FAIR VALUE

9 Months Ended

Sep. 30, 2023

8. FAIR VALUE

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: 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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value:

Investment Securities: The fair values for investment securities are determined by quoted market prices (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Loans Held for Sale, at Fair Value: The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Individually Evaluated Loans: The fair value of collateral dependent loans with specific allocations of the allowance for credit losses is generally 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. Individually evaluated loans may, in some cases, also be measured by the discounted cash flow methodology where payments are anticipated. Adjustments are routinely made in the appraisal process by the 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.

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (“OREO") are measured at fair value, less estimated costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use 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. Such adjustments are usually significant and typically result in a 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 Management. Once received, a third party conducts a review of the appraisal for compliance with the Uniform Standards of Professional Appraisal Practice and appropriate analysis methods for the type of property. Subsequently, a member of 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. Appraisals on collateral dependent impaired loans and other real estate owned (consistent for all loan types) are obtained on an annual basis, unless a significant change in the market or other factors warrants a more frequent appraisal. On an annual basis, Management compares the actual selling price of any collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value for other properties. The most recent analysis performed indicated that a discount up to 15 percent should be applied to appraisals on properties. The discount is determined based on the nature of the underlying properties, aging of appraisals and other factors. For each collateral-dependent impaired loan, we consider other factors, such as certain indices or other market information, as well as property specific circumstances to determine if an adjustment to the appraised value is needed. In situations where there is evidence of change in value, the Bank will determine if there is a need for an adjustment to the specific reserve on the collateral dependent impaired loans. When the Bank applies an interim adjustment, it generally shows the adjustment as an incremental specific reserve against the loan until it has received the full updated appraisal. All collateral-dependent impaired loans and other real estate owned valuations were supported by an appraisal less than 12 months old or in the process of obtaining an appraisal as of September 30, 2023.

The following tables summarize, at the dates indicated, assets measured at fair value on a recurring basis, including financial assets for which the Company has elected the fair value option:

Assets Measured on a Recurring Basis


			Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets For		Other		Significant
			Identical		Observable		Unobservable
	September 30,		Assets		Inputs		Inputs
(In thousands)	2023		(Level 1)		(Level 2)		(Level 3)
Assets:
Available for sale:
U.S. government-sponsored agencies	$	183,415	$	—	$	183,415	$	—
Mortgage-backed securities-residential		305,052		—		305,052		—
SBA pool securities		23,734		—		23,734		—
State and political subdivisions		649		—		649		—
Corporate bond		8,155		—		8,155		—
CRA investment fund		12,581		12,581		—		—
Derivatives:
Cash flow hedges		13,109		—		13,109		—
Loan level swaps		41,721		—		41,721		—
Total	$	588,416	$	12,581	$	575,835	$	—

Liabilities:
Derivatives:
Loan level swaps		41,721		—		41,721		—
Total	$	41,721	$	—	$	41,721	$	—

Assets Measured on a Recurring Basis


			Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets For		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
(In thousands)	2022		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities available for sale:
U.S. government-sponsored agencies	$	190,542	$	—	$	190,542	$	—
Mortgage-backed securities-residential		325,738		—		325,738		—
SBA pool securities		27,427		—		27,427		—
State and political subdivisions		1,849		—		1,849		—
Corporate bond		9,092		—		9,092		—
CRA investment fund		12,985		12,985		—		—
Derivatives:
Cash flow hedges		9,289		—		9,289		—
Loan level swaps		38,265		—		38,265		—
Total	$	615,187	$	12,985	$	602,202	$	—

Liabilities:
Derivatives:
Loan level swaps	$	38,265	$	—	$	38,265	$	—
Total	$	38,265	$	—	$	38,265	$	—

The Company has elected the fair value option for certain loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due or on nonaccrual as of September 30, 2023 and December 31, 2022.

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2023.

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


			Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets For		Other		Significant
			Identical		Observable		Unobservable
	September 30,		Assets		Inputs		Inputs
(In thousands)	2023		(Level 1)		(Level 2)		(Level 3)
Assets:
Individually evaluated loans:
Multifamily property	$	7,572	$	—	$	—	$	7,572
Commercial and industrial		23,508		—		—		23,508
Lease financing		8,065		—		—		8,065

Fair Value Measurements Using

Quoted

Prices in

Active

Significant

Markets For

Other

Significant

Identical

Observable

Unobservable

December 31,

Assets

Inputs

Inputs

(In thousands)

2022

(Level 1)

(Level 2)

(Level 3)

Assets:

Individually evaluated loans:

Investment commercial real estate

10,000

—

—

10,000

Commercial and industrial

743

—

—

743

The carrying amounts and estimated fair values of financial instruments at September 30, 2023 are as follows:


			Fair Value Measurements at September 30, 2023 using
	Carrying
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	187,869	$	187,869	$	—	$	—	$	187,869
Securities available for sale		521,005		—		521,005		—		521,005
Securities held to maturity		108,940		—		91,201		—		91,201
CRA investment fund		12,581		12,581		—		—		12,581
FHLB and FRB stock		34,158		—		—		—	N/A
Loans held for sale, at lower of cost or fair value		6,716		—		7,243		—		7,243
Loans, net of allowance for credit losses		5,418,129		—		—		5,165,016		5,165,016
Accrued interest receivable		22,889		—		2,601		20,288		22,889
Accrued interest receivable loan level swaps (A)		343		—		343		—		343
Cash flow hedges		13,109		—		13,109		—		13,109
Loan level swaps		41,721		—		41,721		—		41,721
Financial liabilities
Deposits	$	5,259,359	$	4,708,502	$	543,328	$	—	$	5,251,830
Short-term borrowings		470,576		—		470,576		—		470,576
Subordinated debt		133,203		—		—		113,950		113,950
Accrued interest payable		7,268		4,696		1,549		1,023		7,268
Accrued interest payable loan level swaps (B)		343		—		343		—		343
Loan level swap		41,721		—		41,721		—		41,721

(A)

Included in other assets in the Consolidated Statement of Condition.

(B)

Included in accrued expenses and other liabilities in the Consolidated Statement of Condition.

The carrying amounts and estimated fair values of financial instruments at December 31, 2022 are as follows:


			Fair Value Measurements at December 31, 2022 using
	Carrying
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	190,075	$	190,075	$	—	$	—	$	190,075
Securities available for sale		554,648		—		554,648		—		554,648
Securities held to maturity		102,291		—		87,187		—		87,187
CRA investment fund		12,985		12,985		—		—		12,985
FHLB and FRB stock		30,672		—		—		—	N/A
Loans held for sale, at lower of cost or fair value		15,626		—		17,176		—		17,176
Loans, net of allowance for loan and lease losses		5,224,417		—		—		5,141,201		5,141,201
Accrued interest receivable		25,157		—		2,393		22,764		25,157
Accrued interest receivable loan level swaps (A)		1,092		—		1,092		—		1,092
Cash flow hedges		9,289		—		9,289		—		9,289
Loan level swaps		38,265		—		38,265		—		38,265
Financial liabilities
Deposits	$	5,205,164	$	4,835,249	$	356,975	$	—	$	5,192,224
Short-term borrowings		379,530		—		379,530		—		379,530
Subordinated debt		132,987		—		—		119,865		119,865
Accrued interest payable		2,997		2,509		413		75		2,997
Accrued interest payable loan level swaps (B)		1,092		—		1,092		—		1,092
Loan level swaps		38,265		—		38,265		—		38,265

(A)

Included in other assets in the Consolidated Statement of Condition.

(B)

Included in accrued expenses and other liabilities in the Consolidated Statement of Condition.

- Definition

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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