XML 39 R26.htm IDEA: XBRL DOCUMENT

Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2020

ASC Topic 820, Fair Value Measurements, defines fair value 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. ASU Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

Level 2 securities include U.S. Government-sponsored agencies, municipal securities, mortgage and asset-backed securities and certain corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but also on the investment securities’ relationship to other benchmark quoted investment securities.

In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of December 31, 2020 or 2019.

Loans Held-for-Sale (mandatory pricing agreements)

The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).

Servicing Asset

Fair value is based on a loan-by-loan basis taking into consideration the original to maturity of the loans, the current age of the loans and the remaining term to maturity. The valuation methodology utilized for the servicing assets begins with generating estimated future cash flows for each servicing asset, based on their unique characteristics and market-based assumptions for prepayment speeds and costs to service. The present value of the future cash flows is then calculated utilizing market-based discount rate assumptions (Level 3).

Interest Rate Swap Agreements

The fair values of interest rate swap agreements are estimated using current market interest rates as of the balance sheet date and calculated using discounted cash flows that are observable or that can be corroborated by observable market data (Level 2).

Forward Contracts

The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets, or benchmarked thereto (Level 1).

Interest Rate Lock Commitments

The fair values of IRLCs are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2020 and 2019.


			December 31, 2020
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government-sponsored agencies	$	60,545	$	—	$	60,545	$	—
Municipal securities	82,489		—		82,489		—
Agency mortgage-backed securities	243,921		—		243,921		—
Private-label mortgage-backed securities	58,116		—		58,116		—
Asset-backed securities	4,961		—		4,961		—
Corporate securities	47,596		—		47,596		—

Total available-for-sale securities	$	497,628	$	—	$	497,628	$	—
Servicing asset	3,569		—		—		3,569

Interest rate swaps liabilities	(17,606)		—		(17,606)		—
Loans held-for-sale (mandatory pricing agreements)	26,341		—		26,341		—
Forward contracts	(640)		(640)		—		—
IRLCs	3,361		—		—		3,361


			December 31, 2019
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government-sponsored agencies	$	75,872	$	—	$	75,872	$	—
Municipal securities	97,652		—		97,652		—
Agency mortgage-backed securities	261,440		—		261,440		—
Private-label mortgage-backed securities	63,613		—		63,613		—
Asset-backed securities	4,955		—		4,955		—
Corporate securities	37,320				37,320

Total available-for-sale securities	$	540,852	$	—	$	540,852	$	—

Servicing asset	2,481		—		—		2,481
Interest rate swaps liabilities	(37,786)		—		(37,786)		—
Loans held-for-sale (mandatory pricing agreements)	56,097		—		56,097		—
Forward contracts	(153)		(153)		—		—
IRLCs	910		—		—		910

The following table reconciles the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs.


	Servicing Asset		Interest Rate Lock Commitments
Balance as of January 1, 2018	$	—	$	551
Total realized losses
Additions	—		(162)


Balance, December 31, 2018	—		389
Total realized gains
Additions	2,481		521


Balance, December 31, 2019	2,481		910
Total realized gains
Additions	1,520		2,451
Change in fair value	(432)		—

Balance, December 31, 2020	$	3,569	$	3,361

The following describes the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The amount of the impairment may be determined based on the fair value of the underlying collateral, less costs to sell, the estimated present value of future cash flows or the loan’s observable market price.

If the impaired loan is identified as collateral dependent, the fair value of the underlying collateral, less costs to sell, is used to measure impairment. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is not collateral dependent, the Company utilizes a discounted cash flow analysis to measure impairment.

Impaired loans with a specific valuation allowance based on the value of the underlying collateral or a discounted cash flow analysis are classified as Level 3 assets.



		2020
		Fair Value Measurements Using
	Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Impaired loans	4,026	—	—	4,026



		2019
		Fair Value Measurements Using
	Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Impaired loans	3,019	—	—	3,019

Unobservable (Level 3) Inputs

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.


(dollars in thousands)	Fair Value at December 31, 2020		Valuation Technique	Significant Unobservable Inputs	Range	Weighted-Average Range

Impaired loans	$	4,026	Fair value of collateral	Discount for type of property and current market conditions	10%	10%
IRLCs	3,361		Discounted cash flow	Loan closing rates	44% - 100%	87%
Servicing asset	3,569		Discounted cash flow	Prepayment speeds Discount rate	0% - 25% 10%	12.1% 10%


(dollars in thousands)	Fair Value at December 31, 2019		Valuation Technique	Unobservable Inputs	Range	Weighted - Average Range

Impaired loans	$	3,019	Fair value of collateral	Discount to reflect current market conditions	10%	10%
IRLCs	910		Discounted cash flow	Loan closing rates	50% - 100%	84%
Servicing asset	2,481		Discounted cash flow	Prepayment speeds	0% - 25%	13.5%

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value:

Cash and Cash Equivalents

For these instruments, the carrying amount is a reasonable estimate of fair value.

Held-to-Maturity Securities

Fair values are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, and interest rate spreads on relevant benchmark securities.

Loans Held-For-Sale (best efforts pricing agreements)

The fair value of these loans approximates carrying value.

Loans

The fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.

Accrued Interest Receivable

The fair value of these financial instruments approximates carrying value.

Federal Home Loan Bank of Indianapolis Stock

The fair value approximates carrying value.

Deposits

The fair value of noninterest-bearing and interest-bearing demand deposits, savings and money market accounts approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated using rates currently offered for deposits of similar remaining maturities.

Advances from Federal Home Loan Bank

The fair value of fixed rate advances is estimated using rates currently offered for similar remaining maturities. The carrying value of variable rate advances approximates fair value.

Subordinated Debt

The fair value of the Company’s publicly traded subordinated debt is obtained from quoted market prices. The fair value of the Company’s remaining subordinated debt is estimated using discounted cash flow analysis, based on current borrowing rates for similar types of debt instruments.

Accrued Interest Payable

The fair value of these financial instruments approximates carrying value.

Commitments

The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at December 31, 2020 and 2019.

The following tables summarize the carrying value and estimated fair value of all financial assets and liabilities at December 31, 2020 and 2019:


	December 31, 2020
	Fair Value Measurements Using
	Carrying Amount		Fair Value		Quoted Prices In Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	419,806	$	419,806	$	419,806	$	—	$	—

Securities held-to-maturity	68,223		69,452		—		69,452		—
Loans held-for-sale (best efforts pricing agreements)	13,243		13,243		—		13,243		—
Net loans	3,029,747		3,084,375		—		—		3,084,375
Accrued interest receivable	17,416		17,416		17,416		—		—
Federal Home Loan Bank of Indianapolis stock	25,650		25,650		—		25,650		—

Deposits	3,270,885		3,307,038		1,679,164		—		1,627,874
Advances from Federal Home Loan Bank	514,916		541,945		—		541,945		—
Subordinated debt	79,603		83,682		63,325		20,357		—
Accrued interest payable	1,439		1,439		1,439		—		—


	December 31, 2019
	Fair Value Measurements Using
	Carrying Amount		Fair Value		Quoted Prices In Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	327,361	$	327,361	$	327,361	$	—	$	—
Securities held-to-maturity	61,878		62,560		—		62,560		—

Net loans	2,941,707		2,876,688		—		—		2,876,688
Accrued interest receivable	18,607		18,607		18,607		—		—
Federal Home Loan Bank of Indianapolis stock	25,650		25,650		—		25,650		—
Deposits	3,153,963		3,232,065		1,002,141		—		2,229,924
Advances from Federal Home Loan Bank	514,910		520,950		—		520,950		—
Subordinated debt	69,528		75,206		64,996		10,210		—
Accrued interest payable	3,767		3,767		3,767		—		—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details