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Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | 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. ASC 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. 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 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 September 30, 2021 or December 31, 2020. 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 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 value of interest rate swap agreements is 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 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 September 30, 2021 and December 31, 2020.
|  |  |  | September 30, 2021 Fair Value Measurements Using
(in thousands) |  | 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 |  | $ | 52,455 |  |  | $ | — |  |  | $ | 52,455 |  |  | $ | — |
Municipal securities |  | 77,450 |  |  | — |  |  | 77,450 |  |  | — |
Agency mortgage-backed securities |  | 429,885 |  |  | — |  |  | 429,885 |  |  | — |
Private label mortgage-backed securities |  | 20,235 |  |  |  |  | 20,235 |  |  | — |
Asset-backed securities |  | 5,005 |  |  | — |  |  | 5,005 |  |  | — |
Corporate securities |  | 48,977 |  |  | — |  |  | 48,977 |  |  | — |
Total available-for-sale securities |  | 634,007 |  |  | — |  |  | 634,007 |  |  | — |
Loans held-for-sale (mandatory pricing agreements) |  | 19,181 |  |  | — |  |  | 19,181 |  |  | — |
Servicing asset |  | 4,412 |  |  | — |  |  | — |  |  | 4,412 |
Interest rate swap agreements |  | (18,710) |  |  | — |  |  | (18,710) |  |  | — |
Forward contracts |  | 458 |  |  | 458 |  |  | — |  |  | — |
IRLCs |  | 840 |  |  | — |  |  | — |  |  | 840 |
|  |  |  | December 31, 2020 Fair Value Measurements Using
(in thousands) |  | 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 |  |  | — |
Loans held-for-sale (mandatory pricing agreements) |  | 26,341 |  |  | — |  |  | 26,341 |  |  | — |
Servicing asset |  | 3,569 |  |  | — |  |  | — |  |  | 3,569 |
Interest rate swap agreements |  | (29,750) |  |  | — |  |  | (29,750) |  |  | — |
Forward contracts |  | (640) |  |  | (640) |  |  | — |  |  | — |
IRLCs |  | 3,361 |  |  | — |  |  | — |  |  | 3,361 |
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 nine months ended September 30, 2021 and 2020.
|  |  |  | Three Months Ended
(in thousands) |  |  |  | Servicing Asset |  | Interest Rate Lock Commitments
Balance, July 1, 2021 |  |  |  | $ | 4,120 |  |  | $ | 818 |
Total realized gains |  |  |  |  |  |
Additions |  |  |  | 566 |  |  | — |
Paydowns |  |  |  | (176) |  |  | — |
Change in fair value |  |  |  | (98) |  |  | 22 |
Balance, September 30, 2021 |  |  |  | 4,412 |  |  | 840 |
Balance as of July 1, 2020 |  |  |  | $ | 2,522 |  |  | $ | 282 |
Total realized gains |  |  |  |  |  |
Additions |  |  |  | 399 |  |  | — |
Paydowns |  |  |  | (103) |  |  | — |
Change in fair value |  |  |  | — |  |  | 2,834 |
Balance, September 30, 2020 |  |  |  | $ | 2,818 |  |  | $ | 3,116 |
|  |  |  | Nine Months Ended
(in thousands) |  |  |  | Servicing Asset |  | Interest Rate Lock Commitments
Balance, January 1, 2021 |  |  |  | $ | 3,569 |  |  | $ | 3,361 |
Total realized gains |  |  |  |  |  |
Additions |  |  |  | 1,512 |  |  | — |
Paydowns |  |  |  | (500) |  |  | — |
Change in fair value |  |  |  | (169) |  |  | (2,521) |
Balance, September 30, 2021 |  |  |  | 4,412 |  |  | 840 |
Balance as of January 1, 2020 |  |  |  | $ | 2,481 |  |  | $ | 910 |
Total realized gains |  |  |  |  |  |
Additions |  |  |  | 709 |  |  | — |
Paydowns |  |  |  | (372) |  |  | — |
Change in fair value |  |  |  | — |  |  | 2,206 |
Balance, September 30, 2020 |  |  |  | $ | 2,818 |  |  | $ | 3,116 |
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 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. The following table presents the fair value measurements of assets and liabilities 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 measurement falls at September 30, 2021 and December 31, 2020.
|  |  |  | September 30, 2021
(in thousands) |  |  |  | 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 |  | $ | 3,747 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,747 |
|  |  |  | December 31, 2020
(in thousands) |  |  |  | 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 |
Significant Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.
(dollars in thousands) |  | Fair Value at September 30, 2021 |  | Valuation Technique |  | Significant Unobservable Inputs |  | Range |  | Weighted-Average Range
Impaired loans |  | $ | 3,747 |  |  | Fair value of collateral |  | Discount for type of property and current market conditions |  | 10% |  | 10%
IRLCs |  | 840 |  |  | Discounted cash flow |  | Loan closing rates |  | 51% - 100% |  | 90%
Servicing asset |  | 4,412 |  |  | Discounted cash flow |  | Prepayment speeds Discount rate |  | 0% - 25% 10% |  | 12.8% 10%
(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%
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. Securities Held-to-Maturity 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 municipal securities and 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 September 30, 2021 or December 31, 2020. 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 available for advances with 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 each of September 30, 2021 and December 31, 2020. The following tables present the carrying value and estimated fair value of all financial assets and liabilities at September 30, 2021 and December 31, 2020.
|  | September 30, 2021 Fair Value Measurements Using
(in thousands) |  | 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 |  | $ | 407,515 |  |  | $ | 407,515 |  |  | $ | 407,515 |  |  | $ | — |  |  | $ | — |
Securities held-to-maturity |  | 62,129 |  |  | 64,337 |  |  | — |  |  | 64,337 |  |  | — |
Loans held-for-sale (best efforts pricing agreements) |  | 24,789 |  |  | 24,789 |  |  | — |  |  | 24,789 |  |  | — |
Net loans |  | 2,908,148 |  |  | 2,969,845 |  |  | — |  |  | — |  |  | 2,969,845 |
Accrued interest receivable |  | 14,866 |  |  | 14,866 |  |  | 14,866 |  |  | — |  |  | — |
Federal Home Loan Bank of Indianapolis stock |  | 25,650 |  |  | 25,650 |  |  | — |  |  | 25,650 |  |  | — |
Deposits |  | 3,224,595 |  |  | 3,244,427 |  |  | 1,857,794 |  |  | — |  |  | 1,386,633 |
Advances from Federal Home Loan Bank |  | 514,920 |  |  | 532,605 |  |  | — |  |  | 532,605 |  |  | — |
Subordinated debt |  | 104,156 |  |  | 110,114 |  |  | 39,960 |  |  | 70,154 |  |  | — |
Accrued interest payable |  | 1,568 |  |  | 1,568 |  |  | 1,568 |  |  | — |  |  | — |
|  | December 31, 2020 Fair Value Measurements Using
(in thousands) |  | 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 |  |  | — |  |  | — |

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- 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 Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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