FAIR VALUE MEASUREMENTS

Below is a description of certain assets and liabilities measured at fair value.

The following table summarizes financial instruments measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



	September 30, 2016
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises	$	—	$	99,058	$	—	$	99,058
Obligations of states and political subdivisions	—		35,242		3,094		38,336
Residential mortgage-backed securities	—		342,215		—		342,215
Total securities available for sale	$	—	$	476,515	$	3,094	$	479,609
State tax credits held for sale	—		—		4,801		4,801
Derivative financial instruments	—		2,099		—		2,099
Total assets	$	—	$	478,614	$	7,895	$	486,509

Liabilities
Derivative financial instruments	$	—	$	2,099	$	—	$	2,099
Total liabilities	$	—	$	2,099	$	—	$	2,099



	December 31, 2015
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises	$	—	$	99,008	$	—	$	99,008
Obligations of states and political subdivisions	—		38,624		3,077		41,701
Residential mortgage-backed securities	—		311,061		—		311,061
Total securities available for sale	$	—	$	448,693	$	3,077	$	451,770
State tax credits held for sale	—		—		5,941		5,941
Derivative financial instruments	—		1,155		—		1,155
Total assets	$	—	$	449,848	$	9,018	$	458,866

Liabilities
Derivative financial instruments	$	—	$	1,155	$	—	$	1,155
Total liabilities	$	—	$	1,155	$	—	$	1,155

•

Securities available for sale. Securities classified as available for sale are reported at fair value utilizing Level 2 and Level 3 inputs. Fair values for Level 2 securities are based upon dealer quotes, market spreads, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions at the security level. At September 30, 2016, Level 3 securities available for sale consist primarily of three Auction Rate Securities that are valued based on the securities' estimated cash flows, yields of comparable securities, and live trading levels.


•	State tax credits held for sale. At September 30, 2016, of the $44.2 million of state tax credits held for sale on the condensed consolidated balance sheet, approximately $4.8 million were carried at fair value. The remaining $39.4 million of state tax credits were accounted for at cost.

The Company is not aware of an active market that exists for the 10-year streams of state tax credit financial instruments. However, the Company’s principal market for these tax credits consists of Missouri state residents who buy these credits and local and regional accounting firms who broker them. As such, the Company employed a discounted cash flow analysis (income approach) to determine the fair value.

The fair value measurement is calculated using an internal valuation model with market data including discounted cash flows based upon the terms and conditions of the tax credits. If the underlying project remains in compliance with the various federal and state rules governing the tax credit program, each project will generate about 10 years of tax credits. The inputs to the discounted cash flow calculation include: the amount of tax credits generated each year, the anticipated sale price of the tax credit, the timing of the sale and a discount rate. The discount rate is estimated using the LIBOR swap curve at a point equal to the remaining life in years of credits plus a 205 basis point spread. With the exception of the discount rate, the other inputs to the fair value calculation are observable and readily available. The discount rate is considered a Level 3 input because it is an “unobservable input” and is based on the Company’s assumptions. An increase in the discount rate utilized would generally result in a lower estimated fair value of the tax credits. Alternatively, a decrease in the discount rate utilized would generally result in a higher estimated fair value of the tax credits. Given the significance of this input to the fair value calculation, the state tax credit assets are reported as Level 3 assets.

•

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains counterparty quotations to value its interest rate swaps and caps. In addition, the Company validates the counterparty quotations with third party valuation sources. Derivatives with negative fair values are included in Other liabilities in the consolidated balance sheets. Derivatives with positive fair value are included in Other assets in the consolidated balance sheets.

Level 3 financial instruments

The following table presents the changes in Level 3 financial instruments measured at fair value on a recurring basis as of September 30, 2016 and 2015.


•	Purchases, sales, issuances and settlements. There were no Level 3 purchases during the quarter ended September 30, 2016 or 2015.


•	Transfers in and/or out of Level 3. There were no Level 3 transfers during the quarter ended September 30, 2016 and 2015.



	Securities available for sale, at fair value
	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2016		2015		2016		2015
Beginning balance	$	3,093	$	3,070	$	3,077	$	3,059
Total gains:
Included in other comprehensive income	1		7		17		18
Purchases, sales, issuances and settlements:
Purchases	—		—		—		—
Ending balance	$	3,094	$	3,077	$	3,094	$	3,077

Change in unrealized gains relating to assets still held at the reporting date	$	1	$	7	$	17	$	18



	State tax credits held for sale
	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2016		2015		2016			2015
Beginning balance	$	4,774	$	9,965	$	5,941		$	11,689
Total gains:
Included in earnings	27		124		144			318
Purchases, sales, issuances and settlements:
Sales	—		—		(1,284		)	(1,918		)
Ending balance	$	4,801	$	10,089	$	4,801		$	10,089

Change in unrealized gains (losses) relating to assets still held at the reporting date	$	27	$	124	$	(237	)	$	(186	)

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 fair value that were recognized at fair value below cost at the end of the period. The following table presents financial instruments and non-financial assets measured at fair value on a non-recurring basis as of September 30, 2016.



	(1)		(1)		(1)		(1)
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total losses for the three months ended September 30, 2016		Total losses for the nine months ended September 30, 2016
Impaired loans	$	357	$	—	$	—	$	357	$	2,073	$	2,309
Other real estate	—		—		—		—		—		1
Total	$	357	$	—	$	—	$	357	$	2,073	$	2,310

(1) The amounts represent only balances measured at fair value during the period and still held as of the reporting date.

Impaired loans are reported at the fair value of the underlying collateral for collateral dependent loans. Fair values for impaired loans are obtained from current appraisals by qualified licensed appraisers or independent valuation specialists. Other real estate owned is adjusted to fair value upon foreclosure of the underlying loan. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less costs to sell. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Certain state tax credits are reported at cost.

Following is a summary of the carrying amounts and fair values of the Company’s financial instruments on the consolidated balance sheets at September 30, 2016 and December 31, 2015.



	September 30, 2016				December 31, 2015
(in thousands)	Carrying Amount		Estimated fair value		Carrying Amount		Estimated fair value
Balance sheet assets
Cash and due from banks	$	56,789	$	56,789	$	47,935	$	47,935
Federal funds sold	488		488		91		91
Interest-bearing deposits	63,202		63,202		47,131		47,131
Securities available for sale	479,609		479,609		451,770		451,770
Securities held to maturity	41,031		42,218		43,714		43,441
Other investments, at cost	19,789		19,789		17,455		17,455
Loans held for sale	7,663		7,663		6,598		6,598
Derivative financial instruments	2,099		2,099		1,155		1,155
Portfolio loans, net	3,041,223		3,045,230		2,781,879		2,782,704
State tax credits, held for sale	44,180		48,959		45,850		49,588
Accrued interest receivable	8,526		8,526		8,399		8,399

Balance sheet liabilities
Deposits	3,124,825		3,126,534		2,784,591		2,784,654
Subordinated debentures	56,807		36,275		56,807		35,432
Federal Home Loan Bank advances	129,000		128,996		110,000		109,994
Other borrowings	190,022		189,996		270,326		270,286
Derivative financial instruments	2,099		2,099		1,155		1,155
Accrued interest payable	648		648		629		629

For information regarding the methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practical to estimate such value, refer to Note 19 – Fair Value Measurements in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

The following table presents the level in the fair value hierarchy for the estimated fair values of only the Company’s financial instruments that are not already presented on the condensed consolidated balance sheets at fair value at September 30, 2016, and December 31, 2015.



	Estimated Fair Value Measurement at Reporting Date Using						Balance at September 30, 2016
(in thousands)	Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity	$	—	$	42,218	$	—	$	42,218
Portfolio loans, net	—		—		3,045,230		3,045,230
State tax credits, held for sale	—		—		44,158		44,158
Financial Liabilities:
Deposits	2,636,980		—		489,554		3,126,534
Subordinated debentures	—		36,275		—		36,275
Federal Home Loan Bank advances	—		128,996		—		128,996
Other borrowings	—		189,996		—		189,996

	Estimated Fair Value Measurement at Reporting Date Using						Balance at December 31, 2015
(in thousands)	Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity	$	—	$	43,441	$	—	$	43,441
Portfolio loans, net	—		—		2,782,704		2,782,704
State tax credits, held for sale	—		—		43,647		43,647
Financial Liabilities:
Deposits	2,428,403		—		356,251		2,784,654
Subordinated debentures	—		35,432		—		35,432
Federal Home Loan Bank advances	—		109,994		—		109,994
Other borrowings	—		270,286		—		270,286