FAIR VALUE ACCOUNTING AND MEASUREMENT

The Company measures and discloses certain assets and liabilities at 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 at the measurement date (that is, not a forced liquidation or distressed sale). GAAP (ASC 820, Fair Value Measurements) establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the accounting standard requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy:


•	Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.


•	Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data.

•

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from non-binding single dealer quotes not corroborated by observable market data.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for certain financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period.

Items Measured at Fair Value on a Recurring Basis:

Banner records trading account securities, securities available-for-sale, FHLB advances, junior subordinated debentures and derivative transactions at fair value on a recurring basis.


•	Investment securities primarily consist of U.S. Government and agency obligations, municipal bonds, corporate bonds, single issue trust preferred securities (TPS), pooled trust preferred collateralized debt obligation securities (TRUP CDO), mortgage-backed securities, asset-backed securities, equity securities and certain other financial instruments.

As of June 30. 2015, Banner no longer owns any TRUP CDOs; however, we did hold positions in these securities at December 31, 2014 and June 30, 2014. From mid-2008 until recent periods, the lack of active markets and market participants for certain securities resulted in significant reliance on Level 3 measurements. In particular, the market for our TRUP CDO securities has been generally inactive during most of this period. This was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which TRUP CDOs trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market also has been inactive as almost no new TRUP CDOs have been issued since 2007. While sporadic activity has increased in recent periods, there are still very few market participants who are willing and/or able to transact for these securities. Thus, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issuer or of the fair value of the security.

Given these conditions in the debt markets and the absence of regularly observable transactions in the secondary and new issue markets, management determined that for the TRUP CDOs at December 31, 2014 and June 30, 2014:


•	The few observable transactions and market quotations that were available were not reliable for purposes of determining fair value,


•	An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs was equally or more representative of fair value than the market approach valuation technique, and


•	The Company’s TRUP CDOs should be classified exclusively within Level 3 of the fair value hierarchy because of the significant assumptions required to determine fair value at the measurement date.

The TRUP CDO valuations were derived using input from independent third parties who used proprietary cash flow models for analyzing collateralized debt obligations. Their approaches to determining fair value involve considering the credit quality of the collateral, assuming a level of defaults based on the probability of default of each underlying trust preferred security, creating expected cash flows for each TRUP CDO security and discounting that cash flow at an appropriate risk-adjusted rate plus a liquidity premium.

Where appropriate, management reviewed the valuation methodologies and assumptions used by the independent third party providers and determined that the fair value estimates were reasonable and utilized those estimates in the Company’s reported financial statements. While we did not own any CDO securities at June 30, 2015, the aggregate estimated fair value of the TRUP CDO securities owned by the Company was $10 million at December 31, 2014.

One TRUP CDO security was sold in the first quarter of 2015 at a price significantly less than par, but more than our carrying value. For that security we received $2.3 million against an unamortized cost of $2.9 million and a carrying value of $1.7 million. A book loss was recognized in the amount of $642,000 but an offsetting reversal of a fair value allowance was also recorded as a gain of $1.2 million, resulting in a net gain for this security of $555,000 in the first quarter 2015 which was recognized in other operating income on the Consolidated Statements of Operations. Another TRUP CDO security was partially redeemed in the amount of $109,000 against a carrying value of zero, resulting in a reversal of a valuation allowance of $109,000 also in the first quarter. In addition, in the first quarter and in the second quarter of 2015, we received full repayment on our remaining TRUP CDOs through the liquidation of the underlying collateral by the trustees for those securities. As a result of those liquidations, we recorded net gains of $665,000 and $1.3 million, respectively, in the quarters ended March 31, 2015 and June 30, 2015.

At June 30, 2015 and December 31, 2014, Banner also owned approximately $19 million in amortized cost of single issuer TPS securities for which no direct market data or independent valuation source is available. Similar to the TRUP CDOs above, there were too few issuances of new TPS securities or sales of existing TPS securities to provide Level 1 or even Level 2 fair value measurements for these securities. Management, therefore, has utilized a discounted cash-flow model to calculate the present value of each security’s expected future cash flows to determine their respective fair values. Management has taken into consideration the limited market data that was available regarding similar securities and assessed the performance of the three individual issuers of TPS securities owned by the Company. In the current quarter, the Company again sought input from independent third parties to help it establish an appropriate set of parameters to identify a reasonable range of discount rates for use in its fair value model. Management concluded that market yields have been relatively stable in the quarter ended June 30, 2015 and that the indicated spreads and implied yields for non-investment grade securities as well as the yields associated with individual issuers in the third party analyst reports continue to support that a 500 basis point spread over the three-month LIBOR index, the same spread as used in the quarters ended December 31, 2014 and March 31, 2015, was still a reasonable basis for determining an appropriate discount rate to estimate the fair value of these securities. These factors were then incorporated into the model at June 30, 2015, where a discount rate equal to three-month LIBOR plus 500 basis points was used to calculate the respective fair values of these securities. The results of this Level 3 fair value measurement were fair value gains of $41,000 and $84,000, respectively in the quarter and six months ended June 30, 2015 for these securities. The Company has and will continue to assess the appropriate fair value hierarchy for determination of fair values on TPS securities on a quarterly basis.

For all other trading securities and securities available-for-sale we used matrix pricing models from investment reporting and valuation services. Management considers this to be a Level 2 input method.


•	Fair valuations for FHLB advances are estimated using fair market values provided by the lender, the FHLB of Des Moines. The FHLB of Des Moines prices advances by discounting the future contractual cash flows for individual advances using its current cost of funds curve to provide the discount rate. Management considers this to be a Level 2 input method.

•

The fair valuations of junior subordinated debentures (TPS-related debt that the Company has issued or acquired in the Siuslaw merger) were also valued using discounted cash flows. These debentures carry interest rates that reset quarterly, using the three-month LIBOR index plus spreads of 1.38% to 3.35%. While the quarterly reset of the index on this debt would seemingly keep its fair value reasonably close to book value, the disparity in the fixed spreads above the index and the inability to determine realistic current market spreads, due to lack of new issuances and trades, resulted in having to rely more heavily on assumptions about what spread would be appropriate if market transactions were to take place. In periods prior to the third quarter of 2008, the discount rate used was based on recent issuances or quotes from brokers on the date of valuation for comparable bank holding companies and was considered to be a Level 2 input method. However, as noted above in the discussions of TPS and TRUP CDOs, due to the unprecedented disruption of certain financial markets, management concluded that there were insufficient transactions or other indicators to continue to reflect these measurements as Level 2 inputs. Due to this reliance on assumptions and not on directly observable transactions, management believes fair value for these instruments should follow a Level 3 input methodology. Since the discount rate used in the fair value modeling is the most sensitive unobservable estimate in the calculation, the Company again utilized input from the same independent third party noted above to help it establish an appropriate set of parameters to identify a reasonable range of discount rates for use in its fair value model. In valuing the debentures at June 30, 2015, management evaluated the general market for credit spreads as noted above and for the discount rate used the period-ending three-month LIBOR plus 500 basis points. As noted above in the discussion about single-issuer TPS securities, since market spreads have been relatively stable in the recent period, we used the same spread as used in the quarters ended December 31, 2014 and March 31, 2015, resulting in fair value losses on these instruments of $368,000 and $734,000 for the quarter and six months ended June 30, 2015. The fair value adjustments in the current periods are attributed to the passage of time on the years to maturity in the discounted present value calculation used to estimate the fair value.

•

Derivative instruments include interest rate commitments related to one- to four-family loans and residential mortgage-backed securities and interest rate swaps. The fair value of interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical trends, where appropriate. The fair value of interest rate swaps is determined by using current market quotes on similar instruments provided by active broker/dealers in the swap market. Management considers these to be Level 2 input methods. The changes in the fair value of all of these derivative instruments are primarily attributable to changes in the level of market interest rates. The Company has elected to record the fair value of these derivative instruments on a net basis.

The following tables present financial assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets and liabilities as of June 30, 2015 and December 31, 2014 (in thousands):



	June 30, 2015
	Level 1		Level 2		Level 3		Total
Assets:
Securities—available-for-sale
U.S. Government and agency	$	—	$	11,756	$	—	$	11,756
Municipal bonds	—		59,054		—		59,054
Corporate bonds	—		5,035		—		5,035
Mortgage-backed or related securities	—		280,779		—		280,779
Asset-backed securities	—		31,252		—		31,252
	—		387,876		—		387,876
Securities—trading
U.S. Government and agency	—		1,492		—		1,492
Municipal bonds	—		1,426		—		1,426
TPS	—		—		12,571		12,571
Mortgage-backed or related securities	—		16,855		—		16,855
Equity securities and other	—		60		—		60
	—		19,833		12,571		32,404
Derivatives
Interest rate lock commitments	—		754		—		754
Interest rate swaps	—		6,627		—		6,627
	$	—	$	415,090	$	12,571	$	427,661

Liabilities:
Advances from FHLB at fair value	$	—	$	236	$	—	$	236
Junior subordinated debentures, net of unamortized deferred issuance costs at fair value	—		—		84,694		84,694
Derivatives
Interest rate sales forward commitments, net	—		148		—		148
Interest rate swaps	—		6,627		—		6,627
	$	—	$	7,011	$	84,694	$	91,705



	December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Securities—available-for-sale
U.S. Government and agency	$	—	$	29,770	$	—	$	29,770
Municipal bonds	—		50,028		—		50,028
Corporate bonds	—		5,018		—		5,018
Mortgage-backed or related securities	—		300,810		—		300,810
Asset-backed securities	—		25,395		—		25,395
	—		411,021		—		411,021
Securities—trading
U.S. Government and agency	—		1,505		—		1,505
Municipal bonds	—		1,440		—		1,440
TPS and TRUP CDOs	—		—		19,118		19,118
Mortgage-backed or related securities	—		18,136		—		18,136
Equity securities and other	—		59		—		59
	—		21,140		19,118		40,258
Derivatives
Interest rate lock commitments	—		317		—		317
Interest rate swaps	—		6,290		—		6,290
	$	—	$	438,768	$	19,118	$	457,886

Liabilities:
Advances from FHLB at fair value	$	—	$	32,250	$	—	$	32,250
Junior subordinated debentures, net of unamortized deferred issuance costs at fair value	—		—		78,001		78,001
Derivatives
Interest rate sales forward commitments, net	—		198		—		198
Interest rate swaps	—		6,290		—		6,290
	$	—	$	38,738	$	78,001	$	116,739

The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and six months ended June 30, 2015 and 2014 (in thousands):



	Three Months Ended					Six Months Ended
	June 30, 2015					June 30, 2015
	Level 3 Fair Value Inputs					Level 3 Fair Value Inputs
	TPS and TRUP CDOs			Borrowings—Junior Subordinated Debentures		TPS and TRUP CDOs			Borrowings— Junior Subordinated Debentures
Beginning balance	$	17,456		$	84,326	$	19,119		$	78,001
Total gains or losses recognized
Assets gains, including OTTI	1,348			—		2,071			—
Liabilities losses	—			368		—			734
Purchases, issuances and settlements, including the Siuslaw acquisition	—			—		—			5,959
Sales, maturities and paydowns, net of discount amortization	(6,233		)	—		(8,619		)	—
Ending balance at June 30, 2015	$	12,571		$	84,694	$	12,571		$	84,694

	Three Months Ended					Six Months Ended
	June 30, 2014					June 30, 2014
	Level 3 Fair Value Inputs					Level 3 Fair Value Inputs
	TPS and TRUP CDOs			Borrowings—Junior Subordinated Debentures		TPS and TRUP CDOs			Borrowings— Junior Subordinated Debentures
Beginning balance	$	35,062		$	74,135	$	35,140		$	73,928
Total gains or losses recognized
Assets gains (losses), including OTTI	3,464			—		3,420			—
Liabilities losses	—			3,178		—			3,385
Sales, maturities and paydowns, net of discount amortization	3			—		(31		)	—
Ending balance at June 30, 2014	$	38,529		$	77,313	$	38,529		$	77,313

The Company has elected to continue to recognize the interest income and dividends from the securities reclassified to fair value as a component of interest income as was done in prior years when they were classified as available-for-sale. Interest expense related to the FHLB advances and junior subordinated debentures continues to be measured based on contractual interest rates and reported in interest expense. The change in fair market value of these financial instruments has been recorded as a component of other operating income.

Items Measured at Fair Value on a Non-recurring Basis:

Impaired loans are periodically evaluated to determine if valuation adjustments, or partial write-downs, should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan and lease losses (ALLL) or charges off the impaired amount. These valuation adjustments are considered non-recurring fair value adjustments. The remaining impaired loans are evaluated for reserve needs in homogenous pools within the Company’s ALLL methodology. As of June 30, 2015, the Company reviewed all of its adversely classified loans totaling $63 million and identified $49 million which were considered impaired. Of those $49 million in impaired loans, $32 million were individually evaluated to determine if valuation adjustments, or partial write-downs, should be recorded, or if specific impairment reserves should be established. The $32 million had original carrying values of $34 million which have been reduced by partial write-downs totaling $2 million. Impaired loans that were collectively evaluated for reserve purposes within homogenous pools totaled $18 million and were found to require allowances totaling $183,000. The valuation inputs for impaired loans are considered to be Level 3 inputs.

The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis. All REO properties are recorded at the lower of the estimated fair value of the real estate, less expected selling costs, or the carrying amount of the defaulted loans. From time to time, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property. Banner considers any valuation inputs related to REO to be Level 3 inputs. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations. For both the three and six month periods ended June 30, 2015, the Company recognized $182,000 in impairment charges related to REO assets, compared to no impairment charges for the three months ended June 30, 2014 and $37,000 for the six months ended June 30, 2014.

The following tables present financial assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets as of June 30, 2015 and December 31, 2014 (in thousands):



	At or For the Six Months Ended June 30, 2015
	Level 1		Level 2		Level 3		Total		Net Gains/(Losses) Recognized During the Period
Impaired loans	$	—	$	—	$	13,643	$	13,643	$	316
REO	—		—		6,105		6,105		(210		)

	At or For the Year Ended December 31, 2014
	Level 1		Level 2		Level 3		Total		Net Gains/(Losses) Recognized During the Period
Impaired loans	$	—	$	—	$	4,725	$	4,725	$	(512	)
REO	—		—		3,352		3,352		(453		)

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3):

The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at June 30, 2015 and December 31, 2014:



			Weighted Average Rate
Financial Instruments	Valuation Techniques	Unobservable Inputs	June 30, 2015		December 31, 2014
TPS securities	Discounted cash flows	Discount rate	5.27	%	5.26	%
TRUP CDOs	Discounted cash flows	Discount rate	n/a		3.96
Junior subordinated debentures	Discounted cash flows	Discount rate	5.27		5.26
Impaired loans	Collateral Valuations	Market values	n/a		n/a
REO	Appraisals	Market values	n/a		n/a

TPS and TRUP CDOs: Management believes that the credit risk-adjusted spread used to develop the discount rate utilized in the fair value measurement of TPS and TRUP CDOs is indicative of the risk premium a willing market participant would require under current market conditions for instruments with similar contractual rates and terms and conditions and issuers with similar credit risk profiles and with similar expected probability of default. Management attributes the change in fair value of these instruments, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of assets subsequent to their issuance.

Junior subordinated debentures: Similar to the TPS and TRUP CDOs discussed above, management believes that the credit risk-adjusted spread utilized in the fair value measurement of the junior subordinated debentures is indicative of the risk premium a willing market participant would require under current market conditions for an issuer with Banner's credit risk profile. Management attributes the change in fair value of the junior subordinated debentures, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of liabilities subsequent to their issuance. Future contractions in the risk adjusted spread relative to the spread currently utilized to measure the Company's junior subordinated debentures at fair value as of June 30, 2015, or the passage of time, will result in negative fair value adjustments. At June 30, 2015, the discount rate utilized was based on a credit spread of 500 basis points and three-month LIBOR of 27 basis points.

Impaired loans: Loans are considered impaired when, based on current information and events, management determines that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral and the current status of the economy. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. If this practical expedient is used, the impaired loans are considered to be held at fair value. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported.

REO: Fair value adjustments on REO are based on updated real estate appraisals which are based on current market conditions.

Fair Values of Financial Instruments:

The following table presents estimated fair values of the Company’s financial instruments as of June 30, 2015 and December 31, 2014, whether or not measured at fair value in the Consolidated Statements of Financial Condition. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data in the development of the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying value and estimated fair value of financial instruments are as follows (in thousands):



	June 30, 2015				December 31, 2014
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Cash and cash equivalents	$	183,974	$	183,974	$	126,072	$	126,072
Securities—trading	32,404		32,404		40,258		40,258
Securities—available-for-sale	387,876		387,876		411,021		411,021
Securities—held-to-maturity	132,197		137,267		131,258		137,608
Loans receivable held for sale	1,154		1,179		2,786		2,807
Loans receivable	4,245,322		4,114,079		3,831,034		3,722,179
FHLB stock	6,120		6,120		27,036		27,036
Bank-owned life insurance	71,744		71,744		63,759		63,759
Mortgage servicing rights	12,329		16,402		9,030		12,987
Derivatives:
Interest rate lock commitments	754		754		317		317
Interest rate swaps	6,627		6,627		6,290		6,290
Liabilities:
Demand, interest checking and money market accounts	2,528,176		2,249,076		2,227,292		1,998,649
Regular savings	1,003,189		866,788		901,142		784,006
Certificates of deposit	765,780		760,167		770,516		764,549
FHLB advances at fair value	236		236		32,250		32,250
Junior subordinated debentures at fair value	84,694		84,694		78,001		78,001
Other borrowings	94,523		94,523		77,185		77,185
Derivatives:
Interest rate forward sales commitments	148		148		198		198
Interest rate swaps	6,627		6,627		6,290		6,290

Fair value estimates, methods, assumptions and the level within the fair value hierarchy of the fair value measurements are set forth below for the Company’s financial and off-balance-sheet instruments:

Cash and Cash Equivalents: The carrying amount of these items is a reasonable estimate of their fair value. These values are considered Level 1 measures.

Securities: The estimated fair values of investment securities and mortgaged-backed securities are priced using current active market quotes, if available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2. Due to the continued credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads for some of the Company’s TPS and TRUP CDO securities (see earlier discussion above in determining the securities’ fair market value), management has classified these securities as a Level 3 fair value measure.

Loans Receivable: Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated by type such as multifamily real estate, residential mortgage, nonresidential mortgage, commercial/agricultural, consumer and other. Each loan category is further segmented into fixed- and adjustable-rate interest terms and by performing and non-performing categories. A preliminary estimate of fair value is then calculated based on discounted cash flows using as a discount rate the current rate offered on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans. The preliminary estimate is then further reduced by the amount of the allowance for loan losses to arrive at a final estimate of fair value. Fair value for significant non-performing loans is also based on recent appraisals or estimated cash flows discounted using rates commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. Management considers this to be a Level 2 measure.

FHLB Stock: The fair value is based upon the redemption value of the stock which equates to its carrying value. This fair value is considered a Level 3 measure.

Bank-owned Life Insurance: The fair value of BOLI policies owned are based on the various insurance contracts' cash surrender value. This fair value is considered a Level 1 measure.

Mortgage Servicing Rights: Fair values are estimated based on current pricing for sales of servicing for new loans adjusted up or down based on the serviced loan’s interest rate versus current new loan rates. Management considers this to be a Level 3 measure.

Deposit Liabilities: The fair value of deposits with no stated maturity, such as savings and checking accounts, is estimated by applying decay rate assumptions to segregated portfolios of similar deposit types to generate cash flows which are then discounted using short-term market interest rates. The market value of certificates of deposit is based upon the discounted value of contractual cash flows. The discount rate is determined using the rates currently offered on comparable instruments. Fair value estimates for deposits are considered Level 3 measures.

FHLB Advances and Other Borrowings: Fair valuations for Banner’s FHLB advances are estimated using fair market values provided by the lender, the FHLB of Des Moines. The FHLB of Des Moines prices advances by discounting the future contractual cash flows for individual advances using its current cost of funds curve to provide the discount rate. This is considered to be a Level 2 input method. Other borrowings are priced using discounted cash flows to the date of maturity based on using current rates at which such borrowings can currently be obtained. This fair value is considered to be a Level 3 measure.

Junior Subordinated Debentures: Due to continued credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads (see earlier discussion above in determining the junior subordinated debentures’ fair market value), junior subordinated debentures have been classified as a Level 3 fair value measure. Management believes that the credit risk adjusted spread and resulting discount rate utilized is indicative of those that would be used by market participants.

Derivatives: Derivatives include interest rate swap agreements, interest rate lock commitments to originate loans held for sale and forward sales contracts to sell loans and securities related to mortgage banking activities. Fair values for these instruments, which generally change as a result of changes in the level of market interest rates, are estimated based on dealer quotes and secondary market sources. Management considers these to be Level 2 inputs.

Off-Balance Sheet Items: Off-balance sheet financial instruments include unfunded commitments to extend credit, including standby letters of credit, and commitments to purchase investment securities. The fair value of these instruments is not considered to be material. Other commitments to fund loans totaled $1.386 billion and $1.197 billion at June 30, 2015 and December 31, 2014, respectively, and have no carrying value at both dates, representing the cost of such commitments. There were no commitments to purchase securities at June 30, 2015 or at December 31, 2014.

Limitations: The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2015 and December 31, 2014. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business. The fair value has not been estimated for assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not financial instruments include the deferred tax assets/liabilities; land, buildings and equipment; costs in excess of net assets acquired; and real estate held for sale.