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FAIR VALUE DISCLOSURES | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
FAIR VALUE DISCLOSURES | FAIR VALUE DISCLOSURES Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2 Significant other 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. Level 3 Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument: Securities: Securities available-for-sale are valued primarily by a third party pricing service. The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs). The Company’s Finance Department, which is responsible for all accounting and SEC disclosure compliance, and the Company’s Treasury Department, which is responsible for investment portfolio management and asset/liability modeling, are the two areas that determine the Company’s valuation policies and procedures. Both of these areas report directly to the Executive Vice President and Chief Financial Officer of the Company. For assets or liabilities that may be considered for Level 3 fair value measurement on a recurring basis, these two departments and the Executive Vice President and Chief Financial Officer determine the appropriate level of the assets or liabilities under consideration. If there are new assets or liabilities that are determined to be Level 3 by this group, the Risk Management Committee of the Company and the Audit Committee of the Board are made aware of such assets at their next scheduled meeting. Securities pricing is obtained on securities from a third party pricing service and all security prices are tested annually against prices from another third party provider and reviewed with a market value price tolerance variance that varies by sector: municipal securities +/-5%, government mbs/cmo +/-3% and U.S. treasuries +/-1%. If any securities fall outside the tolerance threshold and have a variance of $100,000 or more, a determination of materiality is made for the amount over the threshold. Any security that would have a material threshold difference would be further investigated to determine why the variance exists and if any action is needed concerning the security pricing for that individual security. Changes in market value are reviewed monthly in aggregate by security type and any material changes are reviewed to determine why they exist. At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair valued using unobservable inputs by the pricing service. Mortgage banking derivative: The fair values of mortgage banking derivatives are based on observable market data as of the measurement date (Level 2). Interest rate swap derivatives: Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value of interest rate swap derivatives is determined by pricing or valuation models using observable market data as of the measurement date (Level 2). Collateral dependent loans: Collateral dependent loans with specific allocations of the allowance for credit losses generally based on the fair value of the underlying collateral when repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of collateral dependent loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by 0-50% with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company’s management evaluates other types of collateral as follows: (a) raw and finished inventory is discounted from its cost or book value by 35-65%, depending on the marketability of the goods (b) finished goods are generally discounted by 30-60%, depending on the ease of marketability, cost of transportation or scope of use of the finished good (c) work in process inventory is typically discounted by 50%-100%, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base (d) equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 30-70% after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons; and (e) marketable securities are discounted by 10%-30%, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value. Mortgage servicing rights: As of September 30, 2021, the fair value of the Company’s Level 3 servicing assets for residential mortgage loans (“MSRs”) was $2.9 million, carried at amortized cost of $3.4 million less a $518,000 valuation reserve. These residential mortgage loans have a weighted average interest rate of 3.49%, a weighted average maturity of 20 years and are secured by homes generally within the Company’s market area of Northern Indiana and Indianapolis. A third-party valuation is used to estimate fair value by stratifying the portfolios on the basis of certain risk characteristics, including loan type and interest rate. Impairment is estimated based on an income approach. The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees and float income. The most significant assumption used to value MSRs is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At September 30, 2021, the constant prepayment speed (“PSA”) used was 2.67 and discount rate used was 9.5%. At December 31, 2020, the PSA used was 2.04 and the discount rate used was 9.4%. Other real estate owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are reviewed by the Company’s internal appraisal officer. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable properties used to determine value. Such adjustments are usually significant and result in a Level 3 classification. In addition, the Company’s management may apply discount factors to the appraisals to take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Real estate mortgage loans held-for-sale: Real estate mortgage loans held-for-sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors, and result in a Level 2 classification. The tables below presents the balances of assets measured at fair value on a recurring basis:
|  | September 30, 2021
|  | Fair Value Measurements Using |  | Assets at Fair Value
(dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |
Assets: |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 900 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 900 |
U.S. government sponsored agency securities |  | 0 |  |  | 116,461 |  |  | 0 |  |  | 116,461 |
Mortgage-backed securities: residential |  | 0 |  |  | 431,833 |  |  | 0 |  |  | 431,833 |
Mortgage-backed securities: commercial |  | 0 |  |  | 24,182 |  |  | 0 |  |  | 24,182 |
State and municipal securities |  | 0 |  |  | 666,199 |  |  | 140 |  |  | 666,339 |
Total Securities |  | 900 |  |  | 1,238,675 |  |  | 140 |  |  | 1,239,715 |
Mortgage banking derivative |  | 0 |  |  | 719 |  |  | 0 |  |  | 719 |
Interest rate swap derivative |  | 0 |  |  | 15,426 |  |  | 0 |  |  | 15,426 |
Total assets |  | $ | 900 |  |  | $ | 1,254,820 |  |  | $ | 140 |  |  | $ | 1,255,860 |
Liabilities: |  |  |  |  |  |  |  |
Mortgage banking derivative |  | $ | 0 |  |  | $ | 1 |  |  | $ | 0 |  |  | $ | 1 |
Interest rate swap derivative |  | 0 |  |  | 15,447 |  |  | 0 |  |  | 15,447 |
Total liabilities |  | $ | 0 |  |  | $ | 15,448 |  |  | $ | 0 |  |  | $ | 15,448 |
|  | December 31, 2020
|  | Fair Value Measurements Using |  | Assets at Fair Value
(dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |
Assets: |  |  |  |  |  |  |  |
U.S. government sponsored agency securities |  | $ | 0 |  |  | $ | 36,487 |  |  | $ | 0 |  |  | $ | 36,487 |
Mortgage-backed securities: residential |  | 0 |  |  | 279,503 |  |  | 0 |  |  | 279,503 |
Mortgage-backed securities: commercial |  | 0 |  |  | 36,881 |  |  | 0 |  |  | 36,881 |
State and municipal securities |  | 0 |  |  | 381,834 |  |  | 140 |  |  | 381,974 |
Total Securities |  | 0 |  |  | 734,705 |  |  | 140 |  |  | 734,845 |
Mortgage banking derivative |  | 0 |  |  | 1,182 |  |  | 0 |  |  | 1,182 |
Interest rate swap derivative |  | 0 |  |  | 21,764 |  |  | 0 |  |  | 21,764 |
Total assets |  | $ | 0 |  |  | $ | 757,651 |  |  | $ | 140 |  |  | $ | 757,791 |
Liabilities: |  |  |  |  |  |  |  |
Mortgage banking derivative |  | $ | 0 |  |  | $ | 111 |  |  | $ | 0 |  |  | $ | 111 |
Interest rate swap derivative |  | 0 |  |  | 21,794 |  |  | 0 |  |  | 21,794 |
Total liabilities |  | $ | 0 |  |  | $ | 21,905 |  |  | $ | 0 |  |  | $ | 21,905 |
The fair value of Level 3 available-for-sale securities was immaterial and thus did not require additional recurring fair value disclosure. The tables below presents the balances of assets measured at fair value on a nonrecurring basis:
|  | September 30, 2021
|  | Fair Value Measurements Using |  | Assets at Fair Value
(dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |
Assets |  |  |  |  |  |  |  |
Collateral dependent loans: |  |  |  |  |  |  |  |
Commercial and industrial loans: |  |  |  |  |  |  |  |
Working capital lines of credit loans |  | $ | 0 |  |  | $ | 0 |  |  | $ | 9,982 |  |  | $ | 9,982 |
Non-working capital loans |  | 0 |  |  | 0 |  |  | 7,525 |  |  | 7,525 |
Commercial real estate and multi-family residential loans: |  |  |  |  |  |  |  |
Owner occupied loans |  | 0 |  |  | 0 |  |  | 652 |  |  | 652 |
Nonowner occupied loans |  | 0 |  |  | 0 |  |  | 3,131 |  |  | 3,131 |
Agri-business and agricultural loans: |  |  |  |  |  |  |  |
Loans secured by farmland |  | 0 |  |  | 0 |  |  | 43 |  |  | 43 |
Total collateral dependent loans |  | 0 |  |  | 0 |  |  | 21,333 |  |  | 21,333 |
Other real estate owned |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Total assets |  | $ | 0 |  |  | $ | 0 |  |  | $ | 21,333 |  |  | $ | 21,333 |
|  | December 31, 2020
|  | Fair Value Measurements Using |  | Assets at Fair Value
(dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |
Assets |  |  |  |  |  |  |  |
Collateral dependent loans: |  |  |  |  |  |  |  |
Commercial and industrial loans: |  |  |  |  |  |  |  |
Working capital lines of credit loans |  | $ | 0 |  |  | $ | 0 |  |  | $ | 178 |  |  | $ | 178 |
Non-working capital loans |  | 0 |  |  | 0 |  |  | 4,904 |  |  | 4,904 |
Commercial real estate and multi-family residential loans: |  |  |  |  |  |  |  |
Owner occupied loans |  | 0 |  |  | 0 |  |  | 1,211 |  |  | 1,211 |
Agri-business and agricultural loans: |  |  |  |  |  |  |  |
Loans secured by farmland |  | 0 |  |  | 0 |  |  | 61 |  |  | 61 |
Consumer 1‑4 family mortgage loans: |  |  |  |  |  |  |  |
Closed end first mortgage loans |  | 0 |  |  | 0 |  |  | 411 |  |  | 411 |
Total collateral dependent loans |  | 0 |  |  | 0 |  |  | 6,765 |  |  | 6,765 |
Other real estate owned |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Total assets |  | $ | 0 |  |  | $ | 0 |  |  | $ | 6,765 |  |  | $ | 6,765 |
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at September 30, 2021:
(dollars in thousands) |  | Fair Value |  | Valuation Methodology |  | Unobservable Inputs |  | Average |  | Range of Inputs
Collateral dependent loans: |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 17,507 |  |  | Collateral based measurements |  | Discount to reflect current market conditions and ultimate collectability |  | 58 | % |  | 25%-99%
Collateral dependent loans: |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | 3,783 |  |  | Collateral based measurements |  | Discount to reflect current market conditions and ultimate collectability |  | 38 | % |  | 7%-99%
Collateral dependent loans: |  |  |  |  |  |  |  |  |  |
Agribusiness and agricultural |  | 43 |  |  | Collateral based measurements |  | Discount to reflect current market conditions and ultimate collectability |  | 70 | % |  | N/A
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2020:
(dollars in thousands) |  | Fair Value |  | Valuation Methodology |  | Unobservable Inputs |  | Average |  | Range of Inputs
Collateral dependent loans: |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 5,082 |  |  | Collateral basedmeasurements |  | Discount to reflect current market conditions and ultimate collectability |  | 55 | % |  | 16%-100%
Collateral dependent loans: |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | 1,211 |  |  | Collateral basedmeasurements |  | Discount to reflect current market conditions and ultimate collectability |  | 53 | % |  | 21%-74%
Collateral dependent loans: |  |  |  |  |  |  |  |  |  |
Agribusiness and agricultural |  | 61 |  |  | Collateral basedmeasurements |  | Discount to reflect current market conditions and ultimate collectability |  | 58 | % |  | N/A
Collateral dependent loans: |  |  |  |  |  |  |  |  |  |
Consumer 1-4 family mortgage |  | 411 |  |  | Collateral basedmeasurements |  | Discount to reflect current market conditions and ultimate collectability |  | 11 | % |  | 10%-15%
The following tables contain the estimated fair values and the related carrying values of the Company’s financial instruments. Items which are not financial instruments are not included.
|  | September 30, 2021
|  | Carrying Value |  | Estimated Fair Value
(dollars in thousands) |  |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Financial Assets: |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 557,233 |  |  | $ | 555,522 |  |  | $ | 1,711 |  |  | $ | 0 |  |  | $ | 557,233 |
Securities available-for-sale |  | 1,239,715 |  |  | 900 |  |  | 1,238,675 |  |  | 140 |  |  | 1,239,715 |
Real estate mortgages held-for-sale |  | 7,969 |  |  | 0 |  |  | 8,133 |  |  | 0 |  |  | 8,133 |
Loans, net |  | 4,166,405 |  |  | 0 |  |  | 0 |  |  | 4,101,098 |  |  | 4,101,098 |
Mortgage banking derivative |  | 719 |  |  | 0 |  |  | 719 |  |  | 0 |  |  | 719 |
Interest rate swap derivative |  | 15,426 |  |  | 0 |  |  | 15,426 |  |  | 0 |  |  | 15,426 |
Federal Reserve and Federal Home Loan Bank Stock |  | 13,772 |  |  | N/A |  | N/A |  | N/A |  | N/A
Accrued interest receivable |  | 17,780 |  |  | 0 |  |  | 6,710 |  |  | 11,070 |  |  | 17,780 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |
Certificates of deposit |  | (864,902) |  |  | 0 |  |  | (869,759) |  |  | 0 |  |  | (869,759) |
All other deposits |  | (4,549,736) |  |  | (4,549,736) |  |  | 0 |  |  | 0 |  |  | (4,549,736) |
Federal Home Loan Bank advances |  | (75,000) |  |  | 0 |  |  | (66,596) |  |  | 0 |  |  | (66,596) |
Mortgage banking derivative |  | (1) |  |  | 0 |  |  | (1) |  |  | 0 |  |  | (1) |
Interest rate swap derivative |  | (15,447) |  |  | 0 |  |  | (15,447) |  |  | 0 |  |  | (15,447) |
Standby letters of credit |  | (334) |  |  | 0 |  |  | 0 |  |  | (334) |  |  | (334) |
Accrued interest payable |  | (2,916) |  |  | (72) |  |  | (2,844) |  |  | 0 |  |  | (2,916) |
|  | December 31, 2020
|  | Carrying Value |  | Estimated Fair Value
(dollars in thousands) |  |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Financial Assets: |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 249,927 |  |  | $ | 247,228 |  |  | $ | 2,699 |  |  | $ | 0 |  |  | $ | 249,927 |
Securities available-for-sale |  | 734,845 |  |  | 0 |  |  | 734,705 |  |  | 140 |  |  | 734,845 |
Real estate mortgages held-for-sale |  | 11,218 |  |  | 0 |  |  | 11,651 |  |  | 0 |  |  | 11,651 |
Loans, net |  | 4,587,748 |  |  | 0 |  |  | 0 |  |  | 4,532,639 |  |  | 4,532,639 |
Mortgage banking derivative |  | 1,182 |  |  | 0 |  |  | 1,182 |  |  | 0 |  |  | 1,182 |
Interest rate swap derivative |  | 21,764 |  |  | 0 |  |  | 21,764 |  |  | 0 |  |  | 21,764 |
Federal Reserve and Federal Home Loan Bank Stock |  | 13,772 |  |  | N/A |  | N/A |  | N/A |  | N/A
Accrued interest receivable |  | 18,761 |  |  | 0 |  |  | 3,801 |  |  | 14,960 |  |  | 18,761 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |
Certificates of deposit |  | (1,024,819) |  |  | 0 |  |  | (1,033,095) |  |  | 0 |  |  | (1,033,095) |
All other deposits |  | (4,011,986) |  |  | (4,011,986) |  |  | 0 |  |  | 0 |  |  | (4,011,986) |
Miscellaneous borrowings |  | (10,500) |  |  | 0 |  |  | (10,500) |  |  | 0 |  |  | (10,500) |
Federal Home Loan Bank advances |  | (75,000) |  |  | 0 |  |  | (68,967) |  |  | 0 |  |  | (68,967) |
Mortgage banking derivative |  | (111) |  |  | 0 |  |  | (111) |  |  | 0 |  |  | (111) |
Interest rate swap derivative |  | (21,794) |  |  | 0 |  |  | (21,794) |  |  | 0 |  |  | (21,794) |
Standby letters of credit |  | (686) |  |  | 0 |  |  | 0 |  |  | (686) |  |  | (686) |
Accrued interest payable |  | (5,959) |  |  | (66) |  |  | (5,893) |  |  | 0 |  |  | (5,959) |

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- Definition The entire disclosure of the fair value measurement of assets and liabilities, which includes financial instruments measured at fair value that are classified in shareholders' equity, which may be measured on a recurring or nonrecurring basis. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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