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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2021

Fair Value of Financial Instruments

Fair Value of Financial Instruments

(13) Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:

Loans

Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, and consumer. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans, or exit price, is estimated by using the future value of discounted cash flows

using comparable market rates for similar types of loan products and adjusted for market factors. The discount rates used are estimated using comparable market rates for similar types of loan products adjusted to be commensurate with the credit risk, overhead costs, and optionality of such instruments.

Loans Held for Sale

Loans originated and intended to be sold in the secondary market, generally 1-4 family residential mortgage loans, are carried, in aggregate, at the lower of cost or estimated fair value. The estimated fair value measurements of loans held for sale are management's best estimate of fair value, which is primarily based on quoted market prices for similar loans in the secondary market.

Investment Securities

A detailed description of the fair value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided in the Fair Value Measurement section above. A schedule of investment securities by category and maturity is provided in the notes on Investment Securities.

Other Investment Securities

Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values. Investments in FHLB stock, and MIB bankers bank stock, that do not have readily determinable fair values, are required for membership in those organizations. Equity securities that are not actively traded are classified in level 2.

Equity securities with readily determinable fair values are recorded at fair value, with changes in fair value reflected in earnings. Equity securities that do not have readily determinable fair values are carried at cost and are periodically assessed for impairment. The Company uses level 1 inputs to value equity securities that are traded in active markets.

Federal Funds Sold, Cash, and Due from Banks

The carrying amounts of short-term federal funds sold, interest earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold classified as short-term generally mature in 90 days or less.

Certificates of Deposit in Other Banks

Certificates of deposit are other investments made by the Company with other financial institutions that are carried at cost which is equal to fair value.

Cash Surrender Value - Life Insurance

The fair value of Bank-owned life insurance (BOLI) approximates the carrying amount. Upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.

Accrued Interest Receivable and Payable

For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these financial instruments.

Deposits

The fair value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Federal funds purchased and Securities Sold under Agreements to Repurchase

For Federal funds purchased and securities sold under agreements to repurchase, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period.

Subordinated Notes and Other Borrowings

The fair value of subordinated notes and other borrowings is based on the discounted value of contractual cash-flows. The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities.

A summary of the carrying amounts and fair values of the Company’s financial instruments at June 30, 2021 and December 31, 2020 is as follows:


								June 30, 2021
								Fair Value Measurements
									Quoted Prices
								in Active						Net
								Markets for			Other			Significant
		June 30, 2021						Identical			Observable			Unobservable
		Carrying			Fair			Assets			Inputs			Inputs
(in thousands)		amount			value			(Level 1)			(Level 2)			(Level 3)
Assets:
Cash and due from banks		$	17,920		$	17,920		$	17,920		$	—		$	—
Federal funds sold and overnight interest-bearing deposits			58,514			58,514			58,514			—			—
Certificates of deposit in other banks			7,165			7,165			7,165			—			—
Available-for-sale securities			276,013			276,013			3,034			272,979			—
Other investment securities			6,009			6,009			45			5,964			—
Loans, net			1,275,159			1,299,656			—			—			1,299,656
Loans held for sale			2,487			2,565			—			—			2,565
Cash surrender value - life insurance			2,480			2,480			—			2,480			—
Accrued interest receivable			6,849			6,849			6,849			—			—
Total		$	1,652,596		$	1,677,171		$	93,527		$	281,423		$	1,302,221
Liabilities:
Deposits:
Non-interest bearing demand		$	433,288		$	433,288		$	433,288		$	—		$	—
Savings, interest checking and money market			704,236			704,236			704,236			—			—
Time deposits			243,477			244,871			—			—			244,871
Federal funds purchased and securities sold under agreements to repurchase			32,018			32,018			32,018			—			—
Federal Home Loan Bank advances and other borrowings			93,554			95,314			—			95,314			—
Subordinated notes			49,486			41,424			—			41,424			—
Accrued interest payable			376			376			376			—			—
Total		$	1,556,435		$	1,551,527		$	1,169,918		$	136,738		$	244,871


								December 31, 2020
								Fair Value Measurements
								Quoted Prices
								in Active						Net
								Markets for			Other			Significant
		December 31, 2020						Identical			Observable			Unobservable
		Carrying			Fair			Assets			Inputs			Inputs
(in thousands)		amount			value			(Level 1)			(Level 2)			(Level 3)
Assets:
Cash and due from banks		$	19,235		$	19,235		$	19,235		$	—		$	—
Federal funds sold and overnight interest-bearing deposits			161,128			161,128			161,128			—			—
Certificates of deposit in other banks			9,376			9,376			9,376			—			—
Available-for-sale securities			198,030			198,030			2,798			195,232			—
Other investment securities			6,353			6,353			32			6,321			—
Loans, net			1,268,854			1,288,677			—			—			1,288,677
Loans held for sale			5,099			5,279			—			—			5,279
Cash surrender value - life insurance			2,451			2,451			—			2,451			—
Accrued interest receivable			6,640			6,640			6,640			—			—
Total		$	1,677,166		$	1,697,169		$	199,209		$	204,004		$	1,293,956
Liabilities:
Deposits:
Non-interest bearing demand		$	382,492		$	382,492		$	382,492		$	—		$	—
Savings, interest checking and money market			723,808			723,808			723,808			—			—
Time deposits			277,306			279,569			—			—			279,569
Federal funds purchased and securities sold under agreements to repurchase			45,154			45,154			45,154			—			—
Federal Home Loan Bank advances and other borrowings			106,674			110,121			—			110,121			—
Subordinated notes			49,486			40,929			—			40,929			—
Accrued interest payable			837			837			837			—			—
Total		$	1,585,757		$	1,582,910		$	1,152,291		$	151,050		$	279,569

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms that are competitive in the markets in which it operates.

Limitations

The fair value estimates provided are made at a point in time based on market information and information about the financial instruments. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.