FAIR VALUE MEASUREMENTS

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. For example, investment securities available for sale and derivative assets and liabilities are recorded at fair value on a recurring basis. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, impaired loans and foreclosed assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities. Investment securities available for sale ("AFS") are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market exchange prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include marketable securities traded on an active exchange, such as the New York Stock Exchange, or SBA-guaranteed securities where active market pricing is readily available. Level 2 securities include mortgage-backed securities and collateralized mortgage obligations, both issued by GSEs, private label mortgage-backed securities, municipal bonds and corporate debt securities. Level 3 securities include certain corporate debt securities with limited trading activity. The following table provides the components of the change in fair value of level 3 available for sale securities for the periods presented.



	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014			2013

Level 3 AFS securities at beginning of period	$	6,793	$	—	$	7,583		$	—
Purchases	4,600		—		4,600			—
Sales, calls or maturities	—		—		(1,000		)	—
Changes in unrealized gains and losses	30		—		240			—
Level 3 AFS securities at end of period	$	11,423	$	—	$	11,423		$	—

SBA-Guaranteed Loans. The Company has elected to account for certain SBA-guaranteed loans at fair value on a recurring basis. Generally, the Company has reached an agreement with an investor to sell the guaranteed portion of these loans, and these amounts are classified in loans held for sale on the consolidated balance sheets until the sale is complete. The unguaranteed retained portion of the loans remains in loans held for investment and continues to be adjusted to fair value over the remaining life of the respective loans. Fair value estimates for these loans are based on observable market data and pricing and are therefore classified as recurring Level 2.

Derivatives. Derivative instruments include interest rate swaps and caps and are valued on a recurring basis using quoted market prices, dealer quotes, or third party pricing models that are primarily sensitive to market observable data. Currently outstanding derivatives are classified as Level 2 within the fair value hierarchy.

Mortgage Loan Commitments. The fair value of interest rate lock commitments, which are included in derivatives assets and liabilities in the fair value measurement tables below, is based on servicing rate premium, origination income net of origination costs, fall out rates and changes in loan pricing between the commitment date and period end. Interest rate lock commitments are measured at fair value on a recurring basis and are classified as Level 3. The following table provides the components of the change in fair value of interest rate lock commitments for the periods presented.



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013

Interest rate lock commitments at beginning of period	$	296		$	648		$	354		$	795
Fair value of acquired Yadkin interest rate lock commitments	231			—			231			—
Issuances	906			213			1,529			2,403
Settlements	(986		)	(494		)	(1,667		)	(2,831		)
Interest rate lock commitments at end of period	$	447		$	367		$	447		$	367

The fair value of forward sale commitments, also included in derivative assets and liabilities in the fair value measurement tables below, is based on changes in loan pricing between the commitment date and period end. Forward sale commitments are measured at fair value on a recurring basis and are classified as Level 2. The difference between the interest rate lock commitment issuances and settlements in the preceding table and the change in fair value of forward sale commitments in the period represents the gain on mortgage loan commitments and is included in mortgage banking income on the consolidated statements of operations.

Loans. Loans are not generally recorded at fair value on a recurring basis. However, certain loans are determined to be impaired, and those loans are charged down to estimated fair value. The fair value of impaired loans that are collateral dependent is based on collateral value. For impaired loans that are not collateral dependent, estimated value is based on either an observable market price, if available, or the present value of expected future cash flows. Those impaired loans not requiring a charge-off represent loans for which the estimated fair value exceeds the recorded investments in such loans. When the fair value of an impaired loan is based on an observable market price or a current appraised value with no adjustments, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available, or the Company determines the fair value of the collateral is further impaired below the appraised value, and there is no observable market price, the impaired loan is classified as nonrecurring Level 3.

Foreclosed Assets. Foreclosed assets are adjusted to fair value upon transfer of loans to foreclosed assets. Subsequently, foreclosed assets are carried at lower of cost or net realizable value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company classifies foreclosed assets as nonrecurring Level 3.

The following tables summarize information about assets and liabilities measured at fair value.



			Fair Value Measurements as of September 30, 2014
	Assets/(Liabilities) Measured at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
Measured at fair value on a recurring basis:
Securities available for sale:
GSE obligations	$	14,882	$	—	$	14,882	$	—
SBA-guaranteed securities	62,601		62,601		—		—
Mortgage-backed securities issued by GSE	446,499		—		446,499		—
Corporate bonds	120,387		2,524		106,440		11,423
Non-agency CMBS	3,638		—		3,638		—
Municipal bonds	43,632		—		43,632		—
Other debt securities	498		498		—		—
Equity securities	2,856		2,856		—		—
SBA-guaranteed loans held for sale	2,324		—		2,324		—
SBA loans held for investment	1,241		—		1,241		—
Derivative assets	4,217		—		3,770		447
Derivative liabilities	223		—		223		—

Measured at fair value on a non-recurring basis:
Impaired loans	$	10,050	$	—	$	—	$	10,050
Foreclosed assets	11,078		—		—		11,078



			Fair Value Measurements as of December 31, 2013
	Assets/(Liabilities) Measured at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
Measured at fair value on a recurring basis:
Securities available for sale:
GSE obligations	$	14,673	$	—	$	14,673	$	—
SBA-guaranteed securities	65,880		65,880		—		—
Mortgage-backed securities issued by GSE	205,260		—		205,260		—
Corporate bonds	110,740		—		103,157		7,583
Non-agency CMBS	5,938		—		5,938		—
Municipal bonds	601		—		601		—
Other debt securities	253		253		—		—
Equity securities	1,043		1,043		—		—
Derivative assets	4,717		—		4,363		354

Measured at fair value on a non-recurring basis:
Impaired loans	$	8,264	$	—	$	—	$	8,264
Foreclosed assets	10,823		—		—		10,823

Quantitative Information About Level 3 Fair Value Measurements

The table below outlines the valuation techniques, unobservable inputs, and the range of quantitative inputs used in the valuations.



	Valuation Technique	Unobservable Input	Range	Fair Value as of September 30, 2014
Recurring measurements:
Investment securities	Pricing model	Illiquidity or credit factor in discount rates	1-2%	$	11,423

Interest rate lock commitments	Pricing model	Pull through rates	80-95%	$	447

Nonrecurring measurements:
Impaired loans	Discounted appraisals	Collateral discounts	15-50%	$	10,050
	Discounted expected cash flows	Expected loss rates	0-75%
	Discounted expected cash flows	Discount rates	2-8%
Foreclosed assets	Discounted appraisals	Collateral discounts	15-50%	$	11,078

The significant unobservable input used in the fair value measurement of the Company’s interest rate lock commitments is the closing ratio (or pull through rate), which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally, the fair value of an interest rate lock commitment is positive (negative) if the prevailing interest rate is lower (higher) than the interest rate lock commitment rate. Therefore, an increase in the pull through rates (i.e., higher percentage of loans estimated to close) will result in the fair value of the interest rate lock commitments increasing in a gain position, or decreasing in a loss position. The pull through ratio is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The pull through rate is computed based on historical internal data and the ratio is periodically reviewed by the Company’s mortgage banking department.

Due to the nature of the Company’s business, a significant portion of its assets and liabilities consist of financial instruments. Accordingly, the estimated fair values of these financial instruments are disclosed. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. The fair value of such instruments has been derived based on assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net amounts ultimately collected could be materially different from the estimates presented below. In addition, these estimates are only indicative of the values of individual financial instruments and should not be considered an indication of the fair value of the Company taken as a whole.

Cash and Cash Equivalents. The carrying amounts for cash and cash equivalents are equal to fair value.

Investment Securities Available for Sale. See the discussion related to fair value estimates for securities available for sale in the fair value hierarchy section above. There have been no changes in valuation techniques for the nine months ended September 30, 2014.

Investment Securities Held to Maturity. The fair value of the one corporate bond classified as held to maturity as of December 31, 2013 was estimated based on recent issuance yields on subordinated debt from companies with a similar credit and liquidity profile. Due to the non-marketable nature of this bond, it was classified as Level 3. This bond was called at par by the issuer in the first quarter of 2014. The fair value of the municipal bonds classified as held to maturity as of September 30, 2014 are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. These securities are classified as Level 2 in the fair value hierarchy since the inputs used in the valuation are readily available market inputs.

Loans Held For Sale. The fair value of loans held for sale is based on commitments on hand from investors within the secondary market for mortgage and SBA loans with similar characteristics. There have been no changes in valuation techniques for the nine months ended September 30, 2014.

Loans. Expected cash flows are forecasted over the remaining life of each loan and are discounted to present value at current market interest rates for similar loans considering loan collateral type and credit quality. There have been no changes in valuation techniques for the nine months ended September 30, 2014.

Federal Home Loan Bank Stock. Given the option to redeem this stock at par through the FHLB, the carrying value of FHLB stock approximates fair value. There have been no changes in valuation techniques for the nine months ended September 30, 2014.

Bank-Owned Life Insurance. Bank-owned life insurance investments are recorded at their cash surrender value, or the amount that can be realized upon surrender. Therefore, carrying value approximates fair value.

Purchased Accounts Receivable. Purchased accounts receivable, which are classified in other assets on the consolidated balance sheet, are initially recorded at fair value and generally have maturities between 30 and 60 days. Due to the short duration of these assets, the carrying value approximates fair value.

Deposits. The fair value of demand deposits, savings, money market and NOW accounts represents the amount payable on demand. The fair value of time deposits is estimated by calculating the present value of cash flows on the time deposit portfolio discounted using interest rates currently offered for instruments of similar remaining maturities. There have been no changes in valuation techniques for the nine months ended September 30, 2014.

Short-term Borrowings and Long-term Debt. The fair value of short-term borrowings and long-term debt are based upon the discounted value when using current rates at which borrowings of similar maturity could be obtained. There have been no changes in valuation techniques for the nine months ended September 30, 2014.

Accrued Interest Receivable and Accrued Interest Payable. The carrying amounts of accrued interest receivable and payable approximate fair value due to the short maturities of these instruments. There have been no changes in valuation techniques for the nine months ended September 30, 2014.

Derivative Instruments. See the discussion related to fair value estimates for derivative instruments in the fair value hierarchy section above. There have been no changes in valuation techniques for the nine months ended September 30, 2014.

The following tables summarize the carrying amounts and estimated fair values of the Company's financial instruments.



	September 30, 2014
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	91,075	$	91,075	$	91,075	$	—	$	—
Investment securities available for sale	694,993		694,993		68,479		615,091		11,423
Investment securities held to maturity	39,728		40,404		—		40,404		—
Loans held for sale	26,853		26,853		—		26,853		—
Loans, net	2,819,785		2,847,744		—		1,241		2,846,503
Federal Home Loan Bank stock	19,320		19,320		—		19,320		—
Bank-owned life insurance	76,500		76,500		—		76,500		—
Derivative assets	4,218		4,218		—		3,771		447
Purchased accounts receivable	43,187		43,187		—		43,187		—
Accrued interest receivable	11,225		11,225		—		11,225		—

Financial liabilities:
Deposits	3,184,939		3,181,179		—		3,181,179		—
Short-term borrowings	216,500		216,500		—		—		216,500
Long-term debt	210,154		213,316		—		—		213,316
Derivative liabilities	223		223		—		223		—
Accrued interest payable	2,048		2,048		—		2,048		—



	December 31, 2013
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	100,780	$	100,780	$	100,780	$	—	$	—
Investment securities available for sale	404,388		404,388		67,176		329,882		7,583
Investment securities held to maturity	500		500		—		—		500
Loans held for sale	8,663		8,663		—		8,663		—
Loans, net	1,385,790		1,380,437		—		—		1,380,437
Federal Home Loan Bank stock	8,929		8,929		—		8,929		—
Bank-owned life insurance	33,148		33,148		—		33,148		—
Derivative assets	4,717		4,717		—		4,363		354
Purchased accounts receivable	18,725		18,725		—		18,725		—
Accrued interest receivable	5,356		5,356		—		5,356		—

Financial liabilities:
Deposits	1,672,231		1,674,175		—		1,674,175		—
Short-term borrowings	126,500		126,726		—		—		126,726
Long-term debt	72,921		72,397		—		—		72,397
Accrued interest payable	1,817		1,817		—		1,817		—