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:

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.

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 Management. Once received, 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 appraisal 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 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 December 31, 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:


			Fair Value Measurements Using
			Quoted
			Prices In
			Active
			Markets		Significant
			For		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(In thousands)	December 31, 2023		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities available for sale:
U.S. government-sponsored agencies	$	197,691	$	—	$	197,691	$	—
Mortgage-backed securities-residential		320,796		—		320,796		—
SBA pool securities		23,404		—		23,404		—
Corporate bond		8,726		—		8,726		—
CRA investment fund		13,166		13,166		—		—
Derivatives:
Cash flow hedges		6,814		—		6,814		—
Loan level swaps		23,826		—		23,826		—
Total	$	594,423	$	13,166	$	581,257	$	—

Liabilities:
Derivatives:
Loan level swaps		23,826		—		23,826		—
Total	$	23,826	$	—	$	23,826	$	—

(In thousands)	December 31, 2022
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 December 31, 2023 and December 31, 2022.

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

         
        Fair Value Measurements Using

         
        Quoted

         
        Prices In

         
        Active

         
        Markets

        Significant

         
        For

        Other

        Significant

         
        Identical

        Observable

        Unobservable

         
        Assets

        Inputs

        Inputs

        (In thousands)

        December 31, 2023

        (Level 1)

        (Level 2)

        (Level 3)

        Assets:

        Individually evaluated loans:

Commercial and industrial

22,947

—

—

22,947

Lease financing

1,035

—

—

1,035

         
        Fair Value Measurements Using

         
        Quoted

         
        Prices In

         
        Active

         
        Markets

        Significant

         
        For

        Other

        Significant

         
        Identical

        Observable

        Unobservable

         
        Assets

        Inputs

        Inputs

        (In thousands)

        December 31, 2022

        (Level 1)

        (Level 2)

        (Level 3)

        Assets:

        Impaired 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 December 31, 2023 are as follows:


			Fair Value Measurements at December 31, 2023 Using
(In thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	187,671	$	187,671	$	—	$	—	$	187,671
Securities available for sale		550,617		—		550,617		—		550,617
Securities held to maturity		107,755		—		94,415		—		94,415
CRA investment fund		13,166		13,166		—		—		13,166
FHLB and FRB stock		31,044		—		—		—	N/A
Loans held for sale, at fair value		100		—		100		—		100
Loans held for sale, at lower of cost or fair value		6,695		—		7,201		—		7,201
Loans, net of allowance for credit losses		5,363,437		—		—		5,294,942		5,294,942
Accrued interest receivable		30,676		—		2,868		27,808		30,676
Accrued interest receivable loan level swaps (A)		1,373		—		1,373		—		1,373
Cash flow hedges		6,814		—		6,814		—		6,814
Loan level swaps		23,826		—		23,826		—		23,826
Financial liabilities
Deposits	$	5,274,114	$	4,702,012	$	567,696	$	—	$	5,269,708
Short-term borrowings		403,814		—		403,814		—		403,814
Subordinated debt		133,274		—		—		111,924		111,924
Accrued interest payable		7,115		4,989		1,968		158		7,115
Accrued interest payable loan level swaps (B)		1,373		—		1,373		—		1,373
Loan level swaps		23,826		—		23,826		—		23,826

(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
(In thousands)	Carrying 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 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.

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Cash and due from banks is classified as Level 1.

CRA investment fund: The fair value of the investment fund is determined by quoted prices in an active market.

FHLB and FRB stock: It is not practicable to determine the fair value of FHLB or FRB stock due to restrictions placed on its transferability.

Loans held for sale, at lower of cost or 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. Loans held for sale are classified as Level 2.

Loans: At December 31, 2023 and 2022, respectively, the exit price observations are obtained from a third-party using its proprietary valuation model and methodology and may not reflect actual or prospective market valuations. The valuation utilizes a discounted cash-flow based model relying on various assumptions including the probability of default, loss given default, portfolio liquidity and remaining term of the portfolio.

Deposits: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date, (i.e., the carrying amount) resulting in a Level 1 classification. The carrying amounts of variable-rate certificates of deposit approximate the fair values at the reporting date resulting in Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Overnight borrowings: The carrying amounts of overnight borrowings approximate fair values and are classified as Level 2.

Federal Home Loan Bank advances: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Subordinated debentures: The fair values of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Accrued interest receivable/payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification. Accrued interest on deposits and securities are included in Level 2. Accrued interest on loans and subordinated debt are included in Level 3.

Off-balance sheet instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.