Fair Value Measurements

Fair value is 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. There are three levels of inputs that may be used to measure fair values:

Level 1: Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.

Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.

Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

(a) Recurring and Nonrecurring Basis

The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:

Investment Securities Available for Sale:

The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Security valuations are obtained from third party pricing services for comparable assets or liabilities.

Impaired Loans:

At the time a loan is considered impaired, its impairment is measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price, or the fair market value of the collateral (less costs to sell) if the loan is collateral-dependent. Impaired loans for which impairment is measured using the discounted cash flow approach are not considered to be measured at fair value because the loan’s effective interest rate is generally not a fair value input, and for the purposes of fair value disclosures, the fair value of these loans are measured commensurate with non-impaired loans. If the Company utilizes the fair market value of the collateral method, the fair value used to measure impairment is commonly based on recent real estate appraisals. 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on 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 client and client’s business (Level 3). Impaired loans are evaluated on a quarterly basis and impairment is adjusted accordingly.

Other Real Estate Owned:

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less costs to sell. Fair value is commonly based on recent real estate appraisals. 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned 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 Company reviews the assumptions and approaches utilized in the appraisal as well as the 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 selling price of collateral that has been liquidated to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

Derivative Financial Instruments:

The Company obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2).

Recurring Basis

The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and December 31, 2017:



	December 31, 2018
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Investment securities available for sale:
U.S. Treasury and U.S. Government-sponsored agencies	$	101,603	$	15,936	$	85,667	$	—
Municipal securities	158,864		—		158,864		—
Mortgage backed securities and collateralized mortgage obligations:
Residential	331,602		—		331,602		—
Commercial	333,761		—		333,761		—
Corporate obligations	25,563		—		25,563		—
Other asset-backed securities	24,702				24,702		—
Total investment securities available for sale	976,095		15,936		960,159		—
Derivative assets - interest rate swaps	5,095		—		5,095		—
Liabilities
Derivative liabilities - interest rate swaps	$	5,095	$	—	$	5,095	$	—



	December 31, 2017
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Investment securities available for sale:
U.S. Treasury and U.S. Government-sponsored agencies	$	13,442	$	—	$	13,442	$	—
Municipal securities	250,015		—		250,015		—
Mortgage backed securities and collateralized mortgage obligations:
Residential	280,211		—		280,211		—
Commercial	217,079		—		217,079		—
Collateralized loan obligations	4,580		—		4,580		—
Corporate obligations	16,770		—		16,770		—
Other securities	28,433		146		28,287		—
Total investment securities available for sale	810,530		146		810,384		—
Derivative assets - interest rate swaps	3,418		—		3,418		—
Liabilities
Derivative liabilities - interest rate swaps	$	3,418	$	—	$	3,418	$	—

There were no transfers between Level 1 and Level 2 during the years ended December 31, 2018 and 2017.

Nonrecurring Basis

The Company may be required to measure certain financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

The tables below represent assets measured at fair value on a nonrecurring basis at December 31, 2018 and December 31, 2017 and the net losses recorded in earnings during years ended December 31, 2018 and 2017:



	Basis⁽¹⁾		Fair Value at December 31, 2018
	Basis⁽¹⁾		Total		Level 1		Level 2		Level 3		Net Losses Recorded in Earnings During the Year Ended December 31, 2018
	(In thousands)
Impaired loans:
Commercial business:
Commercial and industrial	$	117	$	107	$	—	$	—	$	107	$	10
Non-owner occupied commercial real estate	1,378		1,102		—		—		1,102		150
Total commercial business	1,495		1,209		—		—		1,209		160
Consumer	9		7		—		—		7		8
Total assets measured at fair value on a nonrecurring basis	$	1,504	$	1,216	$	—	$	—	$	1,216	$	168


⁽¹⁾	Basis represents the unpaid principal balance of impaired loans.



	Basis⁽¹⁾		Fair Value at December 31, 2017
	Basis⁽¹⁾		Total		Level 1		Level 2		Level 3		Net Losses (Gains) Recorded in Earnings During the Year Ended December 31, 2017
	(In thousands)
Impaired loans:
Real estate construction and land development:
One-to-four family residential	$	976	$	307	$	—	$	—	$	307	$	(558	)
Total assets measured at fair value on a nonrecurring basis	$	976	$	307	$	—	$	—	$	307	$	(558	)


⁽¹⁾	Basis represents the unpaid principal balance of impaired loans.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2018 and December 31, 2017:



	December 31, 2018
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range of Inputs; Weighted Average
	(Dollars in thousands)
Impaired loans	$	1,216	Market approach	Adjustment for differences between the comparable sales	10.4% - (37.3%); (10.9%)



	December 31, 2017
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range of Inputs; Weighted Average
	(Dollars in thousands)
Impaired loans	$	307	Market approach	Adjustment for differences between the comparable sales	(91.5%) - (14.4%); (44.0%)

(b) Fair Value of Financial Instruments

Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.

The tables below present the carrying value amount of the Company’s financial instruments and their corresponding estimated fair values at the dates indicated:



	December 31, 2018
	Carrying Value		Fair Value		Fair Value Measurements Using:
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	161,910	$	161,910	$	161,910	$	—	$	—
Investment securities available for sale	976,095		976,095		15,936		960,159		—
Federal Home Loan Bank stock	6,076		N/A		N/A		N/A		N/A
Loans held for sale	1,555		1,605		—		1,605		—
Total loans receivable, net	3,619,118		3,614,348		—		—		3,614,348
Accrued interest receivable	15,403		15,403		68		4,091		11,244
Derivative assets - interest rate swaps	5,095		5,095		—		5,095		—
Equity security	114		114		114		—		—
Financial Liabilities:
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts	$	3,965,510	$	3,965,510	$	3,965,510	$	—	$	—
Certificate of deposit accounts	466,892		470,222		—		470,222		—
Securities sold under agreement to repurchase	31,487		31,487		31,487		—		—
Junior subordinated debentures	20,302		20,500		—		—		20,500
Accrued interest payable	191		191		63		81		47
Derivative liabilities - interest rate swaps	5,095		5,095		—		5,095		—



	December 31, 2017
	Carrying Value		Fair Value		Fair Value Measurements Using:
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	103,015	$	103,015	$	103,015	$	—	$	—
Investment securities available for sale	810,530		810,530		146		810,384		—
Federal Home Loan Bank stock	8,347		N/A		N/A		N/A		N/A
Loans held for sale	2,288		2,364		—		2,364		—
Total loans receivable, net	2,816,985		2,810,401		—		—		2,810,401
Accrued interest receivable	12,244		12,244		23		3,772		8,449
Derivative assets - interest rate swaps	3,418		3,418		—		3,418		—
Financial Liabilities:
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts	$	2,994,662	$	2,994,662	$	2,994,662	$	—	$	—
Certificate of deposit accounts	398,398		397,039		—		397,039		—
Federal Home Loan Bank advances	92,500		92,500		—		92,500		—
Securities sold under agreement to repurchase	31,821		31,821		31,821		—		—
Junior subordinated debentures	20,009		18,500		—		—		18,500
Accrued interest payable	162		162		45		79		38
Derivative liabilities - interest rate swaps	3,418		3,418		—		3,418		—