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Fair Value Measurement

3 Months Ended

Mar. 31, 2024

The Corporation uses estimates of fair value in applying various accounting standards for its consolidated financial statements on either a recurring or non-recurring basis. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. Mid Penn groups its assets and liabilities measured at fair value in three hierarchy levels, based on the observability and transparency of the inputs. The fair value hierarchy is as follows:

Level 1 - Inputs that represent quoted prices for identical instruments in active markets.

Level 2 - Inputs that represent quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 - Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

There were no transfers of assets between fair value Level 1 and Level 2 during the three months ended March 31, 2024 or the year ended December 31, 2023.

The following tables illustrate the assets measured at fair value on a recurring basis and reported on the Consolidated Balance Sheets.


	March 31, 2024
(In thousands)	Level 1		Level 2		Level 3		Total
Available-for-sale securities:
U.S. Treasury and U.S. government agencies	$	—	$	35,490	$	—	$	35,490
Mortgage-backed U.S. government agencies	—		146,765		—		146,765
State and political subdivision obligations	—		3,633		—		3,633
Corporate debt securities	—		31,744		—		31,744
Equity securities	431		—		—		431
Loans held for sale	—		4,581		—		4,581
Other assets:
Derivative assets	—		14,543		—		14,543
Total	$	431	$	236,756	$	—	$	237,187


	December 31, 2023
(In thousands)	Level 1		Level 2		Level 3		Total
Available-for-sale securities:
U.S. Treasury and U.S. government agencies	$	—	$	35,649	$	—	$	35,649
Mortgage-backed U.S. government agencies	—		152,683		—		152,683
State and political subdivision obligations	—		3,646		—		3,646
Corporate debt securities	—		31,577		—		31,577
Equity securities	438		—		—		438
Loans held for sale	—		3,855		—		3,855
Other assets:
Derivative assets	—		11,944		—		11,944
Total	$	438	$	239,354	$	—	$	239,792

The valuation methodologies and assumptions used to estimate the fair value for the items in the preceding tables are as follows:

Available for sale investment securities - The fair value of equity and debt securities classified as available for sale is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather, relying on the securities’ relationship to other benchmark quoted prices.

Equity securities - The fair value of equity securities with readily determinable fair values is recorded on the Consolidated Balance Sheet, with realized and unrealized gains and losses reported in other expense on the Consolidated Statements of Income.

Loans held for sale - This category includes mortgage loans held for sale that are measured at fair value. Fair values as of March 31, 2024 were measured as the price that secondary market investors were offering for loans with similar characteristics.

Derivative assets - Interest rate swaps are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These markets do, however, have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair market value. These characteristics classify interest rate swap agreements as Level 2.

Mortgage banking derivatives represent the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors and the fair value of interest rate swaps. The fair values of Mid Penn’s interest rate locks, forward commitments and interest rate swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. These characteristics classify interest rate swap agreements as Level 2. See "Note 5 - Derivative Financial Instruments," for additional information.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. The following table illustrates Level 3 financial instruments measured at fair value on a nonrecurring basis:



(In thousands)	March 31, 2024		December 31, 2023
Individually evaluated loans, net of ACL	$	9,272	$	13,399
Foreclosed assets held for sale	5,110		293

Net loans - This category consists of loans that were individually evaluated for credit losses, net of the related ACL, and have been classified as Level 3 assets. For 2023, the amount shown is the balance of individually evaluated loans reporting a specific allocation or that have been partially charged-off. All of these loans are considered collateral-dependent; therefore, all of Mid Penn’s impaired loans, whether reporting a specific allowance allocation or not, are considered collateral- dependent. Mid Penn utilized Level 3 inputs such as independent appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not observable. Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses.

Foreclosed assets held for sale - Values are based on appraisals that consider the sales prices of property in the proximate vicinity.

The following tables summarize the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn's financial instruments as of the periods presented:


	March 31, 2024
	Carrying Amount		Estimated Fair Value
(In thousands)			Level 1		Level 2		Level 3		Total
Financial instruments - assets
Cash and cash equivalents	$	68,085	$	68,085	$	—	$	—	$	68,085
Available-for-sale investment securities	217,632		—		217,632		—		217,632
Held-to-maturity investment securities	396,998		—		351,204		—		351,204
Equity securities	431		431		—		—		431
Loans held for sale	4,581		—		4,581		—		4,581
Net loans	4,283,925		—		—		4,285,266		4,285,266
Restricted investment in bank stocks	17,446		17,446		—		—		17,446
Accrued interest receivable	26,975		26,975		—		—		26,975
Derivative assets	14,543		—		14,543		—		14,543
Financial instruments - liabilities
Deposits	$	4,379,105	$	—	$	4,368,088	$	—	$	4,368,088
Short-term borrowings	271,849		—		271,849		—		271,849
Long-term debt (1)	20,768		—		20,768		—		20,768
Subordinated debt	46,201		—		40,332		—		40,332
Accrued interest payable	16,330		16,330		—		—		16,330
Derivative liabilities	11,315		—		11,315		—		11,315

(1)Long-term debt excludes finance lease obligations.


	December 31, 2023
			Estimated Fair Value
(In thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial instruments - assets
Cash and cash equivalents	$	96,763	$	96,763	$	—	$	—	$	96,763
Available-for-sale investment securities	223,555		—		223,555		—		223,555
Held-to-maturity investment securities	399,128		—		357,521		—		357,521
Equity securities	438		438		—		—		438
Loans held for sale	3,855		—		3,855		—		3,855
Net loans	4,218,605		—		—		4,221,926		4,221,926
Restricted investment in bank stocks	16,768		16,768		—		—		16,768
Accrued interest receivable	25,820		25,820		—		—		25,820
Derivative assets	11,944		—		11,944		—		11,944
Financial instruments - liabilities
Deposits	$	4,346,212	$	—	$	4,337,723	$	—	$	4,337,723
Short-term debt	241,532		—		241,532		—		241,532
Long-term debt (1)	55,806		—		55,081		—		55,081
Subordinated debt	46,354		—		39,515		—		39,515
Accrued interest payable	14,257		14,257		—		—		14,257
Derivative liabilities	10,484		—		10,484		—		10,484

(1)Long-term debt excludes finance lease obligations.

The Bank’s outstanding and unfunded credit commitments and financial standby letters of credit were deemed to have no significant fair value as of March 31, 2024 and December 31, 2023.

- 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.

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