FAIR VALUE

Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and "Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."

Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but must be disclosed at fair value. See the "Fair Value Measurements of Other Financial Instruments" section of this note. Any aggregation of the estimated fair values presented in this note does not represent the value of the Company.

Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. GAAP provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is defined as follows:


•	Level 1 - Quoted prices in active markets for identical assets or liabilities.


•	Level 2 - Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.


•	Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-based techniques and may be internally developed.

Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented.

Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis

The following table provides the fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.

Recurring Fair Value Measurements

(Dollar amounts in thousands)



	As of March 31, 2018						As of December 31, 2017
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Trading securities:
Money market funds	$	—	$	—	$	—	$	1,685	$	—	$	—
Mutual funds	—		—		—		18,762		—		—
Total trading securities⁽¹⁾	—		—		—		20,447		—		—
Equity securities⁽¹⁾	21,322		7,191		—		—		—		—
Securities available-for-sale⁽¹⁾
U.S. treasury securities	50,191		—		—		46,345		—		—
U.S. agency securities	—		159,538		—		—		156,847		—
CMOs	—		1,181,735		—		—		1,095,186		—
MBSs	—		423,362		—		—		369,543		—
Municipal securities	—		213,984		—		—		208,991		—
Corporate debt securities	—		12,140		—		—		—		—
Equity securities	—		—		—		—		7,297		—
Total securities available-for-sale	50,191		1,990,759		—		46,345		1,837,864		—
Mortgage servicing rights ("MSRs")⁽²⁾	—		—		6,468		—		—		5,894
Derivative assets⁽²⁾	—		28,310		—		—		21,068		—
Liabilities
Derivative liabilities⁽³⁾	$	—	$	38,738	$	—	$	—	$	25,250	$	—


⁽¹⁾	As a result of recently adopted accounting guidance, equity securities are no longer presented within trading securities or securities available-for-sale for the prior period and are now presented within equity securities for the current period. For further discussion of this guidance, see Note 2 of "Notes to the Consolidated Financial Statements" in Item 1 of this Form 10-Q.


⁽²⁾	Included in other assets in the Consolidated Statements of Financial Condition.


⁽³⁾	Included in other liabilities in the Consolidated Statements of Financial Condition.

The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair value.

Equity Securities

The Company's equity securities consist primarily of community development investments and certain diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds. The fair value of community development investments are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and are classified in level 2 of the fair value hierarchy. The fair value of the money market and mutual funds is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy.

Securities Available-for-Sale

The Company's securities available-for-sale are primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair values for these securities are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and are classified in level 2 of the fair value hierarchy. The fair value of U.S. treasury securities is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to estimate the fair value of these securities to determine whether the valuations represent an exit price in the Company's principal markets.

MSRs

The Company services loans for others totaling $604.2 million as of March 31, 2018 and $607.0 million as of December 31, 2017. These loans are owned by third-parties and are not included in the Consolidated Statements of Financial Condition. The Company determines the fair value of MSRs by estimating the present value of expected future cash flows associated with the mortgage loans being serviced and classifies them in level 3 of the fair value hierarchy. The following table presents the ranges of significant, unobservable inputs used by the Company to determine the fair value of MSRs as of March 31, 2018 and December 31, 2017.

Significant Unobservable Inputs Used in the Valuation of MSRs



	As of
	March 31, 2018				December 31, 2017
Prepayment speed	6.7	%	-	13.1%	4.2	%	-	13.1%
Maturity (months)	5		-	102	6		-	92
Discount rate	9.5	%	-	12.0%	9.5	%	-	12.0%

The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for MSRs. Significant increases in expected prepayment speeds and discount rates have negative impacts on the valuation. Higher maturity assumptions have a favorable effect on the estimated fair value.

A rollforward of the carrying value of MSRs for the quarters ended March 31, 2018 and 2017 is presented in the following table.

Carrying Value of MSRs

(Dollar amounts in thousands)



	Quarters Ended March 31,
	2018			2017
Beginning balance	$	5,894		$	6,120
New MSRs	176			156
Total losses (gains) included in earnings⁽¹⁾:
Changes in valuation inputs and assumptions	560			172
Other changes in fair value⁽²⁾	(162		)	(203		)
Ending balance	$	6,468		$	6,245
Contractual servicing fees earned⁽¹⁾	$	378		$	395


⁽¹⁾	Included in mortgage banking income in the Condensed Consolidated Statements of Income and related to assets held as of March 31, 2018 and 2017.


⁽²⁾	Primarily represents changes in expected future cash flows due to payoffs and paydowns.

Derivative Assets and Derivative Liabilities

The Company enters into interest rate swaps and derivative transactions with commercial customers. These derivative transactions are executed in the dealer market, and pricing is based on market quotes obtained from the counterparties. The market quotes were developed using market observable inputs, which primarily include LIBOR. Therefore, derivatives are classified in level 2 of the fair value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterparty are representative of an exit price.

Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis

The following table provides the fair value for each class of assets and liabilities required to be measured at fair value on a non-recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.

Non-Recurring Fair Value Measurements

(Dollar amounts in thousands)



	As of March 31, 2018						As of December 31, 2017
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Collateral-dependent impaired loans⁽¹⁾	$	—	$	—	$	35,715	$	—	$	—	$	33,240
OREO⁽²⁾	—		—		4,792		—		—		12,340
Loans held-for-sale⁽³⁾	—		—		5,970		—		—		21,098
Assets held-for-sale⁽⁴⁾	—		—		3,383		—		—		2,208


⁽¹⁾	Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented.


⁽²⁾	Includes OREO with fair value adjustments subsequent to initial transfer that occurred during the periods presented.


⁽³⁾	Included in other assets in the Consolidated Statements of Financial Condition.


⁽⁴⁾	Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.

Collateral-Dependent Impaired Loans

Certain collateral-dependent impaired loans are subject to fair value adjustments to reflect the difference between the carrying value of the loan and the value of the underlying collateral. The fair values of collateral-dependent impaired loans are primarily determined by current appraised values of the underlying collateral. Based on the age and/or type, appraisals may be adjusted in the range of 0% to 15%. In certain cases, an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair value hierarchy.

Collateral-dependent impaired loans for which the fair value is greater than the recorded investment are not measured at fair value in the Consolidated Statements of Financial Condition and are not included in this disclosure.

OREO

The fair value of OREO is measured using the current appraised value of the properties. In certain circumstances, a current appraisal may not be available or may not represent an accurate measurement of the property's fair value due to outdated market information or other factors. In these cases, the fair value is determined based on the lower of the (i) most recent appraised value, (ii) broker price opinion, (iii) current listing price, or (iv) signed sales contract. Given these valuation methods, OREO is classified in level 3 of the fair value hierarchy.

Loans Held-for-Sale

As of March 31, 2018, loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell. These loans were recorded in the held-for-sale category at the contract price and, accordingly, are classified in level 3 of the fair value hierarchy. As of December 31, 2017, loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell, and a corporate loan.

Assets Held-for-Sale

Assets held-for-sale as of March 31, 2018 and December 31, 2017 consists of former branches that are no longer in operation and parcels of land previously purchased for expansion. These properties are being actively marketed and were transferred into the held-for-sale category at their fair value as determined by current appraisals. Based on these valuation methods, they are classified in level 3 of the fair value hierarchy.

Financial Instruments Not Required to be Measured at Fair Value

For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the following table.

Fair Value Measurements of Other Financial Instruments

(Dollar amounts in thousands)



		As of
		March 31, 2018				December 31, 2017
	Fair Value Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Cash and due from banks	1	$	150,138	$	150,138	$	192,800	$	192,800
Interest-bearing deposits in other banks	2	84,898		84,898		153,770		153,770
Securities held-to-maturity	2	13,400		11,287		13,760		12,013
FHLB and FRB stock	2	80,508		80,508		69,708		69,708
Loans	3	10,584,932		10,256,027		10,345,397		10,059,992
Investment in BOLI	3	281,285		281,285		279,900		279,900
Accrued interest receivable	3	45,703		45,703		45,261		45,261
Other interest-earning assets	3	146		146		228		228
Liabilities
Deposits	2	$	11,146,022	$	11,123,916	$	11,053,325	$	11,038,819
Borrowed funds	2	950,688		950,688		714,884		714,884
Senior and subordinated debt	2	195,312		194,980		195,170		198,806
Accrued interest payable	2	4,107		4,107		4,704		4,704

Management uses various methodologies and assumptions to determine the estimated fair values of the financial instruments in the table above. The fair value estimates are made at a discrete point in time based on relevant market information and consider management's judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the financial instruments. Loans include the FDIC indemnification asset and net loans, which consists of loans held-for-investment, acquired loans, and the allowance for loan losses. As of both March 31, 2018 and December 31, 2017, the Company estimated the fair value of lending commitments outstanding to be immaterial.