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.

For its TRUP investment, the Company considered the most recent bid price for the same instrument to approximate market value at September 30, 2017. 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 an 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 dealer 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, 2017 and December 31, 2016.

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, 2017 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	$	—	$	236,259	$	—	$	236,259
Private label mortgage backed security		—		—		4,575		4,575
Mortgage backed securities - residential		—		104,002		—		104,002
Collateralized mortgage obligations		—		92,234		—		92,234
Freddie Mac preferred stock		—		407		—		407
Community Reinvestment Act mutual fund		2,481		—		—		2,481
Corporate bonds		—		15,261		—		15,261
Trust preferred security		—		—		3,500		3,500
Total securities available for sale	$	2,481	$	448,163	$	8,075	$	458,719

Mortgage loans held for sale	$	—	$	4,083	$	—	$	4,083
Consumer loans held for sale		—		—		3,368		3,368
Rate lock loan commitments		—		484		—		484
Interest rate swap agreements		—		620		—		620

Financial liabilities:
Mandatory forward contracts	$	—	$	44	$	—	$	44
Interest rate swap agreements		—		905		—		905


	Fair Value Measurements at
	December 31, 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	$	—	$	294,544	$	—	$	294,544
Private label mortgage backed security		—		—		4,777		4,777
Mortgage backed securities - residential		—		73,004		—		73,004
Collateralized mortgage obligations		—		87,654		—		87,654
Freddie Mac preferred stock		—		483		—		483
Community Reinvestment Act mutual fund		2,455		—		—		2,455
Corporate bonds		—		15,158		—		15,158
Trust preferred security		—		—		3,200		3,200
Total securities available for sale	$	2,455	$	470,843	$	7,977	$	481,275

Mortgage loans held for sale	$	—	$	11,662	$	—	$	11,662
Consumer loans held for sale		—		—		2,198		2,198
Rate lock loan commitments		—		299		—		299
Mandatory forward contracts		—		204		—		204
Interest rate swap agreements		—		305		—		305

Financial liabilities:
Interest rate swap agreements	$	—	$	597	$	—		597

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, 2017 and 2016.

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, 2017 and 2016:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2017		2016		2017		2016

Balance, beginning of period	$	4,540	$	4,946	$	4,777	$	5,132
Total gains or losses included in earnings:
Net change in unrealized gain		91		57		244		(91)
Principal paydowns		(56)		(135)		(446)		(173)
Balance, end of period	$	4,575	$	4,868	$	4,575	$	4,868

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, 2017 and December 31, 2016:


	Fair		Valuation
September 30, 2017 (dollars in thousands)	Value		Technique	Unobservable Inputs	Range

Private label mortgage backed security	$	4,575	Discounted cash flow	(1) Constant prepayment rate	3.5% - 6.5%

				(2) Probability of default	2.5% - 8.0%

				(3) Loss severity	60% - 85%


	Fair		Valuation
December 31, 2016 (dollars in thousands)	Value		Technique	Unobservable Inputs	Range

Private label mortgage backed security	$	4,777	Discounted cash flow	(1) Constant prepayment rate	2.0% - 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, 2017 and 2016:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2017		2016		2017		2016

Balance, beginning of period	$	3,453	$	3,150	$	3,200	$	3,405
Total gains or losses included in earnings:
Discount accretion		11		11		33		33
Net change in unrealized loss		36		(61)		267		(338)
Balance, end of period	$	3,500	$	3,100	$	3,500	$	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, 2017 and December 31, 2016.

As of September 30, 2017 and December 31, 2016, the aggregate fair value, contractual balance, and unrealized gain was as follows:


(in thousands)	September 30, 2017		December 31, 2016

Aggregate fair value	$	4,083	$	11,662
Contractual balance		3,980		11,568
Unrealized gain		103		94

The total amount of gains and losses from changes in fair value included in earnings for the three and nine months ended September 30, 2017 and 2016 for mortgage loans held for sale are presented in the following table:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2017		2016		2017		2016

Interest income	$	102	$	76	$	255	$	148
Change in fair value		(102)		57		9		155
Total included in earnings	$	—	$	133	$	264	$	303

Consumer Loans Held for Sale

During 2016, the RCS segment of the Company’s RPG segment initiated an 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, 2017 and 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, 2017 and 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 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 installment loans as of September 30, 2017 and December 31, 2016:


	Fair		Valuation
September 30, 2017 (dollars in thousands)	Value		Technique	Unobservable Inputs	Rate

Consumer loans held for sale	$	3,368	Contractual Terms	(1) Net Premium	0.9%

				(2) Discounted Sales	5.0%


	Fair		Valuation
December 31, 2016 (dollars in thousands)	Value		Technique	Unobservable Inputs	Rate

Consumer loans held for sale	$	2,198	Contractual Terms	(1) Net Premium	0.9%

				(2) Discounted Sales	5.0%

As of September 30, 2017 and December 31, 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, 2017		December 31, 2016

Aggregate fair value	$	3,368	$	2,198
Contractual balance		3,189		2,084
Unrealized gain		179		114

The total amount of net gains from changes in fair value included in earnings for the three and nine months ended September 30, 2017 and 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)	2017		2016		2017		2016

Interest income	$	240	$	378	$	748	$	537
Change in fair value		7		(279)		65		83
Total included in earnings	$	247	$	99	$	813	$	620

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


	Fair Value Measurements at
	September 30, 2017 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	$	—	$	—	$	4,206	$	4,206
Nonowner occupied		—		—		26		26
Commercial real estate		—		—		2,668		2,668
Home equity		—		—		449		449
Total impaired loans*	$	—	$	—	$	7,349	$	7,349

Other real estate owned:
Residential real estate	$	—	$	—	$	83	$	83
Total other real estate owned	$	—	$	—	$	83	$	83

Premises and equipment	$	—	$	—	$	3,196	$	3,196


	Fair Value Measurements at
	December 31, 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	$	—	$	—	$	4,787	$	4,787
Nonowner occupied		—		—		8		8
Commercial real estate		—		—		2,643		2,643
Home equity		—		—		426		426
Total impaired loans*	$	—	$	—	$	7,864	$	7,864

Other real estate owned:
Residential real estate	$	—	$	—	$	400	$	400
Total other real estate owned	$	—	$	—	$	400	$	400

Premises and equipment	$	—	$	—	$	2,407	$	2,407

* 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, 2017 (dollars in thousands)	Value		Technique	Inputs	Average)

Impaired loans - residential real estate owner occupied	$	4,206	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 53% (6%)

Impaired loans - residential real estate nonowner occupied	$	26	Sales comparison approach	Adjustments determined for differences between comparable sales	4% (4%)

Impaired loans - commercial real estate	$	1,357	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 23% (8%)

Impaired loans - commercial real estate	$	1,311	Income approach	Adjustments for differences between net operating income expectations	17% (17%)

Impaired loans - home equity	$	449	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 71% (24%)

Other real estate owned - residential real estate	$	83	Sales comparison approach	Adjustments determined for differences between comparable sales	86% (86%)

Premises and equipment	$	3,196	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 61% (18%)


					Range
	Fair		Valuation	Unobservable	(Weighted
December 31, 2016 (dollars in thousands)	Value		Technique	Inputs	Average)

Impaired loans - residential real estate owner occupied	$	4,787	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 53% (6%)

Impaired loans - residential real estate nonowner occupied	$	8	Sales comparison approach	Adjustments determined for differences between comparable sales	0% (0%)

Impaired loans - commercial real estate	$	1,214	Sales comparison approach	Adjustments determined for differences between comparable sales	3% - 49% (30%)

Impaired loans - commercial real estate	$	1,429	Income approach	Adjustments for differences between net operating income expectations	17% (17%)

Impaired loans - home equity	$	426	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 29% (16%)

Other real estate owned - residential real estate	$	400	Sales comparison approach	Adjustments determined for differences between comparable sales	17% (17%)

Premises and equipment	$	2,407	Sales comparison approach	Adjustments determined for differences between comparable sales	6% - 50% (22%)

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, 2017		December 31, 2016

Carrying amount of loans measured at fair value	$	6,576	$	6,963
Estimated selling costs considered in carrying amount		862		936
Valuation allowance		(89)		(35)
Total fair value	$	7,349	$	7,864


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2017		2016		2017		2016

Provisions on collateral-dependent, impaired loans	$	59	$	(16)	$	281	$	(40)

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, 2017		December 31, 2016

Other real estate owned carried at fair value	$	83	$	400
Other real estate owned carried at cost		84		991
Total carrying value of other real estate owned	$	167	$	1,391


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2017		2016		2017		2016

Other real estate owned write-downs during the period	$	76	$	200	$	155	$	200

Premises and Equipment

The Company’s Traditional Banking segment classified four of its former banking centers as held for sale as of September 30, 2017, with three of these former banking centers classified as held for sale as of December 31, 2016. Impairment charges are recorded when the value of a piece of property is reappraised or reassessed below the property’s then-carrying value. Impairment charges related to these properties were as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2017		2016		2017		2016

Impairment charges on premises and equipment	$	965	$	58	$	1,082	$	133

The carrying amounts and estimated fair values of all financial instruments at September 30, 2017 and December 31, 2016 follows:


			Fair Value Measurements at
			September 30, 2017:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value

Assets:
Cash and cash equivalents	$	329,862	$	329,862	$	—	$	—	$	329,862
Securities available for sale		458,719		2,481		448,163		8,075		458,719
Securities held to maturity		65,177		—		65,949		—		65,949
Mortgage loans held for sale, at fair value		4,083		—		4,083		—		4,083
Consumer loans held for sale, at fair value		3,368		—		—		3,368		3,368
Consumer loans held for sale, at the lower of cost or fair value		5,684		—		5,684		—		5,684
Loans, net		3,917,321		—		—		3,895,200		3,895,200
Federal Home Loan Bank stock		32,067		—		—		—		NA
Accrued interest receivable		11,357		—		11,357		—		11,357

Liabilities:
Noninterest-bearing deposits	$	1,040,414		—	$	1,040,414		—	$	1,040,414
Transaction deposits		1,966,819		—		1,966,819		—		1,966,819
Time deposits		342,496		—		341,510		—		341,510
Securities sold under agreements to repurchase and other short-term borrowings		173,311		—		173,311		—		173,311
Federal Home Loan Bank advances		757,500		—		753,504		—		753,504
Subordinated note		41,240		—		36,188		—		36,188
Accrued interest payable		936		—		936		—		936


			Fair Value Measurements at
			December 31, 2016:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value

Assets:
Cash and cash equivalents	$	289,309	$	289,309	$	—	$	—	$	289,309
Securities available for sale		481,275		2,455		470,843		7,977		481,275
Securities held to maturity		52,864		—		53,249		—		53,249
Mortgage loans held for sale, at fair value		11,662		—		11,662		—		11,662
Consumer loans held for sale, at fair value		2,198		—		—		2,198		2,198
Consumer loans held for sale, at the lower of cost or fair value		1,310		—		1,310		—		1,310
Loans, net		3,777,858		—		—		3,757,698		3,757,698
Federal Home Loan Bank stock		28,208		—		—		—		NA
Accrued interest receivable		10,356		—		10,356		—		10,356

Liabilities:
Noninterest-bearing deposits	$	971,952		—	$	971,952		—	$	971,952
Transaction deposits		1,939,338		—		1,939,338		—		1,939,338
Time deposits		249,417		—		248,684		—		248,684
Securities sold under agreements to repurchase and other short-term borrowings		173,473		—		173,473		—		173,473
Federal Home Loan Bank advances		802,500		—		798,594		—		798,594
Subordinated note		41,240		—		30,821		—		30,821
Accrued interest payable		948		—		948		—		948

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 consumer loans generally sold within two business days of origination. The carrying amounts of these loans, due to their 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 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.