Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurement, 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 condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

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.

Loans Held-for-Sale

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).

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 interest rate lock commitments (“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 condensed 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 June 30, 2015 and December 31, 2014.



			June 30, 2015 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	$	27,572	$	—	$	27,572	$	—
Municipal securities	14,779		—		14,779		—
Mortgage-backed securities	106,674		—		106,674		—
Asset-backed securities	19,452		—		19,452		—
Corporate securities	19,305		—		19,305		—
Other securities	2,985		2,985		—		—
Total available-for-sale securities	190,767		2,985		187,782		—
Loans held-for-sale (mandatory pricing agreements)	28,494		—		28,494		—
Forward contracts	240		240		—		—
Interest rate lock commitments	623		—		—		623



				December 31, 2014 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	$	13,552		$	—		$	13,552	$	—
Mortgage-backed securities	117,048			—			117,048		—
Asset-backed securities	4,912			—			4,912		—
Other securities	2,006			2,006			—		—
Total available-for-sale securities	137,518			2,006			135,512		—
Loans held-for-sale (mandatory pricing agreements)	32,618			—			32,618		—
Forward contracts	(405		)	(405		)	—		—
Interest rate lock commitments	521			—			—		521

The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the three and six month periods ended June 30, 2015 and June 30, 2014.



	Three Months Ended
	Securities Available-for- Sale			Interest Rate Lock Commitments
Balance, April 1, 2015	$	—		$	913
Total realized losses
Included in net income	—			(290		)
Balance, June 30, 2015	$	—		$	623

Balance, April 1, 2014	$	1,811		$	170
Total realized and unrealized gains (losses)
Included in net income	(259		)	277
Included in other comprehensive income (loss)	(1,552		)	—
Balance, June 30, 2014	$	—		$	447



	Six Months Ended
	Securities Available-for- Sale			Interest Rate Lock Commitments
Balance, January 1, 2015	$	—		$	521
Total realized gains
Included in net income	—			102
Balance, June 30, 2015	$	—		$	623

Balance as of January 1, 2014	$	1,673		$	79
Total realized and unrealized gains (losses)
Included in net income	(259		)	368
Included in other comprehensive income (loss)	(1,414		)	—
Balance, June 30, 2014	$	—		$	447

The following describes 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. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral, less costs to sell, for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

The following tables present the fair value measurements of impaired loans recognized in the accompanying condensed consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at June 30, 2015 and December 31, 2014.



			June 30, 2015 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	$	46	$	—	$	—	$	46

December 31, 2014
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

—

Significant Unobservable (Level 3) Inputs

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



	Fair Value at June 30, 2015		Valuation Technique	Significant Unobservable Inputs	Range
Collateral dependent impaired loans	$	46	Fair value of collateral	Discount for type of property and current market conditions	23%
IRLCs	623		Discounted cash flow	Loan closing rates	42% - 98%



	Fair Value at December 31, 2014		Valuation Technique	Significant Unobservable Inputs	Range
IRLCs	$	521	Discounted cash flow	Loan closing rates	40% - 95%

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed 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.

Interest-Bearing Time Deposits

The fair value of these financial instruments approximates carrying value.

Loans Held-for-Sale

The fair value of these loans approximates carrying value.

Loans Receivable

The fair value of loans receivable is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities.

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 available for advances with similar remaining maturities. The carrying value of variable rate advances approximates fair value.

Subordinated Debt

The fair value of our 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 each of June 30, 2015 and December 31, 2014.

The following tables summarize the carrying value and estimated fair value of all financial assets and liabilities at June 30, 2015 and December 31, 2014.



			June 30, 2015 Fair Value Measurements Using
	Carrying Amount		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	$	30,602	$	30,602	$	—	$	—
Interest-bearing time deposits	1,250		1,250		—		—
Loans held-for-sale (best efforts pricing agreements)	1,378		—		1,378		—
Loans receivable	814,243		—		—		816,554
Accrued interest receivable	3,550		3,550		—		—
Federal Home Loan Bank of Indianapolis stock	6,946		—		6,946		—
Deposits	856,503		402,012		—		456,250
Advances from Federal Home Loan Bank	140,935		—		137,149		—
Subordinated debt	2,915		—		3,044		—
Accrued interest payable	108		108		—		—



			December 31, 2014 Fair Value Measurements Using
	Carrying Amount		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	$	28,289	$	28,289	$	—	$	—
Interest-bearing time deposits	2,000		2,000		—		—
Loans held-for-sale (best efforts pricing agreements)	2,053		—		2,053		—
Loans receivable	732,426		—		—		733,538
Accrued interest receivable	2,833		2,833		—		—
Federal Home Loan Bank of Indianapolis stock	5,350		—		5,350		—
Deposits	758,598		383,847		—		377,067
Advances from Federal Home Loan Bank	106,897		—		107,743		—
Subordinated debt	2,873		—		3,094		—
Accrued interest payable	97		97		—		—