XML 21 R10.htm IDEA: XBRL DOCUMENT v3.21.2
Fair Value of Assets and Liabilities
 6 Months Ended
Jun. 30, 2021
Fair Value Disclosures [Abstract]  
Fair Value of Assets and Liabilities

Note 3: Fair Value of Assets and Liabilities

 

Fair Value Hierarchy and Fair Value Measurement

 

Accounting standards require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The following table summarizes the Company’s assets and liabilities that were required to be recorded at fair value on a recurring basis.

 

(in thousands)   Carrying
Value		     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		     Significant
Other
Observable
Inputs
(Level 2)		     Significant
Unobservable
Inputs
(Level 3)		     Measurement
Categories: Changes
in Fair Value Recorded
In1
June 30, 2021                                    
Assets:                                    
Securities available-for-sale:                                    
U.S. government treasuries, U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, and collateralized mortgage obligations   $ 160,074     $ —     $ 160,074     $ —     OCI
Derivatives – interest rate swap     119       —       119       —     NI
Liabilities:                                    
Derivatives – interest rate swap     119       —       119       —     NI
                                     
December 31, 2020                                    
Assets:                                    
Securities available-for-sale:                                    
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, and collateralized mortgage obligations   $ 114,949     $ —     $ 114,949     $ —     OCI
Derivatives – interest rate swap     149       —       149       —     NI
Liabilities:                                    
Derivatives – interest rate swap     149       —       149     $ —     NI

 

  1 Other comprehensive income (“OCI”) or net income (“NI”).

 

Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. If quoted market prices are not available, management obtains pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity, and credit spreads (Level 2). Level 2 securities include U.S. agencies or government-sponsored agencies’ debt securities, mortgage-backed securities, government agency issued bonds, privately issued collateralized mortgage obligations, and corporate bonds. As of June 30, 2021 and December 31, 2020, there were no Level 1 or Level 3 securities.

 

On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both the Company’s credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to the Company. For further discussion on the Company’s methodology in valuing its derivative financial instruments, refer to Note 11, Derivative Financial Instruments and Hedging Activities.

 

Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent and other real estate owned (“OREO”). As of June 30, 2021 and December 31, 2020, the Company did not carry any assets measured at fair value on a non-recurring basis.

Disclosures about Fair Value of Financial Instruments

 

The table below is a summary of fair value estimates for financial instruments as of June 30, 2021 and December 31, 2020. The carrying amounts in the following table are recorded in the consolidated balance sheets under the indicated captions. Further, management has not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies (“BOLI”).

                                         
    June 30, 2021   December 31, 2020
(in thousands)   Carrying
Amounts		     Fair
Value		     Fair Value
Hierarchy		   Carrying
Amounts		     Fair
Value		     Fair Value
Hierarchy
Financial assets (recorded at amortized cost)        
Cash and cash equivalents   $ 536,604     $ 536,604     Level 1   $ 290,493     $ 290,493     Level 1
Time deposits in banks     19,451       19,581     Level 1     23,705       23,705     Level 1
Securities – available-for-sale     160,074       160,074     Level 2     114,949       114,949     Level 2
Securities – held-to-maturity     6,473       6,858     Level 3     7,979       8,755     Level 3
Loans – held for sale     2,340       2,447     Level 2     4,820       5,012     Level 2
Loans – held for investment     1,563,309       1,525,826     Level 3     1,480,970       1,464,794     Level 3
Interest receivable     5,774       5,774     Level 3     5,422       5,422     Level 3
Financial liabilities (recorded at amortized cost)        
Deposits     2,066,285       2,050,244     Level 2     1,784,001       1,785,944     Level 2
Interest payable     12       12     Level 3     75       75     Level 3
Subordinated notes     28,353       28,355     Level 3     28,320       28,320     Level 3

 

The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at June 30, 2021 and December 31, 2020:

 

Cash and cash equivalents and time deposits in banks: The carrying amount is estimated to be fair value due to the liquid nature of the assets and their short-term maturities.

 

Investment securities: See discussion above for the methods and assumptions used by the Company to estimate the fair value of investment securities.

 

Loans held for sale: For loans held for sale, the fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.

 

Loans held for investment: For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness without considering widening credit spreads due to market illiquidity, which approximates the exit price notion. The allowance for loan losses is considered to be a reasonable estimate of loan discount for credit quality concerns.

 

Interest receivable and payable: For interest receivable and payable, the carrying amount is estimated to be fair value.

 

Derivatives - interest rate swap: See discussion above for a discussion of the methods and assumptions used by the Company to estimate the fair value of derivatives.

Deposits: The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date represented by their carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis using interest rates being offered at each reporting date by the Company for certificates with similar remaining maturities. For variable rate time deposits, cost approximates fair value.

 

Subordinated Notes: The fair value is estimated by discounting the future cash flow using the current 3-month LIBOR rate. Both notes are not registered securities and issued through private placement, resulting in a Level 3 classification. Both notes are recorded at carrying value.