Annual Report 2018 - Page 36

long as there is not a violation of any condition established in the loan contract. Standby letters of credit are agreements to pay a beneficiary if there is a default on a contractual arrangement. At December 31, 2018, we had commitments to extend credit and unexercised commitments related to standby letters of credit of $812.2 million. Additionally, we had $8.1 million of issued standby letters of credit as of December 31, 2018. Commitments to extend credit and letters of credit generally have fixed expiration dates or other termination clauses and we may require payment of a fee. If commitments to extend credit and letters of credit remain unfulfilled or have not expired, they may have credit risk not recognized in the financial statements. Many of the commitments to extend credit and letters of credit will expire without being fully drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Certain letters of credit may have recourse provisions that would enable us to recover from third parties amounts paid under guarantees, thereby limiting our maximum potential exposure. The credit risk involved in issuing these financial instruments is essentially the same as that involved in extending loans to borrowers and we apply the same credit policies. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on management’s credit evaluation of the borrower. We are among the limited partners in RBICs. Refer to Note 5 for additional discussion regarding these commitments. NOTE 12: FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for the asset or liability. Accounting guidance also establishes a fair value hierarchy, with three input levels that may be used to measure fair value. Refer to Note 2 for a more complete description of the three input levels. We did not have any assets or liabilities measured at fair value on a recurring basis at December 31, 2018, 2017, or 2016. Non-Recurring We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis. Assets Measured at Fair Value on a Non-recurring Basis (in thousands) As of December 31, 2018 Impaired loans Other property owned As of December 31, 2017 Impaired loans Other property owned As of December 31, 2016 Impaired loans Other property owned Fair Value Measurement Using Level 1 Level 2 Level 3 Total Fair Value $ -- -- $ -- -- $1,757 268 $1,757 268 Fair Value Measurement Using Level 1 Level 2 Level 3 Total Fair Value $ -- -- $ -- -- $518 -- $518 -- Level 3 Total Fair Value $ -- -- $1,512 1,110 Fair Value Measurement Using Level 1 Level 2 $ -- -- $1,512 1,110 Valuation Techniques Impaired loans: Represents the carrying amount and related write-downs of loans which were evaluated for individual impairment based on the appraised value of the underlying collateral. When the value of the collateral, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. Costs to sell represent transaction costs and are not included as a component of the asset’s fair value. If the process uses observable market-based information, they are classified as Level 2. If the process requires significant input based on management’s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters, they are classified as Level 3. Other property owned: Represents the fair value and related losses of foreclosed assets that were measured at fair value based on the collateral value, which is generally determined using appraisals, or other indications based on sales of similar properties. Costs to sell represent transaction costs and are not included as a component of the asset’s fair value. If the process uses observable market-based information, they are classified as Level 2. If the process requires significant input based on management’s knowledge of and judgment about current market conditions, specific issues relating to the property and other matters, they are classified as Level 3. NOTE 13: SUBSEQUENT EVENTS We have evaluated subsequent events through March 11, 2019, which is the date the Consolidated Financial Statements were available to be issued. There have been no material subsequent events that would require recognition in our 2018 Consolidated Financial Statements or disclosure in the Notes to Consolidated Financial Statements. 33