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 December 31, 2016						As of December 31, 2015
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets:
Trading securities:
Money market funds	$	1,645	$	—	$	—	$	2,530	$	—	$	—
Mutual funds	16,275		—		—		14,364		—		—
Total trading securities	17,920		—		—		16,894		—		—
Securities available-for-sale:
U.S. treasury securities	48,541		—		—		16,980		—		—
U.S. agency securities	—		183,637		—		—		86,643		—
CMOs	—		1,047,446		—		—		687,185		—
MBSs	—		332,655		—		—		153,530		—
Municipal securities	—		270,846		—		—		327,570
CDOs	—		—		33,260		—		—		31,529
Equity securities	—		3,065		—		—		3,199		—
Total securities available-for- sale	48,541		1,837,649		33,260		16,980		1,258,127		31,529
Mortgage servicing rights ("MSRs") ⁽¹⁾	—		—		6,120		—		—		1,853
Derivative assets⁽¹⁾	—		18,880		—		—		16,233		—
Liabilities:
Derivative liabilities ⁽²⁾	$	—	$	21,150	$	—	$	—	$	21,039	$	—


⁽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 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 in 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.

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 the ranges of significant, unobservable inputs calculated using the weighted average of the Issuers used by the Company as of December 31, 2016 and 2015.

Significant Unobservable Inputs Used in the Valuation of CDOs



	As of December 31,
	2016				2015
Probability of prepayment	0.0	%	-	10.9%	1.8	%	-	15.1%
Probability of default	16.7	%	-	46.8%	19.1	%	-	32.6%
Loss given default	93.3	%	-	98.9%	93.8	%	-	97.1%
Probability of deferral cure	7.6	%	-	100.0%	15.2	%	-	63.1%

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, 2016 is presented in the following table.

Carrying Value of CDOs

(Dollar amounts in thousands)



	Years Ended December 31,
	2016			2015			2014
Beginning balance	$	31,529		$	33,774		$	18,309
Additions	—			—			6,549
Change in other comprehensive (loss) income ⁽¹⁾	2,337			(2,030		)	13,495
Paydowns and sales ⁽²⁾	(606		)	(215		)	(4,579		)
Ending balance	$	33,260		$	31,529		$	33,774


⁽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.

Mortgage Servicing Rights

The Company services loans for others totaling $640.5 million and $242.9 million as of December 31, 2016 and 2015, respectively. As of December 31, 2016, loans serviced for others includes approximately $305.5 million of loans, the servicing of which transitioned from NI Bancshares to the Company as a result of the acquisition. These loans are owned by third-parties and are not included in the Consolidated Statements of Financial Condition. For additional information related to the NI Bancshares transaction, see Note 3, "Acquisitions." MSRs 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 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 December 31, 2016 and 2015.

Significant Unobservable Inputs Used in the Valuation of MSRs



	As of December 31,
	2016				2015
Prepayment speed	7.7	%	-	22.8%	10.1	%	-	20.9%
Maturity (months)	12		-	103	6		-	86
Discount rate	9.5	%	-	13.0%	9.5	%	-	13.0%

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 three years ended December 31, 2016 is presented in the following table.

Carrying Value of MSRs

(Dollar amounts in thousands)



	Years Ended December 31,
	2016			2015			2014
Beginning balance	$	1,853		$	1,728		$	1,893
Additions from acquisition	3,092			—			—
New MSRs	1,263			342			315
Total (losses) gains included in earnings ⁽¹⁾:
Changes in valuation inputs and assumptions	610			(11		)	(480		)
Other changes in fair value ⁽²⁾	(698		)	(206		)	—
Ending balance	$	6,120		$	1,853		$	1,728
Contractual servicing fees earned during the year ⁽¹⁾	$	1,312		$	546		$	520
Total amount of loans being serviced for the benefit of others at the end of the year	640,530			242,915			220,372


⁽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, 2016						As of December 31, 2015
	Level 1		Level 2		Total		Level 1		Level 2		Total
Pension plan assets:
Mutual funds ⁽¹⁾	$	29,071	$	—	$	29,071	$	23,061	$	—	$	23,061
U.S. government and government agency securities	5,957		7,947		13,904		6,866		5,538		12,404
Corporate bonds	—		7,010		7,010		—		9,569		9,569
Common stocks	7,526		—		7,526		11,330		—		11,330
Common trust funds	—		7,678		7,678		—		8,539		8,539
Total pension plan assets	$	42,554	$	22,635	$	65,189	$	41,257	$	23,646	$	64,903


⁽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, 2016						As of December 31, 2015
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Collateral-dependent impaired loans ⁽¹⁾	$	—	$	—	$	22,019	$	—	$	—	$	10,519
OREO ⁽²⁾	—		—		8,624		—		—		8,581
Loans held-for-sale ⁽³⁾	—		—		10,484		—		—		14,444
Assets held-for-sale ⁽⁴⁾	—		—		4,075		—		—		7,428


⁽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

Loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell as of December 31, 2016 and 2015. 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. A commercial real estate loan is also included in loans held-for-sale as of December 31, 2015.

Assets Held-for-Sale

As of December 31, 2016, assets held-for-sale 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.

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, 2016				As of December 31, 2015
	Fair Value Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and due from banks	1	$	155,055	$	155,055	$	114,587	$	114,587
Interest-bearing deposits in other banks	2	107,093		107,093		266,615		266,615
Securities held-to-maturity	2	22,291		18,212		23,152		20,054
FHLB and FRB stock	2	59,131		59,131		39,306		39,306
Loans	3	8,172,584		7,973,845		7,091,988		6,959,024
Investment in BOLI	3	219,746		219,746		209,601		209,601
Accrued interest receivable	3	34,384		34,384		27,847		27,847
Other interest-earning assets	3	834		834		1,982		1,982
Liabilities:
Deposits	2	$	8,828,603	$	8,820,572	$	8,097,738	$	8,093,640
Borrowed funds	2	879,008		879,008		165,096		165,096
Senior and subordinated debt	2	194,603		197,888		201,208		205,726
Accrued interest payable	2	3,416		3,416		2,175		2,175

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 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.

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 values of senior and subordinated notes are estimated based on quoted market prices of similar instruments. The fair values of junior subordinated debentures are estimated based on quoted market prices of comparable securities when available, or by discounting the expected future cash flows at market interest rates.

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.