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. 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 currently include 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.

Items Measured on a Recurring Basis. Assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014 are reflected in the following table:



	Fair Value Measurements
(dollars in thousands)	Level 1		Level 2		Level 3	Fair Value
March 31, 2015:
Assets:
Available-for-sale investment securities:
U.S. Government sponsored agencies	$	—	252,552		—	252,552
Residential mortgage-backed	—		1,056,256		—	1,056,256
Commercial mortgage-backed	—		838		—	838
State and political subdivisions	—		29,194		—	29,194
Corporate notes	—		213,617		—	213,617
Equity investments	1,985		—		—	1,985
Mortgage loans held for sale	—		43,655		—	43,655
Derivative instruments:
Interest rate lock commitments	—		1,268		—	1,268
Forward commitments to sell mortgage-backed securities	—		(284	)	—	(284	)
Servicing rights	—		—		17,402	17,402
Total	$	1,985	1,597,096		17,402	1,616,483
December 31, 2014:
Assets:
Available-for-sale investment securities:
U.S. Government sponsored agencies	$	—	231,731		—	231,731
Residential mortgage-backed	—		1,007,844		—	1,007,844
Commercial mortgage-backed	—		837		—	837
State and political subdivisions	—		29,615		—	29,615
Corporate notes	—		173,695		—	173,695
Equity investments	1,967		—		—	1,967
Mortgage loans held for sale	—		31,411		—	31,411
Derivative instruments:
Interest rate lock commitments	—		580		—	580
Forward commitments to sell mortgage-backed securities	—		(294	)	—	(294	)
Servicing rights	—		—		18,013	18,013
Total	$	1,967	1,475,419		18,013	1,495,399

There were no transfers between Levels 1 and 2 of the fair value hierarchy for the three months ended March 31, 2015 and 2014.

The following table presents the changes in Level 3 assets measured on a recurring basis for the three months ended March 31, 2015 and 2014:



	Servicing Rights
	Three Months Ended
	March 31,
(dollars in thousands)	2015			2014
Balance, beginning of period	$	18,013		18,854
Total gains or losses (realized/unrealized):
Included in earnings ⁽¹⁾	(1,472		)	(232	)
Included in other comprehensive income	—			—
Issuances	822			455
Purchases	39			—
Transfers in and/or out of level 3	—			—
Balance, end of period	$	17,402		19,077

____________________


(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 March 31, 2015 and December 31, 2014 are reflected in the following table:



	Fair Value Measurements
(dollars in thousands)	Level 1		Level 2	Level 3	Fair Value
March 31, 2015:
Assets:
Impaired loans:
Commercial, financial and agricultural	$	—	—	7,033	7,033
Real estate construction and development	—		—	3,396	3,396
Real estate mortgage:
Residential mortgage	—		—	81,475	81,475
Home equity	—		—	5,070	5,070
Multi-family residential	—		—	17,782	17,782
Commercial real estate	—		—	3,788	3,788
Consumer and installment	—		—	4	4
Other real estate	—		—	15,227	15,227
Total	$	—	—	133,775	133,775
December 31, 2014:
Assets:
Impaired loans:
Commercial, financial and agricultural	$	—	—	8,144	8,144
Real estate construction and development	—		—	3,516	3,516
Real estate mortgage:
Residential mortgage	—		—	82,479	82,479
Home equity	—		—	5,465	5,465
Multi-family residential	—		—	18,574	18,574
Commercial real estate	—		—	7,424	7,424
Consumer and installment	—		—	22	22
Other real estate	—		—	55,666	55,666
Total	$	—	—	181,290	181,290

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) 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 $459,000 and $1.0 million for the three months ended March 31, 2015 and 2014, 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 $109,000 and $97,000 to noninterest expense for the three months ended March 31, 2015 and 2014, respectively.

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.

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 March 31, 2015 was as follows:



	March 31, 2015
	Carrying Value		Estimated Fair Value
(dollars in thousands)	Carrying Value		Level 1	Level 2	Level 3	Total
Financial Assets:
Cash and cash equivalents	$	230,735	230,735	—	—	230,735
Investment securities:
Available for sale	1,554,442		1,985	1,552,457	—	1,554,442
Held to maturity	595,335		—	597,341	—	597,341
Loans held for portfolio	3,085,600		—	—	3,096,743	3,096,743
Loans held for sale	43,655		—	43,655	—	43,655
Derivative instruments	984		—	984	—	984
Accrued interest receivable	15,867		15,867	—	—	15,867
Financial Liabilities:
Deposits	$	4,972,089	4,049,806	—	921,817	4,971,623
Securities sold under agreements to repurchase	51,032		51,032	—	—	51,032
Accrued interest payable	830		830	—	—	830
Subordinated debentures	354,305		—	—	270,473	270,473
Liability for Off-Balance Sheet Financial Instruments:
Commitments to extend credit, standby letters of credit and financial guarantees	$	12	—	—	12	12

The estimated fair value of the Company’s financial instruments at December 31, 2014 was as follows:



	December 31, 2014
	Carrying Value		Estimated Fair Value
(dollars in thousands)	Carrying Value		Level 1	Level 2	Level 3	Total
Financial Assets:
Cash and cash equivalents	$	205,402	205,402	—	—	205,402
Investment securities:
Available for sale	1,445,689		1,967	1,443,722	—	1,445,689
Held to maturity	618,148		—	614,272	—	614,272
Loans held for portfolio	3,050,958		—	—	2,937,948	2,937,948
Loans held for sale	31,411		—	31,411	—	31,411
Derivative instruments	286		—	286	—	286
Accrued interest receivable	15,064		15,064	—	—	15,064
Financial Liabilities:
Deposits	$	4,849,504	3,923,627	—	924,955	4,848,582
Securities sold under agreements to repurchase	64,875		64,875	—	—	64,875
Accrued interest payable	831		831	—	—	831
Subordinated debentures	354,286		—	—	303,191	303,191
Liability for Off-Balance Sheet Financial Instruments:
Commitments to extend credit, standby letters of credit and financial guarantees	$	12	—	—	12	12