Fair Value Measurements

6 Months Ended

Jun. 30, 2025

(14.) FAIR VALUE MEASUREMENTS

Determination of Fair Value – Assets Measured at Fair Value on a Recurring and Nonrecurring Basis

Valuation Hierarchy

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. ASC 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. There have been no changes in the valuation techniques used during the current period. The fair value hierarchy is as follows:

•

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

•

Level 3 - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Transfers between levels of the fair value hierarchy are recorded as of the end of the reporting period.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities available for sale: Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Derivative instruments: The fair value of derivative instruments is determined using quoted secondary market prices for similar financial instruments and are classified as Level 2 in the fair value hierarchy.

(14.) FAIR VALUE MEASUREMENTS (Continued)

Loans held for sale: The fair value of loans held for sale is determined using quoted secondary market prices and investor commitments. Loans held for sale are classified as Level 2 in the fair value hierarchy.

Collateral dependent loans: Fair value of collateral dependent loans with specific allocations of the allowance for credit losses – loans are measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and collateral value is determined based on appraisals performed by qualified licensed appraisers hired by the Company. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Long-lived assets held for sale: The fair value of the long-lived assets held for sale was based on estimated market prices from independently prepared current appraisals and are classified as Level 3 in the fair value hierarchy.

Loan servicing rights: Loan servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of loan servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The assumptions used in the discounted cash flow model are those that management believes market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. The significant unobservable inputs used in the fair value measurement of the Company’s loan servicing rights are the constant prepayment rates and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the constant prepayment rate and the discount rate are not directly interrelated, they will generally move in opposite directions. Loan servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

Other real estate owned (foreclosed assets): Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Investment in limited partnership: The fair value of the investment in limited partnership was based on estimated market prices from independently prepared current appraisals and are classified as Level 3 in the fair value hierarchy.

Commitments to extend credit and letters of credit: Commitments to extend credit and fund letters of credit are principally at current interest rates, and, therefore, the carrying amount approximates fair value. The fair value of commitments is not material.

(14.) FAIR VALUE MEASUREMENTS (Continued)

Assets Measured at Fair Value

The following tables present for each of the fair-value hierarchy levels the Company’s assets that are measured at fair value on a recurring and nonrecurring basis as of the dates indicated (in thousands).


	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
June 30, 2025
Measured on a recurring basis:
Securities available for sale:
Mortgage-backed securities	$	—	$	897,240		$	—	$	897,240
Other assets:
Other debt securities		—		18,909			—		18,909
Hedging derivative instruments		—		3,218			—		3,218
Fair value adjusted through comprehensive income	$	—	$	919,367		$	—	$	919,367
Other assets:
Derivative instruments – interest rate swaps		—		28,375			—		28,375
Derivative instruments – mortgage banking		—		173			—		173
Other liabilities:
Derivative instruments – interest rate swaps		—		(28,376	)		—		(28,376	)
Derivative instruments – mortgage banking		—		(114	)		—		(114	)
Fair value adjusted through net income	$	—	$	58		$	—	$	58
Measured on a nonrecurring basis:
Loans:
Loans held for sale	$	—	$	2,356		$	—	$	2,356
Collateral dependent loans		—		—			46,586		46,586
Other assets:
Investment in limited partnership		—		—			3,676		3,676
Long-lived assets held for sale		—		—			528		528
Loan servicing rights		—		—			1,575		1,575
Other real estate owned		—		—			142		142
Total	$	—	$	2,356		$	52,507	$	54,863

There were no transfers between Levels 1 and 2 during the six months ended June 30, 2025. There were no liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2025.

(14.) FAIR VALUE MEASUREMENTS (Continued)


	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
December 31, 2024
Measured on a recurring basis:
Securities available for sale:
Mortgage-backed securities	$	—	$	902,384		$	—	$	902,384
Other debt securities		—		8,721			—		8,721
Other assets:
Hedging derivative instruments		—		4,693			—		4,693
Fair value adjusted through comprehensive income	$	—	$	915,798		$	—	$	915,798
Other assets:
Derivative instruments–interest rate products	$	—	$	41,318		$	—	$	41,318
Derivative instruments–mortgage banking		—		122			—		122
Other liabilities:
Derivative instruments–interest rate products		—		(41,319	)		—		(41,319	)
Derivative instruments–mortgage banking		—		(91	)		—		(91	)
Fair value adjusted through net income	$	—	$	30		$	—	$	30
Measured on a nonrecurring basis:
Loans:
Loans held for sale	$	—	$	2,280		$	—	$	2,280
Collateral dependent loans		—		—			56,246		56,246
Other assets:
Long-lived assets held for sale		—		—			596		596
Loan servicing rights		—		—			1,597		1,597
Other real estate owned		—		—			60		60
Total	$	—	$	2,280		$	58,499	$	60,779

The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value as of June 30, 2025 (dollars in thousands).


Asset	Fair Value		Valuation Technique	Unobservable Input	Unobservable Input Value or Range
Collateral dependent loans	$	46,586	Appraisal of collateral (1)	Appraisal adjustments (2)	37.1% (3) / 0 - 77.3%
Loan servicing rights	$	1,575	Discounted cash flow	Discount rate	10.2% (3)
				Constant prepayment rate	12.7% (3)
Investment in limited partnership	$	3,676	Appraisal of collateral (1)	Appraisal adjustments (2)	0%
Long-lived assets held for sale	$	528	Appraisal of collateral (1)	Appraisal adjustments (2)	12.0%
Other real estate owned	$	142	Appraisal of collateral (1)	Appraisal adjustments (2)	40.0%

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(3) Weighted averages.

(14.) FAIR VALUE MEASUREMENTS (Continued)

Changes in Level 3 Fair Value Measurements

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of or during the six months ended June 30, 2025 and 2024.

Disclosures about Fair Value of Financial Instruments

The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.

The estimated fair value approximates carrying value for cash and cash equivalents, Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, accrued interest receivable, non-maturity deposits, short-term borrowings and accrued interest payable. Fair value estimates for other financial instruments not included elsewhere in this disclosure are discussed below.

Securities held to maturity: The fair value of the Company’s investment securities held to maturity is primarily measured using information from a third-party pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Loans: The fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made for the same remaining maturities. Loans were first segregated by type, such as commercial, residential mortgage, and consumer, and were then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

Time deposits: The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Long-term borrowings: Long-term borrowings consist of $75 million of subordinated notes and $50 million of long-term borrowings from the FHLB. The subordinated notes are publicly traded and are valued based on market prices, which are characterized as Level 2 liabilities in the fair value hierarchy. The FHLB borrowings are valued using discounted cash flows based on current market rates for borrowings with similar remaining maturities and are characterized as Level 2 liabilities in the fair value hierarchy.

(14.) FAIR VALUE MEASUREMENTS (Continued)

The following table presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value measurement hierarchy of the Company’s financial instruments as of the dates indicated.


	Level in Fair Value Measurement Hierarchy	June 30, 2025				December 31, 2024
		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	93,034	$	93,034	$	87,321	$	87,321
Securities available for sale	Level 2		916,149		916,149		911,105		911,105
Securities held to maturity, net	Level 2		92,119		81,555		116,001		104,556
Loans held for sale	Level 2		2,356		2,356		2,280		2,280
Loans	Level 2		4,442,125		4,334,122		4,374,917		4,277,167
Loans (1)	Level 3		46,586		46,586		56,246		56,246
Long-lived assets held for sale	Level 3		528		528		596		596
Accrued interest receivable	Level 1		24,928		24,928		23,748		23,748
Derivative instruments–cash flow hedges	Level 2		3,218		3,218		4,693		4,693
Derivative instruments–interest rate products	Level 2		28,375		28,375		41,318		41,318
Derivative instruments–mortgage banking	Level 2		173		173		122		122
FHLB and FRB stock	Level 2		20,798		20,798		18,261		18,261
Financial liabilities:
Non-maturity deposits	Level 1		3,543,514		3,543,514		3,559,559		3,559,559
Time deposits	Level 2		1,612,500		1,607,647		1,545,172		1,541,013
Short-term borrowings	Level 1		101,000		101,000		99,000		99,000
Long-term borrowings	Level 2		114,960		121,187		124,842		127,402
Accrued interest payable	Level 1		23,687		23,687		25,856		25,856
Derivative instruments–cash flow hedges	Level 2		—		—		—		—
Derivative instruments–interest rate products	Level 2		28,376		28,376		41,319		41,319
Derivative instruments–mortgage banking	Level 2		114		114		91		91

(1) Comprised of collateral dependent loans.

- Definition

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.

+ References

Reference 1: http://www.xbrl.org/2003/role/exampleRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 55
-Paragraph 107
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482078/820-10-55-107

Reference 2: http://www.xbrl.org/2003/role/exampleRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 55
-Paragraph 100
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482078/820-10-55-100

Reference 3: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 2
-Subparagraph (c)(3)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-2

Reference 4: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 6A
-Subparagraph (a)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A

Reference 5: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 2E
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-2E

Reference 6: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 6A
-Subparagraph (h)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A

Reference 7: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 6A
-Subparagraph (f)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A

Reference 8: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 6A
-Subparagraph (e)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A

Reference 9: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 6A
-Subparagraph (d)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A

Reference 10: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 2
-Subparagraph (h)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-2

Reference 11: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 2
-Subparagraph (g)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-2

Reference 12: http://www.xbrl.org/2003/role/disclosureRef
-Topic 940
-SubTopic 820
-Name Accounting Standards Codification
-Section 50
-Paragraph 1
-Subparagraph (a)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147478119/940-820-50-1

+ Details

FINANCIAL INSTITUTIONS INC 10-Q