FAIR VALUE | 9 Months Ended |
Sep. 30, 2014 |
FAIR VALUE | ' |
FAIR VALUE | ' |
3. FAIR VALUE |
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The fair value framework as detailed by FASB ASC Topic 820, “Fair Value Measurement” requires the categorization of assets and liabilities into a three-level hierarchy based on the markets in which the financial instruments are traded and the reliability of the assumptions used to determine fair value. A brief description of each level follows. |
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Level 1 — Valuation is based upon quoted prices (unadjusted) for identical instruments in active markets. |
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Level 2 — Valuation is based upon quoted prices for identical or similar instruments in markets that are not active; quoted prices for similar instruments in active markets; or model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data. |
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Level 3 — Valuation is measured through utilization of model-based techniques that rely on at least one significant assumption not observable in the market. Any necessary unobservable assumptions used reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques. |
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Fair value estimates are based on existing financial instruments and, in accordance with GAAP, do not attempt to estimate the value of anticipated future business or the value of assets and liabilities that are not considered financial instruments. In addition, tax ramifications related to the recognition of unrealized gains and losses, such as those within the investment securities portfolio, can have a significant effect on estimated fair values and, in accordance with GAAP, have not been considered in the estimates. For these reasons, the aggregate fair value should not be considered an indication of the value of the Company. |
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Following is a description of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value, as well as a description of the methods and any significant assumptions used to estimate fair value disclosures for financial assets and liabilities not recorded at fair value in their entirety on a recurring basis. For financial assets and liabilities recorded at fair value, the description includes the level of the fair value hierarchy in which the assets for liabilities are classified. Transfers of asset or liabilities between levels of the fair value hierarchy are recognized at the beginning of the reporting period, when applicable. |
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Cash and cash equivalents: Due to the short-term nature, the carrying amount of these assets approximates the estimated fair value. The Company classifies cash and due from banks as Level 1 and interest-bearing deposits with other banks and federal funds and other short-term investments as Level 2. |
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Securities available-for-sale: Investment securities classified as available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available or the market is deemed to be inactive at the measurement date, fair values are measured utilizing independent valuation techniques of identical or similar investment securities. Third-party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities. Management reviews the methodologies and assumptions used by the third-party pricing services and evaluates the values provided, principally by comparison with other available market quotes for similar instruments and/or analysis based on internal models using available third-party market data. Level 1 securities include equity securities traded on an active exchange, such as the New York Stock Exchange. Level 2 securities include obligations issued by U.S. government-sponsored enterprises, state and municipal obligations, mortgage-backed securities issued by both U.S. government-sponsored enterprises and non-agency enterprises securities, corporate debt securities, Small Business Administration Pools and privately issued commercial mortgage-backed securities that have active markets at the measurement date. The fair value of Level 2 securities was determined using quoted prices of securities with similar characteristics or pricing models based on observable market data inputs, primarily interest rates, spreads and prepayment information. |
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Securities classified as Level 3, including an obligation of a political subdivision and a trust preferred security (included within “Corporate debt securities”) as of September 30, 2014, represent securities in less liquid markets requiring significant management assumptions when determining fair value. The fair values of these investment securities represent less than one percent of the total available-for-sale securities. The Troubled Asset Relief Program preferred securities and the trust preferred security fair values are compiled by a third-party vendor through consideration of recent trades and/or auctions of comparable securities, where applicable and are presented without adjustment. Comparable securities consider credit, structure, tenor, trade flows and cash flow characteristics. Due to the limited sales of these types of securities, significant unobservable assumptions are included to determine comparable securities to be included in the analysis. The fair value of the political subdivision obligation is determined using a discounted cash flow model prepared internally which includes a significant unobservable input related to the credit assumption of the security. Since the purchase of this security, no credit related concerns have come to the Company’s attention, therefore no adjustment for credit loss assumptions were made. |
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Federal Home Loan Bank (“FHLB”) Stock: Restricted equity securities are not readily marketable and are recorded at cost and evaluated for impairment based on the ultimate recoverability of initial cost. No significant observable market data is available for these instruments. The Company considers the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of cost. The Company believes its investments in FHLB stock are ultimately recoverable at cost. |
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Loans held for sale: Loans held for sale are carried at fair value based on the Company’s election of the fair value option. These loans currently consist of one-to-four family residential real estate loans originated for sale to qualified third parties. The fair value is determined based on quoted market rates and other market conditions considered relevant. The Company classifies loans held for sale as recurring Level 2. |
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Loans measured at fair value: During the normal course of business, loans originated with the initial intention to sell but are not ultimately sold, are transferred from held for sale to our portfolio of loans held for investment at fair value as the Company adopted the fair value option at origination. The fair value of these loans is estimated using discounted cash flows, taking into consideration current market interest rates, loan repricing characteristics and expected loan prepayment speeds, while also taking into consideration other significant unobservable inputs such as the payment history and credit quality characteristic of each individual loan and an illiquidity discount reflecting the relative illiquidity of the market. Due to the adjustments made relating to unobservable inputs, the Company classifies the loans transferred from loans held for sale as recurring Level 3. |
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Loans: The Company does not record loans at fair value on a recurring basis other than those discussed in “Loans measured at fair value” above. However, periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements. Loans, outside the scope of ASC 310-30, are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans, which include all nonaccrual loans and troubled debt restructurings, are disclosed as nonrecurring fair value measurements when an allowance is established based on the fair value of the underlying collateral. Appraisals for collateral-dependent impaired loans are prepared by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties). These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area. This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return. This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Adjustments are routinely made in the appraisal process by the appraisers to account for differences between the comparable sales and income data available. These adjustments generally range from 0% to 40% depending on the property type, as well as various sales and property characteristics including but not limited to: date of sale, size and condition of facility, quality of construction and proximity to the subject property. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics to determine if additional downward adjustments should be made. Property values are typically adjusted when management is aware of circumstances, economic changes or other conditions, since the date of the appraisal that would impact the expected selling price. Such adjustments are usually significant and result in a nonrecurring Level 3 classification. |
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Estimated fair values for loans accounted for under ASC 310-30 are based on a discounted cash flow methodology that considers factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Cash flows expected to be collected on these loans are estimated based upon the expected remaining life of the underlying loans, which includes the effects of estimated prepayments. The Company classifies the estimated fair value of loans accounted for under ASC 310-30 as Level 3. |
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For loans excluded from ASC 310-30 accounting that are not individually evaluated for impairment, fair value is estimated using a discounted cash flow model. The cash flows take into consideration current portfolio interest rates and repricing characteristics as well as assumptions relating to prepayment speeds. The discount rates take into consideration the current market interest rate environment, a credit risk component based on the credit characteristics of each loan portfolio, and a liquidity premium reflecting the liquidity or illiquidity of the market. The Company classifies the estimated fair value of non-collateral dependent loans excluded from ASC 310-30 accounting as Level 3. |
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Premises and equipment: Premises and equipment are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. Impaired premises and equipment at September 30, 2014 and December 31, 2013 were recorded at fair value based on a recent appraisal through a valuation allowance. The Company classifies impaired premises and equipment as nonrecurring Level 2. |
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FDIC indemnification asset: The fair value of the FDIC indemnification asset is estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. The Company re-estimates the expected indemnification asset cash flows in conjunction with the quarterly re-estimation of cash flows on covered loans accounted for under ASC 310-30. The expected cash flows are discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be subject to significant change. The estimates used in calculating the value of the FDIC indemnification asset are reflective of the estimates utilized to determine the estimated fair value of loans accounted for under ASC 310-30. The Company classifies the estimated fair value of the FDIC indemnification asset as Level 3. |
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Other real estate owned: Other real estate owned represents property acquired by the Company as part of an acquisition, through the loan foreclosure or repossession process, or any other resolution activity that results in partial or total satisfaction of problem covered loans, or by closing of branches or operating facilities. Properties are initially recorded at fair value, less estimated costs to sell, establishing a new cost basis. Subsequently, the assets are valued at the lower of cost or fair value, less estimated costs to sell, based on periodic valuations performed. Fair value is based upon independent market prices, appraised value or management’s estimate of the value, using a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area. This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return. This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Adjustments are routinely made in the appraisal process by the appraisers to account for differences between the comparable sales and income data available. These adjustments generally range from 0% to 40% depending on the property type, as well as various sales and property characteristics including but not limited to: date of sale, size and condition of facility, quality of construction and proximity to the subject property. Adjustments are typically significant and result in a Level 3 classification. |
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Loan servicing rights: Loan servicing rights are accounted for under the fair value measurement method. A third party valuation model is used to determine the fair value at the end of each reporting period utilizing a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management. Changes in fair value of loan servicing rights are recorded in “Mortgage banking and other loan fees”. Because of the nature of the valuation inputs, the company classifies loan servicing rights as Level 3. Refer to Note 10, “Loan Servicing Rights”, for assumptions included in the valuation of loan servicing rights. |
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FDIC receivable: The FDIC receivable represents claims submitted to the Federal Deposit Insurance Corporation (“FDIC”) for reimbursement for which the Company expects to receive payment within 90 days. Due to their short term nature, the carrying amount of these instruments approximates the estimated fair value. The Company classifies the estimated fair value of FDIC receivable as Level 2. |
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Company-owned life insurance and deferred compensation plan liabilities: The Company holds life insurance policies on certain officers, both for investment purposes and for the Company’s deferred compensation plan. The carrying value of these policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are probable at settlement. As such, the Company classifies the estimated fair value of Company-owned life insurance as Level 2. Deferred compensation plan liabilities represent the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets. Deferred compensation plan liabilities are recorded with “other liabilities” and are classified by the Company as Level 2. |
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Derivative instruments: The Company enters into interest rate lock commitments with prospective borrowers to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors, which are carried at fair value on a recurring basis. The fair value of these commitments is based on the fair value of related mortgage loans determined using observable market data. Interest rate lock commitments are adjusted for expectations of exercise and funding. This adjustment is not considered to be a material input. The Company classifies derivatives as recurring Level 2. |
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Derivative instruments held or issued for customer-initiated activities are traded in over-the counter markets where quoted market prices are not readily available. Fair value for over-the-counter derivative instruments is measured on a recurring basis using third party models that use primarily market observable inputs, such as yield curves and option volatilities. The fair value for these derivatives may include a credit valuation adjustment that is determined by applying a credit spread for the counterparty or the Company, as appropriate, to the total expected exposure of the derivative after considering collateral and other master netting arrangements. These adjustments, which are considered Level 3 inputs, are based on estimates of current credit spreads to evaluate the likelihood of default. The Company assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and at September 30, 2014 it was determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the company classifies its over-the-counter derivative valuations in Level 2 of the fair value hierarchy. |
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Accrued interest receivable and payable: Due to their short term nature, the carrying amount of these instruments approximates the estimated fair value; therefore, the Company classifies the estimated fair value of accrued interest receivable and payable as Level 2. |
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Deposits: The estimated fair value of demand deposits (e.g., noninterest and interest-bearing demand, savings, other brokered funds and certain types of money market accounts) is, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are based on the discounted value of contractual cash flows at current interest rates. The estimated fair value of deposits does not take into account the value of the Company’s long-term relationships with depositors, commonly known as core deposit intangibles, which are not considered financial instruments. The Company classifies the estimated fair value of deposits as Level 2. |
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Clawback liability: The CF Bancorp, First Banking Center and Peoples State Bank loss sharing agreements contain a provision where if losses do not exceed a calculated threshold, the Company is obligated to compensate the FDIC. The carrying amount of these instruments approximates the estimated fair value. The estimated fair value requires management’s assumption of what estimated losses will be, which is a significant component. As such, the Company classifies the estimated fair value of the FDIC clawback liability as Level 3. |
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Short-term borrowings: Short-term borrowings represent federal funds purchased, a senior unsecured line of credit and certain short-term FHLB advances. Due to their short term nature, the carrying amount of these instruments approximates the estimated fair value. The Company classifies the estimated fair value of short-term borrowings as Level 2. |
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Long-term debt: Long-term debt includes securities sold under agreements to repurchase, FHLB advances and subordinated notes related to trust preferred securities. The estimated fair value is based on current rates for similar financing or market quotes to settle those liabilities. The Company classifies the estimated fair value of long-term debt as Level 2. |
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FDIC warrants payable: FDIC warrants payable represent stock warrants that were issued to the FDIC in connection with the 2010 FDIC-assisted acquisition of CF Bancorp. These warrants are recorded at net present value based on management estimates used in a discounted pricing model. The inputs into the pricing model include management’s assumption of an annualized growth rate. The carrying amount of these instruments approximates the estimated fair value. The Company classifies the estimated fair value of FDIC warrants payable as Level 3. |
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The following tables present the recorded amount of assets and liabilities measured at fair value, including financial assets and liabilities for which the Company has elected the fair value option, on a recurring basis: |
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(Dollars in thousands) | | Total | | Quoted Prices in | | Significant | | Significant | | | | |
Active Markets for | Other | Unobservable | | | |
Identical Assets | Observable | Inputs | | | |
(Level 1) | Inputs | (Level 3) | | | |
| (Level 2) | | | | |
September 30, 2014 | | | | | | | | | | | | |
Securities available-for-sale: | | | | | | | | | | | | |
U.S. government sponsored agency obligations | | $ | 105,690 | | $ | — | | $ | 105,690 | | $ | — | | | | |
Obligations of state and political subdivisions: | | | | | | | | | | | | |
Taxable | | 397 | | — | | — | | 397 | | | | |
Tax-exempt | | 220,530 | | — | | 220,530 | | — | | | | |
Small Business Administration (“SBA”) Pools | | 35,332 | | — | | 35,332 | | — | | | | |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises | | 299,605 | | — | | 299,605 | | — | | | | |
Privately issued | | 9,959 | | — | | 9,959 | | — | | | | |
Privately issued commercial mortgage-backed securities | | 5,135 | | — | | 5,135 | | — | | | | |
Corporate debt securities | | 57,841 | | — | | 57,406 | | 435 | | | | |
Total securities available-for-sale | | 734,489 | | — | | 733,657 | | 832 | | | | |
Loans measured at fair value: | | | | | | | | | | | | |
Residential real estate | | 17,881 | | — | | — | | 17,881 | | | | |
Loans held for sale | | 122,599 | | — | | 122,599 | | — | | | | |
Loan servicing rights | | 74,380 | | — | | — | | 74,380 | | | | |
Derivative assets | | 1,798 | | — | | 1,798 | | — | | | | |
Total assets at fair value | | $ | 951,147 | | $ | — | | $ | 858,054 | | $ | 93,093 | | | | |
Derivative liabilities | | 361 | | — | | 361 | | — | | | | |
Total liabilities at fair value | | $ | 361 | | $ | — | | $ | 361 | | $ | — | | | | |
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December 31, 2013 | | | | | | | | | | | | |
Securities available-for-sale: | | | | | | | | | | | | |
U.S. government sponsored agency obligations | | $ | 98,237 | | $ | — | | $ | 98,237 | | $ | — | | | | |
Obligations of state and political subdivisions: | | | | | | | | | | | | |
Taxable | | 396 | | — | | — | | 396 | | | | |
Tax-exempt | | 182,000 | | — | | 182,000 | | — | | | | |
Small Business Administration (“SBA”) Pools | | 42,426 | | — | | 42,426 | | — | | | | |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises | | 218,922 | | — | | 218,922 | | — | | | | |
Privately issued | | 4,446 | | — | | 4,446 | | — | | | | |
Privately issued commercial mortgage-backed securities | | 5,147 | | — | | 5,147 | | — | | | | |
Corporate debt securities | | 68,020 | | — | | 67,615 | | 405 | | | | |
Equity securities | | 489 | | 489 | | — | | — | | | | |
Total securities available-for-sale | | 620,083 | | 489 | | 618,793 | | 801 | | | | |
Loans measured at fair value: | | | | | | | | | | | | |
Residential real estate | | 16,334 | | — | | — | | 16,334 | | | | |
Real estate construction | | 1,374 | | — | | — | | 1,374 | | | | |
Loans held for sale | | 85,252 | | — | | 85,252 | | — | | | | |
Loans servicing rights | | 78,603 | | — | | — | | 78,603 | | | | |
Derivative assets | | 2,630 | | — | | 2,630 | | — | | | | |
Total assets at fair value | | $ | 804,276 | | $ | 489 | | $ | 706,675 | | $ | 97,112 | | | | |
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There were no transfers between levels within the fair value hierarchy during the three and nine months ended September 30, 2014 or 2013. |
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The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a recurring basis. |
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| | Three months ended September 30, 2014 | | | | |
| | Securities available-for-sale | | | | | | | | |
(Dollars in thousands) | | Taxable obligations of | | Corporate Debt | | Loans held for | | Loan servicing | | | | |
state and political | Securities | investment | rights | | | |
subdivisions | | | | | | |
Balance, beginning of period | | $ | 397 | | $ | 433 | | $ | 18,521 | | $ | 74,104 | | | | |
Transfers from loans held for sale | | — | | — | | 280 | | — | | | | |
Gains (losses): | | | | | | | | | | | | |
Recorded in earnings (realized): | | | | | | | | | | | | |
Recorded in “Interest on investments” | | — | | 1 | | — | | — | | | | |
Recorded in “Mortgage banking and other loan fees” | | — | | — | | (93 | ) | (2,022 | ) | | | |
Recorded in OCI (pre-tax) | | — | | 1 | | — | | — | | | | |
New originations | | — | | — | | — | | 2,298 | | | | |
Repayments | | — | | — | | (827 | ) | — | | | | |
Balance, end of period | | $ | 397 | | $ | 435 | | $ | 17,881 | | $ | 74,380 | | | | |
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| | Nine months ended September 30, 2014 | | | | |
| | Securities available-for-sale | | | | | | | | |
(Dollars in thousands) | | Taxable obligations of | | Corporate Debt | | Loans held for | | Loan servicing | | | | |
state and political | Securities | investment | rights | | | |
subdivisions | | | | | | |
Balance, beginning of period | | $ | 396 | | $ | 405 | | $ | 17,708 | | $ | 78,603 | | | | |
Additions due to acquisition | | — | | — | | — | | 767 | | | | |
Transfers from loans held for sale | | — | | — | | 1,058 | | — | | | | |
Gains (losses): | | | | | | | | | | | | |
Recorded in earnings (realized): | | | | | | | | | | | | |
Recorded in “Interest on investments” | | 1 | | 3 | | — | | — | | | | |
Recorded in “Mortgage banking and other loan fees” | | — | | — | | 320 | | (11,036 | ) | | | |
Recorded in OCI (pre-tax) | | — | | 27 | | — | | — | | | | |
New originations | | — | | — | | — | | 6,046 | | | | |
Repayments | | — | | — | | (1,333 | ) | — | | | | |
Draws on previously issued lines of credits | | — | | — | | 128 | | — | | | | |
Balance, end of period | | $ | 397 | | $ | 435 | | $ | 17,881 | | $ | 74,380 | | | | |
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| | Three months ended September 30, 2013 | | | | | | | |
| | Securities available-for-sale | | | | | | | | | |
(Dollars in thousands) | | Taxable obligations of | | Corporate Debt | | Loan servicing | | | | | | | |
state and political | Securities | rights | | | | | | |
subdivisions | | | | | | | | |
Balance, beginning of period | | $ | 396 | | $ | 14,006 | | $ | 65,187 | | | | | | | |
Gains (losses): | | | | | | | | | | | | | |
Recorded in earnings (realized): | | | | | | | | | | | | | |
Recorded in “Interest on investments” | | — | | 47 | | | | | | | | | |
Recorded in “Mortgage banking and other loan fees” | | — | | — | | (69 | ) | | | | | | |
Recorded in OCI (pre-tax) | | — | | (44 | ) | — | | | | | | | |
New originations | | — | | — | | 6,633 | | | | | | | |
Sales/calls | | — | | (835 | ) | — | | | | | | | |
Balance, end of period | | $ | 396 | | $ | 13,174 | | $ | 71,751 | | | | | | | |
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| | Nine months ended September 30, 2013 | | | | | | | |
| | Securities available-for-sale | | | | | | | | | |
(Dollars in thousands) | | Taxable obligations of | | Corporate debt | | Loan servicing | | | | | | | |
state and political | securities | rights | | | | | | |
subdivisions | | | | | | | | |
Balance, beginning of period | | $ | 396 | | $ | 15,250 | | $ | — | | | | | | | |
Transfers based on new accounting policy election | | — | | — | | 5,657 | -1 | | | | | | |
Additions due to acquisition | | — | | — | | 41,967 | | | | | | | |
Gains (losses): | | | | | | | | | | | | | |
Recorded in earnings (realized): | | | | | | | | | | | | | |
Recorded in “Net gain (loss) on sale of securities” | | — | | 69 | | — | | | | | | | |
Recorded in “Interest on investments” | | — | | 47 | | — | | | | | | | |
Recorded in “Mortgage banking and other loan fees” | | — | | — | | 3,997 | | | | | | | |
Recorded in OCI (pre-tax) | | — | | 189 | | — | | | | | | | |
Purchases | | — | | 440 | | — | | | | | | | |
New originations | | — | | — | | 20,130 | | | | | | | |
Sales/calls | | — | | (2,821 | ) | — | | | | | | | |
Balance, end of period | | $ | 396 | | $ | 13,174 | | $ | 71,751 | | | | | | | |
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(1) The balance transferred includes $31 thousand of cumulative adjustment related to the change in accounting policy referenced in Note 1 to our audited financial statements included in our 2013 Annual Report. |
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The aggregate fair value, contractual balance (including accrued interest), and gain or loss position for loans held for investment measured and recorded at fair value was as follows: |
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(Dollars in thousands) | | September 30, 2014 | | December 31, 2013 | | | | | | | | | | |
Aggregate fair value | | $ | 17,881 | | $ | 17,708 | | | | | | | | | | |
Contractual balance | | 17,816 | | 18,022 | | | | | | | | | | |
Fair market value gain (loss) | | 65 | | (314 | ) | | | | | | | | | |
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There were no gains (losses) included in the fair value above that were associated with instrument specific credit risk. The aggregate fair value and contractual principal balance of loans held for investment measured and recorded at fair value that were 90 days or more past due as of September 30, 2014 was $155 thousand and $191 thousand, respectively. Of the aggregate fair value of loans that were 90 days or more past due as of September 30, 2014, $155 thousand were on nonaccrual status. The aggregate fair value and contractual principal balance of loans held for investment measured and recorded at fair value that were 90 days or more past due as of December 31, 2013 was $293 thousand and $301 thousand, respectively. Of the aggregate fair value of loans that were 90 days or more past due as of December 31, 2013, $252 thousand were on nonaccrual status. |
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Interest income is recorded based on the contractual terms of the loans in accordance with the Company’s policy on loans held for investment and is recorded in “Interest and fees on loans” in the Consolidated Statements of Income. For the three and nine months ended September 30, 2014, there was $164 thousand and $423 thousand, respectively, of interest income earned on loans transferred from loans held for sale to loans held for investment. |
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The Company has elected the fair value option for loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans in accordance with the Company policy on loans held for investment in “Interest and fees on loans” in the Consolidated Statements of Income. None of these loans are 90 days past due or on nonaccrual status as of September 30, 2014 or December 31, 2013. |
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The aggregate fair value, contractual balance (including accrued interest), and gain or loss for loans held for sale carried at fair value was as follows: |
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(Dollars in thousands) | | September 30, 2014 | | December 31, 2013 | | | | | | | | | | |
Aggregate fair value | | $ | 122,599 | | $ | 85,252 | | | | | | | | | | |
Contractual balance | | 117,015 | | 82,567 | | | | | | | | | | |
Unrealized gain | | 5,584 | | 2,685 | | | | | | | | | | |
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The total amount of gains (losses) from changes in fair value included in “Net gain on sales of loans” in the Consolidated Statements of Income were as follows: |
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| | For the three months ended | | For the nine months ended | | | | |
September 30, | September 30, | | | |
(Dollars in thousands) | | 2014 | | 2013 | | 2014 | | 2013 | | | | |
Change in fair value | | $ | (1,935 | ) | $ | 12,652 | | $ | 2,899 | | $ | 944 | | | | |
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Certain financial assets and liabilities are measured at fair value on a nonrecurring basis. These include assets that are recorded at the lower of cost or fair value that were recognized at fair value below cost at the end of the period. |
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The following table presents the recorded amount of assets and liabilities measured at fair value on a non-recurring basis: |
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(Dollars in thousands) | | Total | | Quoted Prices in | | Significant | | Significant | | | | |
Active Markets | Other | Unobservable Inputs | | | |
for Identical | Observable | (Level 3) | | | |
Assets | Inputs | | | | |
(Level 1) | (Level 2) | | | | |
September 30, 2014 | | | | | | | | | | | | |
Impaired loans:(1) | | | | | | | | | | | | |
Uncovered | | | | | | | | | | | | |
Residential real estate | | $ | 2,773 | | $ | — | | $ | — | | $ | 2,773 | | | | |
Commercial real estate | | 3,220 | | — | | — | | 3,220 | | | | |
Commercial and industrial | | 7,423 | | — | | — | | 7,423 | | | | |
Consumer | | 15 | | — | | — | | 15 | | | | |
Total uncovered impaired loans | | 13,431 | | — | | — | | 13,431 | | | | |
Covered | | | | | | | | | | | | |
Residential real estate | | 26 | | — | | — | | 26 | | | | |
Commercial and industrial | | 867 | | — | | — | | 867 | | | | |
Total covered impaired loans | | 893 | | — | | — | | 893 | | | | |
Total impaired loans | | 14,324 | | — | | — | | 14,324 | | | | |
Other real estate owned (uncovered)(2) | | 6,793 | | — | | — | | 6,793 | | | | |
Other real estate owned (covered)(3) | | 2,062 | | — | | — | | 2,062 | | | | |
Premises and equipment(4) | | 675 | | — | | 675 | | — | | | | |
Total | | $ | 23,854 | | $ | — | | $ | 675 | | $ | 23,179 | | | | |
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December 31, 2013 | | | | | | | | | | | | |
Impaired loans:(1) | | | | | | | | | | | | |
Uncovered | | | | | | | | | | | | |
Residential real estate | | $ | 1,569 | | $ | — | | $ | — | | $ | 1,569 | | | | |
Commercial and industrial | | 762 | | — | | — | | 762 | | | | |
Total uncovered impaired loans | | 2,331 | | — | | — | | 2,331 | | | | |
Covered | | | | | | | | | | | | |
Commercial real estate | | 644 | | — | | — | | 644 | | | | |
Total covered impaired loans | | 644 | | — | | — | | 644 | | | | |
Total impaired loans | | 2,975 | | — | | — | | 2,975 | | | | |
Other real estate owned (uncovered) (2) | | 2,216 | | — | | — | | 2,216 | | | | |
Other real estate owned (covered) (3) | | 4,596 | | — | | — | | 4,596 | | | | |
Premises and equipment(4) | | 105 | | — | | 105 | | — | | | | |
Total | | $ | 9,892 | | $ | — | | $ | 105 | | $ | 9,787 | | | | |
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(1) Specific reserves of $2.8 million and $1.4 million were provided to reduce the fair value of these loans at September 30, 2014 and December 31, 2013, respectively, based on the estimated fair value of the underlying collateral. In addition, charge-offs of $633 thousand and $36 thousand reduced the fair value of these loans in for the three months ended September 30, 2014 and 2013, respectively, and $1.3 million and $441 thousand for the nine months ended September 30, 2014 and 2013, respectively. |
(2) The Company charged $1.4 million and $155 thousand through other non-interest expenses during the three months ended September 30, 2014 and 2013, respectively, and $2.9 million and $1.4 million during the nine months ended September 30, 2014 and 2013, respectively, to reduce the fair value of these properties. |
(3) The Company charged $701 thousand and $2.0 million through other noninterest expenses during the three months ended September 30, 2014 and 2013, respectively, and $1.6 million and $4.3 million during the nine months ended September 30, 2014 and 2013, respectively, to reduce the fair value of these properties. These expenses were partially offset by FDIC loss sharing income recorded due to the associated loss share coverage. |
(4) The Company charged $185 thousand and $109 thousand through other noninterest expenses during both the three and nine months ended September 30, 2014 and 2013, respectively, to reduce the value of premises and equipment deemed impaired during the period. |
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The Company typically holds the majority of its financial instruments until maturity and thus does not expect to realize many of the estimated fair value amounts disclosed. The disclosures also do not include estimated fair value amounts for items that are not defined as financial instruments, but which have significant value. These include such items as core deposit intangibles, the future earnings potential of significant customer relationships and the value of fee generating businesses. The Company believes the imprecision of an estimate could be significant. |
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The following tables present the carrying amount and estimated fair values of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company’s Consolidated Balance Sheets. |
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| | | | Estimated Fair Value | |
(Dollars in thousands) | | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | |
September 30, 2014 | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | |
Cash and cash equivalents | | $ | 298,666 | | $ | 298,666 | | $ | 91,214 | | $ | 207,452 | | $ | — | |
Federal Home Loan Bank stock | | 17,426 | | N/A | | | | | | | |
Net loans, excluding covered loans(1) | | 3,601,441 | | 3,684,609 | | — | | — | | 3,684,609 | |
Net covered loans(2) | | 378,024 | | 453,652 | | — | | — | | 453,652 | |
Accrued interest receivable | | 12,876 | | 12,876 | | — | | 12,876 | | — | |
FDIC indemnification asset | | 82,441 | | 52,145 | | — | | — | | 52,145 | |
FDIC receivable | | 12,873 | | 12,873 | | — | | 12,873 | | — | |
Company-owned life insurance | | 96,605 | | 96,605 | | — | | 96,605 | | — | |
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Financial liabilities: | | | | | | | | | | | |
Deposits: | | | | | | | | | | | |
Savings and demand deposits | | $ | 3,178,616 | | $ | 3,178,616 | | $ | — | | $ | 3,178,616 | | $ | — | |
Time deposits(3) | | 1,306,981 | | 1,306,427 | | — | | 1,306,427 | | — | |
Total deposits | | 4,485,597 | | 4,485,043 | | — | | 4,485,043 | | | |
FDIC clawback liability | | 25,723 | | 25,723 | | — | | — | | 25,723 | |
Short term borrowings | | 150,573 | | 150,573 | | — | | 150,573 | | — | |
Long-term debt | | 285,009 | | 279,011 | | — | | 279,011 | | — | |
FDIC warrants payable | | 4,563 | | 4,563 | | — | | — | | 4,563 | |
Accrued interest payable | | 694 | | 694 | | — | | 694 | | — | |
Deferred compensation plan liabilities | | 218 | | 218 | | — | | 218 | | — | |
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(1) Included $13.4 million of impaired loans recorded at fair value on a nonrecurring basis and $17.9 million of loans recorded at fair value on a recurring basis. |
(2) Included $893 thousand of impaired loans recorded at fair value on a nonrecurring basis. |
(3) Includes $50.0 million of other brokered funds. |
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| | | | Estimated Fair Value | |
(Dollars in thousands) | | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | |
December 31, 2013 | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | |
Cash and cash equivalents | | $ | 375,356 | | $ | 375,356 | | $ | 97,167 | | $ | 278,189 | | $ | — | |
Federal Home Loan Bank stock | | 16,303 | | N/A | | | | | | | |
Net loans, excluding covered loans(1) | | 2,456,170 | | 2,574,109 | | — | | — | | 2,574,109 | |
Net covered loans(2) | | 489,687 | | 534,857 | | — | | — | | 534,857 | |
Accrued interest receivable | | 7,968 | | 7,968 | | — | | 7,968 | | — | |
FDIC indemnification asset | | 131,861 | | 84,010 | | — | | — | | 84,010 | |
FDIC receivable | | 7,783 | | 7,783 | | — | | 7,783 | | — | |
Company-owned life insurance | | 39,500 | | 39,500 | | — | | 39,500 | | — | |
| | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | |
Deposits: | | | | | | | | | | | |
Savings and demand deposits | | $ | 2,673,524 | | $ | 2,673,524 | | $ | — | | $ | 2,673,524 | | $ | — | |
Time deposits | | 927,313 | | 928,128 | | — | | 928,128 | | — | |
Total deposits | | 3,600,837 | | 3,601,652 | | — | | 3,601,652 | | — | |
FDIC clawback liability | | 24,887 | | 24,887 | | — | | — | | 24,887 | |
Short term borrowings | | 71,876 | | 71,876 | | — | | 71,876 | | — | |
Long-term debt | | 199,037 | | 190,420 | | — | | 190,420 | | — | |
FDIC warrants payable | | 4,118 | | 4,118 | | — | | — | | 4,118 | |
Accrued interest payable | | 626 | | 626 | | — | | 626 | | — | |
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(1) Included $2.3 million of impaired loans recorded at fair value on a nonrecurring basis and $17.7 million of loans recorded at fair value on a recurring basis. |
(2) Included $644 thousand of impaired loans recorded at fair value on a nonrecurring basis. |