FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2023

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 9 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company uses fair value measurements to record fair value adjustments to certain assets and derivative contracts, and to determine fair value disclosures. Other than derivative contacts designated as cash flow hedges, the Company did not have any liabilities that were measured at fair value at March 31, 2023 and December 31, 2022. AFS securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as certain impaired loans. These non-recurring fair value adjustments generally involve the write-down of individual assets due to impairment losses.

Accounting guidance 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 value:

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 judgments about the assumptions that market participants would use in pricing an asset or liability.

Assets and Liabilities Measured on a Recurring Basis

Assets measured on a recurring basis are limited to the Company’s AFS securities portfolio, equity investments and prior to termination, an interest rate cap derivative contract. The AFS portfolio is carried at estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in shareholders’ equity. Equity investments are carried at estimated fair value with changes in fair value reported as “unrealized gain/(loss)” on the statements of operations. Outstanding derivative contracts designated as cash flow hedges are carried at estimated fair value with changes in fair value reported as accumulated other comprehensive income or loss in shareholders’ equity. The fair values for substantially all of these assets are obtained monthly from an independent nationally recognized pricing service. On a quarterly basis, the Company assesses the reasonableness of the fair values obtained for the AFS portfolio by reference to a second independent nationally recognized pricing service. Based on the nature of these securities, the Company’s independent pricing service provides prices which are categorized as Level 2 since quoted prices in active markets for identical assets are generally not available for the majority of securities in the Company’s portfolio. Various modeling techniques are used to determine pricing for the Company’s mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. On an annual basis, the Company obtains the models, inputs and assumptions utilized by its pricing service and reviews them for reasonableness.

Other than derivative contacts designated as cash flow hedges, the Company does not have any liabilities that were measured at fair value on a recurring basis.

Assets measured at fair value on a recurring basis are summarized below (in thousands):

	Fair Value Measurement using:
			Quoted Prices
			in Active		Significant
			Markets		Other		Significant
	Carrying		For Identical		Observable		Unobservable
	Amount		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
At March 31, 2023
U.S. Government agency securities	$	60,236	$	—	$	60,236	$	—
U.S. State and Municipal securities		9,537		—		9,537		—
Residential mortgage securities		335,674		—		335,674		—
Commercial mortgage securities		35,299		—		35,299		—
Asset-backed securities		3,423		—		3,423		—
CRA Mutual Fund		2,087		2,087		—		—
Derivatives		(1,006)		—		(1,006)		—
	Fair Value Measurement using:
			Quoted Prices
			in Active		Significant
			Markets		Other		Significant
	Carrying		For Identical		Observable		Unobservable
	Amount		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
At December 31, 2022
U.S. Government agency securities	$	59,372	$	—	$	59,372	$	—
U.S. State and Municipal securities		9,212		—		9,212		—
Residential mortgage securities		338,548		—		338,548		—
Commercial mortgage securities		34,850		—		34,850		—
Asset-backed securities		3,765		—		3,765		—
CRA Mutual Fund		2,048		2,048		—		—
Derivatives		—		—		—		—

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2023 and 2022.

There were no material assets measured at fair value on a non-recurring basis at March 31, 2023 and December 31, 2022.

Carrying amounts and estimated fair values of financial instruments carried at amortized cost were as follows (in thousands):

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets		Other		Significant
	Carrying		For Identical		Observable		Unobservable		Total Fair
At March 31, 2023	Amount		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)		Value
Financial Assets:
Cash and due from banks	$	32,525	$	32,525	$	—	$	—	$	32,525
Overnight deposits		266,978		266,978		—		—		266,978
Securities held-to-maturity		501,525		—		436,131		—		436,131
Loans, net		4,803,942		—		—		4,718,214		4,718,214
Other investments
FRB Stock		11,411		N/A		N/A		N/A		N/A
FHLB Stock		13,691		N/A		N/A		N/A		N/A
Disability Fund		1,500		—		1,500		—		1,500
Time deposits at banks		498		498		—		—		498
Receivable from prepaid card programs, net		83,787		—		—		83,787		83,787
Accrued interest receivable		24,006		—		859		23,147		24,006
Financial Liabilities:
Non-interest-bearing demand deposits	$	2,122,606	$	2,122,606	$	—	$	—	$	2,122,606
Money market and savings deposits		2,955,407		2,955,407		—		—		2,955,407
Time deposits		53,775		—		52,971		—		52,971
Federal funds purchased		195,000		—		195,000		—		195,000
Federal Home Loan Bank of New York advances		200,000		—		200,000		—		200,000
Trust preferred securities payable		20,620		—		—		19,983		19,983
Prepaid debit cardholder balances		11,102		—		—		11,102		11,102
Accrued interest payable		689		11		338		340		689
Secured borrowings		7,689		—		7,689		—		7,689

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets		Other		Significant
	Carrying		For Identical		Observable		Unobservable		Total Fair
At December 31, 2022	Amount		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)		Value
Financial Assets:
Cash and due from banks	$	26,780	$	26,780	$	—	$	—	$	26,780
Overnight deposits		230,638		230,638		—		—		230,638
Securities held-to-maturity		510,425		—		437,290		—		437,290
Loans, net		4,795,647		—		—		4,737,007		4,737,007
Other investments
FRB Stock		11,421		N/A		N/A		N/A		N/A
FHLB Stock		9,191		N/A		N/A		N/A		N/A
Disability Fund		1,000		—		1,000		—		1,000
Time deposits at banks		498		498		—		—		498
Receivable from prepaid card programs, net		85,605		—		—		85,605		85,605
Accrued interest receivable		24,107		—		964		23,143		24,107
Financial Liabilities:
Non-interest-bearing demand deposits	$	2,422,151	$	2,422,151	$	—	$	—	$	2,422,151
Money market and savings deposits		2,803,698		2,803,698		—		—		2,803,698
Time deposits		52,063		—		51,058		—		51,058
Federal funds purchased		150,000		—		150,000		—		150,000
Federal Home Loan Bank of New York advances		100,000		—		100,000		—		100,000
Trust preferred securities payable		20,620		—		—		19,953		19,953
Prepaid debit cardholder balances		10,579		—		—		10,579		10,579
Accrued interest payable		728		112		293		323		728
Secured borrowings		7,725		—		7,725		—		7,725