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, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



	September 30, 2017
(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	$	—	$	100,123	$	—	$	100,123
Obligations of states and political subdivisions	—		33,341		—		33,341
Residential mortgage-backed securities	—		469,657		—		469,657
Total securities available for sale	$	—	$	603,121	$	—	$	603,121
State tax credits held for sale	—		—		1,274		1,274
Derivative financial instruments	—		3,278		—		3,278
Total assets	$	—	$	606,399	$	1,274	$	607,673

Liabilities
Derivative financial instruments	$	—	$	3,278	$	—	$	3,278
Total liabilities	$	—	$	3,278	$	—	$	3,278



	December 31, 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	$	—	$	107,660	$	—	$	107,660
Obligations of states and political subdivisions	—		33,542		3,089		36,631
Residential mortgage-backed securities	—		316,506		—		316,506
Total securities available for sale	$	—	$	457,708	$	3,089	$	460,797
State tax credits held for sale	—		—		3,585		3,585
Derivative financial instruments	—		4,016		—		4,016
Total assets	$	—	$	461,724	$	6,674	$	468,398

Liabilities
Derivative financial instruments	$	—	$	4,016	$	—	$	4,016
Total liabilities	$	—	$	4,016	$	—	$	4,016

•

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, 2017, there were no Level 3 Auction Rate Securities. Auction Rate Securities at September 30, 2017 were valued using a Level 2 pricing source similar to our other securities available for sale.


•	State tax credits held for sale. At September 30, 2017, of the $35.3 million of state tax credits held for sale on the condensed consolidated balance sheet, approximately $1.3 million were carried at fair value. The remaining $34.0 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. The remaining state tax credits carried at fair value are expected to be sold within the next several quarters. 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. 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, 2017 and 2016.


•	Purchases, sales, issuances and settlements. There were no Level 3 purchases during the quarters ended September 30, 2017 or 2016.


•	Transfers in and/or out of Level 3. There were no Level 3 transfers during the quarters ended September 30, 2017 and 2016.



	Securities available for sale, at fair value
	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2017		2016		2017			2016
Beginning balance	$	—	$	3,093	$	3,089		$	3,077
Total gains:
Included in other comprehensive income	—		1		4			17
Purchases, sales, issuances and settlements:
Purchases	—		—		—			—
Transfer in and/or out of Level 3	—		—		(3,093		)	—
Ending balance	$	—	$	3,094	$	—		$	3,094

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



	State tax credits held for sale
	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2017		2016		2017			2016
Beginning balance	$	1,274	$	4,774	$	3,585		$	5,941
Total gains:
Included in earnings	—		27		49			144
Purchases, sales, issuances and settlements:
Sales	—		—		(2,360		)	(1,284		)
Ending balance	$	1,274	$	4,801	$	1,274		$	4,801

Change in unrealized gains (losses) relating to assets still held at the reporting date	$	—	$	27	$	(655	)	$	(237	)

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, 2017.



	(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, 2017		Total losses for the nine months ended September 30, 2017
Impaired loans	$	2,743	$	—	$	—	$	2,743	$	613	$	5,876
Other real estate	26		—		—		26		38		38
Total	$	2,769	$	—	$	—	$	2,769	$	651	$	5,914

(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. At September 30, 2017, impaired loans measured on a non-recurring basis had a principal balance of $3.9 million, with a valuation allowance of $1.2 million.

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, 2017 and December 31, 2016.



	September 30, 2017				December 31, 2016
(in thousands)	Carrying Amount		Estimated fair value		Carrying Amount		Estimated fair value
Balance sheet assets
Cash and due from banks	$	76,777	$	76,777	$	54,288	$	54,288
Federal funds sold	1,155		1,155		446		446
Interest-bearing deposits	107,821		107,821		145,048		145,048
Securities available for sale	603,121		603,121		460,797		460,797
Securities held to maturity	76,168		76,260		80,463		79,639
Other investments, at cost	29,436		29,436		14,840		14,840
Loans held for sale	6,411		6,411		9,562		9,562
Derivative financial instruments	3,278		3,278		4,016		4,016
Loans, net	3,987,467		4,009,071		3,114,752		3,125,701
State tax credits, held for sale	35,291		37,781		38,071		41,264
Accrued interest receivable	14,213		14,213		11,117		11,117

Balance sheet liabilities
Deposits	4,059,211		4,057,561		3,233,361		3,232,414
Subordinated debentures and notes	118,093		100,062		105,540		86,052
Federal Home Loan Bank advances	248,868		249,168		—		—
Other borrowings	219,104		219,012		276,980		276,905
Derivative financial instruments	3,278		3,278		4,016		4,016
Accrued interest payable	2,007		2,007		1,105		1,105

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, 2016.

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, 2017, and December 31, 2016.



	Estimated Fair Value Measurement at Reporting Date Using						Balance at September 30, 2017
(in thousands)	Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity	$	—	$	76,260	$	—	$	76,260
Portfolio loans, net	—		—		4,009,071		4,009,071
State tax credits, held for sale	—		—		36,508		36,508
Financial Liabilities:
Deposits	3,442,015		—		615,546		4,057,561
Subordinated debentures and notes	—		100,062		—		100,062
Federal Home Loan Bank advances	—		249,168		—		249,168
Other borrowings	—		219,012		—		219,012

	Estimated Fair Value Measurement at Reporting Date Using						Balance at December 31, 2016
(in thousands)	Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity	$	—	$	79,639	$	—	$	79,639
Portfolio loans, net	—		—		3,125,701		3,125,701
State tax credits, held for sale	—		—		37,679		37,679
Financial Liabilities:
Deposits	2,760,202		—		472,212		3,232,414
Subordinated debentures and notes	—		86,052		—		86,052
Other borrowings	—		276,905		—		276,905