FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received on the measurement date to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants, with a three level valuation input hierarchy. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities. Securities available for sale ("AFS") are recorded at fair value on a recurring basis. Fair value measurements are based upon quoted market exchange prices, if available. If quoted prices are not available, third-party pricing sources are generally utilized to determine fair value. These fair values are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads, and broker quotes. Level 1 securities include 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 generally include GSE securities and mortgage-backed securities issued by GSEs, private label mortgage-backed securities, municipal bonds, corporate debt securities, and collateralized loan obligations. Level 3 securities include one municipal bond and 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 June 30,				Six months ended June 30,
	2016		2015		2016			2015

Level 3 AFS securities at beginning of period	$	11,506	$	11,380	$	11,728		$	11,290
Purchases	—		—		—			—
Sales, calls or maturities	—		—		—			—
Changes in unrealized gains and losses	219		23		(3		)	113
Level 3 AFS securities at end of period	$	11,725	$	11,403	$	11,725		$	11,403

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, except for mortgage interest rate lock commitments described below, 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 June 30,						Six months ended June 30,
	2016			2015			2016			2015

Interest rate lock commitments at beginning of period	$	1,125		$	636		$	408		$	342
Issuances	4,041			1,645			6,802			2,972
Settlements	(3,559		)	(1,798		)	(5,603		)	(2,831		)
Interest rate lock commitments at end of period	$	1,607		$	483		$	1,607		$	483

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.

Other Real Estate. Foreclosed assets are adjusted to fair value upon transfer of loans to other real estate. Subsequently, other real estate is 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 other real estate as nonrecurring Level 3.

The following tables summarize fair value information for assets and liabilities measured on a recurring and nonrecurring basis.



	Total		Level 1		Level 2		Level 3
June 30, 2016
Measured at fair value on a recurring basis:
Securities available for sale:
GSE obligations	$	31,554	$	—	$	31,554	$	—
SBA-guaranteed securities	19,042		19,042		—		—
Mortgage-backed securities issued by GSE	563,413		—		563,413		—
Municipal bonds	134,337		—		133,211		1,126
Corporate bonds	202,441		2,529		189,313		10,599
Collateralized loan obligations	50,276		—		50,276		—
Non-agency CMBS	25,497		—		25,497		—
Certificates of deposit	992		992		—		—
Equity securities	10,755		10,755		—		—
SBA-guaranteed loans held for sale	31,933		—		31,933		—
SBA loans held for investment	39,077		—		39,077		—
Derivative assets	2,512		—		905		1,607
Derivative liabilities	11,942		—		11,942		—

Measured at fair value on a non-recurring basis:
Impaired loans	$	19,529	$	—	$	—	$	19,529
Other real estate	23,091		—		—		23,091



	Total		Level 1		Level 2		Level 3
December 31, 2015
Measured at fair value on a recurring basis:
Securities available for sale:
GSE obligations	$	5,982	$	—	$	5,982	$	—
SBA-guaranteed securities	12,176		12,176		—		—
Mortgage-backed securities issued by GSE	435,625		—		435,625		—
Collateralized loan obligations	50,483		—		50,483		—
Municipal bonds	55,800		—		54,692		1,108
Corporate bonds	123,532		2,485		110,427		11,728
Non-agency RMBS	3,663		—		3,663		—
Certificates of deposit	245		245		—		—
Equity securities	1,626		1,626		—		—
SBA-guaranteed loans held for sale	23,664		—		23,664		—
SBA loans held for investment	20,423		—		20,423		—
Derivative assets	996		—		588		408
Derivative liabilities	4,376		—		4,376		—

Measured at fair value on a non-recurring basis:
Impaired loans	$	15,066	$	—	$	—	$	15,066
Other real estate	15,346		—		—		15,346

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.



				Fair Value
	Valuation Technique	Unobservable Input	Range	June 30, 2016		December 31, 2015
Recurring measurements:
Investment securities	Pricing model	Illiquidity or credit factor in discount rates	1-2%	$	11,725	$	11,728

Interest rate lock commitments	Pricing model	Pull through rates	80-95%	1,607		408

Nonrecurring measurements:
Impaired loans	Discounted appraisals	Collateral discounts	15-50%	19,529		15,066
	Discounted expected cash flows	Expected loss rates	0-75%
	Discounted expected cash flows	Discount rates	2-8%
Other real estate	Discounted appraisals	Collateral discounts	15-50%	23,091		15,346

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 a reasonable estimate of fair value.

Investment Securities Available for Sale. A description of fair value estimates for securities available for sale is included in the recurring fair value measurements section above.

Investment Securities Held to Maturity. The fair value of the municipal bonds classified as held to maturity are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads, and broker quotes. 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 mortgage loans held for sale is based on commitments on hand from investors within the secondary market. A description of fair value estimates for SBA-guaranteed loans held for sale is included in the recurring fair value measurements section above.

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.

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.

Purchased Accounts Receivable. Purchased accounts receivable, which are classified in other assets on the consolidated balance sheet, are initially recorded at fair value, which is the same as the discounted purchase price, and generally have maturities between 30 and 60 days. Due to the short duration of these assets, the carrying amounts are a reasonable estimate of 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.

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.

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.

Derivative Instruments. A description of fair value estimates for derivative instruments is included in the recurring fair value measurements section above.

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



	June 30, 2016
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	120,536	$	120,536	$	120,536	$	—	$	—
Investment securities available for sale	1,038,307		1,038,307		33,318		993,264		11,725
Investment securities held to maturity	38,959		41,197		—		41,197		—
Loans held for sale	139,513		139,513		—		139,513		—
Loans, net	5,257,135		5,334,194		—		39,077		5,295,117
Purchased accounts receivable	9,657		9,657		—		9,657		—
Federal Home Loan Bank stock	45,284		45,284		—		45,284		—
Derivative assets	2,512		2,512		—		905		1,607
Accrued interest receivable	19,590		19,590		—		19,590		—

Financial liabilities:
Deposits	5,338,586		5,345,875		—		5,345,875		—
Short-term borrowings	811,383		811,383		—		—		811,383
Long-term debt	229,012		239,072		—		—		239,072
Derivative liabilities	11,942		11,942		—		11,942		—
Accrued interest payable	2,985		2,985		—		2,985		—



	December 31, 2015
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	111,918	$	111,918	$	111,918	$	—	$	—
Investment securities available for sale	689,132		689,132		16,532		665,872		6,728
Investment securities held to maturity	39,182		40,500		—		40,500		—
Loans held for sale	47,287		47,287		—		47,287		—
Loans, net	3,066,775		3,092,461		—		23,664		3,068,797
Purchased accounts receivable	52,688		52,688		—		52,688		—
Federal Home Loan Bank stock	24,844		24,844		—		24,844		—
Derivative assets	996		996		—		588		408
Accrued interest receivable	12,695		12,695		—		12,695		—

Financial liabilities:
Deposits	3,310,297		3,310,306		—		3,310,306		—
Short-term borrowings	375,500		375,500		—		—		375,500
Long-term debt	194,967		198,928		—		—		198,928
Derivative liabilities	4,376		4,376		—		4,376		—
Accrued interest payable	2,550		2,550		—		2,550		—