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Fair Value
12 Months Ended
Dec. 31, 2015
Fair Value Disclosures [Abstract]  
Fair Value
 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 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 December 31, 2015
 
As of December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
2,530

 
$

 
$

 
$
1,725

 
$

 
$

Mutual funds
 
14,364

 

 

 
15,735

 

 

Total trading securities
 
16,894

 

 

 
17,460

 

 

Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
16,980

 

 

 

 

 

U.S. agency securities
 

 
86,643

 

 

 
30,431

 

CMOs
 

 
687,185

 

 

 
534,156

 

MBSs
 

 
153,530

 

 

 
159,765

 

Municipal securities
 

 
327,570

 

 

 
423,820

 

CDOs
 

 

 
31,529

 

 

 
33,774

Corporate debt securities
 

 

 

 

 
1,802

 

Equity securities
 

 
3,199

 

 

 
3,261

 

Total securities available-for-
  sale
 
16,980

 
1,258,127

 
31,529

 

 
1,153,235

 
33,774

Mortgage servicing rights (1)
 

 

 
1,853

 

 

 
1,728

Derivative assets (1)
 

 
16,233

 

 

 
9,018

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities (2)
 
$

 
$
21,039

 
$

 
$

 
$
11,980

 
$

(1) 
Included in other assets in the Consolidated Statements of Financial Condition.
(2) 
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.
Trading Securities
The Company's trading securities consist of diversified investment securities held in a grantor trust and are invested in money market and mutual funds. The fair value of these 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 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 in 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.
CDOs are classified in level 3 in the fair value hierarchy. The Company estimates the fair values for each CDO using discounted cash flow analyses with the assistance of a structured credit valuation firm. This methodology is based on a credit analysis and historical financial data for each of the issuers underlying the CDOs (the "Issuers"). These estimates are highly subjective and sensitive to several significant, unobservable inputs. The cash flows for each Issuer are then discounted to present values using LIBOR plus an adjustment to reflect the impact of market factors. Finally, the discounted cash flows for each Issuer are aggregated to derive the estimated fair value for the specific CDO.
The following table presents ranges of significant, unobservable inputs calculated using the weighted average of the Issuers used by the Company as of December 31, 2015 and 2014.
Significant Unobservable Inputs Used in the Valuation of CDOs
 
 
As of December 31,
 
 
2015
 
2014
Probability of prepayment
 
1.8
%
 -
15.1%
 
2.9
%
 -
15.2%
Probability of default
 
19.1
%
 -
32.6%
 
18.4
%
 -
57.7%
Loss given default
 
93.8
%
 -
97.1%
 
83.8
%
 -
97.0%
Probability of deferral cure
 
15.2
%
 -
63.1%
 
6.7
%
 -
75.0%

Most Issuers have the right to prepay the securities on the fifth anniversary of issuance and under other limited circumstances. To estimate prepayments, a credit analysis of each Issuer is performed to estimate its ability and likelihood to fund a prepayment. If a prepayment occurs, the Company receives cash equal to the par value for the portion of the CDO associated with that Issuer.
The likelihood that an Issuer who is currently deferring payment on the securities will pay all deferred amounts and remain current thereafter is based on an analysis of the Issuer's asset quality, leverage ratios, and other measures of financial viability.
The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for each CDO. The timing of the default, the magnitude of the default, and the timing and magnitude of the cure probability are directly interrelated. Defaults that occur sooner and/or are greater than anticipated have a negative impact on the valuation. In addition, a high cure probability assumption has a positive effect on the fair value, and, if a cure event takes place sooner than anticipated, the impact on the valuation is also favorable.
Management monitors the valuation results of each CDO on a semi-annual basis, which includes an analysis of historical pricing trends for these types of securities, overall economic conditions (such as tracking LIBOR curves), and the performance of the Issuers' industries. Annually, management validates significant assumptions by reviewing detailed back-testing performed by the structured credit valuation firm.
A rollforward of the carrying value of CDOs for the three years ended December 31, 2015 is presented in the following table.
Rollforward of Carrying Value of CDOs
(Dollar amounts in thousands)
 
 
Years Ended December 31,
 
 
2015
 
2014
 
2013
Beginning balance
 
$
33,774

 
$
18,309

 
$
12,129

Additions
 

 
6,549

 

Change in other comprehensive (loss) income (1)
 
(2,030
)
 
13,495

 
6,180

Paydowns and sales (2) 
 
(215
)
 
(4,579
)
 

Ending balance
 
$
31,529

 
$
33,774

 
$
18,309


(1) 
Included in unrealized holding (losses) gains in the Consolidated Statements of Comprehensive Income.
(2) 
During the year ended December 31, 2014, one CDO with a carrying value of $1.3 million and four CDOs totaling $2.9 million, which were acquired in the Great Lakes transaction, were sold. In addition, one CDO with a carrying value of zero was sold during the year ended December 31, 2013.
Mortgage Servicing Rights
The Company services loans for others owned by third parties that as a result are not included in the Consolidated Statements of Financial Condition. The Company collects servicing fees equal to a percentage of the outstanding principal balance of the loans being serviced. Mortgage servicing rights are recorded at fair value and are included in other assets in the Consolidated Statements of Financial Condition. The Company determines the fair value of mortgage servicing rights by estimating the present value of expected future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights as of December 31, 2015 included prepayment speeds, maturities, and discount rates. While market-based data is used to determine the assumptions, the Company incorporates its own estimates of the assumptions market participants would use in determining the fair value of mortgage servicing rights, which results in a level 3 classification in the fair value hierarchy.
A rollforward of the carrying value of mortgage servicing rights for the three years ended December 31, 2015 is presented in the following table.
Carrying Value of Mortgage Servicing Rights
(Dollar amounts in thousands)
 
 
Years Ended December 31,
 
 
2015
 
2014
 
2013
Beginning balance
 
$
1,728

 
$
1,893

 
$
985

New mortgage servicing rights
 
342

 
315

 
1,060

Total (losses) gains included in earnings (1):
 
 
 
 
 
 
Changes in valuation inputs and assumptions
 
(11
)
 
(480
)
 
63

Other changes in fair value (2)
 
(206
)
 

 
(215
)
Ending balance
 
$
1,853

 
$
1,728

 
$
1,893

Contractual servicing fees earned during the year (1)
 
$
546

 
$
520

 
$
418

Total amount of loans being serviced for the benefit of
  others at the end of the year
 
242,915

 
220,372

 
214,458

(1) 
Included in mortgage banking income in the Consolidated Statements of Income and relate to assets still held at the end of the year.
(2) 
Primarily represents changes in expected future cash flows over time 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 counterparties are representative of an exit price.
Pension Plan Assets
Although Pension Plan assets are not consolidated in the Company's Consolidated Statements of Financial Condition, they are required to be measured at fair value on an annual basis. The fair value of Pension Plan assets is presented in the following table by level in the fair value hierarchy.
Annual Fair Value Measurements for Pension Plan Assets
(Dollar amounts in thousands)
 
 
As of December 31, 2015
 
As of December 31, 2014
 
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Pension plan assets:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds (1)
 
$
23,061

 
$

 
$
23,061

 
$
25,499

 
$

 
$
25,499

U.S. government and government
  agency securities
 
6,866

 
5,538

 
12,404

 
7,879

 
8,063

 
15,942

Corporate bonds
 

 
9,569

 
9,569

 

 
6,599

 
6,599

Common stocks
 
11,330

 

 
11,330

 
14,149

 

 
14,149

Common trust funds
 

 
8,539

 
8,539

 

 
10,004

 
10,004

Total pension plan assets
 
$
41,257

 
$
23,646

 
$
64,903

 
$
47,527

 
$
24,666

 
$
72,193

(1) 
Includes mutual funds, money market funds, cash, cash equivalents, and accrued interest.
Mutual funds, certain U.S. government agency securities, and common stocks are based on quoted market prices in active exchange markets and classified in level 1 of the fair value hierarchy. Corporate bonds and certain U.S. government and government agency securities are valued at quoted prices from independent sources that are based on observable market trades or observable prices for similar bonds where a price for the identical bond is not observable and, therefore, are classified in level 2 of the fair value hierarchy. Common trust funds are valued at quoted redemption values on the last business day of the Pension Plan's fiscal year and are classified in level 2 of the fair value hierarchy. There were no Pension Plan assets classified in level 3 of the fair value hierarchy.
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 December 31, 2015
 
As of December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Collateral-dependent impaired loans (1)
 
$

 
$

 
$
10,519

 
$

 
$

 
$
23,799

OREO (2)
 

 

 
8,581

 

 

 
22,760

Loans held-for-sale (3)
 

 

 
14,444

 

 

 
9,459

Assets held-for-sale (4)
 

 

 
7,428

 

 

 
2,026

(1) 
Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented.
(2) 
Includes OREO and covered 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
Loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell, and one commercial real estate loan as of both December 31, 2015 and 2014. These loans were transferred to the held-for-sale category at the contract price and, accordingly, are classified in level 3 of the fair value hierarchy.
Assets Held-for-Sale
Assets-held-for-sale as of December 31, 2014 consists of former branches no longer in operation. As of December 31, 2015, assets held-for-sale consists of twelve former branches that are no longer in operation and seven parcels of land previously purchased for expansion. The increase in assets held-for-sale during 2015 was driven by the Company's strategic branch initiatives. These properties are being actively marketed and were transferred into the held-for-sale category at the lower of their fair value, as determined by a current appraisal, or their recorded investment. Based on these valuation methods, they are classified in level 3 of the fair value hierarchy.

Goodwill and Other Intangible Assets
Goodwill and other intangible assets are subject to annual impairment testing, which requires a significant degree of management judgment. If the testing had resulted in impairment, the Company would have classified goodwill and other intangible assets as a level 3 non-recurring fair value measurement. Additional information regarding goodwill, other intangible assets, and impairment policies can be found in Note 1, "Summary of Significant Accounting Policies," and Note 9, "Goodwill and Other Intangible Assets."
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 December 31, 2015
 
As of December 31, 2014
 
 
Fair Value Hierarchy
Level
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
1
 
$
114,587

 
$
114,587

 
$
117,315

 
$
117,315

Interest-bearing deposits in other banks
 
2
 
266,615

 
266,615

 
488,947

 
488,947

Securities held-to-maturity
 
2
 
23,152

 
20,054

 
26,555

 
27,670

FHLB and FRB stock
 
2
 
39,306

 
39,306

 
37,558

 
37,558

Loans
 
3
 
7,091,988

 
6,959,024

 
6,672,611

 
6,536,248

Investment in BOLI
 
3
 
209,601

 
209,601

 
206,498

 
206,498

Accrued interest receivable
 
3
 
27,847

 
27,847

 
27,506

 
27,506

Other interest-earning assets
 
3
 
1,982

 
1,982

 
3,799

 
3,799

Liabilities:
 
 
 
 

 
 

 
 

 
 

Deposits
 
2
 
$
8,097,738

 
$
8,093,640

 
$
7,887,758

 
$
7,879,413

Borrowed funds
 
2
 
165,096

 
165,096

 
137,994

 
137,994

Senior and subordinated debt
 
1
 
201,208

 
205,726

 
200,869

 
209,035

Accrued interest payable
 
2
 
2,175

 
2,175

 
2,324

 
2,324


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.
Short-Term Financial Assets and Liabilities – For financial instruments with a shorter-term or with no stated maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value. Those financial instruments include cash and due from banks, interest-bearing deposits in other banks, accrued interest receivable, and accrued interest payable.
Securities Held-to-Maturity – The fair value of securities held-to-maturity is estimated using the present value of expected future cash flows of the remaining maturities of the securities.
FHLB and FRB Stock – The carrying amounts approximate fair value as the stock is non-marketable.
Loans – Loans includes the FDIC indemnification asset and net loans, which consists of loans held-for-investment, acquired loans, covered loans, and the allowance for loan and covered loan losses. The fair value of loans is estimated using the present value of the expected future cash flows of the remaining maturities of the loans. Prepayment assumptions that consider the Company's historical experience and current economic and lending conditions were included. The discount rate was based on the LIBOR yield curve with adjustments for liquidity and credit risk inherent in the loans.
The fair value of the covered loan portfolio is determined by discounting the expected future cash flows at a market interest rate, which is derived from LIBOR swap rates over the life of those loans. The expected future cash flows are derived from the contractual terms of the covered loans, net of any projected credit losses. For valuation purposes, these loans are placed into groups with similar characteristics and risk factors, where appropriate. The timing and amount of credit losses for each group are estimated using historical default and loss experience, current collateral valuations, borrower credit scores, and internal risk ratings. For individually significant loans or credit relationships, the estimated fair value is determined by a specific loan level review utilizing appraised values for collateral and projections of the timing and amount of expected future cash flows.
Investment in BOLI – The fair value of BOLI approximates the carrying amount as both are based on each policy's respective CSV, which is the amount the Company would receive from liquidation of these investments. The CSV is derived from monthly reports provided by the managing brokers and is determined using the Company's initial insurance premium and earnings of the underlying assets, offset by management fees.
Other Interest-Earning Assets – The fair value of other interest-earning assets is estimated using the present value of the expected future cash flows of the remaining maturities of the assets.
Deposits – The fair values disclosed for demand deposits, savings deposits, NOW accounts, and money market deposits are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value for fixed-rate time deposits was estimated using the expected future cash flows discounted based on the LIBOR yield curve, plus or minus the spread associated with current pricing.
Borrowed Funds – The fair value of FHLB advances is estimated by discounting the agreements based on maturities using the rates currently offered for FHLB advances of similar remaining maturities adjusted for prepayment penalties that would be incurred if the borrowings were paid off on the measurement date. The carrying amounts of securities sold under agreements to repurchase approximate their fair value due to their short-term nature.
Senior and Subordinated Debt – The fair value of senior and subordinated debt was determined using quoted market prices.
Commitments to Extend Credit and Letters of Credit – The Company estimated the fair value of lending commitments outstanding to be immaterial based on (i) the limited interest rate exposure of the commitments outstanding due to their variable nature, (ii) the short-term nature of the commitment periods, (iii) termination clauses provided in the agreements, and (iv) the market rate of fees charged.