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, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.



	September 30, 2014
(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	$	—	$	92,272	$	—	$	92,272
Obligations of states and political subdivisions	—		46,887		3,054		49,941
Agency mortgage-backed securities	—		314,371		—		314,371
Total securities available for sale	$	—	$	453,530	$	3,054	$	456,584
State tax credits held for sale	—		—		15,131		15,131
Derivative financial instruments	—		951		—		951
Total assets	$	—	$	454,481	$	18,185	$	472,666

Liabilities
Derivative financial instruments	$	—	$	949	$	—	$	949
Total liabilities	$	—	$	949	$	—	$	949

•

Securities available for sale. Securities classified as available for sale are reported at fair value utilizing Level 2 and Level 3 inputs. The Company obtains fair value measurements from an independent pricing service. 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, 2014, 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.


•	Portfolio Loans. Certain fixed rate portfolio loans are accounted for as trading instruments and reported at fair value. Fair value on these loans is determined using a third party valuation model with observable Level 2 market data inputs.


•	State tax credits held for sale. At September 30, 2014, of the $45.6 million of state tax credits held for sale on the condensed consolidated balance sheet, approximately $15.1 million were carried at fair value. The remaining $30.5 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 from 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 observable 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 for the periods ended September 30, 2014 and 2013, respectively.


•	Purchases, sales, issuances and settlements, net. There were no Level 3 purchases during the nine months or quarters ended September 30, 2014 or 2013.


•	Transfers in and/or out of Level 3. There were no Level 3 transfers during the nine months or quarters ended September 30, 2014 or 2013.



	Securities available for sale, at fair value
	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2014		2013		2014		2013
Beginning balance	$	3,051	$	3,039	$	3,040	$	3,049
Total (losses) gains:
Included in other comprehensive income	3		3		14		(7		)
Purchases, sales, issuances and settlements:
Purchases	—		—		—		—
Transfer in and/or out of Level 3	—		—		—		—
Ending balance	$	3,054	$	3,042	$	3,054	$	3,042

Change in unrealized (losses) gains relating to assets still held at the reporting date	$	3	$	3	$	14	$	(7	)



	State tax credits held for sale
	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2014		2013		2014			2013
Beginning balance	$	14,985	$	19,822	$	16,491		$	23,020
Total gains:
Included in earnings	146		317		407			422
Purchases, sales, issuances and settlements:
Sales	—		—		(1,767		)	(3,303		)
Ending balance	$	15,131	$	20,139	$	15,131		$	20,139

Change in unrealized gains relating to assets still held at the reporting date	$	146	$	317	$	(58	)	$	(456	)

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, 2014:



	(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, 2014			Total losses for the nine months ended September 30, 2014
Impaired loans	$	3,163	$	—	$	—	$	3,163	$	(865	)	$	(3,328	)
Other real estate	5,374		—		—		5,374		(28		)	(618		)
Total	$	8,537	$	—	$	—	$	8,537	$	(893	)	$	(3,946	)

(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 or by determining the net present value of future cash flows. Fair values for collateral dependent impaired loans are obtained from current appraisals by qualified licensed appraisers or independent valuation specialists. Fair values of impaired loans that are not collateral dependent are determined by using a discounted cash flow model to determine the net present value of future cash flows. Other real estate owned is adjusted to fair value upon foreclosure of the loan collateral. 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.

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, 2014, and December 31, 2013.



	September 30, 2014				December 31, 2013
(in thousands)	Carrying Amount		Estimated fair value		Carrying Amount		Estimated fair value
Balance sheet assets
Cash and due from banks	$	54,113	$	54,113	$	19,573	$	19,573
Federal funds sold	36		36		76		76
Interest-bearing deposits	74,963		74,963		196,220		196,220
Securities available for sale	456,584		456,584		434,587		434,587
Other investments, at cost	15,291		15,291		12,605		12,605
Loans held for sale	4,899		4,899		1,834		1,834
Derivative financial instruments	951		951		1,000		1,000
Portfolio loans, net	2,364,423		2,360,077		2,235,124		2,232,134
State tax credits, held for sale	45,631		51,037		48,457		52,159
Accrued interest receivable	7,526		7,526		7,303		7,303

Balance sheet liabilities
Deposits	2,509,764		2,513,418		2,534,953		2,540,822
Subordinated debentures	56,807		33,997		62,581		39,358
Federal Home Loan Bank advances	120,000		123,153		50,000		54,137
Other borrowings	187,122		187,123		214,331		214,377
Derivative financial instruments	949		949		990		990
Accrued interest payable	854		854		957		957

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 20–Fair Value Measurements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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, 2014, and December 31, 2013:



	Estimated Fair Value Measurement at Reporting Date Using						Balance at September 30, 2014
(in thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2014
Financial Assets:
Portfolio loans, net	$	—	$	—	$	2,360,077	$	2,360,077
State tax credits, held for sale	$	—	$	—	$	35,906	$	35,906
Financial Liabilities:
Deposits	1,951,370		—		562,048		2,513,418
Subordinated debentures	—		33,997		—		33,997
Federal Home Loan Bank advances	—		123,153		—		123,153
Other borrowings	—		187,123		—		187,123

	Estimated Fair Value Measurement at Reporting Date Using						Balance at December 31, 2013
(in thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2013
Financial Assets:
Portfolio loans, net	$	—	$	—	$	2,232,134	$	2,232,134
State tax credits, held for sale	$	—	$	—	$	35,668	$	35,668
Financial Liabilities:
Deposits	1,902,038		—		638,784		2,540,822
Subordinated debentures	—		39,358		—		39,358
Federal Home Loan Bank advances	—		54,137		—		54,137
Other borrowings	—		214,377		—		214,377