10. FAIR VALUE

Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Bank used the following methods and significant assumptions to estimate fair value:

Securities available for sale: Quoted market prices in an active market are available for the Bank’s Community Reinvestment Act (“CRA”) mutual fund investment and fall within Level 1 of the fair value hierarchy.

Except for the Bank’s CRA mutual fund investment, its private label mortgage backed security and its TRUP investment, the fair value of securities available for sale is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The Bank’s private label mortgage backed security remains illiquid, and as such, the Bank classifies this security as a Level 3 security in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. Based on this determination, the Bank utilized an income valuation model (present value model) approach in determining the fair value of this security.

See in this section of the filing under Footnote 3 “Investment Securities” for additional discussion regarding the Bank’s private label mortgage backed security.

The Company acquired its TRUP investment in November 2015 and considered the most recent bid price for the same instrument to approximate market value at September 30, 2016. The Company’s TRUP investment is considered highly illiquid and also valued using Level 3 inputs, as the most recent bid price for this instrument is not always considered generally observable.

Mortgage loans held for sale, at fair value: The fair value of mortgage loans held for sale is determined using quoted secondary market prices. Mortgage loans held for sale are classified as Level 2 in the fair value hierarchy.

Consumer loans held for sale, at fair value: During 2016, RCS initiated a short-term installment loan program and elected to carry all loans originated through this program at fair value. Such loans are generally sold within 21 days of origination, with their fair value based on contractual terms, Level 3 inputs.

Mortgage Banking derivatives: Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts (“forward contracts”) and interest rate lock loan commitments. The fair value of the Bank’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Bank. Forward contracts and rate-lock loan commitments are classified as Level 2 in the fair value hierarchy.

Interest rate swap agreements: Interest rate swaps are recorded at fair value on a recurring basis. The Company values its interest rate swaps using a third-party valuation service and classifies such valuations as Level 2. Valuations of these interest rate swaps are also received from the relevant counterparty and validated against the Company’s calculations. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.

Impaired loans: Collateral-dependent impaired loans generally reflect partial charge-downs to their respective fair value, which is commonly based on recent real estate appraisals or broker price opinions (“BPOs”). These appraisals or BPOs may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the process by the independent experts to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral-dependent loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Premises and Equipment carried at fair value: Premises and equipment are accounted for at the lower of cost less accumulated depreciation or fair value less estimated costs to sell. The fair value of Bank premises are commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other real estate owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals or BPOs. These appraisals or BPOs may utilize a single approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the process by the independent experts to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for collateral-dependent impaired loans, impaired premises and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Bank. Once the appraisal is received, a member of the Bank’s Credit Administration Department reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison with independent data sources, such as recent market data or industry-wide statistics. On at least an annual basis, the Bank performs a back test of collateral appraisals by comparing actual selling prices on recent collateral sales to the most recent appraisal of such collateral. Back tests are performed for each collateral class, e.g., residential real estate or commercial real estate, and may lead to additional adjustments to the value of unliquidated collateral of similar class.

Mortgage servicing rights: On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded and the respective individual tranche is carried at fair value. If the carrying amount of an individual tranche does not exceed fair value, impairment is reversed if previously recognized and the carrying value of the individual tranche is based on the amortization method. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and can generally be validated against available market data (Level 2). There were no MSR tranches carried at fair value at September 30, 2016 and December 31, 2015.

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Bank has elected the fair value option, are summarized below:


	Fair Value Measurements at
	September 30, 2016 Using:
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Total
	Assets		Inputs		Inputs		Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Value
Financial assets:
Securities available for sale:
U.S. Treasury securities and U.S. Government agencies	$	—	$	287,645	$	—	$	287,645
Private label mortgage backed security		—		—		4,868		4,868
Mortgage backed securities - residential		—		80,832		—		80,832
Collateralized mortgage obligations		—		95,595		—		95,595
Freddie Mac preferred stock		—		193		—		193
Community Reinvestment Act mutual fund		2,544		—		—		2,544
Corporate bonds		—		15,128		—		15,128
Trust preferred security		—		—		3,100		3,100
Total securities available for sale	$	2,544	$	479,393	$	7,968	$	489,905

Mortgage loans held for sale	$	—	$	8,442	$	—	$	8,442
Consumer loans held for sale		—		—		1,691		1,691
Rate lock commitments		—		910		—		910
Interest rate swap agreements		—		1,736		—		1,736

Financial liabilities:
Mandatory forward contracts	$	—	$	130	$	—	$	130
Interest rate swap agreements		—		2,772		—		2,772


	Fair Value Measurements at
	December 31, 2015 Using:
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Total
	Assets		Inputs		Inputs		Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Value
Financial assets:
Securities available for sale:
U.S. Treasury securities and U.S. Government agencies	$	—	$	286,479	$	—	$	286,479
Private label mortgage backed security		—		—		5,132		5,132
Mortgage backed securities - residential		—		92,268		—		92,268
Collateralized mortgage obligations		—		113,668		—		113,668
Freddie Mac preferred stock		—		173		—		173
Community Reinvestment Act mutual fund		1,011		—		—		1,011
Corporate bonds		—		14,922		—		14,922
Trust preferred security		—		—		3,405		3,405
Total securities available for sale	$	1,011	$	507,510	$	8,537	$	517,058

Mortgage loans held for sale	$	—	$	4,083	$	—	$	4,083
Rate lock commitments		—		306		—		306
Interest rate swap agreements		—		400		—		400

Financial liabilities:
Mandatory forward contracts	$	—	$	25	$	—	$	25
Interest rate swap agreements		—		1,000		—		1,000

All transfers between levels are generally recognized at the end of each quarter. There were no transfers into or out of Level 1, 2 or 3 assets during the three and nine months ended September 30, 2016 and 2015.

Private Label Mortgage Backed Security

The following table presents a reconciliation of the Bank’s private label mortgage backed security measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ended September 30, 2016 and 2015:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2016		2015		2016		2015

Balance, beginning of period	$	4,946	$	5,231	$	5,132	$	5,250
Total gains or losses included in earnings:
Net change in unrealized gain		57		(58)		(91)		(84)
Recovery of actual losses previously recorded		—		—		—		35
Principal paydowns		(135)		—		(173)		(28)
Balance, end of period	$	4,868	$	5,173	$	4,868	$	5,173

The fair value of the Bank’s single private label mortgage backed security is supported by analysis prepared by an independent third party. The third party’s approach to determining fair value involved several steps: 1) detailed collateral analysis of the underlying mortgages, including consideration of geographic location, original loan-to-value and the weighted average Fair Isaac Corporation (“FICO”) score of the borrowers; 2) collateral performance projections for each pool of mortgages underlying the security (probability of default, severity of default, and prepayment probabilities); and 3) discounted cash flow modeling.

The significant unobservable inputs in the fair value measurement of the Bank’s single private label mortgage backed security are prepayment rates, probability of default and loss severity in the event of default. Significant fluctuations in any of those inputs in isolation would result in a significantly lower/higher fair value measurement.

The following tables present quantitative information about recurring Level 3 fair value measurement inputs for the Bank’s single private label mortgage backed security at September 30, 2016 and December 31, 2015:


	Fair		Valuation
September 30, 2016 (dollars in thousands)	Value		Technique	Unobservable Inputs	Range

Private label mortgage backed security	$	4,868	Discounted cash flow	(1) Constant prepayment rate	0.0% - 6.5%

				(2) Probability of default	3.0% - 9.0%

				(3) Loss severity	60% - 90%


	Fair		Valuation
December 31, 2015 (dollars in thousands)	Value		Technique	Unobservable Inputs	Range

Private label mortgage backed security	$	5,132	Discounted cash flow	(1) Constant prepayment rate	0.0% - 6.5%

				(2) Probability of default	3.0% - 9.0%

				(3) Loss severity	60% - 90%

Trust Preferred Security

The Company invested in its TRUP in November 2015. The following table presents a reconciliation of the Company’s TRUP measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2016:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(in thousands)	2016		2016

Balance, beginning of period	$	3,150	$	3,405
Total gains or losses included in earnings:
Net change in unrealized loss		(50)		(305)
Balance, end of period	$	3,100	$	3,100

The fair value of the Company’s TRUP investment is based on the most recent bid price for this instrument, as provided by a third-party broker.

Mortgage Loans Held for Sale

The Bank has elected the fair value option for mortgage loans held for sale. These loans are intended for sale and the Bank believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of September 30, 2016 and December 31, 2015.

As of September 30, 2016 and December 31, 2015, the aggregate fair value, contractual balance, and unrealized gain was as follows:


(in thousands)	September 30, 2016		December 31, 2015

Aggregate fair value	$	8,442	$	4,083
Contractual balance		8,197		3,993
Unrealized gain		245		90

The total amount of gains and losses from changes in fair value included in earnings for the three and nine months ended September 30, 2016 and 2015 for mortgage loans held for sale are presented in the following table:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2016		2015		2016		2015

Interest income	$	76	$	67	$	148	$	180
Change in fair value		57		10		155		107
Total included in earnings	$	133	$	77	$	303	$	287

Consumer Loans Held for Sale

During 2016, RCS initiated a short-term installment loan program and elected to carry all loans originated through this program at fair value. Such loans are generally sold within 21 days of origination, with their fair value based on contractual terms. Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of September 30, 2016.

A reconciliation of the Company’s consumer loans held for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2016 is included in Footnote 4 of this section of the filing.

The significant unobservable inputs in the fair value measurement of the Bank’s short-term installment loans are the net contractual premiums and level of loans sold at a discount price. Significant fluctuations in any of those inputs in isolation would result in a significantly lower/higher fair value measurement.

The following table presents quantitative information about recurring Level 3 fair value measurement inputs for short-term installment loans as of September 30, 2016:


	Fair		Valuation
September 30, 2016 (dollars in thousands)	Value		Technique	Unobservable Inputs	Range

Consumer loans held for sale	$	1,691	Contractual Terms	(1) Net Premium	0.9%

				(2) Discounted Sales	5.0%

As of September 30, 2016, the aggregate fair value, contractual balance, and unrealized gain on consumer loans held for sale, at fair value, was as follows:


(in thousands)	September 30, 2016

Aggregate fair value	$	1,691
Contractual balance		1,608
Unrealized gain		83

The total amount of net gains from changes in fair value included in earnings for the three and nine months ended September 30, 2016 for consumer loans held for sale, at fair value, are presented in the following table:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(in thousands)	2016		2016

Interest income	$	378	$	537
Change in fair value		(279)		83
Total included in earnings	$	99	$	620

Assets measured at fair value on a non-recurring basis are summarized below:


	Fair Value Measurements at
	September 30, 2016 Using:
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Total
	Assets		Inputs		Inputs		Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Value

Impaired loans:
Residential real estate:
Owner occupied	$	—	$	—	$	3,555	$	3,555
Non owner occupied		—		—		9		9
Commercial real estate		—		—		3,217		3,217
Home equity		—		—		383		383
Total impaired loans*	$	—	$	—	$	7,164	$	7,164

Other real estate owned:
Construction & land development	$	—	$	—	$	205	$	205
Total other real estate owned	$	—	$	—	$	205	$	205

Premises and equipment	$	—	$	—	$	1,086	$	1,086


	Fair Value Measurements at
	December 31, 2015 Using:
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Total
	Assets		Inputs		Inputs		Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Value

Impaired loans:
Residential real estate:
Owner occupied	$	—	$	—	$	3,631	$	3,631
Non owner occupied		—		—		689		689
Commercial real estate		—		—		3,443		3,443
Home equity		—		—		1,245		1,245
Total impaired loans*	$	—	$	—	$	9,008	$	9,008

Other real estate owned:
Residential real estate	$	—	$	—	$	128	$	128
Commercial real estate		—		—		442		442
Construction & land development		—		—		300		300
Total other real estate owned	$	—	$	—	$	870	$	870

Premises and equipment	$	—	$	—	$	1,185	$	1,185

* The difference between the carrying value and the fair value of impaired loans measured at fair value is reconciled in a subsequent table of this Footnote.

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:


					Range
	Fair		Valuation	Unobservable	(Weighted
September 30, 2016 (dollars in thousands)	Value		Technique	Inputs	Average)

Impaired loans - residential real estate owner occupied	$	3,555	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 53% (6%)

Impaired loans - residential real estate non owner occupied	$	9	Sales comparison approach	Adjustments determined for differences between comparable sales	0% (0%)

Impaired loans - commercial real estate	$	1,713	Sales comparison approach	Adjustments determined for differences between comparable sales	3% - 42% (19%)

Impaired loans - commercial real estate	$	1,504	Income approach	Adjustments for differences between net operating income expectations	17% (17%)

Impaired loans - home equity	$	383	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 29% (15%)

Other real estate owned - construction & land development	$	205	Sales comparison approach	Adjustments determined for differences between comparable sales	60% (60%)

Premises and equipment	$	1,086	Sales comparison approach	Adjustments determined for differences between comparable sales	5% (5%)


					Range
	Fair		Valuation	Unobservable	(Weighted
December 31, 2015 (dollars in thousands)	Value		Technique	Inputs	Average)

Impaired loans - residential real estate owner occupied	$	3,631	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 53% (7%)

Impaired loans - residential real estate non owner occupied	$	689	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 1% (1%)

Impaired loans - commercial real estate	$	1,839	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 58% (19%)

Impaired loans - commercial real estate	$	1,604	Income approach	Adjustments for differences between net operating income expectations	17% (17%)

Impaired loans - home equity	$	1,245	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 29% (20%)

Other real estate owned - residential real estate	$	128	Sales comparison approach	Adjustments determined for differences between comparable sales	18% (18%)

Other real estate owned - commercial real estate	$	442	Sales comparison approach	Adjustments determined for differences between comparable sales	12% - 23% (13%)

Other real estate owned - construction & land development	$	300	Sales comparison approach	Adjustments determined for differences between comparable sales	49% (49%)

Premises and equipment	$	1,185	Sales comparison approach	Adjustments determined for differences between comparable sales	5% (5%)

Impaired Loans

Collateral-dependent impaired loans are generally measured for impairment using the fair value for reasonable disposition of the underlying collateral. The Bank’s practice is to obtain new or updated appraisals or BPOs on the loans subject to the initial impairment review and then to evaluate the need for an update to this value on an as necessary or possibly annual basis thereafter (depending on the market conditions impacting the value of the collateral). The Bank may discount the valuation amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal or BPO is not available at the time of a loan’s impairment review, the Bank may apply a discount to the existing value of an old valuation to reflect the property’s current estimated value if it is believed to have deteriorated in either: (i) the physical or economic aspects of the subject property or (ii) material changes in market conditions. The impairment review generally results in a partial charge-off of the loan if fair value less selling costs are below the loan’s carrying value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Impaired collateral-dependent loans are as follows:


(in thousands)	September 30, 2016		December 31, 2015

Carrying amount of loans measured at fair value	$	6,446	$	8,162
Estimated selling costs considered in carrying amount		752		946
Valuation allowance		(34)		(100)
Total fair value	$	7,164	$	9,008


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2016		2015		2016		2015

Provisions for loss on collateral-dependent, impaired loans	$	(16)	$	17	$	(40)	$	73

Other Real Estate Owned

Other real estate owned, which is carried at the lower of cost or fair value, is periodically assessed for impairment based on fair value at the reporting date. Fair value is determined from external appraisals or BPOs using judgments and estimates of external professionals. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3.

Details of other real estate owned carrying value and write downs follow:



(in thousands)	September 30, 2016		December 31, 2015

Other real estate owned carried at fair value	$	205	$	870
Other real estate owned carried at cost		2,230		350
Total carrying value of other real estate owned	$	2,435	$	1,220


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2016		2015		2016		2015

Other real estate owned write-downs during the period	$	200	$	312	$	200	$	1,016

Premises and Equipment

The Company closed its Hudson, Florida banking center in 2015. Since closing, the Hudson property has been carried at fair value less estimated selling costs. The Hudson property was written down $33,000 during the three months ended September 30, 2016 and 2015 and $99,000 during the nine months ended September 30, 2016 and 2015. Fair value was determined from an external appraisal using judgments and estimates. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3.

The carrying amounts and estimated fair values of all financial instruments at September 30, 2016 and December 31, 2015 follows:


			Fair Value Measurements at
			September 30, 2016:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value

Assets:
Cash and cash equivalents	$	302,167	$	302,167	$	—	$	—	$	302,167
Securities available for sale		489,905		2,544		479,393		7,968		489,905
Securities held to maturity		34,539		—		34,651		—		34,651
Mortgage loans held for sale, at fair value		8,442		—		8,442		—		8,442
Consumer loans held for sale, at fair value		1,691		—		—		1,691		1,691
Consumer loans held for sale, at the lower of cost or fair value		1,093		—		1,093		—		1,093
Loans, net		3,792,595		—		—		3,821,130		3,821,130
Federal Home Loan Bank stock		28,208		—		—		—		NA
Accrued interest receivable		9,780		—		9,780		—		9,780

Liabilities:
Noninterest-bearing deposits	$	947,602		—	$	947,602		—	$	947,602
Transaction deposits		1,930,028		—		1,930,028		—		1,930,028
Time deposits		258,263		—		260,002		—		260,002
Securities sold under agreements to repurchase and other short-term borrowings		152,458		—		152,458		—		152,458
Federal Home Loan Bank advances		862,500		—		868,148		—		868,148
Subordinated note		41,240		—		31,169		—		31,169
Accrued interest payable		1,027		—		1,027		—		1,027


			Fair Value Measurements at
			December 31, 2015:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value

Assets:
Cash and cash equivalents	$	210,082	$	210,082	$	—	$	—	$	210,082
Securities available for sale		517,058		1,011		507,510		8,537		517,058
Securities held to maturity		38,727		—		39,196		—		39,196
Mortgage loans held for sale, at fair value		4,083		—		4,083		—		4,083
Consumer loans held for sale, at the lower of cost or fair value		514		—		514		—		514
Loans, net		3,299,119		—		—		3,332,608		3,332,608
Federal Home Loan Bank stock		28,208		—		—		—		NA
Accrued interest receivable		9,233		—		9,233		—		9,233

Liabilities:
Noninterest-bearing deposits	$	634,863		—	$	634,863		—	$	634,863
Transaction deposits		1,601,647		—		1,601,647		—		1,601,647
Time deposits		250,967		—		250,882		—		250,882
Securities sold under agreements to repurchase and other short-term borrowings		395,433		—		395,433		—		395,433
Federal Home Loan Bank advances		699,500		—		708,722		—		708,722
Subordinated note		41,240		—		33,358		—		33,358
Accrued interest payable		1,229		—		1,229		—		1,229

NA - Not applicable

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the Bank’s estimates.

The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow and other valuation techniques. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather a good-faith estimate of the fair value of financial instruments held by the Company.

In addition to those previously disclosed, the following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Consumer loans held for sale, at lower of cost or fair value – Consumer loans held for sale at the lower of cost or fair value constitute short-term consumer loans generally sold within two business days of origination. The carrying amounts of these loans, due to their short-term nature, approximate fair value and result in a Level 2 classification.

Loans, net of Allowance — The fair value of loans is calculated using discounted cash flows by loan type resulting in a Level 3 classification. The discount rate used to determine the present value of the loan portfolio is an estimated market rate that reflects the credit and interest rate risk inherent in the loan portfolio without considering widening credit spreads due to market illiquidity. The estimated maturity is based on the Bank’s historical experience with repayments adjusted to estimate the effect of current market conditions. The Allowance is considered a reasonable discount for credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Federal Home Loan Bank stock — It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Accrued interest receivable/payable — The carrying amounts of accrued interest, due to their short-term nature, approximate fair value and result in a Level 2 classification.

Deposits — Fair values for time deposits have been determined using discounted cash flows. The discount rate used is based on estimated market rates for deposits of similar remaining maturities and are classified as Level 2. The carrying amounts of all other deposits, due to their short-term nature, approximate their fair values and are also classified as Level 2.

Securities sold under agreements to repurchase and other short-term borrowings — The carrying amount for securities sold under agreements to repurchase and other short-term borrowings generally maturing within ninety days approximates its fair value resulting in a Level 2 classification.

Federal Home Loan Bank advances — The fair value of the FHLB advances is obtained from the FHLB and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available to the Company for debt of similar remaining maturities and collateral terms resulting in a Level 2 classification.

Subordinated note — The fair value for the subordinated note is calculated using discounted cash flows based upon current market spreads to London Interbank Borrowing Rate (“LIBOR”) for debt of similar remaining maturities and collateral terms resulting in a Level 2 classification.

The fair value estimates presented herein are based on pertinent information available to management as of the respective period ends. Although management is not aware of any factors that would dramatically affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, estimates of fair value may differ significantly from the amounts presented.