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FAIR VALUE

6 Months Ended

Jun. 30, 2018

ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

5. FAIR VALUE

As described in Note 14. Recent Accounting Pronouncements, during the first quarter of 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The Company adopted the amended guidance that requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

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:

		June 30, 2018
						Fair Value Measurements Using:
										Significant
						Quoted Prices In				Other				Significant
						Active Markets for				Observable				Unobservable
		Carrying				Identical Assets				Inputs				Inputs
(In thousands)		Value				(Level 1)				(Level 2)				(Level 3)
Financial assets:
Available for sale securities:
U.S. GSE securities		$	28,738							$	28,738
State and municipal obligations			37,948								37,948
U.S. GSE residential mortgage-backed securities			98,196								98,196
U.S. GSE residential collateralized mortgage obligations			332,047								332,047
U.S. GSE commercial mortgage-backed securities			3,517								3,517
U.S. GSE commercial collateralized mortgage obligations			92,407								92,407
Other asset backed securities			23,523								23,523
Corporate bonds			42,700								42,700
Total available for sale securities		$	659,076							$	659,076
Derivatives		$	8,743							$	8,743

Financial liabilities:
Derivatives		$	2,451							$	2,451

		December 31, 2017
						Fair Value Measurements Using:
										Significant
						Quoted Prices In				Other				Significant
						Active Markets for				Observable				Unobservable
		Carrying				Identical Assets				Inputs				Inputs
(In thousands)		Value				(Level 1)				(Level 2)				(Level 3)
Financial assets:
Available for sale securities:
U.S. GSE securities		$	56,814							$	56,814
State and municipal obligations			87,022								87,022
U.S. GSE residential mortgage-backed securities			186,901								186,901
U.S. GSE residential collateralized mortgage obligations			307,390								307,390
U.S. GSE commercial mortgage-backed securities			5,979								5,979
U.S. GSE commercial collateralized mortgage obligations			48,716								48,716
Other asset backed securities			23,401								23,401
Corporate bonds			43,693								43,693
Total available for sale securities		$	759,916							$	759,916
Derivatives		$	4,546							$	4,546

Financial liabilities:
Derivatives		$	1,823							$	1,823

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

June 30, 2018

Fair Value Measurements Using:

Significant

Quoted Prices In

Other

Significant

Active Markets for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Inputs

(In thousands)

Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans

$

-

$

-

Other real estate owned

$

175

$

175

December 31, 2017

Fair Value Measurements Using:

Significant

Quoted Prices In

Other

Significant

Active Markets for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Inputs

(In thousands)

Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans

$

-

$

-

Other real estate owned

$

-

$

-

There were no impaired loans with an allocated allowance for loan losses at June 30, 2018. Impaired loans with an allocated allowance for loan losses at December 31, 2017 had a carrying amount of zero, which is made up of the outstanding balance of $1.7 million, net of a valuation allowance of $1.7 million. This resulted in an additional provision for loan losses of $1.7 million that is included in the amount reported on the Consolidated Statements of Income for the year ended December 31, 2017.

Other real estate owned at June 30, 2018 had a carrying amount of $0.2 million with no valuation allowance recorded. Accordingly, there was no additional provision for loan losses included in the amount reported on the Consolidated Statements of Income. There was no other real estate owned at December 31, 2017.

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

Cash and Due from Banks and Interest Earning Deposits with Banks: Carrying amounts approximate fair value, since these instruments are either payable on demand or have short-term maturities and as such are classified as Level 1.

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.

Impaired Loans and Other Real Estate Owned: For impaired loans, the Company evaluates the fair value of the loan in accordance with current accounting guidance. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based on recent appraised values. The fair value of other real estate owned is also evaluated in accordance with current accounting guidance and 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 insure that the methodology employed and the values derived are reasonable. The fair value of the loan is compared to the carrying value to determine if any write-down or specific reserve is required. Impaired loans are evaluated quarterly for additional impairment and adjusted accordingly.

Appraisals for collateral-dependent impaired 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 Credit Department reviews 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. On a quarterly basis, the Company compares the actual sale price of collateral that has been sold to the most recent appraised value to determine what additional adjustments should be made to appraisal values to arrive at fair value. 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 impaired loan, management considers information that relates to the type of commercial 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 impaired loans measured at fair value on a nonrecurring basis.

Deposits: The estimated fair values of certificates of deposit are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for certificate of deposit maturities resulting in a Level 2 classification. Stated value is fair value for all other deposits resulting in a Level 1 classification.

Borrowed Funds: Represents federal funds purchased, repurchase agreements and FHLB advances for which the estimated fair values are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for funding maturities resulting in a Level 1 classification for overnight federal funds purchased, repurchase agreements and FHLB advances and a Level 2 classification for all other maturity terms.

Accrued Interest Receivable and Payable: For these short-term instruments, the carrying amount is a reasonable estimate of the fair value resulting in a Level 1, 2 or 3 classification consistent with the underlying asset or liability the interest is associated with.

Off-Balance-Sheet Liabilities: The fair value of off-balance-sheet commitments to extend credit is estimated using fees currently charged to enter into similar agreements. The fair value is immaterial as of June 30, 2018 and December 31, 2017.

Fair value estimates are made at specific points in time and are based on existing on-and off-balance sheet financial instruments. These estimates are subjective in nature and dependent on a number of significant assumptions associated with each financial instrument or group of financial instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments.

The following tables summarize the estimated fair values and recorded carrying amounts of the Company’s financial instruments at June 30, 2018 and December 31, 2017:

		June 30, 2018
						Fair Value Measurements Using:
										Significant
						Quoted Prices In				Other				Significant
						Active Markets for				Observable				Unobservable				Total
		Carrying				Identical Assets				Inputs				Inputs				Fair
(In thousands)		Amount				(Level 1)				(Level 2)				(Level 3)				Value
Financial assets:
Cash and due from banks		$	74,255			$	74,255			$	—			$	—			$	74,255
Interest earning deposits with banks			31,636				31,636				—				—				31,636
Securities available for sale			659,076				—				659,076				—				659,076
Securities restricted			26,747				n/a				n/a				n/a				n/a
Securities held to maturity			169,717				—				165,606				—				165,606
Loans held for sale			6,338				—				6,852				—				6,852
Loans, net			3,149,024				—				—				3,129,139				3,129,139
Derivatives			8,743				—				8,743				—				8,743
Accrued interest receivable			11,625				—				2,881				8,744				11,625

Financial liabilities:
Certificates of deposit			326,219				—				323,551				—				323,551
Demand and other deposits			3,226,978				3,226,978				—				—				3,226,978
Federal Home Loan Bank advances			300,863				10,000				284,531				—				294,531
Repurchase agreements			1,437				—				1,437				—				1,437
Subordinated debentures			78,711				—				74,913				—				74,913
Derivatives			2,451				—				2,451				—				2,451
Accrued interest payable			1,639				—				1,639				—				1,639

		December 31, 2017
						Fair Value Measurements Using:
										Significant
						Quoted Prices In				Other				Significant
						Active Markets for				Observable				Unobservable				Total
		Carrying				Identical Assets				Inputs				Inputs				Fair
(In thousands)		Amount				(Level 1)				(Level 2)				(Level 3)				Value
Financial assets:
Cash and due from banks		$	76,614			$	76,614			$	-			$	-			$	76,614
Interest earning deposits with banks			18,133				18,133				-				-				18,133
Securities available for sale			759,916				-				759,916				-				759,916
Securities restricted			35,349				n/a				n/a				n/a				n/a
Securities held to maturity			180,866				-				179,885				-				179,885
Loans, net			3,071,045				-				-				3,010,023				3,010,023
Derivatives			4,546				-				4,546				-				4,546
Accrued interest receivable			11,652				-				3,211				8,441				11,652

Financial liabilities:
Certificates of deposit			222,364				-				220,775				-				220,775
Demand and other deposits			3,112,179				3,112,179				-				-				3,112,179
Federal funds purchased			50,000				50,000				-				-				50,000
Federal Home Loan Bank advances			501,374				185,000				313,558				-				498,558
Repurchase agreements			877				-				877				-				877
Subordinated debentures			78,641				-				77,933				-				77,933
Derivatives			1,823				-				1,823				-				1,823
Accrued interest payable			1,574				-				1,574				-				1,574

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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