Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2025

Fair Value of Financial Instruments

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.

The fair value of an asset or liability is the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date.  In estimating fair value, the Corporation utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.  Such valuation techniques are consistently applied.  Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.    ASU Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The fair value hierarchy is 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 March 31, 2025 and December 31, 2024, the U.S. Government agencies and treasuries, residential and commercial mortgage-backed securities, and municipal bonds segments 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 we have historically transacted both purchases and sales of investment securities.

Equity investments not held for trading with readily determinable fair values consisted of money market mutual funds as of March 31, 2025 and are classified as Level 1 within the valuation hierarchy.  Their fair values were determined based upon daily published net asset values with which investors can freely redeem from the fund.

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 measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2025 and December 31, 2024 were as follows:

			Fair Value Measurements at March 31, 2025 Using
			Quoted
			Prices in		Significant
	Assets		Active Markets		Other		Significant
	Measured at		for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
(in thousands)	03/31/25		(Level 1)		(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. treasuries	$	4,013			$	4,013
U.S. government agencies	$	6,219			$	6,219
Residential mortgage-backed agencies	$	20,217			$	20,217
Commercial mortgage-backed agencies	$	28,925			$	28,925
Collateralized mortgage obligations	$	17,763			$	17,763
Obligations of states and political subdivisions	$	7,258			$	7,258
Corporate bonds	$	906			$	906
Collateralized debt obligations	$	14,697					$	14,697
Equity investments not held for trading with readily determinable fair values	$	1,001	$	1,001
Financial derivatives	$	347			$	347
Non-recurring:
Equity investment	$	4,034					$	4,034

			Fair Value Measurements at December 31, 2024 Using
			Quoted
			Prices in	Significant
	Assets/(liabilities)		Active Markets	Other		Significant
	Measured at		for Identical	Observable		Unobservable
	Fair Value		Assets	Inputs		Inputs
(in thousands)	12/31/24		(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 derivatives	$	455		$	455
Non-recurring:
Individually evaluated loans, net	$	647				$	647
Equity investment	$	3,928				$	3,928
Other real estate owned	$	2,698				$	2,698

Individually evaluated loans, with no valuation allowance, had a net carrying amount of $3.4 million and $4.4 million at March 31, 2025 and December 31, 2024, respectively.  Individually evaluated loans recorded at fair value at both March 31, 2025 and December 31, 2024 totaled $0.6 million, which was inclusive of $0.2 million in partial charge-offs.  

There were no transfers of assets between any of the fair value hierarchy for the three-month periods ended March 31, 2025 or 2024.

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2025 and December 31, 2024, the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands)	Fair Value at March 31, 2025		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Recurring:
Investment securities – available for sale -CDO	$	14,697	Discounted Cash Flow	Discount Margin	Range of low 300 to high 400
Non-recurring:
Equity investment	$	4,034	Market Method	Revenue Multiples	2.8x

(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 Margin	Range of low to mid 300 and low 500
Non-recurring:
Individually Evaluated Loans	$	647	Market Comparable Properties	Marketability Discount	N/A
Equity investment	$	3,928	Market Method	Revenue Multiples	2.8x
Other real estate owned (1)	$	2,698	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 three-month periods ended March 31, 2025 and 2024:

	Fair Value Measurements
	Using Significant Unobservable Inputs
	(Level 3)
	Investment Securities
(in thousands)	Available for Sale
Beginning balance January 1, 2025	$	14,718
Total losses realized/unrealized:
Included in other comprehensive income		(21)
Ending balance March 31, 2025	$	14,697

	Fair Value Measurements
	Using Significant Unobservable Inputs
	(Level 3)
	Investment Securities
(in thousands)	Available for Sale
Beginning balance January 1, 2024	$	14,709
Total gains realized/unrealized:
Included in other comprehensive loss		177
Ending balance March 31, 2024	$	14,886

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 three-month periods ended March 31, 2025 or 2024.

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:

	March 31, 2025				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	$	82,813	$	82,813	$	82,813
Interest bearing deposits in banks		1,618		1,618		1,618
Investment securities - AFS		99,998		99,998			$	85,301	$	14,697
Investment securities - HTM		174,144		146,771				144,924		1,847
Equity securities not held for trading with readily determinable fair values		1,001		1,001		1,001
Restricted bank stock		5,815		N/A
Loans, net		1,460,945		1,408,335						1,408,335
Financial derivatives		347		347				347
Accrued interest receivable		6,975		6,975				796		6,179
Financial Liabilities:
Deposits - non-maturity		1,428,220		1,428,220				1,428,220
Deposits - time deposits		195,354		193,981				193,981
Short-term borrowed funds		20,342		20,342				20,342
Long-term borrowed funds		120,929		119,442				119,442
Accrued interest payable		693		693				693

	December 31, 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	$	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