ConnectOne Bancorp, Inc. Fair Value Disclosure

Note 21 – Fair Value Measurements and Fair Value of Financial Instruments

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

FASB ASC 820-10, “Fair Value Measurements and Disclosures”, is the standard used to govern disclosures related to fair value measurements. FASB ASC 820-10-05 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurements and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.

 

FASB ASC 820-10-05 establishes a fair value hierarchy that prioritizes the inputs to valuation methods 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). The three levels of the fair value hierarchy under FASB ASC 820-10-05 are as follows:

 

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 and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).

 

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

 

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of December 31, 2025 and December 31, 2024:

 

Securities Available-for-Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments, and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

 

Derivatives: The fair value of derivatives is based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

 

 

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of December 31, 2025 and  December 31, 2024 are as follows:

 

						December 31, 2025
						Fair Value Measurements at Reporting Date Using
						Quoted Prices
						in Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
		Total Fair Value				(Level 1)				(Level 2)				(Level 3)
(dollars in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations		$	391,190			$	-			$	391,190			$	-
Residential mortgage pass-through securities			607,144				-				607,144				-
Commercial mortgage pass-through securities			26,969				-				26,969				-
Obligations of U.S. states and political subdivision			212,409				-				205,897				6,512
Corporate bonds and notes			12,519				-				12,519				-
Asset-backed securities			525				-				525				-
Other securities			182				182				-				-
Total available-for-sale		$	1,250,938			$	182			$	1,244,244			$	6,512
Equity securities			19,287				10,073				9,214				-
Derivatives - interest rate contracts			16,074				-				16,074				-
Total assets		$	1,286,299			$	10,255			$	1,269,532			$	6,512
Liabilities
Derivatives - interest rate contracts			704				-				704				-
Total liabilities		$	704			$	-			$	704			$	-

 

 

 

						December 31, 2024
						Fair Value Measurements at Reporting Date Using
						Quoted Prices
						in Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
		Total Fair Value				(Level 1)				(Level 2)				(Level 3)
(dollars in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations		$	84,670			$	-			$	84,670			$	-
Residential mortgage pass-through securities			378,838				-				378,838				-
Commercial mortgage pass-through securities			20,892				-				20,892				-
Obligations of U.S. states and political subdivision			122,404				-				115,878				6,526
Corporate bonds and notes			4,987				-				4,987				-
Asset-backed securities			885				-				885				-
Other securities			171				171				-				-
Total available-for-sale		$	612,847			$	171			$	606,150			$	6,526
Equity securities			20,092				9,739				10,353				-
Derivatives - interest rate contracts			37,398				-				37,398				-
Total assets		$	670,337			$	9,910			$	653,901			$	6,526

 

There were no transfers between Level 1, Level 2 and Level 3 during the years ended December 31, 2025 and 2024.

 

Assets Measured at Fair Value on a NonRecurring Basis

 

The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2025 and December 31, 2024:

 

 

Collateral Dependent Loans: The Company may record adjustments to the carrying value of loans based on fair value measurements, either as an individually evaluated allowance or as partial charge-offs of the uncollectible portions of these loans. Individually evaluated allowances are calculated in accordance with GAAP. Individually evaluated allowances are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the individually evaluated allowance amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and are also based on Level 3 inputs.

 

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of December 31, 2025 and  December 31, 2024 are as follows:

 

 

Fair Value Measurements at Reporting Date Using

Quoted

Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

December 31,

Assets

Inputs

Inputs

2025

(Level 1)

(Level 2)

(Level 3)

Assets measured at fair value on a nonrecurring basis:

(dollars in thousands)

Collateral dependent loans:

Commercial

$

693

$

-

$

-

$

693

 

Fair Value Measurements at Reporting Date Using

Quoted

Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

December 31,

Assets

Inputs

Inputs

2024

(Level 1)

(Level 2)

(Level 3)

Assets measured at fair value on a nonrecurring basis:

(dollars in thousands)

Collateral dependent loans:

Commercial

$

793

$

-

$

-

$

793

Commercial real estate

2,913

-

-

2,913

 

Collateral dependent loans - Collateral dependent loans as of December 31, 2025 that required a valuation allowance were $0.8 million with a related valuation allowance of $0.1 million. As of  December 31, 2024 loans that required a valuation allowance were $4.7 million with a related valuation allowance of $1.1 million.

 

 

Assets Measured With Significant Unobservable Level 3 Inputs

 

Recurring basis

 

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2025 and year ended December 31, 2024:

 

		Municipal
		Securities
		(dollars in thousands)
Beginning balance, January 1, 2025		$	6,526
Principal paydowns			(314	)
Changes in unrealized gain			300
Ending balance, December 31, 2025		$	6,512

 

		Municipal
		Securities
		(dollars in thousands)
Beginning balance, January 1, 2024		$	7,122
Principal paydowns			(304	)
Changes in unrealized loss			(292	)
Ending balance, December 31, 2024		$	6,526

 

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of December 31, 2025 and December 31, 2024. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

 

December 31, 2025					Valuation		Unobservable
		Fair Value			Techniques		Input		Range
Securities available-for-sale:					(dollars in thousands)
Municipal securities		$	6,512		Discounted cash flows		Discount rate		4.6	%

 

December 31, 2024					Valuation	Unobservable
		Fair Value			Techniques	Input		Range
Securities available-for-sale:					(dollars in thousands)
Municipal securities		$	6,526		Discounted cash flows	Discount rate			5.0	%

 

 

 

Non-recurring basis

 

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

 

December 31, 2025
					Valuation		Unobservable
(dollars in thousands)		Fair Value			Techniques		Input		Range (weighed average)
Commercial loans		$	693		Appraisals of collateral		Adjustment for comparable sales		-5% to +15% (+8.1%)

 

December 31, 2024
					Valuation		Unobservable
(dollars in thousands)		Fair Value			Techniques		Input		Range (weighed average)
Commercial loans		$	726		Appraisals of collateral		Adjustment for comparable sales		-10% to +5% (-4.3%)
Commercial real estate loans			2,913		Appraisals of collateral		Adjustment for comparable sales		-40% to +0% (-14.3%)

 

 

Fair Value of Financial Instruments

 

FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and investment securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure.

 

Fair values for financial instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with ASC Topic 825 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs.

 

Cash and cash equivalents. The carrying amounts of cash and short-term instruments approximate fair values.

 

FHLB stock. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

Loans. The fair value of portfolio loans, net is determined using an exit price methodology. The exit price methodology continues to be based on a discounted cash flow analysis, in which projected cash flows are based on contractual cash flows adjusted for prepayments for certain loan types (e.g., residential mortgage loans and multifamily loans) and the use of a discount rate based on expected relative risk of the cash flows. The discount rate selected considers loan type, maturity date, a liquidity premium, cost to service, and cost of capital, which is a Level 3 fair value estimate.

 

Deposits. The carrying amounts of deposits with no stated maturities (i.e., noninterest-bearing, savings, NOW, and money market deposits) are assigned fair values equal to the carrying amounts payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturity.

 

Term Borrowings and Subordinated Debentures. The fair value of the Company’s long-term borrowings and subordinated debentures were calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities.

 

Accrued Interest Receivable/Payable. The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.

 

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2025 and December 31, 2024:

 

										Fair Value Measurements
										Quoted
										Prices in
										Active				Significant
										Markets for				Other				Significant
										Identical				Observable				Unobservable
		Carrying				Fair				Assets				Inputs				Inputs
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
		(dollars in thousands)
December 31, 2025
Financial assets:
Cash and due from banks		$	380,895			$	380,895			$	380,895			$	-			$	-
Investment securities available-for-sale			1,250,938				1,250,938				182				1,244,244				6,512
Restricted investment in bank stocks			54,722				n/a				n/a				n/a				n/a
Equity securities			19,287				19,287				10,073				9,214				-
Net loans			11,298,975				11,232,658				-				-				11,232,658
Derivatives - interest rate contracts			16,074				16,074				-				16,074				-
Accrued interest receivable			60,761				60,761				-				5,172				55,589
Financial liabilities:
Noninterest-bearing deposits			2,420,397				2,420,397				2,420,397				-				-
Interest-bearing deposits			8,820,218				8,816,234				6,023,341				2,792,893				-
Borrowings			903,489				902,908				-				902,908				-
Subordinated debentures			201,864				204,454				-				204,454				-
Derivatives - interest rate contracts			704				704				-				704				-
Accrued interest payable			12,740				12,740				-				12,740				-
December 31, 2024
Financial assets:
Cash and due from banks		$	356,488			$	356,488			$	356,488			$	-			$	-
Investment securities available-for-sale			612,847				612,847				171				606,150				6,526
Restricted investment in bank stocks			40,449				n/a				n/a				n/a				n/a
Equity securities			20,092				20,092				9,739				10,353				-
Net loans			8,192,125				7,980,038				-				-				7,980,038
Derivatives - interest rate contracts			37,398				37,398				-				37,398				-
Accrued interest receivable			45,498				45,498				-				5,444				40,054
Financial liabilities:
Noninterest-bearing deposits			1,422,044				1,422,044				1,422,044				-				-
Interest-bearing deposits			6,398,070				6,387,896				3,840,870				2,547,026				-
Borrowings			688,064				687,273				-				687,273				-
Subordinated debentures			79,944				77,968				-				77,968				-
Accrued interest payable			9,320				9,320				-				9,320				-

 

 

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, considering the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above.

 

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

 

The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825-10.

 

Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as the brokerage network, deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

 

Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.