Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Valuation techniques use certain inputs to arrive at fair value. Inputs to valuation techniques are the assumptions that market participants would use in pricing the asset or liability. They may be observable or unobservable. Applicable accounting principles establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might 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 (such as interest rates, volatilities, prepayment speeds or credit risks) or inputs that are derived principally from or corroborated by market data.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Note 2: (Continued)

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



			Fair Value Measurements at June 30, 2013, Using
	Assets/Liabilities Measured at Fair Value		Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	June 30, 2013		(Level 1)		(Level 2)		(Level 3)
U.S. Government sponsored entities	$	68,699	$	—	$	68,699	$	—
Mortgage-backed investments	124,309		—		124,309		—
Obligations of states and political subdivisions	74,402		—		74,402		—
Collateralized debt obligations	1,070		—		—		1,070
Other debt securities	5,073		—		5,073		—
Total securities available for sale	$	273,553	$	—	$	272,483	$	1,070
Mortgage derivative assets	31		—		—		31
	$	273,584	$	—	$	272,483	$	1,101

Interest rate swap liability	$	1,565	$	—	$	—	$	1,565
Mortgage derivative liabilities	46		—		—		46
	$	1,611	$	—	$	—	$	1,611



			Fair Value Measurements at December 31, 2012, Using
	Assets/Liabilities Measured at Fair Value		Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	December 31, 2012		(Level 1)		(Level 2)		(Level 3)
U.S. Government sponsored entities	$	72,615	$	—	$	72,615	$	—
Mortgage-backed investments	190,563		—		190,563		—
Obligations of states and political subdivisions	71,461		—		71,461		—
Collateralized debt obligations	946		—		—		946
Other debt securities	12,977		—		12,977		—
Total available for sale securities	$	348,562	$	—	$	347,616	$	946
Mortgage derivative assets	317		—		—		317
	$	348,879	$	—	$	347,616	$	1,263

Interest rate swap liability	$	2,484	$	—	$	—	$	2,484
Mortgage derivative liabilities	126		—		—		126
	$	2,610	$	—	$	—	$	2,610

Note 2: (Continued)

U.S. Government sponsored entity and mortgage-backed securities. Securities issued by the U.S. Government sponsored entities and mortgage-backed securities are traded in a dealer market and are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service that primarily uses trading activity in the dealer market to determine market prices.

Obligations of states and political subdivisions. Municipal securities include investments that are traded in a dealer market and investments that trade infrequently and are reported using Level 2 inputs. The fair value measurements are obtained from both an independent pricing service and from a pricing matrix that considers observable inputs such as dealer quotes, market yield curves, credit information (including observable default rates) and the instrument’s contractual terms and conditions, obtained from a municipal security data provider.

Other debt securities. Other debt securities trade in a dealer market and are reported using Level 2 inputs. The fair value measurements are provided by an independent pricing service and are derived from trading activity in the dealer market.

Collateralized debt obligations. The Company owns certain beneficial interests in collateralized debt obligations secured by community bank trust preferred securities. These interests do not trade in a liquid market, and therefore, market quotes are not a reliable indicator of their ultimate realizability. The Company utilizes a discounted cash flow model using inputs of (1) market yields of trust-preferred securities as the discount rate and (2) expected cash flows which are estimated using assumptions related to defaults, deferrals and prepayments to determine the fair values of these beneficial interests. Many of the factors that adjust the timing and extent of cash flows are based on judgment and not directly observable in the markets. Therefore, these fair values are classified as Level 3 valuations for accounting and disclosure purposes.

Mortgage Derivatives. Mortgage derivative assets and liabilities represent the fair values of the interest rate lock commitments (IRLCs) of the Company to originate mortgages at certain rates as well as the commitments, or forward sale agreements (FSAs), to sell the mortgages to investors at locked prices within a specified period of time. The Company uses an internal valuation model with observable market data inputs consisting primarily of dealer quotes, market yield curves and estimated servicing values, and non-observable inputs such as credit-related adjustments and estimated pull-through rates. These instruments are classified as Level 3 fair values. Mortgage derivative assets are included in other assets and mortgage derivative liabilities are included in other liabilities in the Company’s consolidated statement of condition.

Interest rate swap. The interest rate swap is valued using a discounted cash flow model. Future net cash flows are estimated based on the forward LIBOR rate curve, the payment terms of the swap and potential credit events. These cash flows are discounted using a rate derived from the forward swap curve, with the resulting fair value being classified as a Level 3 valuation.

Note 2: (Continued)

The following table reports the activity for the second quarter and first six months of 2013 and 2012 in assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.



(Dollars in thousands)	Three Months Ended									Six Months Ended
	June 30, 2013									June 30, 2013
	Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap			Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap
Beginning Balance	$	956		$	153		$	(2,396	)	$	946		$	191		$	(2,484	)
Total gains or losses (realized/unrealized):
Other-than-temporary impairment included in earnings	(2,038		)	—			—			(2,038		)	—			—
Other-than-temporary impairment (included in) transferred from other comprehensive income	2,038			—			—			2,038			—			—
Other gains/losses included in other comprehensive income	114			—			660			124			—			591
Net swap settlement recorded	—			—			171			—			—			328
IRLC and FSA issuances	—			179			—			—			797			—
IRLC and FSA expirations and fair value changes included in earnings	—			(179		)	—			—			(334		)	—
IRLC transfers into closed loans/FSA transferred on sales	—			(168		)	—			—			(669		)	—
Ending Balance	$	1,070		$	(15	)	$	(1,565	)	$	1,070		$	(15	)	$	(1,565	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	(2,038	)	$	—		$	(171	)	$	(2,038	)	$	—		$	(328	)



	Three Months Ended									Six Months Ended
(Dollars in thousands)	June 30, 2012									June 30, 2012
	Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap			Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap
Beginning Balance	$	872		$	81		$	(1,728	)	$	819		$	(22	)	$	(1,834	)
Total gains or losses (realized/unrealized):
Other-than-temporary impairment included in earnings	(4		)	—			—			(4		)	—			—
Other-than-temporary impairment (included in) transferred from other comprehensive income	(4		)	—			—			(4		)	—			—
Other gains/losses included in other comprehensive income	(14		)	—			(772		)	39			—			(812		)
Net swap settlement recorded	—			—			151			—			—			297
IRLC and FSA issuances	—			448			—			—			95			—
IRLC and FSA expirations and fair value changes included in earnings	—			(180		)	—			—			50			—
IRLC transfers into closed loans/FSA transferred on sales	—			(77		)	—			—			149			—
Ending Balance	$	850		$	272		$	(2,349	)	$	850		272			$	(2,349	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	(4	)	$	—		$	(151	)	$	(4	)	—			$	(297	)

Note 2: (Continued)

The following table summarizes certain quantitative information about valuation techniques and significant unobservable inputs used in determining Level 3 fair value measurements at June 30, 2013:



	Fair Value at			Valuation	Unobservable			Weighted
(Dollars in thousands)	June 30, 2013			Techniques	Inputs	Range		Average
Collateralized debt obligations	$	1,070		Discounted cash flow	Discount margin Default rates	14.00% - 19.00% 0.25% - 0.59%		16.27% 0.31%
Mortgage interest rate lock agreements	30			Discounted cash flow	Pull-through rates	85.00	%	85.00	%
Mortgage forward sale agreements	45			Consensus pricing	Pull-through rates	85.00	%	85.00	%
Interest rate swap	(1,565		)	Discounted cash flow	Discount rate	0.22% - 1.46%		0.43	%

The following table summarizes certain quantitative information about valuation techniques and significant unobservable inputs used in determining Level 3 fair value measurements at December 31, 2012:



	Fair Value at			Valuation	Unobservable			Weighted
(Dollars in thousands)	December 31, 2012			Techniques	Inputs	Range		Average
Collateralized debt obligations	$	946		Discounted cash flow	Discount margin Default rates	15.00% - 20.00% 0.25% - 0.98%		17.30% 0.45%
Mortgage interest rate lock agreements	86			Discounted cash flow	Pull-through rates	85.00	%	85.00	%
Mortgage forward sale agreements	105			Consensus pricing	Pull-through rates	85.00	%	85.00	%
Interest rate swap	(2,484		)	Discounted cash flow	Discount rate	0.31% - 0.83%		0.52	%

Collateralized debt obligations: The discount margins for the collateralized debt obligations are the margins added to the LIBOR yield curve. The margins are based on averages of observed market transactions for similar preferred securities and adjusted to reflect the lack of liquidity in the trust preferred CDO market. The default rates are annual rates based on a credit scoring analysis of the underlying collateral issuers. The default rates are used in estimating the timing and amounts of expected cash flows.

Mortgage interest rate lock agreements: The pull-through rate is estimated based on closing activity from a sample time period. The pull-though rate is applied as a probability estimate that is multiplied by the estimated price in arriving at an expected price.

Mortgage forward sale agreements: The pull-through rate is estimated based on data provided by mortgage investors. The pull-through rate is applied as a probability estimate that is multiplied by the estimated price in arriving at an expected price.

Interest rate swap: A LIBOR swap yield curve is used to discount the expected cash flows. The yield curve is constructed from swap quotes derived by a third party.

Note 2: (Continued)

The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	06/30/13 (a)		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	15,700	$	—	$	—	$	15,700
Loan foreclosures	1,048		—		—		1,048
Other real estate	6,203		—		—		6,203

The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	12/31/12 (a)		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	20,815	$	—	$	—	$	20,815
Loan foreclosures	2,562		—		—		2,562
Other real estate	12,771		—		—		12,771

(a)

These amounts represent the resulting carrying amounts on the consolidated statement of condition for impaired real estate-secured loans and other real estate for which fair value re-measurements took place during the period. Loan foreclosures represent the fair value portion of the carrying amounts of other real estate properties that were re-measured at the point of foreclosure during the period.

The following table summarizes certain quantitative information about valuation techniques and significant unobservable inputs used in determining Level 3 nonrecurring fair value measurements at June 30, 2013:

Fair Value at

Valuation

Unobservable

Weighted

(Dollars in thousands)

June 30, 2013

Techniques

Inputs

Range

Average

Impaired loans

15,700

Appraisals from comparable properties

Adjustments for market conditions since appraisal

$1 thousand -
$698 thousand

$76 thousand

Loan foreclosures

1,048

Appraisals from comparable properties

Adjustments for market conditions since appraisal

$5 thousand - $153 thousand

$41 thousand

Other real estate

6,203

Appraisals from comparable properties

Adjustments for market conditions since appraisal

$2 thousand - $212 thousand

$57 thousand

Note 2: (Continued)

Fair Value at

Valuation

Unobservable

Weighted

(Dollars in thousands)

December 31, 2012

Techniques

Inputs

Range

Average

Impaired loans

20,815

Appraisals from comparable properties

Adjustments for market conditions since appraisal

$1 thousand -
$956 thousand

$96 thousand

Loan foreclosures

2,562

Appraisals from comparable properties

Adjustments for market conditions since appraisal

$2 thousand - $292 thousand

$97 thousand

Other real estate

12,771

Appraisals from comparable properties

Adjustments for market conditions since appraisal

$1 thousand - $631 thousand

$95 thousand

Collateral dependent loans and foreclosed properties are primarily valued using appraisals based on sales of comparable properties in the same or similar markets. These valuations are updated by appraisal staff using an internal database of factors. The values of foreclosed properties may also be revised when sale discussions indicate or when sale contracts are negotiated that require an additional write-down to the buyers' expectations.

The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios:



	Three Months Ended				Six Months Ended
	June 30				June 30
(Dollars in thousands)	2013		2012		2013		2012
Impaired loans (a)	$	2,010	$	2,595	$	2,693	$	5,442
Loan foreclosures (b)	162		1,124		287		1,503
Other real estate (c)	794		536		1,022		1,636


(a)	Represents additional impairments on loans which are based on the appraised value of the collateral. These impairments are accrued in the allowance for loan losses and charged to provision for loan loss expense.


(b)	Represents foreclosures of loans secured by real estate when the foreclosed value is lower than the carrying value of the loan. These amounts are charged to the allowance for loan losses with the fair value of the foreclosed property being recorded in other real estate.


(c)	Represents related losses of foreclosed properties that were measured at fair value subsequent to their initial acquisition.

Impaired loans. Collateral dependent loans, which are loans for which the repayment is expected to be provided solely by the underlying collateral, are valued for impairment purposes by using the fair value of the underlying collateral. For collateral dependent loans, collateral values are estimated using Level 3 inputs based on observable market data and other internal estimates.

Loan foreclosures. Certain foreclosed assets, upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for possible loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 3 inputs based on appraisals, observable market data and other internal estimates.

Other real estate. Other real estate consists primarily of real estate from loans that have been foreclosed on. It is carried at the lower of cost or fair value less costs to sell. Subsequent to foreclosure, these properties may experience further market declines. When this occurs, the Company writes the property down to management’s best estimate of what the market may be willing to pay. Management considers recent appraisals when available, what other properties have sold for, how long properties have been on the market, the condition of the property, the availability of liquid buyers and other assumptions that market participants may use in determining a price at which they would acquire the property. Since certain significant inputs to these estimates are management-derived and unobservable, fair values are reported as using Level 3 inputs.

Note 2: (Continued)

Fair Value of Financial Instruments

The following tables present the carrying amounts and fair values of the Company’s financial instruments at June 30, 2013 and December 31, 2012:



							Fair Value Measurements at June 30, 2013, Using
	June 30, 2013						Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Carrying			Estimated			Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Amount			Fair Value			(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and short-term investments	$	194,626		$	194,626		$	194,626	$	—	$	—
Securities available for sale	273,553			273,553			—		272,483		1,070
Loans held for sale	2,614			2,614			—		—		2,614
Loans held for investment	947,582			845,749			—		—		845,749
Agency accounts receivable	272			272			272		—		—
Accrued interest receivable	4,777			4,777			5		1,117		3,655
Nonmarketable equity investments	2,024			2,024			—		—		2,024
Investments in unconsolidated VIEs	2,992			2,992			—		—		2,992
Mortgage derivative assets	31			31			—		—		31
Financial liabilities:
Noninterest-bearing deposits	304,734			304,734			304,734		—		—
NOW, MMDA and savings deposits	724,879			724,879			724,879		—		—
Certificates of deposit	336,595			341,206			—		—		341,206
Short-term borrowings	1,994			1,994			1,994		—		—
Other borrowings	2,792			2,792			—		—		2,792
Junior subordinated debt	30,928			26,428			—		—		26,428
Agency accounts payable	1,103			1,103			1,103		—		—
Accrued interest payable	482			482			34		—		448
Mortgage derivative liabilities	46			46			—		—		46
Other financial instruments:
Commitments to extend credit and letters of credit	(1		)	(328		)	—		—		(328		)
Interest rate swap	(1,565		)	(1,565		)	—		—		(1,565		)

Note 2: (Continued)



							Fair Value Measurements at December 31, 2012, Using
	December 31, 2012						Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Carrying			Estimated
	Amount			Fair Value			(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and short-term investments	$	159,124		$	159,124		$	159,124	$	—	$	—
Securities available for sale	348,562			348,562			—		347,616		946
Loans held for sale	21,014			21,398			—		—		21,398
Loans held for investment	957,981			860,071			—		—		860,071
Agency accounts receivable	151			151			151		—		—
Accrued interest receivable	5,683			5,683			7		1,682		3,994
Nonmarketable equity investments	2,201			2,201			—		—		2,201
Investments in unconsolidated VIEs	3,136			3,136			—		—		3,136
Mortgage derivative assets	317			317			—		—		317
Financial liabilities:
Noninterest-bearing deposits	276,295			276,295			276,295		—		—
NOW, MMDA and savings deposits	755,675			755,675			755,675		—		—
Certificates of deposit	370,705			377,459			—		—		377,459
Short-term borrowings	3,720			3,720			3,720		—		—
Other borrowings	36,007			37,441			—		—		37,441
Junior subordinated debt	30,928			25,795			—		—		25,795
Agency accounts payable	612			612			612		—		—
Accrued interest payable	661			661			23		—		638
Mortgage derivative liabilities	126			126			—		—		126
Other financial instruments:
Commitments to extend credit and letters of credit	(3		)	(346		)	—		—		(346		)
Interest rate swap	(2,484		)	(2,484		)	—		—		(2,484		)

The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:

Cash and due from banks, interest-bearing bank balances and Federal funds sold are valued at their carrying amounts which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments.

Securities available for sale are predominantly valued based on prices obtained from an independent nationally recognized pricing service and market yield matrices. An external pricing service is used to electronically provide prices by CUSIP number. These prices include exchange quoted prices, dealer quoted prices and prices derived from market yields published by specialized financial database providers. The price per instrument provided by the pricing service is used and not adjusted. Typically, all securities except for some small municipal issues and the collateralized debt obligations are priced by the primary external provider. For issues that are not priced by the primary provider, we use a third-party value provided by a broker-dealer affiliate of a correspondent bank. The broker-dealer’s valuation system uses prices provided by (1) the same external pricing service that the Company uses, (2) Standard & Poor’s, (3) matrix pricing with market yield inputs provided by Bloomberg and a municipal securities market data provider and (4) the broker-dealer’s trading staff. Any quotes provided by a broker-dealer are usually non-binding. However, the Company rarely uses solicited broker-dealer quotes to price any of its securities. The broker-dealer prices all municipal securities through its pricing matrix. At June 30, 2013, the only securities that were not priced by the primary provider were 10 municipal bonds representing 5 issuers and the collateralized debt obligations. The broker-dealer’s matrix prices were used for the municipal securities and a third-party provider’s modeled prices were used for the collateralized debt obligations (CDOs).

Note 2: (Continued)

CDOs are valued by an external party using a model. The model inputs are (1) discount margins based on current market activity and (2) cash flows based upon contractual amounts adjusted for expected defaults, expected deferrals and expected prepayments. Expected defaults and deferrals are determined through a credit analysis of and risk rating assignment to each obligor of the collateral that funds the investment vehicles. Most of these inputs are not directly observable in the market, resulting in the fair values being classified as Level 3 valuations within the fair value accounting hierarchy.

The primary method of validation of investment security values is the comparison of the prices that are received from the primary pricing service provider with the prices that are used in the broker-dealer’s valuation system. The fair values used for selected agency, mortgage-backed and corporate securities are also periodically checked by comparing them to prices obtained from Bloomberg. The CDOs are validated by comparing the fair values with market activity of similar instruments. Management reviews the documentation provided with the CDO pricing and impairment models to assure that sound valuation methodologies are used and to determine whether or not the significant inputs are reasonable.

Loans held for sale are valued by discounting the estimated cash flows using current market rates for instruments with similar credit ratings and maturities and adjusting those rates using dealer pricing adjustments for characteristics unique to the borrower’s circumstances or the structuring of the credit.

Loans held for investment are valued by discounting the estimated future cash flows, using rates at which these loans would currently be made to borrowers with similar credit ratings and similar maturities.

Agency accounts receivable are trade receivables of M&F Insurance Group, Inc. These receivables are short-term in nature and therefore the fair value is assumed to be the carrying value. These receivables are carried in other assets in the statement of condition.

Accrued interest receivable is short-term in nature and therefore the fair value is assumed to be the carrying value.

Nonmarketable equity investments are primarily securities of the Federal Home Loan Banks for which the carrying value is estimated to be an accurate approximation of fair value. These equity securities are carried in other assets in the consolidated statement of condition.

Investments in unconsolidated VIEs are the Company’s investment in the First M&F Statutory Trust I, which acquired the Company’s junior subordinated debt through funding provided by the issuance of trust preferred securities, and an investment in a low income housing tax credit entity. The investment in the statutory trust depends on the Company’s own cash flows and therefore, the carrying value is an accurate approximation of fair value. The low income housing tax credit investment is a limited partnership interest for which the carrying value is assumed to be a reasonable estimate of its fair value. These investments are carried in other assets in the consolidated statement of condition.

Noninterest-bearing deposits do not pay interest and do not have defined maturity dates. Therefore, the carrying value is estimated to be equivalent to fair value for these deposits.

NOW, MMDA and savings deposits pay interest and generally do not have defined maturity dates. Although there are some restrictions on access to certain savings deposits, these restrictions are not expected to have a material effect on the value of the deposits. Therefore, the fair value for NOW, MMDA and savings deposits is estimated to be their carrying value.

Certificates of deposit pay interest and do have defined maturity dates. The fair value of certificates of deposit is estimated by discounting the future cash flows, using current market rates for certificates of deposit of similar maturities.

Short-term borrowings are highly liquid and therefore the net book value of the majority of these financial instruments approximates fair value due to the short-term nature of these items.

The fair value of other borrowings, which consist of Federal Home Loan Bank advances and borrowings from correspondent banks, is estimated by discounting the future cash flows using current market rates for borrowings of similar terms and maturities.

Junior subordinated debt is valued by discounting the expected cash flows using a current market rate for similar instruments.

Agency accounts payable are trade payables of M&F Insurance Group, Inc. due to insurance companies. These payables are very short term in nature and therefore the fair value of the payables is estimated to be their carrying value. These payables are carried in other liabilities in the statement of condition.

Accrued interest payable is short-term in nature and therefore the fair value is estimated to be the carrying value.

Commitments to extend credit and letters of credit are valued based on the fees charged to enter into similar credit arrangements.

Note 2: (Continued)

Mortgage origination and sale commitments are considered derivatives and are therefore carried at fair value with the changes in fair value recorded in mortgage banking income. Mortgage-related commitments with positive values are carried in other assets and those with negative values are carried in other liabilities in the statement of condition. Mortgage derivatives are valued using a combination of market discount rates, dealer quotes, estimated servicing values and pull-through rates.

The interest rate swap is being used to hedge the interest cash flows on the Company’s junior subordinated debentures. It is valued using a discounted cash flow methodology with cash flows being estimated from the 3-month LIBOR curve and discount rates derived from the swap curve.