Fair Value Measurements

3 Months Ended

Mar. 31, 2023

FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC Topic 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Transfers between levels, when determined to be appropriate, are recognized at the end of each reporting period.

The three levels of the fair value hierarchy under FASB ASC Topic 820 are:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022, segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value:


Recurring Fair Value Measurements
March 31, 2023
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-sale debt securities
U.S. Treasuries	$	170,814	$	0	$	170,814	$	0
Obligations of U.S. Government sponsored entities	599,762		0		599,762		0
Obligations of U.S. states and political subdivisions	86,684		0		86,684		0
Mortgage-backed securities – residential, issued by:
U.S. Government agencies	50,891		0		50,891		0
U.S. Government sponsored entities	675,310		0		675,310		0

U.S. corporate debt securities	2,393		0		2,393		0
Total Available-for-sale debt securities	$	1,585,854	$	0	$	1,585,854	$	0
Equity securities, at fair value	$	790	$	0	$	0	$	790


Recurring Fair Value Measurements
December 31, 2022
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-sale debt securities
U.S. Treasuries	$	167,251	$	0	$	167,251	$	0
Obligations of U.S. Government sponsored entities	601,167		0		601,167		0
Obligations of U.S. states and political subdivisions	85,281		0		85,281		0
Mortgage-backed securities – residential, issued by:
U.S. Government agencies	52,668		0		52,668		0
U.S. Government sponsored entities	686,222		0		686,222		0

U.S. corporate debt securities	2,378		0		2,378		0
Total Available-for-sale debt securities	$	1,594,967	$	0	$	1,594,967	$	0
Equity securities, at fair value	$	777	$	0	$	0	$	777

Securities: Fair values for U.S. Treasury securities are based on quoted market prices. Fair values for obligations of U.S. government sponsored entities, mortgage-backed securities-residential, obligations of U.S. states and political subdivisions, and U.S. corporate debt securities are based on quoted market prices, where available, as provided by third party pricing vendors. If quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon a matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.

The change in the fair value of equity securities valued using significant unobservable inputs (level 3), between December 31, 2022 and March 31, 2023, was immaterial.

There were no transfers between Levels 1, 2 and 3 for the three months ended March 31, 2023.

The Company determines fair value for its available-for-sale debt securities using an independent bond pricing service for identical assets or very similar securities. The Company determines fair value for its equity securities based on the underlying equity fund’s pricing and valuation procedures which consider recent sales price, market quotations from a pricing service, or market quotes from an independent broker-dealer. The Company has reviewed the pricing sources, including methodologies used, and finds them to be fairly stated.

Certain assets are measured at fair value on a nonrecurring basis. For the Company, these include loans held for sale, collateral dependent individually evaluated loans, and other real estate owned ("OREO"). As of March 31, 2023 and 2022, certain collateral dependent evaluated loans were remeasured and reported at fair value through a specific valuation allowance and/or partial charge-offs for credit losses based upon the fair value of the underlying collateral. Collateral values are estimated using Level 3 inputs. Upon initial recognition, fair value write-downs are taken through a charge-off to the allowance for credit losses. Subsequent fair value write-downs on other real estate owned are reported in other noninterest expense.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at March 31, 2023 and 2022. The carrying amounts shown in the table are included in the Consolidated Statements of Condition under the indicated captions:


Three months ended March 31, 2023
(In thousands)			Fair value measurements at reporting date using:						Gain (losses) from fair value changes
Assets:	As of 03/31/2023		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Three months ended 03/31/2023
Individually evaluated loans	$	0	$	0	$	0	$	0	$	826
Other real estate owned	36		0				36		22


December 31, 2022
(In thousands)			Fair value measurements at reporting date using:						Gain (losses) from fair value changes
Assets:	As of 12/31/2022		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Three months ended 12/31/2022
Individually evaluated loans	$	9,460	$	0	$	0	$	9,460	$	59
Other real estate owned	152		0		0		152		15

The fair value estimates, methods and assumptions set forth below for the Company's financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by U.S. GAAP and should be read in conjunction with the financial statements and notes included herein.

For loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For real estate loans, fair value of the loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.


Estimated Fair Value of Financial Instruments
March 31, 2023
(In thousands)	Carrying Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and cash equivalents	$	70,537	$	70,537	$	70,537	$	0	$	0
Securities - held-to-maturity	312,357		267,099		0		267,099		0
FHLB and other stock	19,326		19,326		0		19,326		0
Accrued interest receivable	23,629		23,629		0		23,629		0
Loans/leases, net1	5,227,572		4,911,105		0		0		4,911,105

Financial Liabilities:
Time deposits	$	725,338	$	713,125	$	0	$	713,125	$	0
Other deposits	5,783,671		5,783,671		0		5,783,671		0
Fed funds purchased and securities sold
under agreements to repurchase	63,491		63,491		0		63,491		0
Other borrowings	327,000		324,849		0		324,849		0
Accrued interest payable	1,579		1,579		0		1,579		0


Estimated Fair Value of Financial Instruments
December 31, 2022
(In thousands)	Carrying Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and cash equivalents	$	77,837	$	77,837	$	77,837	$	0	$	0
Securities - held to maturity	312,344		261,692		0		261,692		0
FHLB and other stock	17,720		17,720		0		17,720		0
Accrued interest receivable	24,865		24,865		0		24,865		0
Loans/leases, net1	5,222,977		4,939,246		0		0		4,939,246

Financial Liabilities:
Time deposits	$	631,411	$	616,488	$	0	$	616,488	$	0
Other deposits	5,970,884		5,970,884		0		5,970,884		0
Fed funds purchased and securities
sold under agreements to repurchase	56,278		56,278		0		56,278		0
Other borrowings	291,300		289,234		0		289,234		0
Accrued interest payable	1,420		1,420		0		1,420		0

1 Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.

The following methods and assumptions were used in estimating fair value disclosures for financial instruments.

Cash and Cash Equivalents: The carrying amounts reported in the Consolidated Statements of Condition for cash, noninterest-bearing deposits, money market funds, and Federal funds sold approximate the fair value of those assets.

FHLB Stock: The carrying amount of FHLB stock approximates fair value. If the stock is redeemed, the Company will receive an amount equal to the par value of the stock. For other stock reported above, carrying value is cost.

Loans and Leases: Fair value for loans are calculated using an exit price notion. The Company's valuation methodology takes into account factors such as estimated cash flows, including contractual cash flow and assumptions for prepayments; liquidity risk; and credit risk. The fair values of residential loans were estimated using discounted cash flow analyses, based upon available market benchmarks for rates and prepayment assumptions. The fair values of commercial and consumer loans were estimated using discounted cash flow analyses, based upon interest rates currently offered for loans and leases with similar terms and credit quality. The fair values of loans held for sale were determined based upon contractual prices for loans with similar characteristics.

Accrued Interest Receivable and Accrued Interest Payable: The carrying amount of these short term instruments approximate fair value.

Deposits: The fair values disclosed for noninterest bearing accounts and accounts with no stated maturities are equal to the amount payable on demand at the reporting date. The fair value of time deposits is based upon discounted cash flow analyses using rates offered for FHLB advances, which is the Company’s primary alternative source of funds.

Other borrowings: The fair value of other borrowings is based upon discounted cash flow analyses using current rates offered for FHLB advances, with similar terms.

- Definition

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.

+ References + Details