Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2025

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 June 30, 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 June 30, 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 June 30, 2025 and December 31, 2024 were as follows:



			Fair Value Measurements at June 30, 2025 Using
			Quoted
			Prices in		Significant
	Assets		Active Markets		Other		Significant
	Measured at		for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
(in thousands)	06/30/25		(Level 1)		(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. treasuries	$	4,014			$	4,014
U.S. government agencies	$	6,229			$	6,229
Residential mortgage-backed agencies	$	21,265			$	21,265
Commercial mortgage-backed agencies	$	30,151			$	30,151
Collateralized mortgage obligations	$	17,468			$	17,468
Obligations of states and political subdivisions	$	8,303			$	8,303
Corporate bonds	$	911			$	911
Collateralized debt obligations	$	15,241					$	15,241
Equity investments not held for trading with readily determinable fair values	$	1,008	$	1,008
Financial derivatives	$	266			$	266
Non-recurring:
Equity investment	$	4,088					$	4,088
Other real estate owned	$	176					$	176



			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 $3.3 million and $4.4 million at June 30, 2025 and December 31, 2024, respectively. Individually evaluated loans recorded at fair value at both June 30, 2025 and December 31, 2024 totaled $0.6 million, which was inclusive of $0.2 million in partial charge-offs recorded in the year ended December 31, 2024.

There were no transfers of assets between any of the fair value hierarchy for the six- or three-month periods ended June 30, 2025 or 2024.

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2025 and December 31, 2024, the significant unobservable inputs used in the fair value measurements were as follows:


(in thousands)	Fair Value at June 30, 2025		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Recurring:
Investment securities – available for sale -CDO	$	15,241	Discounted Cash Flow	Discount Margin	Range of low 300 to high 400

Non-recurring:
Equity investment	$	4,088	Market Method	Revenue Multiples	2.8x

Other real estate owned (1)	$	176	Market Comparable Properties	Marketability Discount	10.00%

(1)

Range would include discounts taken since appraisal and estimated values


(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 six- and three-month periods ended June 30, 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 gains realized/unrealized:
Included in other comprehensive income		523
Ending balance June 30, 2025	$	15,241


	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)
(in thousands)	Investment Securities Available for Sale
Beginning balance April 1, 2025	$	14,697
Total gains realized/unrealized:
Included in other comprehensive income		544
Ending balance June 30, 2025	$	15,241



	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

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, 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:


	June 30, 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	$	77,313	$	77,313	$	77,313
Interest bearing deposits in banks		1,800		1,800		1,800
Investment securities - AFS		103,582		103,582			$	88,341	$	15,241
Investment securities - HTM		174,951		148,496				146,784		1,712
Equity securities not held for trading with readily determinable fair values		1,008		1,008		1,008
Restricted bank stock		5,815		N/A
Loans, net		1,482,904		1,432,772						1,432,772
Financial derivatives		266		266				266
Accrued interest receivable		7,160		7,160				890		6,270
Financial Liabilities:
Deposits - non-maturity		1,417,096		1,417,096				1,417,096
Deposits - time deposits		197,111		195,746				195,746
Short-term borrowed funds		50,954		50,954				50,954
Long-term borrowed funds		120,929		120,240				120,240
Accrued interest payable		935		935				935


	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

- 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

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Reference 11: http://www.xbrl.org/2003/role/disclosureRef
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+ Details

FIRST UNITED CORP/MD/ 10-Q