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Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2022
Fair Value of Financial Instruments [Abstract]  
Fair Value of Financial Instruments

Note 6 – Fair Value of Financial Instruments

The Corporation complies with the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. The Corporation also follows the guidance on matters relating to all financial instruments found in ASC Subtopic 825-10, Financial Instruments – Overall.

Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flows or other valuation techniques described below. As a result, the Corporation’s ability to actually realize these derived values cannot be assumed.

The Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37. 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 inputs that may be used to measure fair value under the hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. This level is the most reliable source of valuation.

Level 2: Quoted prices that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). It also includes inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). Several sources are utilized for valuing these assets, including a contracted valuation service, Standard & Poor’s (“S&P”) evaluations and pricing services, and other valuation matrices.

Level 3: Prices or valuation techniques that require inputs that are both significant to the valuation assumptions and not readily observable in the market (i.e. supported with little or no market activity). Level 3 instruments are valued based on the best available data, some of which is internally developed, and consider risk premiums that a market participant would require.

The level established within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2 or 3 are recorded at fair value at the beginning of the reporting period.

Investments – The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.

The fair value of investments is determined using a market approach.  As of September 30, 2022, the U.S. Government agencies and treasuries, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding the tax increment financing (“TIF”) bonds, were classified as Level 2 within the valuation hierarchy.  Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities.  The TIF bonds and collateralized debt obligation (“CDO”) portfolio, which consists of pooled trust preferred securities issued by banks, thrifts, and insurance companies, are classified as Level 3 within the valuation hierarchy.  The CDO fair values are determined by a third party using a discounted cash flow model.

Derivative financial instruments (Cash flow hedge) – The Corporation’s open derivative positions are interest rate swap agreements. Those classified as Level 2 open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management.  The Corporation has considered counterparty credit risk in the valuation of its interest rate swap assets.

Impaired loans – Loans included in the table below are those that are considered impaired with a specific allocation or with partial charge-offs, based upon the guidance of the loan impairment subsection of the Receivables Topic, ASC Section 310-10-35, under which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

Equity Investment- Equity investments included in the table below are considered impaired with losses recognized on the income statement in net gains.  Fair value of the equity investment was based on an independent third-party valuation report where the value was determined based on the revenue multiples of like kind information technology businesses.  These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

Other real estate owned – OREO included in the table below are considered impaired with specific write-downs. Fair value of other real estate owned was based on independent third-party appraisals of the properties. These values were determined based on the sales prices of similar properties in the approximate geographic area. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2022 and December 31, 2021 were as follows:

Fair Value Measurements
at September 30, 2022 Using

Quoted

Prices in

Significant

Assets

Active Markets

Other

Significant

Measured at

for Identical

Observable

Unobservable

Fair Value

Assets

Inputs

Inputs

(in thousands)

    

09/30/22

    

(Level 1)

    

(Level 2)

    

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. government agencies

$

9,447

$

9,447

Residential mortgage-backed agencies

$

37,734

$

37,734

Commercial mortgage-backed agencies

$

31,611

$

31,611

Collateralized mortgage obligations

$

21,701

$

21,701

Obligations of states and political subdivisions

$

10,744

$

10,744

Corporate bonds

$

920

$

920

Collateralized debt obligations

$

15,882

$

15,882

Financial derivatives

$

1,171

$

1,171

Non-recurring:

Impaired loans, net

$

128

$

128

Equity Investment

$

1,052

$

1,052

Other real estate owned

$

$

Fair Value Measurements
at December 31, 2021 Using

Quoted

Prices in

Significant

Assets/(liabilities)

Active Markets

Other

Significant

Measured at

for Identical

Observable

Unobservable

Fair Value

Assets

Inputs

Inputs

(in thousands)

    

12/31/21

    

(Level 1)

    

(Level 2)

    

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. government agencies

$

67,169

$

67,169

Residential mortgage-backed agencies

$

48,661

$

48,661

Commercial mortgage-backed agencies

$

50,868

$

50,868

Collateralized mortgage obligations

$

90,077

$

90,077

Obligations of states and political subdivisions

$

12,804

$

12,804

Collateralized debt obligations

$

17,192

$

17,192

Financial derivatives

$

(453)

$

(453)

Non-recurring:

Impaired loans, net

$

408

$

408

Equity investment

$

590

$

590

Other real estate owned

$

349

$

349

At September 30, 2022, the fair value of impaired loans with a valuation allowance or partial charge-off was $0.5 million, net of valuation allowances of $29,781 and partial charge-offs of $0.1 million.  During the nine months ended September 30, 2022, changes to the valuation allowance or additional charge off activity was recorded on loans with a net balance of approximately $0.1 million.  At December 31, 2021, the fair value of impaired loans with a valuation allowance or charge-off was $1.0 million, net of valuation allowances of $64,700 and charge-offs of $1.3 million. During the year ended December 31, 2021, changes to the valuation allowance or additional charge off activity was recorded on loans with a net balance of approximately $0.4 million.

There were no transfers of assets between any of the fair value hierarchy for the nine month periods ended September 30, 2022 or 2021.

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2022 and December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands)

    

Fair Value at
September 30,
2022

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale -CDO

$

15,882

Discounted Cash Flow

Discount Margin

Range of low to mid 300 and low to high 400

Non-recurring:

Impaired Loans, net

$

128

Market Comparable Properties

Marketability Discount

N/A

Equity Investment

$

1,052

Market Method

Revenue Multiples

2.8x

(in thousands)

    

Fair Value at
December 31,
2021

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale -CDO

$

17,192

Discounted Cash Flow

Discount Rate

Libor + 3.25%

Non-recurring:

Impaired Loans, net

$

408

Market Comparable Properties

Marketability Discount

10.0% - 15.0% (1) (weighted avg 13.2%)

Equity Investment

$

590

Market Method

Revenue Multiples

2.8x

Other Real Estate Owned

$

349

Market Comparable Properties

Marketability Discount

15.0%

(1)Range would include discounts taken since appraisal and estimated values

The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the nine and three month periods ended September 30, 2022 and 2021:

Fair Value Measurements

Using Significant Unobservable Inputs

(Level 3)

Investment Securities

(in thousands)

    

Available for Sale

Beginning balance January 1, 2022

$

17,192

Total losses realized/unrealized:

Included in other comprehensive loss

(1,310)

Ending balance September 30, 2022

$

15,882

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

Beginning balance July 1, 2022

$

16,258

Total gains realized/unrealized:

Included in other comprehensive income

(376)

Ending balance September 30, 2022

$

15,882

Fair Value Measurements

Using Significant Unobservable Inputs

(Level 3)

Investment Securities

(in thousands)

    

Available for Sale

Beginning balance January 1, 2021

$

13,260

Total losses realized/unrealized:

Included in other comprehensive loss

3,832

Ending balance September 30, 2021

$

17,092

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

Beginning balance July 1, 2021

$

16,230

Total losses realized/unrealized:

Included in other comprehensive income

862

Ending balance September 30, 2021

$

17,092

There were no gains or losses included in earnings attributable to the change in realized/unrealized gains or losses related to the assets for the nine and three month periods ended September 30, 2022 or 2021.

The disclosed fair values may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value. Disclosure of non-financial assets such as buildings, as well as certain financial instruments such as leases is not required. Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.

The following tables present fair value information about financial instruments, whether or not recognized in the Consolidated Statement of Financial Condition, for which it is practicable to estimate that value. The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the Consolidated Statement of Financial Condition are as follows:

September 30, 2022

Fair Value Measurements

Quoted

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Carrying

Fair

Assets

Inputs

Inputs

(in thousands)

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial Assets:

Cash and due from banks

$

28,888

$

28,888

$

28,888

Interest bearing deposits in banks

1,868

1,868

1,868

Investment securities - AFS

128,039

128,039

$

112,157

$

15,882

Investment securities - HTM

238,445

205,745

185,484

20,261

Restricted bank stock

1,027

N/A

Loans, net

1,262,173

1,186,783

1,186,783

Financial derivatives

1,171

1,171

1,171

Accrued interest receivable

5,157

5,157

751

4,406

Financial Liabilities:

Deposits - non-maturity

1,386,816

1,386,816

1,386,816

Deposits - time deposits

124,302

124,217

124,217

Short-term borrowed funds

89,726

89,726

89,726

Long-term borrowed funds

30,929

30,928

30,928

Accrued interest payable

104

104

104

Off balance sheet financial instruments

December 31, 2021

Fair Value Measurements

Quoted

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Carrying

Fair

Assets

Inputs

Inputs

(in thousands)

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial Assets:

Cash and due from banks

$

109,823

$

109,823

$

109,823

Interest bearing deposits in banks

5,897

5,897

5,897

Investment securities - AFS

286,771

286,771

$

269,579

$

17,192

Investment securities - HTM

56,259

65,369

36,448

28,921

Restricted bank stock

1,029

1,029

1,029

Loan held for sale

67

67

67

Loans, net

1,137,440

1,122,671

1,122,671

Accrued interest receivable

4,821

4,821

4,821

Financial Liabilities:

Deposits - non-maturity

1,306,145

1,306,145

1,306,145

Deposits - time deposits

163,229

163,961

163,961

Financial derivatives

453

453

453

Short-term borrowed funds

57,699

57,699

57,699

Long-term borrowed funds

30,929

31,085

31,085

Accrued interest payable

137

137

137