FAIR VALUE MEASUREMENTS

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value.

Recurring Fair Value Measurements

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.



	March 31, 2018
	Level 1		Level 2		Level 3		Total
(In thousands)	Inputs		Inputs		Inputs		Fair Value
Trading security	$	—	$	—	$	11,795	$	11,795
Securities available for sale and other:
Municipal bonds and obligations	—		114,920		—		114,920
Agency collateralized mortgage obligations	—		912,936		—		912,936
Agency residential mortgage-backed securities	—		190,098		—		190,098
Agency commercial mortgage-backed securities	—		60,558		—		60,558
Corporate bonds	—		101,792		—		101,792
Trust preferred securities	—		11,563		—		11,563
Other bonds and obligations	—		9,532		—		9,532
Marketable equity securities	58,630		631		—		59,261
Loans held for sale	—		98,440		—		98,440
Derivative assets	—		19,949		6,531		26,480
Capitalized servicing rights	—		—		5,705		5,705
Derivative liabilities	909		21,051		—		21,960



	December 31, 2017
	Level 1		Level 2		Level 3		Total
(In thousands)	Inputs		Inputs		Inputs		Fair Value
Trading security	$	—	$	—	$	12,277	$	12,277
Securities available for sale and other:
Municipal bonds and obligations	—		118,233		—		118,233
Agency collateralized mortgage obligations	—		851,158		—		851,158
Agency residential mortgage-backed securities	—		216,940		—		216,940
Agency commercial mortgage-backed securities	—		62,305		—		62,305
Corporate bonds	—		110,721		—		110,721
Trust preferred securities	—		11,677		—		11,677
Other bonds and obligations	—		9,880		—		9,880
Marketable equity securities	44,851		334		—		45,185
Loans held for sale	—		153,620		—		153,620
Derivative assets	—		14,049		5,259		19,308
Capitalized servicing rights	—		—		3,834		3,834
Derivative liabilities	104		15,715		19		15,838

There were no transfers between levels during the three months ended March 31, 2018.

Trading Security at Fair Value. The Company holds one security designated as a trading security. It is a tax advantaged economic development bond issued to the Company by a local nonprofit which provides wellness and health programs. The determination of the fair value for this security is determined based on a discounted cash flow methodology. Certain inputs to the fair value calculation are unobservable and there is little to no market activity in the security; therefore, the security meets the definition of a Level 3 security. The discount rate used in the valuation of the security is sensitive to movements in the 3-month LIBOR rate.

Securities Available for Sale and Other. AFS and other securities classified as Level 1 consist of publicly-traded equity securities for which the fair values can be obtained through quoted market prices in active exchange markets. AFS and other securities classified as Level 2 include most of the Company’s debt securities. The pricing on Level 2 was primarily sourced from third party pricing services, overseen by management, and is based on models that consider standard input factors such as dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and condition, among other things.



March 31, 2018
(In thousands)	Fair Value		Amortized Cost		Gains
Marketable equity securities	$	59,261	$	55,719	$	3,542



December 31, 2017
(In thousands)	Fair Value		Amortized Cost		Gains
Marketable equity securities	$	45,185	$	36,483	$	8,702

Loans Held for Sale. The Company elected the fair value option for all loans held for sale (HFS) originated for sale on or after May 1, 2012. Loans HFS are classified as Level 2 as the fair value is based on input factors such as quoted prices for similar loans in active markets.

Aggregate Fair Value

March 31, 2018

Aggregate

Less Aggregate

(In thousands)

Fair Value

Unpaid Principal

Loans Held for Sale

98,440

96,300

2,140

Aggregate Fair Value

December 31, 2017

Aggregate

Less Aggregate

(In thousands)

Fair Value

Unpaid Principal

Loans Held for Sale

153,620

149,022

4,598

The changes in fair value of loans held for sale for the three months ended March 31, 2018 and March 31, 2017, were losses of $2.5 million and $593 thousand, respectively. The changes in fair value are included in mortgage banking originations in the Consolidated Statements of Income.

Interest Rate Swaps. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s 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.

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 itself and its counterparties. However, as of March 31, 2018, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Commitments to Lend. The Company enters into commitments to lend for residential mortgage loans intended for sale, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood that the loan in a lock position will ultimately close, and by the non-refundable costs of originating the loan. The closing ratio is derived from the Bank’s internal data and is adjusted using significant management judgment. The costs to originate are primarily based on the Company’s internal commission rates that are not observable. As such, these commitments are classified as Level 3 measurements.

Forward Sale Commitments. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the commitments to lend and loans originated for sale. To Be Announced (“TBA”) mortgage-backed securities forward commitment sales are used as the hedging instrument, are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of the Company’s best efforts and mandatory delivery loan sale commitments are determined similarly to the commitments to lend using quoted prices in the market place that are observable. However, costs to originate and closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are considered factors that are not observable. As such, best efforts and mandatory forward commitments are classified as Level 3 measurements.

Capitalized Servicing Rights. The Company accounts for certain capitalized servicing rights at fair value in its Consolidated Financial Statements, as the Company is permitted to elect the fair value option for each specific instrument. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy. These capitalized servicing rights are included in other assets on the consolidated balance sheet.

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three months ended March 31, 2018 and 2017.



	Assets (Liabilities)
										Capitalized
	Trading			Commitments			Forward			Servicing
(In thousands)	Security			to Lend			Commitments			Rights
Three Months Ended March 31, 2018
December 31, 2017	$	12,277		$	5,259		$	19		$	3,834
Unrealized (loss) gain, net recognized in other non-interest income	(317		)	12,213			(19		)	465
Paydown of trading security	(165		)	—			—			—
Transfers to held for sale loans	—			(10,941		)	—			—
Additions to servicing rights	—			—			—			1,406
March 31, 2018	$	11,795		$	6,531		$	—		$	5,705

Unrealized gains (losses) relating to instruments still held at March 31, 2018	$	1,205		$	6,531		$	—		—



Three Months Ended March 31, 2017
December 31, 2016	$	13,229		$	4,738		$	100		$	798
Unrealized gain, net recognized in other non-interest income	(106		)	17,302			(122		)	(2		)
Paydown of trading security	(157		)	—			—			—
Transfers to held for sale loans	—			(13,979		)	—			—
Additions to servicing rights	$	—		$	—		$	—		$	180
March 31, 2017	$	12,966		$	8,061		$	(22	)	$	976

Unrealized gains (losses) relating to instruments still held at March 31, 2017	$	1,736		$	8,061		$	(22	)	$	—

Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is as follows:



	Fair Value				Significant Unobservable Input
(In thousands)	March 31, 2018		Valuation Techniques	Unobservable Inputs	Value
Assets (Liabilities)
Trading Security	$	11,795	Discounted Cash Flow	Discount Rate	3.15		%

Commitments to Lend	6,531		Historical Trend	Closing Ratio	80.65		%
			Pricing Model	Origination Costs, per loan	$	3,063
Forward Commitments	—		Historical Trend	Closing Ratio	80.65		%
			Pricing Model	Origination Costs, per loan	$	3,063
Capitalized Servicing Rights	5,705		Discounted cash flow	Constant Prepayment Rate (CPR)	8.30		%
				Discount Rate	9.96		%
Total	$	24,031



	Fair Value				Significant Unobservable Input
(In thousands)	December 31, 2017		Valuation Techniques	Unobservable Inputs	Value
Assets (Liabilities)
Trading Security	$	12,277	Discounted Cash Flow	Discount Rate	2.74		%

Commitments to Lend	5,259		Historical Trend	Closing Ratio	81.53		%
			Pricing Model	Origination Costs, per loan	$	3,692
Forward Commitments	19		Historical Trend	Closing Ratio	81.53		%
			Pricing Model	Origination Costs, per loan	$	3,692
Capitalized Servicing Rights	3,834		Discounted Cash Flow	Constant Prepayment Rate (CPR)	10.00		%
				Discount Rate	10.95		%
Total	$	21,389

Non-Recurring Fair Value Measurements

The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements. There are no liabilities measured at fair value on a non-recurring basis.



	March 31, 2018		December 31, 2017		Fair Value Measurement Date as of March 31, 2018
	Level 3		Level 3		Level 3
(In thousands)	Inputs		Inputs		Inputs
Assets
Impaired loans	$	22,766	$	23,853	March 2018
Capitalized servicing rights	12,400		12,527		March 2018
Total	$	35,166	$	36,380

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is as follows:



	Fair Value
(In thousands)	March 31, 2018		Valuation Techniques	Unobservable Inputs	Range (Weighted Average) (a)
Assets
Impaired Loans	$	22,766	Fair Value of Collateral	Discounted Cash Flow - Loss Severity	38.43% to 0.08% (2.41%)
				Appraised Value	$10.6 to $5,944 ($2,143)
Capitalized Servicing Rights	12,400		Discounted Cash Flow	Constant Prepayment Rate (CPR)	7.51% to 11.22% (9.65%)
				Discount Rate	10.00% to 13.12% (11.64%)
Total	$	35,166


(a)	Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.



	Fair Value
(In thousands)	December 31, 2017		Valuation Techniques	Unobservable Inputs	Range (Weighted Average) (a)
Assets
Impaired Loans	$	23,853	Fair Value of Collateral	Discounted Cash Flow - loss severity	38.72% to 0.21% (3.40%)
				Appraised Value	$10.9 to $5,967 ($2,197)
Capitalized Servicing Rights	12,527		Discounted Cash Flow	Constant Prepayment Rate (CPR)	7.78% to 12.78% (10.38%)
				Discount Rate	10.00% to 13.28% (11.72%)
Total	$	36,380


(a)	Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.

There were no Level 1 or Level 2 nonrecurring fair value measurements for the periods ended March 31, 2018 and December 31, 2017.

Impaired loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, nonrecurring fair value measurement adjustments that relate to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.

Capitalized loan servicing rights. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Bank. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including comparable sales and appraisals.

Summary of Estimated Fair Values of Financial Instruments

The following tables summarize the estimated fair values, and related carrying amounts, of the Company’s financial instruments. Certain financial instruments and all non-financial instruments are excluded. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.



	March 31, 2018
	Carrying		Fair
(In thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	123,887	$	123,887	$	123,887	$	—	$	—
Trading security	11,795		11,795		—		—		11,795
Securities available for sale and other	1,460,660		1,460,660		58,630		1,402,030		—
Securities held to maturity	395,337		394,296		—		361,142		33,154
FHLB bank stock and restricted securities	64,038		N/A		N/A		N/A		N/A
Net loans	8,322,558		8,451,273		—		—		8,451,273
Loans held for sale	98,440		98,440		—		98,440		—
Accrued interest receivable	30,585		30,585		—		30,585		—
Cash surrender value of bank-owned life insurance policies	192,379		192,379		—		192,379		—
Derivative assets	26,480		26,480		—		19,949		6,531
Assets held for sale	1,392		1,392		—		1,392		—
Financial Liabilities
Total deposits	$	8,683,267	$	8,652,801	$	—	$	8,652,801	$	—
Short-term debt	835,892		836,095		—		836,095		—
Long-term Federal Home Loan Bank advances	289,969		285,102		—		285,102		—
Subordinated borrowings	89,384		96,794		—		96,794		—
Derivative liabilities	21,960		21,960		909		21,051		—



	December 31, 2017
	Carrying		Fair
(In thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	248,763	$	248,763	$	248,763	$	—	$	—
Trading security	12,277		12,277		—		—		12,277
Securities available for sale and other	1,426,099		1,426,099		44,850		1,381,249		—
Securities held to maturity	397,103		405,276		—		371,458		33,818
FHLB bank stock and restricted securities	63,085		N/A		N/A		N/A		N/A
Net loans	8,247,504		8,422,034		—		—		8,422,034
Loans held for sale	153,620		153,620		—		153,620		—
Accrued interest receivable	33,739		33,739		—		33,739		—
Derivative assets	19,308		19,308				14,049		5,259
Assets held for sale	1,392		1,392		—		1,392		—
Financial Liabilities
Total deposits	$	8,749,530	$	8,731,527	$	—	$	8,731,527	$	—
Short-term debt	667,300		667,246		—		667,246		—
Long-term Federal Home Loan Bank advances	380,436		378,766		—		378,766		—
Subordinated borrowings	89,339		97,414		—		97,414		—
Derivative liabilities	15,838		15,838		104		15,715		19

Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which it is practicable to estimate that value.

Cash and cash equivalents. Carrying value is assumed to represent fair value for cash and cash equivalents that have original maturities of ninety days or less.

FHLB bank stock and restricted securities. It is not practical to determine fair value due to the restricted nature of the security.

Cash surrender value of life insurance policies. Carrying value approximates fair value.

Loans, net. In accordance with recent accounting guidance, the fair value of loans as of March 31, 2018 was measured using the exit price valuation method, determined primarily 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, while incorporating liquidity and credit assumptions.

Accrued interest receivable. Carrying value approximates fair value.

Deposits. The fair value of demand, non-interest bearing checking, savings and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.

Borrowed funds. The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings. Such funds include all categories of debt and debentures in the table above.

Subordinated borrowings. The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every ninety days.

Off-balance-sheet financial instruments. Off-balance-sheet financial instruments include standby letters of credit and other financial guarantees and commitments considered immaterial to the Company’s financial statements.