Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Fair Value of Financial Instruments

10.     Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At March 31, 2023, the Company carried financial assets and financial liabilities under the fair value option with fair values of $13.2 million and $48.1 million, respectively. At December 31, 2022, the Company carried financial assets and financial liabilities under the fair value option with fair values of $13.0 million and $50.5 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three months ended March 31, 2023 and 2022.

The following table presents the financial assets and financial liabilities reported at fair value under the fair value option, and the changes in fair value included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments, at or for the periods ended as indicated:

	Fair Value		Fair Value		Changes in Fair Values For Items Measured at Fair Value
	Measurements		Measurements		Pursuant to Election of the Fair Value Option
	at March 31,		at December 31,		For the three months ended March 31,
Description	2023		2022		2023		2022
(In thousands)
Mortgage-backed securities	$	288	$	295	$	1	$	(4)
Other securities		12,904		12,728		109		(536)
Borrowed funds		48,117		50,507		2,509		(1,269)
Net gain (loss) from fair value adjustments					$	2,619	$	(1,809)

Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued interest receivable or payable for the related instrument. The Company reports as interest income or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial instruments selected for the fair value option at their respective contractual rates.

The borrowed funds had a contractual principal amount of $61.9 million at both March 31, 2023 and December 31, 2022. The fair value of borrowed funds includes accrued interest payable of $0.4 million at both March 31, 2023 and December 31, 2022.

The Company generally holds its earning assets to maturity and settles its liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair value estimates change, and these amounts may not necessarily be realized in an immediate sale.

Disclosure of fair value does not require fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes and equity.

Further, fair value disclosure does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying “market” or franchise value of the Company.

A description of the methods and significant assumptions utilized in estimating the fair value of the Company’s financial assets and liabilities that are carried at fair value on a recurring basis are as follows:

Level 1 – when quoted market prices are available in an active market. At March 31, 2023 and December 31, 2022, Level 1 included one mutual fund.

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At March 31, 2023 and December 31, 2022, Level 2 included mortgage-backed securities, CLOs, corporate debt, municipals, and interest rate swaps.

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At March 31, 2023 and December 31, 2022, Level 3 included trust preferred securities owned, and junior subordinated debentures issued by the Company.

The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. While the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies, assumptions, and models to determine fair value of certain financial instruments could produce different estimates of fair value at the reporting date.

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a recurring basis, including those reported at fair value under the fair value option, and the level that was used to determine their fair value, at March 31, 2023 and December 31, 2022:

	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a recurring basis
	2023		2022		2023		2022		2023		2022		2023		2022
Assets:	(In thousands)
Securities available for sale:
Mortgage-backed securities	$	—	$	—	$	380,110	$	384,283	$	—	$	—	$	380,110	$	384,283
Other securities		11,460		11,211		418,913		338,347		1,445		1,516		431,818		351,074
Interest rate swaps		—		—		65,072		74,586		—		—		65,072		74,586
Total assets	$	11,460	$	11,211	$	864,095	$	797,216	$	1,445	$	1,516	$	877,000	$	809,943
Liabilities:
Borrowings	$	—	$	—	$	—	$	—	$	48,117	$	50,507	$	48,117	$	50,507
Interest rate swaps		—		—		18,729		18,407		—		—		18,729		18,407
Total liabilities	$	—	$	—	$	18,729	$	18,407	$	48,117	$	50,507	$	66,846	$	68,914

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the periods indicated:  

	For the three months ended
	March 31, 2023				March 31, 2022
	Trust preferred		Junior subordinated		Trust preferred		Junior subordinated
	securities		debentures		securities		debentures
	(In thousands)
Beginning balance	$	1,516	$	50,507	$	1,695	$	56,472
Net (loss) gain from fair value adjustment of financial assets (1)		(71)		—		45		—
Net (gain) loss from fair value adjustment of financial liabilities (1)		—		(2,509)		—		1,269
Increase (decrease) in accrued interest		—		12		—		16
Change in unrealized (gains) losses included in other comprehensive loss		—		107		—		198
Ending balance	$	1,445	$	48,117	$	1,740	$	57,955
Changes in unrealized gains held at period end	$	—	$	2,078	$	—	$	3,136

(1) Presented in the Consolidated Statements of Income under net gain (loss) from fair value adjustments.

The following tables present the quantitative information about recurring Level 3 fair value of financial instruments and the fair value measurements at the periods indicated:

	March 31, 2023
			Valuation	Input		Weighted
	Fair Value		Technique	Unobservable	Range	Average
	(Dollars in thousands)
Assets:
Trust preferred securities	$	1,445	Discounted cash flows	Spread over 3-month Libor	n/a	4.1	%
Liabilities:
Junior subordinated debentures	$	48,117	Discounted cash flows	Spread over 3-month Libor	n/a	4.1	%

	December 31, 2022
			Valuation	Input		Weighted
	Fair Value		Technique	Unobservable	Range	Average
	(Dollars in thousands)
Assets:
Trust preferred securities	$	1,516	Discounted cash flows	Spread over 3-month Libor	n/a	3.6	%
Liabilities:
Junior subordinated debentures	$	50,507	Discounted cash flows	Spread over 3-month Libor	n/a	3.6	%

The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and junior subordinated debentures valued under Level 3 at March 31, 2023 and December 31, 2022, are the effective yields used in the cash flow models. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a non-recurring basis and the level that was used to determine their fair value at March 31, 2023 and December 31, 2022:

	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a non-recurring basis
	2023		2022		2023		2022		2023		2022		2023		2022
	(In thousands)
Assets:
Certain delinquent loans	$	—	$	—	$	—	$	—	$	8,535	$	18,330	$	8,535	$	18,330
Total assets	$	—	$	—	$	—	$	—	$	8,535	$	18,330	$	8,535	$	18,330

The following tables present the qualitative information about non-recurring Level 3 fair value of financial instruments and the fair value measurements at the periods indicated:

	At March 31, 2023
	Fair Value		Valuation Technique	Unobservable Input	Range		Weighted Average
	(Dollars in thousands)
Assets:
Certain delinquent loans	$	8,474	Sales approach	Adjustment to sales comparison value	-16.9% to 0.0	%	-1.5	%
				Reduction for planned expedited disposal	7.5% to 15.0	%	9.9	%
Certain delinquent loans	$	61	Discounted Cashflow	Discount Rate	4.3	%	4.3	%
				Probability of Default	35.0	%	35.0	%

	At December 31, 2022
	Fair Value		Valuation Technique	Unobservable Input	Range		Weighted Average
	(Dollars in thousands)
Assets:
Certain delinquent loans	$	18,189	Sales approach	Adjustment to sales comparison value	-20.0% to 0.0	%	-1.3	%
				Reduction for planned expedited disposal	10.0% to 15.0	%	13.6	%
Certain delinquent loans	$	141	Discounted Cashflow	Discount Rate	4.3	%	4.3	%
				Probability of Default	35.0	%	35.0	%

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at March 31, 2023 and December 31, 2022.

The methods and assumptions used to estimate fair value at March 31, 2023 and December 31, 2022 are as follows:

Securities:

The fair values of securities are contained in Note 4 (“Securities”) of the Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. When there is limited activity or less transparency around inputs to the valuation, securities are valued using discounted cash flows.

Certain Delinquent Loans:

For certain delinquent loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or, for collateral dependent loans, 85% of the appraised or internally estimated value of the property. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.

Junior Subordinated Debentures:

The fair value of the junior subordinated debentures was developed using a credit spread based on stated spreads for recently issued subordinated debt instruments for issuers of similar asset size and credit quality of the Company and with similar durations adjusting for differences in the junior subordinated debt’s credit rating, liquidity, and time to maturity. The unrealized net gain/loss attributable to changes in our own credit risk was determined by adjusting the fair value as determined in the proceeding sentence by the average rate of default on debt instruments with a similar debt rating as our junior subordinated debentures, with the difference from the original calculation and this calculation resulting in the instrument-specific unrealized gain/loss.

Interest Rate Swaps:

The fair value of interest rate swaps is based upon broker quotes.

The following tables set forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at the periods indicated:

	March 31, 2023
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Cash and due from banks	$	176,747	$	176,747	$	176,747	$	—	$	—
Securities held-to-maturity
Mortgage-backed securities		7,870		7,137		—		7,137		—
Other securities		65,653		60,732		—		—		60,732
Securities available for sale
Mortgage-backed securities		380,110		380,110		—		380,110		—
Other securities		431,818		431,818		11,460		418,913		1,445
Loans		6,904,176		6,580,759		—		—		6,580,759
FHLB-NY stock		38,779		38,779		—		38,779		—
Accrued interest receivable		46,836		46,836		—		4,774		42,062
Interest rate swaps		65,072		65,072		—		65,072		—
Liabilities:
Deposits	$	6,734,090	$	6,702,840	$	4,853,830	$	1,849,010	$	—
Borrowed Funds		887,509		861,879		—		813,762		48,117
Accrued interest payable		7,520		7,520		—		7,520		—
Interest rate swaps		18,729		18,729		—		18,729		—

	December 31, 2022
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Cash and due from banks	$	151,754	$	151,754	$	151,754	$	—	$	—
Securities held-to-maturity
Mortgage-backed securities		7,875		6,989		—		6,989		—
Other securities		65,836		55,561		—		—		55,561
Securities available for sale
Mortgage-backed securities		384,283		384,283		—		384,283		—
Other securities		351,074		351,074		11,211		338,347		1,516
Loans		6,934,769		6,651,795		—		—		6,651,795
FHLB-NY stock		45,842		45,842		—		45,842		—
Accrued interest receivable		45,048		45,048		—		3,819		41,229
Interest rate swaps		74,856		74,856		—		74,856		—
Liabilities:
Deposits	$	6,485,342	$	6,453,978	$	4,959,004	$	1,494,974	$	—
Borrowed Funds		1,052,973		1,027,370		—		976,863		50,507
Accrued interest payable		10,034		10,034		—		10,034		—
Interest rate swaps		18,407		18,407		—		18,407		—