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Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2023

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

19. 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 available-for-sale is determined using a market approach. At December 31, 2023 and 2022, the U.S. Government agencies and treasuries, residential and commercial mortgage-backed securities, and municipal bonds segments are 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 we have historically transacted both purchases and sales of investment securities.

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.

Individually evaluated loans – Loans included in the table below are those that are considered individually evaluated 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 investments- Equity investments included in the table below are considered are recorded with a write-down to fair value recorded in other operating expenses. 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 recorded 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 and liabilities measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2023 and 2022 are as follows:


					Fair Value Measurements at
					December 31, 2023 Using
					(in Thousands)
		Assets & Liabilities Measured at			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
Description		12/31/23			(Level 1)			(Level 2)			(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies		$	6,034					$	6,034
Residential mortgage-backed agencies		$	20,563					$	20,563
Commercial mortgage-backed agencies		$	28,417					$	28,417
Collateralized mortgage obligations		$	16,356					$	16,356
Obligations of states and political subdivisions		$	10,312					$	10,312
Corporate bonds		$	778					$	778
Collateralized debt obligations		$	14,709								$	14,709
Financial derivative		$	756					$	756
Non-recurring:
Individually evaluated loans		$	—								$	—
Equity investments		$	3,087								$	3,087
Other real estate owned		$	4,443								$	4,443

					Fair Value Measurements at
					December 31, 2022 Using
					(in Thousands)
		Assets & Liabilities Measured at			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
Description		12/31/22			(Level 1)			(Level 2)			(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. treasuries		$	9,462					$	9,462
U.S. government agencies		$	37,401					$	37,401
Residential mortgage-backed agencies		$	30,732					$	30,732
Commercial mortgage-backed agencies		$	21,044					$	21,044
Collateralized mortgage obligations		$	10,492					$	10,492
Obligations of states and political subdivisions		$	887					$	887
Collateralized debt obligations		$	15,871								$	15,871
Financial derivative		$	1,068					$	1,068
Non-recurring:
Individually evaluated loans		$	211								$	211
Equity investment		$	1,796								$	1,796
Other real estate owned		$	—								$	—

There were no transfers of assets between any of the levels of the fair value hierarchy for the years ended December 31, 2023 or December 31, 2022.

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2023 and 2022, the significant unobservable inputs used in the fair value measurements were as follows:



(in thousands)		Fair Value at December 31, 2023			Valuation Technique		Significant Unobservable Inputs		Significant Unobservable Input Value
Recurring:
Investment Securities – available for sale - CDO		$	14,709		Discounted Cash Flow		Discount Rate		Range of low to mid 500 and low to mid 600
Non-recurring:
Equity Investments		$	3,087		Market Method		Revenue Multiples		2.8x
Other Real Estate Owned		$	4,443		Market Comparable Properties		Marketability Discount		5.0% to 15.0% (weighted avg 5.9%)



(in thousands)		Fair Value at December 31, 2022			Valuation Technique		Significant Unobservable Inputs		Significant Unobservable Input Value
Recurring:
Investment Securities – available for sale - CDO		$	15,871		Discounted Cash Flow		Discount Rate		Range of low to mid 300 and low to high 400
Non-recurring:
Individually Evaluated Loans		$	211		Market Comparable Properties		Marketability Discount		10.0% to 15.0%
Equity Investment		$	1,796		Market Method		Revenue Multiples		2.8x
Other Real Estate Owned		$	—		Market Comparable Properties		Marketability Discount

(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 using Level 3 significant unobservable inputs for the years ended December 31, 2023 and 2022:


			Fair Value Measurement Using Unobservable Inputs (Level 3)
(in thousands)			Investment Securities Available for Sale
Beginning balance January 1, 2023		$	15,871
Total gains/(losses) realized/unrealized:
Included in other comprehensive income			(1,162)
Ending balance December 31, 2023		$	14,709

			Fair Value Measurement Using Unobservable Inputs (Level 3)
(in thousands)			Investment Securities Available for Sale
Beginning balance January 1, 2022		$	17,192
Total gains/(losses) realized/unrealized:
Included in other comprehensive income			(1,321)
Ending balance December 31, 2022		$	15,871

Gains and losses (realized and unrealized) included in earnings for the periods above are reported in the Consolidated Statement of Income in other operating income.

The fair values disclosed 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 table presents fair value information about financial instruments, whether or not recognized in the 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 statement of financial condition are as follows:



		December 31, 2023						Fair Value Measurements
		Carrying			Fair			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
(in thousands)		Amount			Value			(Level 1)			(Level 2)			(Level 3)
Financial Assets:
Cash and due from banks		$	48,343		$	48,343		$	48,343
Interest bearing deposits in banks			1,410			1,410			1,410
Investment securities - AFS			97,169			97,169					$	82,460		$	14,709
Investment securities - HTM			214,297			184,415						182,510			1,905
Restricted bank stock			5,250			N/A
Loans, net			1,388,847			1,319,456									1,319,456
Financial derivative			778			778						778
Accrued interest receivable			7,487			7,487						828			6,659
Financial Liabilities:
Deposits – non-maturity			1,355,444			1,355,444						1,355,444
Deposits – time deposits			195,533			193,337						193,337
Short-term borrowed funds			45,418			45,418						45,418
Long-term borrowed funds			110,929			110,809						110,809
Accrued interest payable			612			612						612



		December 31, 2022						Fair Value Measurements
		Carrying			Fair			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
(in thousands)		Amount			Value			(Level 1)			(Level 2)			(Level 3)
Financial Assets:
Cash and due from banks		$	72,720		$	72,720		$	72,720
Interest bearing deposits in banks			1,595			1,595			1,595
Investment securities - AFS			125,889			125,889					$	110,018		$	15,871
Investment securities - HTM			235,659			203,080						182,380			20,700
Restricted bank stock			1,027			N/A
Loans, net			1,264,684			1,177,702									1,177,702
Financial derivative			1,068			1,068						1,068
Accrued interest receivable			6,051			6,051						933			5,118
Financial Liabilities:
Deposits – non-maturity			1,450,210			1,450,210						1,450,210
Deposits – time deposits			120,523			120,083						120,083
Financial derivative			—			—						—
Short-term borrowed funds			64,565			64,565						64,565
Long-term borrowed funds			30,929			30,909						30,909
Accrued interest payable			151			151						151

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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