Fair Value of Financial Instruments

A description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring and non-recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. There were no changes in the valuation techniques used during the three and nine months ended September 30, 2016 and September 30, 2015.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following tables set forth the carrying value of assets and liabilities measured at fair value on a recurring basis at the dates indicated:



	Carrying Value at September 30, 2016
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Assets:
Investment securities available-for-sale:
Debt securities:
GSEs debentures	$	—	$	66,339	$	—	$	66,339
GSE CMOs	—		172,805		—		172,805
GSE MBSs	—		233,423		—		233,423
SBA commercial loan asset-backed securities	—		111		—		111
Corporate debt obligations	—		49,304		—		49,304
Trust preferred securities	—		1,313		—		1,313
Total debt securities	—		523,295		—		523,295
Marketable equity securities	1,000		—		—		1,000
Total investment securities available-for-sale	$	1,000	$	523,295	$	—	$	524,295

Interest-rate swaps	$	—	$	24,790	$	—	$	24,790

Liabilities:
Interest-rate swaps	$	—	$	24,790	$	—	$	24,790



	Carrying Value at December 31, 2015
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Assets:
Investment securities available-for-sale:
Debt securities:
GSEs debentures	$	—	$	40,627	$	—	$	40,627
GSE CMOs	—		193,816		—		193,816
GSE MBSs	—		229,881		—		229,881
SBA commercial loan asset-backed securities	—		147		—		147
Corporate debt obligations	—		46,486		—		46,486
Trust preferred securities	—		1,267		—		1,267
Total debt securities	—		512,224		—		512,224
Marketable equity securities	977		—		—		977
Total investment securities available-for-sale	$	977	$	512,224	$	—	$	513,201

Interest-rate swaps	$	—	$	8,656	$	—	$	8,656

Liabilities:
Interest-rate swaps	$	—	$	8,781	$	—	$	8,781

Investment Securities Available-for-Sale

The fair value of investment securities is based principally on market prices and dealer quotes received from third-party and nationally-recognized pricing services for identical investment securities such as U.S. Treasury and agency securities. The Company's marketable equity securities are priced this way and are included in Level 1. These prices are validated by comparing the primary pricing source with an alternative pricing source when available. When quoted market prices for identical securities are unavailable, the Company uses market prices provided by independent pricing services based on recent trading activity and other observable information, including but not limited to market interest-rate curves, referenced credit spreads, and estimated prepayment speeds where applicable. These investments include GSE debentures, GSE mortgage-related securities, SBA commercial loan asset backed securities, corporate debt securities, and trust preferred securities, all of which are included in Level 2. As of September 30, 2016 and December 31, 2015, respectively, none of the investment securities available-for-sale were valued using pricing models included in Level 3.

Additionally, management reviews changes in fair value from period to period and performs testing to ensure that prices received from the third parties are consistent with management's expectation of the market. Changes in the prices obtained from the pricing service are analyzed on a month to month basis, taking into consideration changes in market conditions including changes in mortgage spreads, changes in U.S. Treasury security yields, and changes in generic pricing of 15-year and 30-year securities. Additional analysis may include a review of prices provided by other independent parties, a yield analysis, a review of average life changes using Bloomberg analytics, and a review of historical pricing for a particular security.

Interest-Rate Swaps

The fair values for the interest-rate swap assets and liabilities represent a Level 2 valuation and are based on settlement values adjusted for credit risks associated with the counterparties and the Company and observable market interest rate curves. Credit risk adjustments consider factors such as the likelihood of default by the Company and its counterparties, its net exposures, and remaining contractual life. To date, the Company has not realized any losses due to a counterparty’s inability to pay any net uncollateralized position. See also Note 8, “Derivatives and Hedging Activities.”

There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during the three and nine months ended, September 30, 2016 and 2015, respectively.

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The tables below summarize assets and liabilities measured at fair value on a non-recurring basis at the dates indicated:



	Carrying Value at September 30, 2016
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Assets measured at fair value on a non-recurring basis:
Collateral-dependent impaired loans and leases	$	—	$	—	$	33,414	$	33,414
OREO	—		—		367		367
Repossessed assets	—		785		—		785
Total assets measured at fair value on a non-recurring basis	$	—	$	785	$	33,781	$	34,566



	Carrying Value at December 31, 2015
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Assets measured at fair value on a non-recurring basis:
Collateral-dependent impaired loans and leases	$	—	$	—	$	12,137	$	12,137
OREO	—		—		729		729
Repossessed assets	—		614		—		614
Total assets measured at fair value on a non-recurring basis	$	—	$	614	$	12,866	$	13,480

Collateral-Dependent Impaired Loans and Leases

For nonperforming loans and leases where the credit quality of the borrower has deteriorated significantly, fair values of the underlying collateral is estimated using purchase and sales agreements (Level 2), comparable sales, or recent appraisals (Level 3), adjusted for selling costs and other expenses.

Other Real Estate Owned

The Company records OREO at the lower of cost or fair value. In estimating fair value, the Company utilizes purchase and sales agreements (Level 2) or comparable sales, recent appraisals or cash flows discounted at an interest rate commensurate with the risk associated with these cash flows (Level 3), adjusted for selling costs and other expenses.

Repossessed Assets

Repossessed assets are carried at estimated fair value less costs to sell based on auction pricing (Level 2).

The table below presents quantitative information about significant unobservable inputs (Level 3) for assets measured at fair value on a recurring and non-recurring basis at the dates indicated.



	Fair Value				Valuation Technique
	At September 30, 2016		At December 31, 2015
	(Dollars in Thousands)
Collateral-dependent impaired loans and leases	$	33,414	$	12,137	Appraisal of collateral (1)
Other real estate owned	$	367	$	729	Appraisal of collateral (1)

(1) Fair value is generally determined through independent appraisals of the underlying collateral. The Company may also use another available source of collateral assessment to determine a reasonable estimate of the fair value of the collateral. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of the unobservable inputs used may vary but is generally 0% - 10% on the discount for costs to sell and 0% - 15% on appraisal adjustments.

Summary of Estimated Fair Values of Financial Instruments

The following table presents the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at the dates indicated. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, FHLBB and FRB stock, and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings, and accrued interest payable.



					Fair Value Measurements
	Carrying Value		Estimated Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
	(In Thousands)
At September 30, 2016
Financial assets:
Investment securities held-to-maturity:
GSEs debentures	$	14,734	$	14,705	$	—	$	14,705	$	—
GSE MBSs	18,710		18,752		—		18,752		—
Municipal obligations	43,150		44,131		—		44,131		—
Foreign government obligations	500		491		—		—		491
Loans held-for-sale	21,109		21,109		—		21,109		—
Loans and leases, net	5,273,408		5,206,031		—		—		5,206,031
Financial liabilities:
Certificates of deposit	1,106,046		1,115,664		—		1,115,664		—
Borrowed funds	1,022,653		1,027,986		—		1,027,986		—

At December 31, 2015
Financial assets:
Investment securities held-to-maturity:
GSE debentures	$	34,915	$	34,819	$	—	$	34,819	$	—
GSE MBSs	19,291		18,986		—		18,986		—
Municipal obligations	39,051		39,390		—		39,390		—
Foreign government obligations	500		500		—		—		500
Loans held-for-sale	13,383		13,383		—		13,383		—
Loans and leases, net	4,938,801		4,857,060		—		—		4,857,060
Financial liabilities:
Certificates of deposit	1,087,872		1,091,906		—		1,091,906		—
Borrowed funds	983,029		981,349		—		981,349		—

Investment Securities Held-to-Maturity

The fair values of certain investment securities held-to-maturity are estimated using market prices provided by independent pricing services based on recent trading activity and other observable information, including but not limited to market interest-rate curves, referenced credit spreads, and estimated prepayment speeds, where applicable. These investments include GSE debentures, GSE MBSs, and municipal obligations, all of which are included in Level 2. Additionally, fair values of foreign government obligations are based on comparisons to market prices of similar securities and are considered to be Level 3.

Loans Held-for-Sale

Fair value is measured using quoted market prices when available. These assets are typically categorized as Level 1. If quoted market prices are not available, comparable market values may be utilized. These assets are typically categorized as Level 2.

Loans and Leases

The fair values of performing loans and leases are estimated by segregating the portfolio into its primary loan and lease categories—commercial real estate mortgage, multi-family mortgage, construction, commercial, equipment financing, condominium association, indirect automobile, residential mortgage, home equity, and other consumer. These categories were further disaggregated based on significant financial characteristics such as type of interest rate (fixed / variable) and payment status (current / past-due). The Company discounts the contractual cash flows for each loan category using interest rates currently being offered for loans with similar terms to borrowers of similar quality and incorporates estimates of future loan prepayments. This method of estimating fair value does not incorporate the exit price concept of fair value.

Deposits

The fair values of deposit liabilities with no stated maturity (demand, NOW, savings and money market savings accounts) are equal to the carrying amounts payable on demand. The fair value of certificates of deposit represents contractual cash flows discounted using interest rates currently offered on deposits with similar characteristics and remaining maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the Company’s core deposit relationships (deposit-based intangibles).

Borrowed Funds

The fair value of federal funds purchased is equal to the amount borrowed. The fair value of FHLBB advances and repurchase agreements represents contractual repayments discounted using interest rates currently available for borrowings with similar characteristics and remaining maturities. The fair values reported for retail repurchase agreements are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on borrowings with similar characteristics and maturities. The fair values reported for subordinated deferrable interest debentures are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on instruments with similar terms and maturities.