Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2020

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 market 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 Federal Home Loan Bank (FHLB) stock, and Midwest Independent Bank (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.

Operating Lease Liabilities

The fair value of operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company's incremental borrowing rate at the lease commencement date.

A summary of the carrying amounts and fair values of the Company’s financial instruments at June 30, 2020 and December 31, 2019 is as follows:

					June 30, 2020
					Fair Value Measurements
						Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	June 30, 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	$	18,406	$	18,406	$	18,406	$	—	$	—
Federal funds sold and overnight interest-bearing deposits		116,255		116,255		116,255		—		—
Certificates of deposit in other banks		10,364		10,364		10,364		—		—
Available for sale securities		192,036		192,036		776		191,260		—
Other investment securities		6,976		6,976		14		6,962		—
Loans, net		1,263,993		1,283,400		—		—		1,283,400
Loans held for sale		9,041		9,352		—		—		9,352
Cash surrender value - life insurance		2,425		2,425		—		2,425		—
Accrued interest receivable		7,600		7,600		7,600		—		—
Total	$	1,627,096	$	1,646,814	$	153,415	$	200,647	$	1,292,752
Liabilities:
Deposits:
Non-interest bearing demand	$	367,828	$	367,828	$	367,828	$	—	$	—
Savings, interest checking and money market		652,429		652,429		652,429		—		—
Time deposits		307,376		310,395		—		—		310,395
Federal funds purchased and securities sold under agreements to repurchase		42,197		42,197		42,197		—		—
Federal Home Loan Bank advances and other borrowings		125,802		129,686		—		129,686		—
Subordinated notes		49,486		40,187		—		40,187		—
Operating lease liabilities		2,099		2,099				2,099
Accrued interest payable		901		901		901		—		—
Total	$	1,548,118	$	1,545,722	$	1,063,355	$	171,972	$	310,395

					December 31, 2019
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2019				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	22,576	$	22,576	$	22,576	$	—	$	—
Federal funds sold and overnight interest-bearing deposits		55,545		55,545		55,545		—		—
Certificates of deposit in other banks		10,862		10,862		10,862		—		—
Available-for-sale securities		175,093		175,093		995		174,098		—
Other investment securities		5,808		5,808		13		5,795		—
Loans, net		1,156,320		1,148,339		—		—		1,148,339
Loans held for sale		428		435		—		—		435
Cash surrender value - life insurance		2,398		2,398		—		2,398		—
Accrued interest receivable		6,481		6,481		6,481		—		—
	$	1,435,511	$	1,427,537	$	96,472	$	182,291	$	1,148,774
Liabilities:
Deposits:
Non-interest bearing demand	$	261,166	$	261,166	$	261,166	$	—	$	—
Savings, interest checking and money market		614,331		614,331		614,331		—		—
Time deposits		311,024		311,489		—		—		311,489
Federal funds purchased and securities sold under agreements to repurchase		27,272		27,272		27,272		—		—
Federal Home Loan Bank advances and other borrowings		96,919		97,833		—		97,833		—
Subordinated notes		49,486		43,640		—		43,640		—
Operating lease liabilities		2,224		2,224		—		2,224		—
Accrued interest payable		1,136		1,136		1,136		—		—
	$	1,363,558	$	1,359,091	$	903,905	$	143,697	$	311,489

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.