Financial Instruments

6 Months Ended

Jun. 30, 2020

Financial Instruments, Owned, at Fair Value [Abstract]

Fair value estimates are generally subjective in nature and are dependent upon a number of significant assumptions associated with each instrument or group of similar instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows and relevant available market information. Fair value information is intended to represent an estimate of an amount at which a financial instrument could be exchanged in a current transaction between a willing buyer and seller engaging in an exchange transaction. However, since there are no established trading markets for a significant portion of First Guaranty's financial instruments, First Guaranty may not be able to immediately settle financial instruments; as such, the fair values are not necessarily indicative of the amounts that could be realized through immediate settlement. In addition, the majority of the financial instruments, such as loans and deposits, are held to maturity and are realized or paid according to the contractual agreement with the customer.

Quoted market prices are used to estimate fair values when available. However, due to the nature of the financial instruments, in many instances quoted market prices are not available. Accordingly, estimated fair values have been estimated based on other valuation techniques, such as discounting estimated future cash flows using a rate commensurate with the risks involved or other acceptable methods. Fair values are estimated without regard to any premium or discount that may result from concentrations of ownership of financial instruments, possible income tax ramifications or estimated transaction costs. The fair value estimates are subjective in nature and involve matters of significant judgment and, therefore, cannot be determined with precision. Fair values are also estimated at a specific point in time and are based on interest rates and other assumptions at that date. As events change the assumptions underlying these estimates, the fair values of financial instruments will change.

Disclosure of fair values is not required for certain items such as lease financing, investments accounted for under the equity method of accounting, obligations of pension and other postretirement benefits, premises and equipment, other real estate, prepaid expenses, the value of long-term relationships with depositors (core deposit intangibles) and other customer relationships, other intangible assets and income tax assets and liabilities. Fair value estimates are presented for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses have not been considered in the estimates. Accordingly, the aggregate fair value amounts presented do not purport to represent and should not be considered representative of the underlying market or franchise value of First Guaranty.

Because the standard permits many alternative calculation techniques and because numerous assumptions have been used to estimate the fair values, reasonable comparison of the fair value information with other financial institutions' fair value information cannot necessarily be made. The methods and assumptions used to estimate the fair values of financial instruments are as follows:

Cash and due from banks, interest-bearing deposits with banks, federal funds sold and federal funds purchased.

These items are generally short-term and the carrying amounts reported in the consolidated balance sheets are a reasonable estimation of the fair values.

Investment Securities.

Fair values are principally based on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or the use of discounted cash flow analyses.

Loans Held for Sale.

Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices. These loans are classified within level 3 of the fair value hierarchy.

Loans, net.

Market values are computed present values using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. These loans are classified within level 3 of the fair value hierarchy.

Impaired loans.

Fair value of impaired loans is measured by either the fair value of the collateral if the loan is collateral dependent (Level 2 or Level 3), or the present value of expected future cash flows, discounted at the loan's effective interest rate (Level 3). Fair value of the collateral is determined by appraisals or by independent valuation.

Accrued interest receivable.

The carrying amount of accrued interest receivable approximates its fair value.

Deposits.

The fair value of demand deposits, savings and interest-bearing demand deposits is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are classified within level 3 of the fair value hierarchy.

Accrued interest payable.

The carrying amount of accrued interest payable approximates its fair value.

Borrowings.

The carrying amount of federal funds purchased and other short-term borrowings approximate their fair values. The fair value of First Guaranty's long-term borrowings is computed using net present value formulas. The present value is the sum of the present value of all projected cash flows on an item at a specified discount rate. The discount rate is set as an appropriate rate index, plus or minus an appropriate spread. Borrowings are classified within level 3 of the fair value hierarchy.

Other Unrecognized Financial Instruments.

The fair value of commitments to extend credit is estimated using the fees charged to enter into similar legally binding agreements, taking into account the remaining terms of the agreements and customers' credit ratings. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Noninterest-bearing deposits are held at cost. The fair values of letters of credit are based on fees charged for similar agreements or on estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At June 30, 2020 and December 31, 2019 the fair value of guarantees under commercial and standby letters of credit was not material.

The carrying amounts and estimated fair values of financial instruments at June 30, 2020 were as follows:


			Fair Value Measurements at June 30, 2020 Using
(in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets
Cash and due from banks	$	236,365	$	236,365	$	—	$	—	$	236,365
Federal funds sold	778		778		—		—		778
Securities, available for sale	450,538		47,700		390,024		12,814		450,538
Loans held for sale	280		—		—		280		280
Loans, net	1,626,706		—		—		1,657,356		1,657,356
Cash surrender value of BOLI	5,322		—		—		5,322		5,322
Accrued interest receivable	16,339		—		—		16,339		16,339

Liabilities
Deposits	$	2,120,998	$	—	$	—	$	2,141,119	2,141,119
Short-term advances from Federal Home Loan Bank	50,000		—		—		50,000		50,000
Repurchase agreements	6,569		—		—		6,569		6,569
Accrued interest payable	5,377		—		—		5,377		5,377
Long-term advances from Federal Home Loan Bank	3,443		—		—		3,443		3,443
Senior long-term debt	45,470		—		—		45,504		45,504
Junior subordinated debentures	14,757		—		—		15,149		15,149

The carrying amounts and estimated fair values of financial instruments at December 31, 2019 were as follows:


			Fair Value Measurements at December 31, 2019 Using
(in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets
Cash and due from banks	$	66,511	$	66,511	$	—	$	—	$	66,511
Federal funds sold	914		914		—		—		914
Securities, available for sale	339,937		—		330,539		9,398		339,937
Securities, held for maturity	86,579		—		86,817		—		86,817
Loans, net	1,514,561		—		—		1,515,277		1,515,277
Cash surrender value of BOLI	5,288		—		—		5,288		5,288
Accrued interest receivable	8,412		—		—		8,412		8,412

Liabilities
Deposits	$	1,853,013	$	—	$	—	$	1,863,179	1,863,179
Short-term advances from Federal Home Loan Bank	13,079		—		—		13,079		13,079
Repurchase agreements	6,840		—		—		6,840		6,840
Accrued interest payable	6,047		—		—		6,047		6,047
Long-term advances from Federal Home Loan Bank	3,533		—		—		3,533		3,533
Senior long-term debt	48,558		—		—		48,599		48,599
Junior subordinated debentures	14,737		—		—		14,762		14,762

There is no material difference between the contract amount and the estimated fair value of off-balance sheet items that are primarily comprised of short-term unfunded loan commitments that are generally at market prices.