FAIR VALUE MEASUREMENTS

Accounting standards require that the Company adopt fair value measurement for financial assets and financial liabilities. This enhanced guidance for using fair value to measure assets and liabilities applies whenever other standards require or permit assets or liabilities to be measured at fair value. This guidance does not expand the use of fair value in any new circumstances.

Accounting standards establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by these standards are as follows:



Level I:	Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:	Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III:	Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Assets Measured on a Recurring Basis

As required by accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company classified investments in government securities as Level II instruments and valued them using the market approach. The following measurements are made on a recurring basis.

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Available-for-sale investment securities — Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted 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 I securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level II securities include mortgage-backed securities issued by government sponsored entities and private label entities, municipal bonds and corporate debt securities. There have been no changes in valuation techniques for the year ended December 31, 2016. Valuation techniques are consistent with techniques used in prior periods.


•	Loans held for sale — The fair value of mortgage loans held for sale is determined, when possible, using quoted secondary-market prices or investor commitments. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan, which would be used by other market participants.


•	Interest rate lock commitment — The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted mortgage-backed security prices and estimates of the fair value of the mortgage servicing rights and the probability that the mortgage loan will fund within the terms of the interest rate lock commitments.


•	Mortgage-backed security hedges — MBS hedges are considered derivatives and are recorded at fair value based on observable market data of the individual mortgage-backed security.


•	Interest rate cap — The fair value of the interest rate cap is determined at the end of each quarter by using Bloomberg Finance which values the interest rate cap using observable inputs from forward and futures yield curves as well as standard market volatility.


•	Interest rate swap — Interest rate swaps are recorded at fair value based on third party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data.

The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of December 31, 2016 and 2015 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.



	December 31, 2016
(Dollars in thousands)	Level I		Level II		Level III		Total
Assets:
U.S. Government Agency securities	$	—	$	28,816	$	—	$	28,816
U.S. Sponsored Mortgage backed securities	—		54,732		—		54,732
Municipal securities	—		70,796		—		70,796
Equity and other securities	—		8,024		—		8,024
Loans held for sale	—		90,174		—		90,174
Interest rate lock commitment	—		—		1,546		1,546
Mortgage-backed security hedges	—		372		—		372
Interest rate swap	—		250		—		250
Interest rate cap	—		268		—		268
Liabilities:
Interest rate swap	—		250		—		250



	December 31, 2015
(Dollars in thousands)	Level I		Level II		Level III		Total
Assets:
U.S. Government Agency securities	$	—	$	29,351	$	—	$	29,351
U.S. Sponsored Mortgage backed securities	—		33,714		—		33,714
Municipal securities	—		1,798		—		1,798
Equity and other securities	—		5,393		—		5,393
Loans held for sale	—		102,623		—		102,623
Interest rate lock commitment	—		—		1,537		1,537
Interest rate swap	—		405		—		405
Interest rate cap	—		437		—		437
Liabilities:
Interest rate swap	—		405		—		405
Mortgage-backed security hedges	—		19		—		19

The following table represents recurring level III assets:

Interest Rate Lock Commitments	December 31, 2016		December 31, 2015
(Dollars in thousands)
Balance, beginning of period	$	1,537	$	1,020

Realized and unrealized gains included in earnings	9		517

Balance, end of period	$	1,546	$	1,537

Assets Measured on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets and non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a nonrecurring basis during 2016 and 2015 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other noninterest expense.

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Impaired Loans — Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.

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Other Real Estate owned — Other real estate owned, which is obtained through the Bank’s foreclosure process is valued utilizing the appraised collateral value. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. At the time, the foreclosure is completed, the Company obtains a current external appraisal.

Assets measured at fair value on a nonrecurring basis as of December 31, 2016 and 2015 are included in the table below:



(Dollars in thousands)	December 31, 2016
	Level I		Level II		Level III		Total
Impaired loans	$	—	$	—	$	11,609	$	11,609
Other real estate owned	—		—		414		414



(Dollars in thousands)	December 31, 2015
	Level I		Level II		Level III		Total
Impaired loans	$	—	$	—	$	14,362	$	14,362
Other real estate owned	—		—		239		239

The following tables presents quantitative information about the Level III significant unobservable inputs for assets and liabilities measured at fair value at December 31, 2016 and 2015.



	Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
December 31, 2016
Nonrecurring measurements:
Impaired loans	$	11,609	Appraisal of collateral ¹	Appraisal adjustments ²	20% - 62%
				Liquidation expense ²	5% - 10%

Other real estate owned	$	414	Appraisal of collateral ¹	Appraisal adjustments ²	20% - 30%
				Liquidation expense ²	5% - 10%

Recurring measurements:
Interest rate lock commitments	$	1,546	Pricing model	Pull through rates	73% - 85%



	Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
December 31, 2015
Nonrecurring measurements:
Impaired loans	$	14,362	Appraisal of collateral ¹	Appraisal adjustments ²	20% - 62%
				Liquidation expense ²	5% - 10%

Other real estate owned	$	239	Appraisal of collateral ¹	Appraisal adjustments ²	20% - 30%
				Liquidation expense ²	5% - 10%

Recurring measurements:
Interest rate lock commitments	$	1,537	Pricing model	Pull through rates	76% - 85%

¹ Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.

² Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.