12.	Fair Values of Financial Instruments

Most of our assets and liabilities are considered financial instruments. Many of these financial instruments lack an available trading market and it is our general practice and intent to hold the majority of our financial instruments to maturity. Significant estimates and assumptions were used to determine the fair value of financial instruments. These estimates are subjective in nature, involving uncertainties and matters of judgment, and therefore, fair values may not be a precise estimate. Changes in assumptions could significantly affect the estimates.

As discussed in note #2, we adopted ASU 2016-02 as of January 1, 2018. This new ASU requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. All of estimated fair values of our financial instruments in the table below at June 30, 2018 have used this exit price notion. In addition, except as discussed below in the net loans and loans held for sale section, all of our financial assets and liabilities have historically been valued using an exit price notion. This new ASU also removes the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. The methods and significant assumptions for those financial instruments measured at amortized cost disclosed below are presented for fair values at December 31, 2017.

Estimated fair values have been determined using available data and methodologies that are considered suitable for each category of financial instrument. For instruments with adjustable interest rates which reprice frequently and without significant credit risk, it is presumed that estimated fair values approximate the recorded book balances.

Cash and due from banks and interest bearing deposits: The recorded book balance of cash and due from banks and interest bearing deposits approximate fair value and are classified as Level 1.

Interest bearing deposits - time: Interest bearing deposits - time have been valued based on a model using a benchmark yield curve plus a base spread and are classified as Level 2.

Securities: Financial instrument assets actively traded in a secondary market have been valued using quoted market prices. Equity securities at fair value, trading securities and U.S. Treasury securities available for sale are classified as Level 1 while all other securities available for sale are classified as Level 2 as described in note #11.

Federal Home Loan Bank and Federal Reserve Bank stock: It is not practicable to determine the fair value of FHLB and FRB stock due to restrictions placed on transferability.

Net loans and loans held for sale: The fair value of loans at December 31, 2017 is calculated by discounting estimated future cash flows using estimated market discount rates that reflect credit and interest-rate risk inherent in the loans and do not necessarily represent an exit price. Loans are classified as Level 3. Impaired loans are valued at the lower of cost or fair value as described in note #11. Loans held for sale are classified as Level 2 as described in note #11.

Accrued interest receivable and payable: The recorded book balance of accrued interest receivable and payable approximate fair value and are classified at the same Level as the asset and liability they are associated with.

Derivative financial instruments: The fair value of rate-lock mortgage loan commitments is based on agency cash window loan pricing for comparable assets, the fair value of mandatory commitments to sell mortgage loans is based on mortgage backed security pricing for comparable assets, the fair value of interest rate swap and interest rate cap agreements is derived from proprietary models which utilize current market data whose significant fair value inputs can generally be observed in the market place and do not typically involve judgment by management and the fair value of purchased and written options is based on prices of financial instruments with similar characteristics and do not typically involve judgment by management. Each of these instruments has been classified as Level 2 as described in note #11.

Deposits: Deposits without a stated maturity, including demand deposits, savings, NOW and money market accounts, have a fair value equal to the amount payable on demand. Each of these instruments is classified as Level 1. Deposits with a stated maturity, such as time deposits have generally been valued based on the discounted value of contractual cash flows using a discount rate approximating current market rates for liabilities with a similar maturity resulting in a Level 2 classification.

Other borrowings: Other borrowings have been valued based on the discounted value of contractual cash flows using a discount rate approximating current market rates for liabilities with a similar maturity resulting in a Level 2 classification.

Subordinated debentures: Subordinated debentures have generally been valued based on a quoted market price of similar instruments resulting in a Level 2 classification.

The estimated recorded book balances and fair values follow:

					Fair Value Using
	Recorded Book Balance		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Un- observable Inputs (Level 3)
	(In thousands)
June 30, 2018
Assets
Cash and due from banks	$	36,433	$	36,433	$	36,433	$	-	$	-
Interest bearing deposits		22,278		22,278		22,278		-		-
Interest bearing deposits - time		2,478		2,472		-		2,472		-
Equity securities at fair value		336		336		336		-		-
Securities available for sale		450,593		450,593		-		450,593		-
Federal Home Loan Bank and Federal Reserve Bank Stock		16,321	NA		NA		NA		NA
Net loans and loans held for sale		2,507,944		2,477,253		-		64,131		2,413,122
Accrued interest receivable		9,722		9,722		1		1,870		7,851
Derivative financial instruments		6,307		6,307		-		6,307		-

Liabilities
Deposits with no stated maturity (1)	$	2,120,537	$	2,120,537	$	2,120,537	$	-	$	-
Deposits with stated maturity (1)		659,979		654,745		-		654,745		-
Other borrowings		40,584		40,604		-		40,604		-
Subordinated debentures		39,354		36,082		-		36,082		-
Accrued interest payable		1,331		1,331		86		1,245		-
Derivative financial instruments		2,573		2,573		-		2,573		-

December 31, 2017
Assets
Cash and due from banks	$	36,994	$	36,994	$	36,994	$	-	$	-
Interest bearing deposits		17,744		17,744		17,744		-		-
Interest bearing deposits - time		2,739		2,740		-		2,740		-
Trading securities		455		455		455		-		-
Securities available for sale		522,925		522,925		898		522,027		-
Federal Home Loan Bank and Federal Reserve Bank Stock		15,543	NA		NA		NA		NA
Net loans and loans held for sale		2,035,666		1,962,937		-		39,436		1,923,501
Accrued interest receivable		8,609		8,609		1		2,192		6,416
Derivative financial instruments		3,080		3,080		-		3,080		-

Liabilities
Deposits with no stated maturity (1)	$	1,845,716	$	1,845,716	$	1,845,716	$	-	$	-
Deposits with stated maturity (1)		554,818		551,489		-		551,489		-
Other borrowings		54,600		54,918		-		54,918		-
Subordinated debentures		35,569		29,946		-		29,946		-
Accrued interest payable		892		892		48		844		-
Derivative financial instruments		1,292		1,292		-		1,292		-

(1)

Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $22.0 million and $13.0 million at June 30, 2018 and December 31, 2017, respectively. Deposits with a stated maturity include reciprocal deposits with a recorded book balance of $44.5 million and $38.0 million June 30, 2018 and December 31, 2017, respectively.

The fair values for commitments to extend credit and standby letters of credit are estimated to approximate their aggregate book balance, which is nominal and therefore are not disclosed.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the entire holdings of a particular financial instrument.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, the value of future earnings attributable to off-balance sheet activities and the value of assets and liabilities that are not considered financial instruments.

Fair value estimates for deposit accounts do not include the value of the core deposit intangible asset resulting from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.