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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 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 September 30, 2023, the Company carried financial assets and financial liabilities under the fair value option with fair values of $12.8 million and $48.3 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 and nine months ended September 30, 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 (loss) gain from fair value adjustments, at or for the periods ended as indicated:


								Changes in Fair Values For Items Measured at Fair Value
		Fair Value			Fair Value			Pursuant to Election of the Fair Value Option
		Measurements at			Measurements at			For the three months ended September 30,						For the nine months ended September 30,
Description		September 30, 2023			December 31, 2022			2023			2022			2023			2022
(In thousands)
Mortgage-backed securities		$	266		$	295		$	1		$	(6)		$	3		$	(18)
Other securities			12,516			12,728			(338)			(661)			(422)			(1,681)
Borrowed funds			48,329			50,507			(909)			6,293			2,086			8,049
Net (loss) gain from fair value adjustments								$	(1,246)		$	5,626		$	1,667		$	6,350

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 September 30, 2023 and December 31, 2022. The fair value of borrowed funds includes accrued interest payable of $0.4 million at both September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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		$	—		$	—		$	337,879		$	384,283		$	—		$	—		$	337,879		$	384,283
Other securities			11,066			11,211			493,267			338,347			1,451			1,516			505,784			351,074
Interest rate swaps			—			—			104,576			74,586			—			—			104,576			74,586

Total assets		$	11,066		$	11,211		$	935,722		$	797,216		$	1,451		$	1,516		$	948,239		$	809,943

Liabilities:
Borrowings		$	—		$	—		$	—		$	—		$	48,329		$	50,507		$	48,329		$	50,507
Interest rate swaps			—			—			22,016			18,407			—			—			22,016			18,407

Total liabilities		$	—		$	—		$	22,016		$	18,407		$	48,329		$	50,507		$	70,345		$	68,914

The following tables set 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
		September 30, 2023						September 30, 2022
		Trust preferred			Junior subordinated			Trust preferred			Junior subordinated
		securities			debentures			securities			debentures

		(In thousands)
Beginning balance		$	1,434		$	47,777		$	1,662		$	55,352
Net (loss) gain from fair value adjustment of financial assets⁽¹⁾			16			—			(171)			—
Net (gain) loss from fair value adjustment of financial liabilities⁽¹⁾			—			909			—			(6,293)
Increase (decrease) in accrued interest			1			20			3			95
Change in unrealized (gains) losses included in other comprehensive loss			—			(377)			—			598
Ending balance		$	1,451		$	48,329		$	1,494		$	49,752
Changes in unrealized gains held at period end		$	—		$	2,338		$	—		$	2,177

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


		For the nine months ended
		September 30, 2023						September 30, 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⁾			(67)			—			(206)			—
Net (gain) loss from fair value adjustment of financial liabilities⁽¹⁾			—			(2,086)			—			(8,049)
Increase (decrease) in accrued interest			2			60			5			172
Change in unrealized (gains) losses included in other comprehensive loss			—			(152)			—			1,157
Ending balance		$	1,451		$	48,329		$	1,494		$	49,752
Changes in unrealized gains held at period end		$	—		$	2,338		$	—		$	2,177

(1) Presented in the Consolidated Statements of Income under net (loss) gain 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:

September 30, 2023

Valuation

Input

Weighted

Fair Value

Technique

Unobservable

Range

Average

(Dollars in thousands)

Assets:

Trust preferred securities

$

1,451

Discounted cash flows

Spread over 3-month SOFR

n/a

4.4

%

Liabilities:

Junior subordinated debentures

$

48,329

Discounted cash flows

Spread over 3-month SOFR

n/a

4.4

%

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 September 30, 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 September 30, 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		$	—		$	—		$	—		$	—		$	1,045		$	18,330		$	1,045		$	18,330

Total assets		$	—		$	—		$	—		$	—		$	1,045		$	18,330		$	1,045		$	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 September 30, 2023

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Certain delinquent loans

$

1,045

Discounted Cashflow

Discount Rate

4.3% to 9.8

%

9.4

%

Probability of Default

35.0% to 42.0

%

41.6

%


		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 September 30, 2023 and December 31, 2022.

The methods and assumptions used to estimate fair value at September 30, 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:


		September 30, 2023
		Carrying			Fair
		Amount			Value			Level 1			Level 2			Level 3

		(In thousands)
Assets:

Cash and due from banks		$	200,926		$	200,926		$	200,926		$	—		$	—
Securities held-to-maturity
Mortgage-backed securities			7,860			6,634			—			6,634			—
Other securities			65,271			51,031			—			—			51,031
Securities available for sale
Mortgage-backed securities			337,879			337,879			—			337,879			—
Other securities			505,784			505,784			11,066			493,267			1,451
Loans			6,896,074			6,511,963			—			—			6,511,963
FHLB-NY stock			43,821			43,821			—			43,821			—
Accrued interest receivable			55,660			55,660			—			6,723			48,937
Interest rate swaps			104,576			104,576			—			104,576			—

Liabilities:

Deposits		$	6,681,509		$	6,630,112		$	4,360,140		$	2,269,972		$	—
Borrowed Funds			1,001,010			950,476			—			902,147			48,329
Accrued interest payable			10,001			10,001			—			10,001			—
Interest rate swaps			22,016			22,016			—			22,016			—


		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			—

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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