Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Fair Value of Financial Instruments

19. 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, establishes a framework for measuring fair value and expands disclosures about fair value measurements. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not purchase or sell any financial assets or liabilities under the fair value option during the years ended December 31, 2023 and 2022.

Management selected the fair value option for certain investment securities, and certain borrowed funds as the yield, at the time of election, on the financial assets was below-market, while the rate on the financial liabilities was above-market rate. Management also considered the average duration of these instruments, which, for investment securities, was longer than the average for the portfolio of securities, and, for borrowings, primarily represented the longer-term borrowings of the Company. Choosing these instruments for the fair value option adjusted the carrying value of these financial assets and financial liabilities to their current fair value, and more closely aligned the financial performance of the Company with the economic value of these financial instruments. Management believed that electing the fair value option for these financial assets and financial liabilities allows them to better react to changes in interest rates. At the time of election, Management did not elect the fair value option for investment securities and borrowings with shorter duration, adjustable-rates, and yields that approximated the then current market rate, as management believed that these financial assets and financial liabilities approximated their economic value.

The following table presents the financial assets and financial liabilities reported at fair value under the fair value option at December 31, 2023 and 2022, and the changes in fair value included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments:

					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 year ended December 31,
Description	December 31, 2023		December 31, 2022		2023		2022		2021
(In thousands)
Mortgage-backed securities	$	262	$	295	$	6	$	(27)	$	(5)
Other securities		13,097		12,728		81		(1,639)		36
Borrowed funds		47,850		50,507		2,486		7,394		(14,004)
Net gain (loss) from fair value adjustments (1)					$	2,573	$	5,728	$	(13,973)

(1) The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of $1.0 million from the change in fair value of derivative instruments during the years ended December 31, 2021. There were no gains or (losses) from changes in the fair value of derivative instruments for the years ended December 31, 2023 and 2022.

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

The Company generally holds its earning assets, other than securities available for sale, 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.

Financial assets and financial liabilities reported at fair value are required to be measured based on either: (1) quoted prices in active markets for identical financial instruments (Level 1); (2) significant other observable inputs (Level 2); or (3) significant unobservable inputs (Level 3).

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

Level 1 – where quoted market prices are available in an active market. At December 31, 2023 and 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 December 31, 2023 and 2022, Level 2 included mortgage related securities, 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 December 31, 2023 and 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 December 31:

	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	$	—	$	—	$	354,344	$	384,283	$	—	$	—	$	354,344	$	384,283
Other securities		11,660		11,211		507,312		338,347		1,437		1,516		520,409		351,074
Interest rate swaps		—		—		69,013		74,586		—		—		69,013		74,586
Total assets	$	11,660	$	11,211	$	930,669	$	797,216	$	1,437	$	1,516	$	943,766	$	809,943
Liabilities:
Borrowings	$	—	$	—	$	—	$	—	$	47,850	$	50,507	$	47,850	$	50,507
Interest rate swaps		—		—		28,401		18,407		—		—		28,401		18,407
Total liabilities	$	—	$	—	$	28,401	$	18,407	$	47,850	$	50,507	$	76,251	$	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 year ended
	December 31, 2023				December 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 gain (loss) from fair value adjustment of financial assets (1)		(81)		—		(187)		—
Net (gain) loss from fair value adjustment of financial liabilities (1)		—		(2,486)		—		(7,393)
Increase (decrease) in accrued interest		2		68		8		280
Change in unrealized (gains) losses included in other comprehensive loss		—		(239)		—		1,148
Ending balance	$	1,437	$	47,850	$	1,516	$	50,507
Changes in unrealized gains (losses) held at period end	$	—	$	2,425	$	—	$	2,186

(1) Presented in the Consolidated Statement of Income under Net loss from fair value adjustments.

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

	December 31, 2023
	Fair Value		Valuation Technique	Unobservable Input	Range		Weighted Average
		(Dollars in thousands)
Assets:
Trust preferred securities	$	1,437	Discounted cash flows	Spread over 3-month SOFR	4.4	%	n/a
Liabilities:
Junior subordinated debentures	$	47,850	Discounted cash flows	Spread over 3-month SOFR	4.4	%	n/a

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

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 December 31, 2023 and 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 that are carried at fair value on a non-recurring basis, and the level that was used to determine their fair value, at December 31:

	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	$	—	$	—	$	—	$	—	$	5,279	$	18,330	$	5,279	$	18,330
Total assets	$	—	$	—	$	—	$	—	$	5,279	$	18,330	$	5,279	$	18,330

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

	At December 31, 2023
	Fair Value		Valuation Technique	Unobservable Input	Range		Weighted Average
	(Dollars in thousands)
Assets:
Certain delinquent loans	$	1,105	Sales approach	Adjustment to sales comparison value	-16.9% to -6.0	%	-11.5	%
				Reduction for planned expedited disposal	n/a		15.0	%
Certain delinquent loans	$	4,174	Discounted Cash flow	Discount Rate	4.3% to 13.5	%	12.7	%
				Probability of Default	30.0% to 46.0	%	33.5	%

	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 Cash flow	Discount Rate	n/a		4.3	%
				Probability of Default	n/a		35.0	%

The weighted average for unobservable inputs for collateral-dependent loans is based on the relative fair value of the loans.

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

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

Securities:

The fair values of securities are contained in Note 6 (“Securities”) of Notes to the 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.

Other Real Estate Owned and Other Repossessed Assets:

The fair value for OREO is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property. The fair value for other repossessed assets are based upon the most recently reported arm’s length sales transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates.

Junior Subordinated Debentures:

The fair value of the junior subordinated debentures was developed using a credit spread based on the subordinated debt issued by the Company 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 fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at the periods indicated:

	December 31, 2023
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Cash and due from banks	$	172,157	$	172,157	$	172,157	$	—	$	—
Securities held-to-maturity
Mortgage-backed securities		7,855		7,058		—		7,058		—
Other securities		65,068		58,697		—		—		58,697
Securities available for sale
Mortgage-backed securities		354,344		354,344		—		354,344		—
Other securities		520,409		520,409		11,660		507,312		1,437
Loans		6,906,950		6,512,841		—		—		6,512,841
FHLB-NY stock		31,066		31,066		—		31,066		—
Accrued interest receivable		59,018		59,018		—		59,018		—
Interest rate swaps		69,013		69,013		—		69,013		—
Liabilities:
Deposits	$	6,815,261	$	6,778,657	$	4,503,971	$	2,274,686	$	—
Borrowed Funds		841,281		801,156		—		753,306		47,850
Accrued interest payable		12,111		12,111		—		12,111		—
Interest rate swaps		28,401		28,401		—		28,401		—

	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		—		45,048		—
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		—