Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2024

Fair Value of Financial Instruments

Fair Value of Financial Instruments

17. 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, 2024 and 2023, 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, 2024 and 2023 are as follows:

			Fair Value Measurements at
			December 31, 2024 Using
			(in thousands)
	Assets & Liabilities Measured at		Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs		Significant Unobservable Inputs
Description	12/31/24		(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies	$	6,115		$	6,115
Residential mortgage-backed agencies	$	20,196		$	20,196
Commercial mortgage-backed agencies	$	28,634		$	28,634
Collateralized mortgage obligations	$	17,726		$	17,726
Obligations of states and political subdivisions	$	6,209		$	6,209
Corporate bonds	$	896		$	896
Collateralized debt obligations	$	14,718				$	14,718
Financial derivative	$	455		$	455
Non-recurring:
Individually evaluated loans	$	647				$	647
Equity investments	$	3,928				$	3,928
Other real estate owned	$	2,698				$	2,698
			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. treasuries	$	6,034		$	6,034
U.S. government agencies	$	20,563		$	20,563
Residential mortgage-backed agencies	$	28,417		$	28,417
Commercial mortgage-backed agencies	$	16,356		$	16,356
Collateralized mortgage obligations	$	10,312		$	10,312
Obligations of states and political subdivisions	$	778		$	778
Collateralized debt obligations	$	14,709				$	14,709
Financial derivative	$	756		$	756
Non-recurring:
Equity investment	$	3,087				$	3,087
Other real estate owned	$	4,443				$	4,443

There were no transfers of assets between any of the levels of the fair value hierarchy for the years ended December 31, 2024 or December 31, 2023.

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

(in thousands)	Fair Value at December 31, 2024		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Recurring:
Investment Securities – available for sale - CDO	$	14,718	Discounted Cash Flow	Discount Rate	Range of low to mid 300 and low 500
Non-recurring:
Individually Evaluated Loans	$	647	Market Comparable Properties	Marketability Discount	N/A
Equity Investments	$	3,928	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 Rate	Range of low to mid 300 and low to high 400
Non-recurring:
Equity Investment	$	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%)

(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, 2024 and 2023:

		Fair Value Measurement Using Unobservable Inputs (Level 3)
(in thousands)		Investment Securities Available for Sale
Beginning balance January 1, 2024	$	14,709
Total gains realized/unrealized:
Included in other comprehensive income		9
Ending balance December 31, 2024	$	14,718
		Fair Value Measurement Using Unobservable Inputs (Level 3)
(in thousands)		Investment Securities Available for Sale
Beginning balance January 1, 2023	$	15,871
Total losses realized/unrealized:
Included in other comprehensive income		(1,162)
Ending balance December 31, 2023	$	14,709

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, 2024				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	$	77,020	$	77,020	$	77,020
Interest bearing deposits in banks		1,307		1,307		1,307
Investment securities - AFS		94,494		94,494			$	79,776	$	14,718
Investment securities - HTM		175,497		144,760				142,954		1,806
Restricted bank stock		5,768		N/A
Loans, net		1,462,181		1,421,600						1,421,600
Financial derivative		455		455				455
Accrued interest receivable		7,473		7,473				827		6,646
Financial Liabilities:
Deposits – non-maturity		1,431,662		1,431,662				1,431,662
Deposits – time deposits		143,167		141,698				141,698
Short-term borrowed funds		65,409		65,409				65,409
Long-term borrowed funds		120,929		119,586				119,586
Accrued interest payable		489		489				489

	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		756		756				756
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