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.
In estimating fair value, the Company 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.
ASC Topic 820
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 Inputs -
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 -
Inputs other than quoted prices included in Level 1 that
are observable for the asset or liability,
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
are derived principally from, or corroborated, by market
data by correlation or other means
Level 3 Inputs -
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.
Assets and Liabilities Measured at Fair
a Recurring Basis
Securities Available for Sale.
U.S. Treasury securities are reported
at fair value utilizing Level 1 inputs.
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
include dealer quotes, market spreads, cash flows, the
U.S. Treasury yield curve, live trading levels,
trade execution data, credit
information and the bond’s
terms and conditions, among other things.
In general, the Company does not purchase securities that have
a complicated structure.
The Company’s entire portfolio
of traditional investments, nearly all of which are U.S.
Treasury obligations, federal agency bullet or mortgage
securities, or general obligation or revenue based municipal
Pricing for such instruments is easily obtained.
annually, the Company
will validate prices supplied by the independent pricing service
by comparing them to prices obtained
from an independent third-party source.
Loans Held for Sale
. The fair value of residential mortgage loans held for sale based
on Level 2 inputs is determined, when
possible, using either quoted secondary-market prices
or investor commitments. If no such quoted price exists, the fair
determined using quoted prices for a similar asset or assets, adjusted
for the specific attributes of that loan, which would be used
by other market participants. The Company has elected
the fair value option accounting for its held for sale loans.
Mortgage Banking Derivative Instruments.
The fair values of interest rate lock commitments (“IRLCs”) are
derived by valuation
models incorporating market pricing for instruments with
similar characteristics, commonly referred to as best execution
or investor commitment prices for best effort
IRLCs which have unobservable inputs, such as an estimate of the
fair value of the
servicing rights expected to be recorded upon sale of the
loans, net estimated costs to originate the loans, and the pull-through
rate, and are therefore classified as Level 3 within
the fair value hierarchy. The fair
value of forward sale commitments is based
on observable market pricing for similar instruments and
are therefore classified as Level 2 within the fair value hierarchy.
Interest Rate Swap.
The Company’s derivative
positions are classified as level 2 within the fair value
hierarchy and are valued
using models generally accepted in the financial services
industry and that use actively quoted or observable market
from external market data providers. The fair value
derivatives are determined using discounted cash flow models.
The Company entered into a stand-alone derivative contract
with the purchaser of its Visa Class B
valuation represents the amount due and payable to the counterparty
based upon the revised share conversion rate, if any,
At December 31, 2020, there were no amounts payable.
A summary of fair values for assets and liabilities at December
31 consisted of the following:
Mortgage Banking Activities.
The Company had Level 3 issuances and transfers of
March 1, 2020 to December 31, 2020 related to mortgage
are valued based on the change in fair
value of the underlying mortgage loan from inception
of the IRLC to the balance sheet date, adjusted for pull
-through rates and
costs to originate.
IRLCs transferred out of Level 3 represent IRLCs that were funded
and moved to mortgage loans held for sale,
at fair value.
Assets Measured at Fair Value
on a Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring
basis (i.e., the assets are not measured at fair value on an
basis but are subject to fair value adjustments in certain
An example would be assets exhibiting evidence of
The following is a description of valuation methodologies used for assets measured
on a non-recurring basis.
Collateral Dependent Loans
Impairment for collateral dependent loans is measured
using the fair value of the collateral less
The fair value of collateral is determined by an independent
valuation or professional appraisal in conformance with
Collateral values are estimated using Level 3 inputs due
to the volatility in the real estate market, and the
judgment and estimation involved in the real estate appraisal
Collateral dependent loans are reviewed and evaluated on
at least a quarterly basis for additional impairment and
techniques are consistent with those
techniques applied in prior periods.
Collateral dependent loans had a carrying value of $
million with a valuation allowance of
million at December 31, 2020.
Other Real Estate Owned
During 2020 and 2019, certain foreclosed assets, upon initial recognition,
were measured and reported
at fair value through a charge-off
to the allowance for loan losses based on the fair value of the foreclosed
asset less estimated
cost to sell.
The fair value of the foreclosed asset is determined by
an independent valuation or professional appraisal in
conformance with banking regulations.
On an ongoing basis, we obtain updated appraisals on foreclosed
assets and record
valuation adjustments as necessary.
The fair value of foreclosed assets is estimated using Level
3 inputs due to the judgment and
estimation involved in the real estate valuation process.
Mortgage Servicing Rights
. Residential mortgage loan servicing rights are evaluated
for impairment at each reporting period
based upon the fair value of the rights as compared
to the carrying amount.
Fair value is determined by a third party valuation
model using estimated prepayment speeds of the underlying
mortgage loans serviced and stratifications based on the
characteristics of the underlying loans (predominantly
loan type and note interest rate).
The fair value is estimated using Level 3
inputs, including a discount rate, weighted average prepayment
speed, and the cost of loan servicing.
Further detail on the key
inputs utilized are provided in Note 4 – Mortgage
At December 31, 2020, there was a $
allowance for mortgage servicing rights.
Assets and Liabilities Disclosed at Fair Value
The Company is required to disclose the estimated fair value
of financial instruments, both assets and liabilities, for which
practical to estimate fair value and the following
is a description of valuation methodologies used for those assets and liabilities.
Cash and Short-Term
The carrying amount of cash and short-term investments is used
to approximate fair value,
given the short time frame to maturity and as such assets do
not present unanticipated credit concerns.
Securities Held to Maturity
Securities held to maturity are valued in accordance
with the methodology previously noted in the
caption “Assets and Liabilities Measured at Fair Value
on a Recurring Basis – Securities Available
The loan portfolio is segregated into categories and the fair value
of each loan category is calculated using present value
techniques based upon projected cash flows and
estimated discount rates.
Pursuant to the adoption of ASU 2016-01,
and Measurement of Financial Assets and
, the values reported reflect the incorporation of
discount to meet the objective of “exit price” valu
The fair value of Noninterest Bearing Deposits, NOW Accounts,
Money Market Accounts and Savings Accounts are
the amounts payable on demand at the reporting date.
The fair value of fixed maturity certificates of deposit is estimated using
present value techniques and rates currently offered
for deposits of similar remaining maturities.
Subordinated Notes Payab
The fair value of each note is calculated using present
value techniques, based upon projected cash
flows and estimated discount rates as well as rates being offered
for similar obligations.
The fair value of each note is calculated using present value
techniques, based upon
projected cash flows and estimated discount rates as well as rates
being offered for similar debt.
A summary of estimated fair values of significant
financial instruments at December 31 consisted of the following:
(Dollars in Thousands)
Investment Securities, Available
Investment Securities, Held to Maturity
Loans Held for Sale
Other Equity Securities
Loans, Net of Allowance for Credit Losses
Subordinated Notes Payable
All non-financial instruments are excluded from the
The disclosures also do not include goodwill.
aggregate fair value amounts presented do not represent
the underlying value of the Company.