Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2024

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 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 June 30, 2024, the U.S. Government agencies and treasuries, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding 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.

Nonrecurring Basis  –

Individually Evaluated Loans- Individual loans with borrowers experiencing financial difficulty and with a remaining principal balance of $0.1 million or more are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell.  Fair value is measured based on the value of the underlying collateral securing the loan if repayment is expected solely from the sale of operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent.  

Fair value for individually evaluated loans is determined using several methods.  Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal.  

Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate.  For individually evaluated loans, the first state of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date.  Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property.  The second state involves an assessment of current trends in the regional market.  After thorough consideration of these factors, management will order a new appraisal.

For non-individually evaluated loans, the fair value is determined by updating the present value of estimated future cash flows using the loan’s existing rate to reflect the payment schedule for the remaining life of the loan.

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 – Other real estate owned 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 June 30, 2024 and December 31, 2023 were as follows:

			Fair Value Measurements at June 30, 2024 Using
			Quoted
			Prices in	Significant
	Assets		Active Markets	Other		Significant
	Measured at		for Identical	Observable		Unobservable
	Fair Value		Assets	Inputs		Inputs
(in thousands)	06/30/24		(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies	$	6,035		$	6,035
Residential mortgage-backed agencies	$	19,283		$	19,283
Commercial mortgage-backed agencies	$	27,308		$	27,308
Collateralized mortgage obligations	$	15,449		$	15,449
Obligations of states and political subdivisions	$	10,167		$	10,167
Corporate bonds	$	737		$	737
Collateralized debt obligations	$	13,975				$	13,975
Financial derivatives	$	762		$	762
Non-recurring:
Individually evaluated loans, net	$	2,096				$	2,096
Equity Investment	$	3,551				$	3,551
Other real estate owned	$	2,698				$	2,698

			Fair Value Measurements at December 31, 2023 Using
			Quoted
			Prices in	Significant
	Assets/(liabilities)		Active Markets	Other		Significant
	Measured at		for Identical	Observable		Unobservable
	Fair Value		Assets	Inputs		Inputs
(in thousands)	12/31/23		(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 derivatives	$	756		$	756
Non-recurring:
Individually evaluated loans, net	$	—				$	—
Equity investment	$	3,087				$	3,087
Other real estate owned	$	4,443				$	4,443

Individually evaluated loans had a net carrying amount of $8.8 million and $3.0 million with no valuation allowance at June 30, 2024 or December 31, 2023.

There were no transfers of assets between any of the fair value hierarchy for the six-month periods ended June 30, 2024 or 2023.

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands)	Fair Value at June 30, 2024		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Recurring:
Investment Securities – available for sale -CDO	$	13,975	Discounted Cash Flow	Discount Margin	Range of mid 400 to high 400
Non-recurring:
Individually Evaluated Loans, net	$	2,096	Market Comparable Properties	Marketability Discount	N/A
Equity Investment	$	3,551	Market Method	Revenue Multiples	2.8x
Other Real Estate Owned	$	2,698	Market Comparable Properties	Marketability Discount	5.0% to 15.0% (weighted avg 5.9%)

(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 Margin	Range of low to mid 500 and low to mid 600
Non-recurring:
Equity Investment	$	3,087	Market Method	Revenue Multiples	2.8x
Other Real Estate	$	4,443	Market Comparable Properties	Marketability Discount	5.0% to 15.0% (weighted avg 5.9%)

(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 six- and three-month periods ended June 30, 2024 and 2023:

	Fair Value Measurements
	Using Significant Unobservable Inputs
	(Level 3)
	Investment Securities
(in thousands)	Available for Sale
Beginning balance January 1, 2024	$	14,709
Total losses realized/unrealized:
Included in other comprehensive loss		(734)
Ending balance June 30, 2024	$	13,975

	Fair Value Measurements
	Using Significant Unobservable Inputs
	(Level 3)
	Investment Securities
(in thousands)	Available for Sale
Beginning balance January 1, 2023	$	15,871
Total losses realized/unrealized:
Included in other comprehensive loss		(1,766)
Ending balance June 30, 2023	$	14,105

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale
Beginning balance April 1, 2024	$	14,886
Total losses realized/unrealized:
Included in other comprehensive loss		(911)
Ending balance June 30, 2024	$	13,975

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale
Beginning balance April 1, 2023	$	14,114
Total losses realized/unrealized:
Included in other comprehensive loss		(9)
Ending balance June 30, 2023	$	14,105

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 six- or three-month periods ended June 30, 2024 or 2023.

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:

	June 30, 2024				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	$	43,635	$	43,635	$	43,635
Interest bearing deposits in banks		1,457		1,457		1,457
Investment securities - AFS		92,954		92,954			$	78,979	$	13,975
Investment securities - HTM		174,197		143,030				141,259		1,771
Restricted bank stock		3,395		N/A
Loans, net		1,404,746		1,329,798						1,329,798
Financial derivatives		762		762				762
Accrued interest receivable		7,115		7,115				847		6,268
Financial Liabilities:								8
Deposits - non-maturity		1,378,674		1,378,674				1,378,674
Deposits - time deposits		158,397		155,969				155,969
Short-term borrowed funds		62,564		62,564				62,564
Long-term borrowed funds		70,929		70,939				70,939
Accrued interest payable		1,352		1,352				1,352

	December 31, 2023				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	$	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