5. FAIR VALUE

The Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities during the first quarter of 2018.

FASB ASC No. 820‑10 defines fair value as 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. FASB ASC 820‑10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes 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 following tables summarize assets and liabilities measured at fair value on a recurring basis:


	March 31, 2020
			Fair Value Measurements Using:
			Quoted Prices
			In Active	Significant
			Markets for	Other		Significant
			Identical	Observable		Unobservable
	Carrying		Assets	Inputs		Inputs
(In thousands)	Value		(Level 1)	(Level 2)		(Level 3)
Financial assets:
Available for sale securities:
U.S. Treasury securities	$	59,999		$	59,999
State and municipal obligations		37,946			37,946
U.S. GSE residential mortgage-backed securities		81,654			81,654
U.S. GSE residential collateralized mortgage obligations		205,492			205,492
U.S. GSE commercial mortgage-backed securities		17,049			17,049
U.S. GSE commercial collateralized mortgage obligations		83,380			83,380
Other asset-backed securities		22,552			22,552
Corporate bonds		45,206			45,206
Total available for sale securities	$	553,278		$	553,278
Derivatives	$	57,874		$	57,874

Financial liabilities:
Derivatives	$	68,839		$	68,839


	December 31, 2019
			Fair Value Measurements Using:
			Quoted Prices
			In Active	Significant
			Markets for	Other		Significant
			Identical	Observable		Unobservable
	Carrying		Assets	Inputs		Inputs
(In thousands)	Value		(Level 1)	(Level 2)		(Level 3)
Financial assets:
Available for sale securities:
U.S. Treasury securities	$	50,822		$	50,822
U.S. GSE securities		4,995			4,995
State and municipal obligations		34,964			34,964
U.S. GSE residential mortgage-backed securities		84,691			84,691
U.S. GSE residential collateralized mortgage obligations		277,851			277,851
U.S. GSE commercial mortgage-backed securities		13,609			13,609
U.S. GSE commercial collateralized mortgage obligations		104,156			104,156
Other asset-backed securities		23,401			23,401
Corporate bonds		43,802			43,802
Total available for sale securities	$	638,291		$	638,291
Derivatives	$	15,437		$	15,437

Financial liabilities:
Derivatives	$	16,645		$	16,645

The following tables summarize assets measured at fair value on a non-recurring basis:


	March 31, 2020
			Fair Value Measurements Using:
			Quoted Prices
			In Active	Significant
			Markets for	Other	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
(In thousands)	Value		(Level 1)	(Level 2)	(Level 3)
Loans held for sale	$	12,643			$	12,643
Collateral dependent loans	$	2,902			$	2,902


	December 31, 2019
			Fair Value Measurements Using:
			Quoted Prices
			In Active	Significant
			Markets for	Other	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
(In thousands)	Value		(Level 1)	(Level 2)	(Level 3)
Loans held for sale	$	12,643			$	12,643
Impaired loans	$	6,981			$	6,981

Loans held for sale at March 31, 2020 and December 31, 2019 had a carrying amount of $12.6 million with no valuation allowance recorded.

Collateral dependent loans with an allowance for credit losses at March 31, 2020 had a carrying amount of $2.9 million, which is made up of the outstanding balance of $7.3 million, net of a valuation allowance of $4.4 million. Impaired loans (prior to the adoption of CECL standard) with an allowance for credit losses at December 31, 2019 had a carrying amount of $7.0 million, which is made up of the outstanding balance of $11.7 million, net of a valuation allowance of $4.7 million.

There was no other real estate owned at March 31, 2020 and December 31, 2019.

The Company used the following methods and assumptions in estimating the fair value of its financial instruments:

Securities Available for Sale and Held to Maturity: If available, the estimated fair values are based on independent dealer quotations on nationally recognized securities exchanges and are classified as Level 1. For securities where quoted prices are not available, fair value is based on matrix pricing, which is a mathematical technique widely used 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 resulting in a Level 2 classification.

Derivatives: Represents interest rate swaps for which the estimated fair values are based on valuation models using observable market data as of the measurement date resulting in a Level 2 classification.

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is initially determined using the price we expect to receive for the loans based on commitments received from third-party investors. Thereafter, loans held for sale are re-evaluated quarterly to determine if a valuation allowance is required to adjust for a decline in fair value below the carrying amount, resulting in a Level 3 classification.

Collateral Dependent Loans with an ACL (Impaired Loans with and ACL prior to the adoption of the CECL Standard) and Other Real Estate Owned: For collateral dependent loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. The fair value of real estate collateral is determined based on recent appraised values. The fair value of other real estate owned is also determined based on recent appraised values less the estimated cost to sell. 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. Adjustments may relate to location, square footage, condition, amenities, market rate of leases as well as timing of comparable sales. All appraisals undergo a second review process to ensure that the methodology employed and the values derived are reasonable. 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 borrower and its business. These valuation methods result in a Level 3 classification.

Appraisals for collateral-dependent loans 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 Company. Once received, the Appraisal and Credit Departments review 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. Management also considers the appraisal values for commercial properties associated with current loan origination activity. Collectively, this information is reviewed to help assess current trends in commercial property values. For each collateral dependent loan, management considers information that relates to the type of property to determine if such properties may have appreciated or depreciated in value since the date of the most recent appraisal. Adjustments to fair value are made only when the analysis indicates a probable decline in collateral values. Adjustments made in the appraisal process are not deemed material to the overall consolidated financial statements given the level of collateral dependent loans measured at fair value on a non-recurring basis.

The following tables summarize the estimated fair values and recorded carrying amounts of the Company's financial instruments at March 31, 2020 and December 31, 2019:


	March 31, 2020
			Fair Value Measurements Using:
					Significant
			Quoted Prices In		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs		Total
(In thousands)	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
Financial assets:
Cash and due from banks	$	61,352	$	61,352	$	—	$	—	$	61,352
Interest-bearing deposits with banks		172,830		172,830		—		—		172,830
Securities available for sale		553,278		—		553,278		—		553,278
Securities restricted		26,354		n/a		n/a		n/a		n/a
Securities held to maturity		124,231		—		127,653		—		127,653
Loans held for sale		12,643		—		—		12,643		12,643
Loans, net		3,722,915		—		—		3,755,669		3,755,669
Derivatives		57,874		—		57,874		—		57,874
Accrued interest receivable		11,070		—		2,105		8,965		11,070

Financial liabilities:
Certificates of deposit		310,077		—		312,965		—		312,965
Demand and other deposits		3,745,658		3,745,658		—		—		3,745,658
FHLB advances		290,000		—		300,760		—		300,760
Repurchase agreements		1,195		—		1,195		—		1,195
Subordinated debentures		78,955		—		89,678		—		89,678
Derivatives		68,839		—		68,839		—		68,839
Accrued interest payable		387		—		387		—		387


	December 31, 2019
			Fair Value Measurements Using:
					Significant
			Quoted Prices In		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs		Total
(In thousands)	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
Financial assets:
Cash and due from banks	$	77,693	$	77,693	$	—	$	—	$	77,693
Interest-bearing deposits with banks		39,501		39,501		—		—		39,501
Securities available for sale		638,291		—		638,291		—		638,291
Securities restricted		32,879		n/a		n/a		n/a		n/a
Securities held to maturity		133,638		—		135,027		—		135,027
Loans held for sale		12,643		—		—		12,643		12,643
Loans, net		3,647,499		—		—		3,685,770		3,685,770
Derivatives		15,437		—		15,437		—		15,437
Accrued interest receivable		10,908		—		2,181		8,727		10,908

Financial liabilities:
Certificates of deposit		307,977		—		308,660		—		308,660
Demand and other deposits		3,506,670		3,506,670		—		—		3,506,670
FHLB advances		435,000		195,000		239,622		—		434,622
Repurchase agreements		999		—		999		—		999
Subordinated debentures		78,920		—		81,010		—		81,010
Derivatives		16,645		—		16,645		—		16,645
Accrued interest payable		1,467		—		1,467		—		1,467