Other real estate owned consists of loan collateral which has been repossessed through foreclosure or other measures. Initially, foreclosed assets are recorded at the lower of the loan balance or fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically and the assets may be marked down further, reflecting a new cost basis. The fair value of our real estate owned was estimated using Level 3 inputs based on appraisals obtained from third parties.

Loans held for sale

The fair value of our loans held for sale is based upon estimates using Level 2 inputs. These inputs are based upon pricing information obtained from secondary markets and brokers and applied to loans with similar interest rates and maturities.

Impaired loans

We evaluate and value impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which typically ranges from 10% to 20%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by us. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.

Impaired loans, which are measured for impairment by either calculating the expected future cash flows discounted at the loan’s effective interest rate or determining the fair value of the collateral for collateral dependent loans has a gross amount of $62.1 million and $51.6 million at December 31, 2017 and December 31, 2016, respectively. The valuation allowance on impaired loans was $5.0 million as of December 31, 2017 and $3.4 million as of December 31, 2016.

Fair Value of Financial Instruments

The reported fair values of financial instruments are based on a variety of factors. In certain cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions regarding the amount and timing of estimated future cash flows that are discounted to reflect current market rates and varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of period-end or that will be realized in the future.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and cash equivalents

For cash and short-term investment securities, including due from banks, federal funds sold or purchased under agreements to resell and interest-bearing deposits with other banks, the carrying amount is a reasonable estimate of fair value.

Investment securities

Fair value is estimated using quoted prices for similar securities, which we obtain from a third party vendor. We utilize one of the largest providers of securities pricing to the industry and management periodically assesses the inputs used by this vendor to price the various types of securities owned by us to validate the vendor’s methodology.

Loans held for sale

Loans held for sale are carried at their fair value (see discussion earlier in this note).

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type: commercial, commercial mortgages, construction, residential mortgages and consumer. For loans that reprice frequently, the book value approximates fair value. The fair values of other types of loans are estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities. The fair value of nonperforming loans is based on recent external appraisals of the underlying collateral. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are utilized if appraisals are not available. This technique does not contemplate an exit price.

Stock in the Federal Home Loan Bank (FHLB) of Pittsburgh

The fair value of FHLB stock is assumed to be equal to its cost basis, since the stock is non-marketable but redeemable at its par value.

Other assets

Other assets include, among other items, other real estate owned (see discussion earlier in this note), derivative financial instruments and our investment in 359,744 shares of Visa Class B stock. Our derivative financial instruments include the interest rate lock commitments and forward sale commitments related to our mortgage banking activities. The fair values of the interest rate lock commitments and forward sale commitments represent the amounts that would be required to settle the derivative financial instrument at the balance sheet date.

We acquired 50,833 shares of Visa Class B stock at no cost from our prior participation in Visa’s network. In addition, we purchased 308,911 shares in 2015 - 2017 which are accounted for as non-marketable equity securities. Only current owners of Class B shares are allowed to transact in Class B shares. Following the resolution of Visa’s covered litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares using a conversion factor (1.6483 as of December 31, 2017), which is periodically adjusted to reflect VISA’s ongoing litigation costs. We estimate the fair value of our Visa Class B shares to be $44.7 million as of December 31, 2017, which is consistent with the terms of recent publicly observable transactions between other owners of Visa Class B shares. Our purchased Class B shares are carried at cost ($14.0 million at December 31, 2017).

We evaluate the shares carried at cost for OTTI periodically. As of December 31, 2017, our evaluation indicated that there was no OTTI associated with these shares.

Deposits

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, money market and interest-bearing demand deposits, is assumed to be equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using rates currently offered for deposits with comparable remaining maturities.

Borrowed funds

Rates currently available to us for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Other Liabilities

Other liabilities include our derivative financial instruments of interest rate swaps and derivatives related to our mortgage banking activities (See discussion earlier in this note).

Off-balance sheet instruments

The fair value of off-balance sheet instruments, including commitments to extend credit and standby letters of credit, approximates the recorded net deferred fee amounts, which are not significant. Because commitments to extend credit and letters of credit are generally not assignable by either us or the borrower, they only have value to us and the borrower.

The book value and estimated fair value of our financial instruments are as follows:



	December 31,
	Fair Value Measurement	2017				2016
(Dollars in thousands)	Fair Value Measurement	Book Value		Fair Value		Book Value		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	723,866	$	723,866	$	821,923	$	821,923
Investment securities available for sale	See previous table	838,122		838,122		794,543		794,543
Investment securities held to maturity	Level 2	161,186		162,853		164,346		163,232
Loans, held for sale	See previous table	31,055		31,055		54,782		54,782
Loans, net ⁽¹⁾	Level 3^(r)	4,719,229		4,699,458		4,397,876		4,300,963
Impaired loans, net	Level 3	57,089		57,089		46,499		46,499
Stock in Federal Home Loan Bank of Pittsburgh	Level 2	31,284		31,284		38,248		38,248
Accrued interest receivable	Level 2	19,405		19,405		17,027		17,027
Other assets	Level 3	16,931		47,586		9,189		15,787
Financial liabilities:
Deposits	Level 2	$	5,247,604	$	4,848,588	$	4,738,438	$	4,423,921
Borrowed funds	Level 2	937,806		937,605		1,267,447		1,264,170
Standby letters of credit	Level 3	603		603		468		468
Accrued interest payable	Level 2	1,037		1,037		1,151		1,151
Other liabilities	Level 2	3,188		3,188		3,380		3,380
⁽¹⁾ Excludes impaired loans, net.
^(r)In 2017, we reclassified Loans, net as “Level 3” for all periods presented. See Note 1 for further information.

At December 31, 2017 and December 31, 2016 we had no commitments to extend credit measured at fair value.