FAIR VALUE DISCLOSURES

In accordance with ASC Topic 820, “Fair Value Measurements and Disclosures,” financial assets and financial liabilities that are measured at fair value subsequent to initial recognition are grouped into three levels of inputs or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the reliability of assumptions used to determine fair value. The three input levels of the valuation hierarchy are as follows:


Level 1 Inputs –	Valuation is based on quoted prices in active markets for identical instruments in active markets.


Level 2 Inputs –	Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.


Level 3 Inputs –	Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following describes valuation methodologies used to measure financial assets and financial liabilities at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy:

Available-for-sale investment securities. Available-for-sale investment securities are recorded at fair value on a recurring basis. Available-for-sale investment securities included in Level 1 are valued using quoted market prices. Where quoted market prices are unavailable, the fair value included in Level 2 is based on quoted market prices of comparable instruments obtained from independent pricing vendors based on recent trading activity and other relevant information.

Loans held for sale. Mortgage loans held for sale are carried at fair value on a recurring basis. The determination of fair value is based on quoted market prices of comparable instruments obtained from independent pricing vendors based on recent trading activity and other relevant information. Other loans held for sale are carried at the lower of cost or market value, which is determined on an individual loan basis. The fair value is based on the prices secondary markets are offering for portfolios with similar characteristics. The Company classifies mortgage loans held for sale subjected to recurring fair value adjustments as recurring Level 2. The Company classifies other loans held for sale subjected to nonrecurring fair value adjustments as nonrecurring Level 2.

Impaired loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans are considered impaired when, in the judgment of management based on current information and events, it is probable that payment of all amounts due under the contractual terms of the loan agreement will not be collected. Acquired impaired loans are classified as nonaccrual loans and are initially measured at fair value with no allocated allowance for loan losses. An allowance for loan losses is recorded to the extent there is further credit deterioration subsequent to the acquisition date. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Once a loan is identified as impaired, management measures the impairment in accordance with ASC Topic 310-10-35, “Receivables.” Impairment is measured by reference to an observable market price, if one exists, the expected future cash flows of an impaired loan discounted at the loan’s effective interest rate, or the fair value of the collateral for a collateral-dependent loan. In most cases, the Company measures fair value based on the value of the collateral securing the loan. Collateral may be in the form of real estate or personal property, including equipment and inventory. The vast majority of the collateral is real estate. The value of the collateral is determined based on third party appraisals as well as internal estimates. These measurements are classified as nonrecurring Level 3.

Other real estate. Certain other real estate, upon initial recognition, is re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the estimated fair value of the other real estate. The fair value of other real estate, upon initial recognition, is estimated using Level 3 inputs based on third party appraisals, and where applicable, discounted based on management’s judgment taking into account current market conditions, distressed or forced sale price comparisons and other factors in effect at the time of valuation. The Company classifies other real estate subjected to nonrecurring fair value adjustments as Level 3.

Derivative instruments. Substantially all derivative instruments utilized by the Company are traded in over-the-counter markets where quoted market prices are not readily available. Derivative instruments utilized by the Company include interest rate swap agreements, interest rate lock commitments and forward commitments to sell mortgage-backed securities. For these derivative instruments, fair value is based on market observable inputs utilizing pricing systems and valuation models, and where applicable, the values are compared to the market values calculated independently by the respective counterparties. The Company classifies its derivative instruments as Level 2.

Servicing rights. The valuation of mortgage and SBA servicing rights is performed by an independent third party. The valuation models estimate the present value of estimated future net servicing income, using market-based discount rate assumptions, and utilize assumptions based on the predominant risk characteristics of the underlying loans, including principal balance, interest rate, weighted average life, and certain unobservable inputs, including cost to service, estimated prepayment speed rates and default rates. Changes in the fair value of servicing rights occur primarily due to the realization of expected cash flows, as well as changes in valuation inputs and assumptions. Significant increases (decreases) in any of the unobservable inputs would result in a significantly lower (higher) fair value of the servicing rights. The Company classifies its servicing rights as Level 3.

Nonqualified Deferred Compensation Plan. The Company’s nonqualified deferred compensation plan is recorded at fair value on a recurring basis. The unfunded plan allows participants to hypothetically invest in various specified investment options such as equity funds, international stock funds, capital appreciation funds, money market funds, bond funds, mid-cap value funds and growth funds. The nonqualified deferred compensation plan liability is valued based on quoted market prices of the underlying investments. The Company classifies its nonqualified deferred compensation plan liability as Level 1.

Items Measured on a Recurring Basis. Assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 are reflected in the following table:



	Fair Value Measurements
	Level 1		Level 2		Level 3	Fair Value
	(dollars expressed in thousands)
June 30, 2014:
Assets:
Available-for-sale investment securities:
U.S. Government sponsored agencies	$	—	193,893		—	193,893
Residential mortgage-backed	—		1,031,336		—	1,031,336
Commercial mortgage-backed	—		851		—	851
State and political subdivisions	—		30,753		—	30,753
Corporate notes	—		171,155		—	171,155
Equity investments	1,705		—		—	1,705
Mortgage loans held for sale	—		27,576		—	27,576
Derivative instruments:
Interest rate lock commitments	—		535		—	535
Forward commitments to sell mortgage-backed securities	—		(441	)	—	(441	)
Servicing rights	—		—		18,784	18,784
Total	$	1,705	1,455,658		18,784	1,476,147
Liabilities:
Nonqualified deferred compensation plan	$	6,594	—		—	6,594
Total	$	6,594	—		—	6,594
December 31, 2013:
Assets:
Available-for-sale investment securities:
U.S. Government sponsored agencies	$	—	275,899		—	275,899
Residential mortgage-backed	—		1,105,787		—	1,105,787
Commercial mortgage-backed	—		856		—	856
State and political subdivisions	—		31,557		—	31,557
Corporate notes	—		196,203		—	196,203
Equity investments	1,443		—		—	1,443
Mortgage loans held for sale	—		25,548		—	25,548
Derivative instruments:
Interest rate lock commitments	—		217		—	217
Forward commitments to sell mortgage-backed securities	—		296		—	296
Servicing rights	—		—		18,854	18,854
Total	$	1,443	1,636,363		18,854	1,656,660
Liabilities:
Nonqualified deferred compensation plan	$	6,641	—		—	6,641
Total	$	6,641	—		—	6,641

There were no transfers between Levels 1 and 2 of the fair value hierarchy for the three and six months ended June 30, 2014 and 2013.

The following table presents the changes in Level 3 assets measured on a recurring basis for the three and six months ended June 30, 2014 and 2013:



	Servicing Rights
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014			2013	2014		2013
	(dollars expressed in thousands)
Balance, beginning of period	$	19,077		16,175	18,854		14,792
Total gains or losses (realized/unrealized):
Included in earnings ⁽¹⁾	(901		)	470	(1,133	)	624
Included in other comprehensive income	—			—	—		—
Issuances	577			888	1,032		2,117
Purchases	31			—	31		—
Transfers in and/or out of level 3	—			—	—		—
Balance, end of period	$	18,784		17,533	18,784		17,533

____________________


(1)	Gains or losses (realized/unrealized) are included in noninterest income in the consolidated statements of income.

Items Measured on a Nonrecurring Basis. From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of June 30, 2014 and December 31, 2013 are reflected in the following table:



	Fair Value Measurements
	Level 1		Level 2	Level 3	Fair Value
	(dollars expressed in thousands)
June 30, 2014:
Assets:
Impaired loans:
Commercial, financial and agricultural	$	—	—	11,573	11,573
Real estate construction and development	—		—	4,016	4,016
Real estate mortgage:
Residential mortgage	—		—	86,461	86,461
Home equity	—		—	5,609	5,609
Multi-family residential	—		—	22,781	22,781
Commercial real estate	—		—	9,638	9,638
Consumer and installment	—		—	12	12
Other real estate	—		—	59,235	59,235
Total	$	—	—	199,325	199,325
December 31, 2013:
Assets:
Impaired loans:
Commercial, financial and agricultural	$	—	—	10,026	10,026
Real estate construction and development	—		—	4,620	4,620
Real estate mortgage:
Residential mortgage	—		—	88,476	88,476
Home equity	—		—	5,889	5,889
Multi-family residential	—		—	27,310	27,310
Commercial real estate	—		—	11,812	11,812
Consumer and installment	—		—	19	19
Other real estate	—		—	66,702	66,702
Total	$	—	—	214,854	214,854

Non-Financial Assets and Non-Financial Liabilities. Certain non-financial assets measured at fair value on a nonrecurring basis include other real estate (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

Other real estate measured at fair value upon initial recognition totaled $2.9 million and $5.2 million for the six months ended June 30, 2014 and 2013, respectively. In addition to other real estate measured at fair value upon initial recognition, the Company recorded write-downs to the balance of other real estate of $100,000 and $197,000 to noninterest expense for the three and six months ended June 30, 2014, respectively, compared to $551,000 and $809,000 for the comparable periods in 2013.

Fair Value of Financial Instruments. The fair value of financial instruments is management’s estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred income tax assets, bank premises and equipment and goodwill. Furthermore, the income taxes that would be incurred if the Company were to realize any of the unrealized gains or unrealized losses indicated between the estimated fair values and corresponding carrying values could have a significant effect on the fair value estimates and have not been considered in any of the estimates.

The following summarizes the methods and assumptions used in estimating the fair value of all other financial instruments:

Cash and cash equivalents and accrued interest receivable. The carrying values reported in the consolidated balance sheets approximate fair value.

Held-to-maturity investment securities. The fair value of held-to-maturity investment securities is based on quoted market prices where available. If quoted market prices are not available, the fair value is based on quoted market prices of comparable instruments. The Company classifies its held-to-maturity investment securities as Level 2.

Loans. The fair value of loans held for portfolio uses an exit price concept and reflects discounts the Company believes are consistent with liquidity discounts in the market place. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial and industrial, real estate construction and development, commercial real estate, one-to-four-family residential real estate, home equity and consumer and installment. The fair value of loans is estimated by discounting the future cash flows, utilizing assumptions for prepayment estimates over the loans’ remaining life and considerations for the current interest rate environment compared to the weighted average rate of the loan portfolio. The fair value analysis also includes other assumptions to estimate fair value, intended to approximate those factors a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit spreads, as appropriate. The Company classifies its loans held for portfolio as Level 3.

FRB and FHLB stock. The carrying values reported in the consolidated balance sheets for FRB and FHLB stock, which are carried at cost, represent redemption value and approximate fair value.

Deposits. The fair value of deposits payable on demand with no stated maturity (i.e., noninterest-bearing and interest-bearing demand, and savings and money market accounts) is considered equal to their respective carrying amounts as reported in the consolidated balance sheets. The fair value of demand deposits does not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. The fair value disclosed for time deposits is estimated utilizing a discounted cash flow calculation that applies interest rates currently being offered on similar deposits to a schedule of aggregated monthly maturities of time deposits. If the estimated fair value is lower than the carrying value, the carrying value is reported as the fair value of time deposits. The Company classifies its time deposits as Level 3.

Other borrowings and accrued interest payable. The carrying values reported in the consolidated balance sheets for variable rate borrowings approximate fair value. The fair value of fixed rate borrowings is based on quoted market prices where available. If quoted market prices are not available, the fair value is based on discounting contractual maturities using an estimate of current market rates for similar instruments. The Company classifies its other borrowings, comprised of securities sold under agreements to repurchase, as Level 1. The carrying values reported in the consolidated balance sheets for accrued interest payable approximate fair value.

Subordinated debentures. The fair value of subordinated debentures is based on quoted market prices of comparable instruments. The Company classifies its subordinated debentures as Level 3.

Off-Balance Sheet Financial Instruments. The fair value of commitments to extend credit, standby letters of credit and financial guarantees is based on estimated probable credit losses. The Company classifies its off-balance sheet financial instruments as Level 3.

The estimated fair value of the Company’s financial instruments at June 30, 2014 was as follows:



	June 30, 2014
	Carrying Value			Estimated Fair Value
	Carrying Value			Level 1	Level 2	Level 3		Total
	(dollars expressed in thousands)
Financial Assets:
Cash and cash equivalents	$	287,379		287,379	—	—		287,379
Investment securities:
Available for sale	1,429,693			1,705	1,427,988	—		1,429,693
Held to maturity	694,085			—	685,869	—		685,869
Loans held for portfolio	2,846,525			—	—	2,732,392		2,732,392
Loans held for sale	27,576			—	27,576	—		27,576
FRB and FHLB stock	30,388			30,388	—	—		30,388
Derivative instruments	94			—	94	—		94
Accrued interest receivable	14,742			14,742	—	—		14,742
Financial Liabilities:
Deposits:
Noninterest-bearing demand	$	1,299,746		1,299,746	—	—		1,299,746
Interest-bearing demand	680,324			680,324	—	—		680,324
Savings and money market	1,844,362			1,844,362	—	—		1,844,362
Time deposits	981,602			—	—	981,846		981,846
Securities sold under agreements to repurchase	57,572			57,572	—	—		57,572
Accrued interest payable	783			783	—	—		783
Subordinated debentures	354,248			—	—	302,308		302,308
Off-Balance Sheet Financial Instruments:
Commitments to extend credit, standby letters of credit and financial guarantees	$	(2,430	)	—	—	(2,430	)	(2,430	)

The estimated fair value of the Company’s financial instruments at December 31, 2013 was as follows:



	December 31, 2013
	Carrying Value			Estimated Fair Value
	Carrying Value			Level 1	Level 2	Level 3		Total
	(dollars expressed in thousands)
Financial Assets:
Cash and cash equivalents	$	190,435		190,435	—	—		190,435
Investment securities:
Available for sale	1,611,745			1,443	1,610,302	—		1,611,745
Held to maturity	740,186			—	719,183	—		719,183
Loans held for portfolio	2,750,514			—	—	2,562,160		2,562,160
Loans held for sale	25,548			—	25,548	—		25,548
FRB and FHLB stock	27,357			27,357	—	—		27,357
Derivative instruments	513			—	513	—		513
Accrued interest receivable	17,798			17,798	—	—		17,798
Financial Liabilities:
Deposits:
Noninterest-bearing demand	$	1,243,545		1,243,545	—	—		1,243,545
Interest-bearing demand	679,527			679,527	—	—		679,527
Savings and money market	1,844,710			1,844,710	—	—		1,844,710
Time deposits	1,046,113			—	—	1,046,485		1,046,485
Securities sold under agreements to repurchase	43,143			43,143	—	—		43,143
Accrued interest payable	63,341			63,341	—	—		63,341
Subordinated debentures	354,210			—	—	242,678		242,678
Off-Balance Sheet Financial Instruments:
Commitments to extend credit, standby letters of credit and financial guarantees	$	(2,715	)	—	—	(2,715	)	(2,715	)