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Fair Values of Assets and Liabilities

6 Months Ended

Jun. 30, 2020

The Company measures, monitors and discloses certain of its assets and liabilities on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:


•	Level 1—unadjusted quoted prices in active markets for identical assets or liabilities.

•

Level 2—inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

Level 3—significant unobservable inputs that reflect the Company’s own assumptions that market participants would use in pricing the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the above valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the assets or liabilities. The following is a description of the valuation methodologies used for the Company’s assets and liabilities measured at fair value on a recurring basis.

Available-for-sale debt securities, trading account securities and equity securities with readily determinable fair value—Fair values for available-for-sale debt securities, trading account securities and equity securities with readily determinable fair value are typically based on prices obtained from independent pricing vendors. Securities measured with these valuation techniques are generally classified as Level 2 of the fair value hierarchy. Typically, standard inputs such as benchmark yields, reported trades for similar securities, issuer spreads, benchmark securities, bids, offers and reference data including market research publications are used to fair value these securities. When these inputs are not available, broker/dealer quotes may be obtained by the vendor to determine the fair value of the security. We review the vendor’s pricing methodologies to determine if observable market information is being used, versus unobservable inputs. Fair value measurements using significant inputs that are unobservable in the market due to limited activity or a less liquid market are classified as Level 3 in the fair value hierarchy. The fair value of U.S. Treasury

securities and certain equity securities with readily determinable fair value are based on unadjusted quoted prices in active markets for identical securities. As such, these securities are classified as Level 1 in the fair value hierarchy.

The Company’s Investment Operations Department is responsible for the valuation of Level 3 available-for-sale debt securities. The methodology and variables used as inputs in pricing Level 3 securities are derived from a combination of observable and unobservable inputs. The unobservable inputs are determined through internal assumptions that may vary from period to period due to external factors, such as market movement and credit rating adjustments.

At June 30, 2020, the Company classified $117.3 million of municipal securities as Level 3. These municipal securities are bond issues for various municipal government entities primarily located in the Chicago metropolitan area and southern Wisconsin and are privately placed, non-rated bonds without CUSIP numbers. The Company also classified $2.3 million of U.S. Government agency securities as Level 3 at June 30, 2020. The Company’s methodology for pricing these securities focuses on three distinct inputs: equivalent rating, yield and other pricing terms. To determine the rating for a given non-rated municipal bond, the Investment Operations Department references a rated, publicly issued bond by the same issuer if available. A reduction is then applied to the rating obtained from the comparable bond, as the Company believes if liquidated, a non-rated bond would be valued less than a similar bond with a verifiable rating. The reduction applied by the Company is one complete rating grade (i.e. a “AA” rating for a comparable bond would be reduced to “A” for the Company’s valuation). For bond issues without comparable bond proxies, a rating of "BBB" was assigned. In the second quarter of 2020, all of the ratings derived by the Investment Operations Department using the above process were "BBB" or better. The fair value measurement of municipal bonds is sensitive to the rating input, as a higher rating typically results in an increased valuation. The remaining pricing inputs used in the bond valuation are observable. Based on the rating determined in the above process, Investment Operations obtains a corresponding current market yield curve available to market participants. Other terms including coupon, maturity date, redemption price, number of coupon payments per year, and accrual method are obtained from the individual bond term sheets. Certain municipal bonds held by the Company at June 30, 2020 are continuously callable. When valuing these bonds, the fair value is capped at par value as the Company assumes a market participant would not pay more than par for a continuously callable bond. To determine the rating for the U.S. Government agency securities, the Investment Operations Department assigned a AAA rating as it is guaranteed by the U.S. government.

Mortgage loans held-for-sale—The fair value of mortgage loans held-for-sale is determined by reference to investor price sheets for loan products with similar characteristics. As such, these loans are classified as Level 2 in the fair value hierarchy.

Loans held-for-investment—The fair value for loans in which the Company elected the fair value option is estimated by discounting future scheduled cash flows for the specific loan through maturity, adjusted for estimated credit losses and prepayments. The Company uses a discount rate based on the actual coupon rate of the underlying loan. At June 30, 2020, the Company classified $14.0 million of loans held-for-investment as Level 3. The weighted average discount rate used as an input to value these loans at June 30, 2020 was 2.80% with discount rates applied ranging from 2%-3%. The higher the rate utilized to discount estimated future cash flows, the lower the fair value measurement. As noted above, the fair value estimate also includes assumptions of prepayment speeds and credit losses. The Company included a prepayments speed assumption of 17.25% at June 30, 2020. Prepayment speeds are inversely related to the fair value of these loans as an increase in prepayment speeds results in a decreased valuation. Additionally, the weighted average credit discount used as an input to value the specific loans was 1.24% with credit loss discount ranging from 0%-6% at June 30, 2020.

MSRs—Fair value for MSRs is determined utilizing a valuation model which calculates the fair value of each servicing rights based on the present value of estimated future cash flows. The Company uses a discount rate commensurate with the risk associated with each servicing rights, given current market conditions. At June 30, 2020, the Company classified $77.2 million of MSRs as Level 3. The weighted average discount rate used as an input to value the pool of MSRs at June 30, 2020 was 10.21% with discount rates applied ranging from 3%-21%. The higher the rate utilized to discount estimated future cash flows, the lower the fair value measurement. The fair value of MSRs was also estimated based on other assumptions including prepayment speeds and the cost to service. Prepayment speeds ranged from 0%-95% or a weighted average prepayment speed of 17.25%. Further, for current and delinquent loans, the Company assumed a weighted average cost of servicing of $77 and $442, respectively, per loan. Prepayment speeds and the cost to service are both inversely related to the fair value of MSRs as an increase in prepayment speeds or the cost to service results in a decreased valuation. See Note 9 - Mortgage Servicing Rights (“MSRs”) for further discussion of MSRs.

Derivative instruments—The Company’s derivative instruments include interest rate swaps, caps and collars, commitments to fund mortgages for sale into the secondary market (interest rate locks), forward commitments to end investors for the sale of mortgage loans and foreign currency contracts. Interest rate swaps, caps and collars are valued by a third party, using models that primarily use market observable inputs, such as yield curves, and are classified as Level 2 in the fair value hierarchy. The credit risk associated with derivative financial instruments that are subject to master netting agreements is measured on a net basis by counterparty portfolio. The fair value for mortgage-related derivatives is based on changes in mortgage rates from the date of the

commitments. The fair value of foreign currency derivatives is computed based on change in foreign currency rates stated in the contract compared to those prevailing at the measurement date.

At June 30, 2020, the Company classified $58.4 million of derivative assets related to interest rate locks as Level 3. The fair value of interest rate locks is based on prices obtained for loans with similar characteristics from third parties, adjusted for the pull-through rate, which represents the Company’s best estimate of the likelihood that a committed loan will ultimately fund. The weighted-average pull-through rate at June 30, 2020 was 79% with pull-through rates applied ranging from 0% to 100%. Pull-through rates are directly related to the fair value of interest rate locks as an increase in the pull-through rate results in an increased valuation.

Nonqualified deferred compensation assets—The underlying assets relating to the nonqualified deferred compensation plan are included in a trust and primarily consist of non-exchange traded institutional funds which are priced based by an independent third party service. These assets are classified as Level 2 in the fair value hierarchy.

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented:



	June 30, 2020
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Available-for-sale securities
U.S. Treasury	$	60,539	$	60,539	$	—	$	—
U.S. Government agencies	293,507		—		291,214		2,293
Municipal	150,879		—		33,624		117,255
Corporate notes	102,879		—		102,879		—
Mortgage-backed	2,587,157		—		2,587,157		—
Trading account securities	890		—		890		—
Equity securities with readily determinable fair value	52,460		44,394		8,066		—
Mortgage loans held-for-sale	833,163		—		833,163		—
Loans held-for-investment	254,614		—		240,661		13,953
MSRs	77,203		—		—		77,203
Nonqualified deferred compensation assets	13,576		—		13,576		—
Derivative assets	327,624		—		269,191		58,433
Total	$	4,754,491	$	104,933	$	4,380,421	$	269,137
Derivative liabilities	$	355,265	$	—	$	355,265	$	—



	December 31, 2019
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Available-for-sale securities
U.S. Treasury	$	121,088	$	121,088	$	—	$	—
U.S. Government agencies	365,442		—		362,796		2,646
Municipal	145,318		—		33,368		111,950
Corporate notes	94,841		—		94,841		—
Mortgage-backed	2,379,525		—		2,379,525		—
Trading account securities	1,068		—		1,068		—
Equity securities with readily determinable fair value	50,840		42,774		8,066		—
Mortgage loans held-for-sale	377,313		—		377,313		—
Loans held-for-investment	132,718		—		123,098		9,620
MSRs	85,638		—		—		85,638
Nonqualified deferred compensation assets	14,213		—		14,213		—
Derivative assets	103,644		—		101,013		2,631
Total	$	3,871,648	$	163,862	$	3,495,301	$	212,485
Derivative liabilities	$	129,204	$	—	$	129,204	$	—



	June 30, 2019
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Available-for-sale securities
U.S. Treasury	$	132,269	$	132,269	$	—	$	—
U.S. Government agencies	170,940		—		167,963		2,977
Municipal	142,609		—		32,313		110,296
Corporate notes	90,913		—		90,913		—
Mortgage-backed	1,649,423		—		1,649,423		—
Trading account securities	2,430		—		2,430		—
Equity securities with readily determinable fair value	44,319		36,253		8,066		—
Mortgage loans held-for-sale	394,975		—		394,975		—
Loans held-for-investment	106,081		—		95,600		10,481
MSRs	72,850		—		—		72,850
Nonqualified deferred compensation assets	13,672		—		13,672		—
Derivative assets	108,784		—		105,188		3,596
Total	$	2,929,265	$	168,522	$	2,560,543	$	200,200
Derivative liabilities	$	136,312	$	—	$	136,312	$	—

The aggregate remaining contractual principal balance outstanding as of June 30, 2020, December 31, 2019 and June 30, 2019 for mortgage loans held-for-sale measured at fair value under ASC 825 was $781.8 million, $368.0 million and $378.8 million, respectively, while the aggregate fair value of mortgage loans held-for-sale was $833.2 million, $377.3 million and $395.0 million, for the same respective periods, as shown in the above tables. There were $1.3 million of loans past due greater than 90 days and still accruing in the mortgage loans held-for-sale portfolio as of June 30, 2020 compared to $1.8 million as of December 31, 2019 and $1.3 million as of June 30, 2019.

The changes in Level 3 assets measured at fair value on a recurring basis during the three and six months ended June 30, 2020 and 2019 are summarized as follows:



				U.S. Government Agencies			Loans held-for- investment			Mortgage servicing rights		Derivative Assets
(Dollars in thousands)	Municipal			U.S. Government Agencies			Loans held-for- investment			Mortgage servicing rights		Derivative Assets
Balance at April 1, 2020	$	113,267		$	2,457		$	9,568		$	73,504	$	39,816
Total net gains (losses) included in:
Net income ⁽¹⁾	—			—			200			3,699		18,617
Other comprehensive income (loss)	(546		)	(7		)	—			—		—
Purchases	6,997			—			—			—		—
Issuances	—			—			—			—		—
Sales	—			—			—			—		—
Settlements	(2,463		)	(157		)	(1,364		)	—		—
Net transfers into/(out of) Level 3	—			—			5,549			—		—
Balance at June 30, 2020	$	117,255		$	2,293		$	13,953		$	77,203	$	58,433



				U.S. Government Agencies			Loans held-for- investment			Mortgage servicing rights			Derivative Assets
(Dollars in thousands)	Municipal			U.S. Government Agencies			Loans held-for- investment			Mortgage servicing rights			Derivative Assets
Balance at January 1, 2020	$	111,950		$	2,646		$	9,620		$	85,638		$	2,631
Total net gains (losses) included in:
Net income ⁽¹⁾	—			—			122			(8,435		)	55,802
Other comprehensive income (loss)	(1,795		)	(39		)	—			—			—
Purchases	12,872			—			—			—			—
Issuances	—			—			—			—			—
Sales	—			—			—			—			—
Settlements	(5,772		)	(314		)	(1,460		)	—			—
Net transfers into/(out of) Level 3	—			—			5,671			—			—
Balance at June 30, 2020	$	117,255		$	2,293		$	13,953		$	77,203		$	58,433



				U.S. Government Agencies			Loans held-for- investment			Mortgage servicing rights		Derivative Assets
(Dollars in thousands)	Municipal			U.S. Government Agencies			Loans held-for- investment			Mortgage servicing rights		Derivative Assets
Balance at April 1, 2019	$	103,834		$	2,993		$	11,249		$	71,022	$	3,089
Total net gains (losses) included in:
Net income ⁽¹⁾	—			—			118			1,421		507
Other comprehensive income (loss)	6,519			142			—			—		—
Purchases	555			—			—			407		—
Issuances	—			—			—			—		—
Sales	—			—			—			—		—
Settlements	(612		)	(158		)	(886		)	—		—
Net transfers into/(out of) Level 3	—			—			—			—		—
Balance at June 30, 2019	$	110,296		$	2,977		$	10,481		$	72,850	$	3,596



				U.S. Government Agencies			Loans held-for- investment			Mortgage servicing rights			Derivative Assets
(Dollars in thousands)	Municipal			U.S. Government Agencies			Loans held-for- investment			Mortgage servicing rights			Derivative Assets
Balance at January 1, 2019	$	108,926		$	3,150		$	11,347		$	75,183		$	2,457
Total net gains (losses) included in:
Net income ⁽¹⁾	—			—			285			(2,740		)	1,139
Other comprehensive income (loss)	8,056			143			—			—			—
Purchases	1,524			—			—			407			—
Issuances	—			—			—			—			—
Sales	—			—			—			—			—
Settlements	(8,210		)	(316		)	(1,351		)	—			—
Net transfers into/(out of) Level 3	—			—			200			—			—
Balance at June 30, 2019	$	110,296		$	2,977		$	10,481		$	72,850		$	3,596


(1)	Changes in the balance of MSRs and derivative assets related to fair value adjustments are recorded as components of mortgage banking revenue. Changes in the balance of loans held-for-investment related to fair value adjustments are recorded as other non-interest income.

Also, the Company may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from impairment charges on individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at the end of the period, the following table provides the carrying value of the related individual assets or portfolios at June 30, 2020:



	June 30, 2020								Three Months Ended June 30, 2020 Fair Value Losses Recognized, net		Six Months Ended June 30, 2020 Fair Value Losses Recognized, net
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Individually assessed loans - foreclosure probable and collateral-dependent	$	140,473	$	—	$	—	$	140,473	$	13,414	$	17,474
Other real estate owned ⁽¹⁾	10,197		—		—		10,197		217		523
Total	$	150,670	$	—	$	—	$	150,670	$	13,631	$	17,997


(1)	Fair value losses recognized, net on other real estate owned include valuation adjustments and charge-offs during the respective period.

Individually assessed loans—In accordance with ASC 326, the allowance for credit losses for loans and other financial assets held at amortized cost should be measured on a collective or pooled basis when such assets exhibit similar risk characteristics. In instances in which a financial asset does not exhibit similar risk characteristics to a pool, the Company is required to measure such allowance for credit losses on an individual asset basis. For the Company's loan portfolio, nonaccrual loans and TDRs are considered to not exhibit similar risk characteristics as pools and thus are individually assessed. Credit losses are measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the fair value of the underlying collateral. Individually assessed loans are considered a fair value measurement where an allowance for credit loss is established based on the fair value of collateral. Appraised values, which may require adjustments to market-based valuation inputs, are generally used on real estate foreclosure probable and collateral-dependent loans.

The Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 inputs of individually assessed loans. For more information on individually assessed loans refer to Note 7 – Allowance for Credit Losses. At June 30, 2020, the

Company had $183.4 million of individually assessed loans classified as Level 3. Of the $183.4 million of individually assessed loans, $140.5 million were measured at fair value based on the underlying collateral of the loan as shown in the table above. The remaining $42.9 million were valued based on discounted cash flows in accordance with ASC 310.

Other real estate owned —Other real estate owned is comprised of real estate acquired in partial or full satisfaction of loans and is included in other assets. Other real estate owned is recorded at its estimated fair value less estimated selling costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the allowance for loan losses. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in other non-interest expense. Gains and losses upon sale, if any, are also charged to other non-interest expense. Fair value is generally based on third party appraisals and internal estimates that are adjusted by a discount representing the estimated cost of sale and is therefore considered a Level 3 valuation.

The Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 inputs for other real estate owned. At June 30, 2020, the Company had $10.2 million of other real estate owned classified as Level 3. The unobservable input applied to other real estate owned relates to the 10% reduction to the appraisal value representing the estimated cost of sale of the foreclosed property. A higher discount for the estimated cost of sale results in a decreased carrying value.

The valuation techniques and significant unobservable inputs used to measure both recurring and non-recurring Level 3 fair value measurements at June 30, 2020 were as follows:

(Dollars in thousands)

Fair Value

Valuation Methodology

Significant Unobservable Input

Range

of Inputs

Weighted

Average

of Inputs

Impact to valuation

from an increased or

higher input value

Measured at fair value on a recurring basis:

Municipal Securities

117,255

Bond pricing

Equivalent rating

BBB-AA+

N/A

Increase

U.S. Government agencies

2,293

Bond pricing

Equivalent rating

AAA

Increase

Loans held-for-investment

13,953

Discounted cash flows

Discount rate

2%-3%

2.80%

Decrease

Credit discount

0%-6%

1.24%

Decrease

Constant prepayment rate (CPR)

17.25%

Decrease

MSRs

77,203

Discounted cash flows

Discount rate

3%-21%

10.21%

Decrease

Constant prepayment rate (CPR)

0%-95%

17.25%

Decrease

Cost of servicing

$70-$200

$77

Decrease

Cost of servicing - delinquent

$200-$1,000

$442

Decrease

Derivatives

58,433

Discounted cash flows

Pull-through rate

0%-100%

79%

Increase

Measured at fair value on a non-recurring basis:

Individually assessed loans - foreclosure probable and collateral-dependent

140,473

Appraisal value

Appraisal adjustment - cost of sale

10%

10.00%

Decrease

Other real estate owned

10,197

Appraisal value

Appraisal adjustment - cost of sale

10%

10.00%

Decrease

The Company is required under applicable accounting guidance to report the fair value of all financial instruments on the Consolidated Statements of Condition, including those financial instruments carried at cost. The table below presents the carrying amounts and estimated fair values of the Company’s financial instruments as of the dates shown:



	At June 30, 2020				At December 31, 2019				At June 30, 2019
	Carrying		Fair		Carrying		Fair		Carrying		Fair
(In thousands)	Value		Value		Value		Value		Value		Value
Financial Assets:
Cash and cash equivalents	$	345,057	$	345,057	$	286,476	$	286,476	$	300,992	$	300,992
Interest bearing deposits with banks	4,015,072		4,015,072		2,164,560		2,164,560		1,437,105		1,437,105
Available-for-sale securities	3,194,961		3,194,961		3,106,214		3,106,214		2,186,154		2,186,154
Held-to-maturity securities	728,465		744,286		1,134,400		1,138,396		1,191,634		1,198,478
Trading account securities	890		890		1,068		1,068		2,430		2,430
Equity securities with readily determinable fair value	52,460		52,460		50,840		50,840		44,319		44,319
FHLB and FRB stock, at cost	135,571		135,571		100,739		100,739		92,026		92,026
Brokerage customer receivables	14,623		14,623		16,573		16,573		13,569		13,569
Mortgage loans held-for-sale, at fair value	833,163		833,163		377,313		377,313		394,975		394,975
Loans held-for-investment, at fair value	254,614		254,614		132,718		132,718		106,081		106,081
Loans held-for-investment, at amortized cost	31,148,289		31,004,403		26,667,572		26,659,903		25,198,578		25,086,371
Nonqualified deferred compensation assets	13,576		13,576		14,213		14,213		13,672		13,672
Derivative assets	327,624		327,624		103,644		103,644		108,784		108,784
Accrued interest receivable and other	263,743		263,743		303,090		303,090		271,988		271,988
Total financial assets	$	41,328,108	$	41,200,043	$	34,459,420	$	34,455,747	$	31,362,307	$	31,256,944
Financial Liabilities
Non-maturity deposits	$	30,814,487	$	30,814,487	$	24,483,867	$	24,483,867	$	22,013,192	$	22,013,192
Deposits with stated maturities	4,837,387		4,838,831		5,623,271		5,635,475		5,505,623		5,526,715
FHLB advances	1,228,416		1,181,462		674,870		715,129		574,823		596,689
Other borrowings	508,535		508,535		418,174		418,174		418,057		418,057
Subordinated notes	436,298		473,324		436,095		458,796		436,021		451,874
Junior subordinated debentures	253,566		170,449		253,566		243,158		253,566		250,697
Derivative liabilities	355,265		355,265		129,204		129,204		136,312		136,312
Accrued interest payable	17,200		17,200		19,940		19,940		17,503		17,503
Total financial liabilities	$	38,451,154	$	38,359,553	$	32,038,987	$	32,103,743	$	29,355,097	$	29,411,039

Not all the financial instruments listed in the table above are subject to the disclosure provisions of ASC Topic 820, as certain assets and liabilities result in their carrying value approximating fair value. These include cash and cash equivalents, interest bearing deposits with banks, brokerage customer receivables, FHLB and FRB stock, accrued interest receivable and accrued interest payable and non-maturity deposits.

The following methods and assumptions were used by the Company in estimating fair values of financial instruments that were not previously disclosed.

Held-to-maturity securities. Held-to-maturity securities include U.S. Government-sponsored agency securities and municipal bonds issued by various municipal government entities primarily located in the Chicago metropolitan area and southern Wisconsin. Fair values for held-to-maturity securities are typically based on prices obtained from independent pricing vendors. In accordance with ASC 820, the Company has generally categorized these held-to-maturity securities as a Level 2 fair value measurement. Fair values for certain other held-to-maturity securities are based on the bond pricing methodology discussed previously related to certain available-for-sale securities. In accordance with ASC 820, the Company has categorized these held-to-maturity securities as a Level 3 fair value measurement.

Loans held-for-investment, at amortized cost. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are analyzed by type such as commercial, residential real estate, etc. Each category is further segmented by interest rate type (fixed and variable) and term. For variable-rate loans that reprice frequently, estimated fair values are based on carrying values. The fair value of residential loans is based on secondary market sources for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value for other fixed rate loans is estimated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect credit and interest rate risks inherent in the loan. In accordance with ASC 820, the Company has categorized loans as a Level 3 fair value measurement.

Deposits with stated maturities. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently in effect for deposits of similar remaining maturities. In accordance with ASC 820, the Company has categorized deposits with stated maturities as a Level 3 fair value measurement.

FHLB advances. The fair value of FHLB advances is obtained from the FHLB which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities to discount cash flows. In accordance with ASC 820, the Company has categorized FHLB advances as a Level 3 fair value measurement.

Subordinated notes. The fair value of the subordinated notes is based on a market price obtained from an independent pricing vendor. In accordance with ASC 820, the Company has categorized subordinated notes as a Level 2 fair value measurement.

Junior subordinated debentures. The fair value of the junior subordinated debentures is based on the discounted value of contractual cash flows. In accordance with ASC 820, the Company has categorized junior subordinated debentures as a Level 3 fair value measurement.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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