Fair Value | 12 Months Ended |
Dec. 31, 2014 |
Fair Value Disclosures [Abstract] | |
Fair Value | NOTE 11 – FAIR VALUE |
Measurements |
The Company groups assets and liabilities recorded at fair value into three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows: |
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Level 1: | | Quoted prices are available in active markets for identical assets or liabilities as of the reported date. | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Level 2: | Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but which trade less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed. | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Level 3: | Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where inputs into the determination of fair value require significant management judgment or estimation. | | | | | | | | | | | | | | | | | | | | | | | | | | |
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The following table presents the assets reported on the consolidated balance sheets at their fair value as of December 31, 2014 and December 31, 2013 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. |
| | (Amounts in thousands) | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements at December 31, 2014 Using | | | | | | | | | | | | | |
Description | | December 31, | | | Quoted Prices in | | | Significant Other | | | Significant | | | | | | | | | | | | | |
2014 | Active Markets for | Observable Inputs | Unobservable Inputs | | | | | | | | | | | | |
| Identical Assets | (Level 2) | (Level 3) | | | | | | | | | | | | |
| (Level 1) | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 101 | | | $ | — | | | $ | 101 | | | $ | — | | | | | | | | | | | | | |
U.S. Government agencies and corporations | | | 8,648 | | | | — | | | | 8,648 | | | | — | | | | | | | | | | | | | |
Obligations of states and political subdivisions | | | 50,091 | | | | — | | | | 50,091 | | | | — | | | | | | | | | | | | | |
U.S. Government-sponsored mortgage-backed securities | | | 85,587 | | | | — | | | | 85,587 | | | | — | | | | | | | | | | | | | |
U.S. Government-sponsored collateralized mortgage obligations | | | 13,992 | | | | — | | | | 13,992 | | | | — | | | | | | | | | | | | | |
Trust preferred securities | | | 779 | | | | — | | | | — | | | | 779 | | | | | | | | | | | | | |
Regulatory stock | | | 3,049 | | | | 3,049 | | | | — | | | | — | | | | | | | | | | | | | |
Trading securities | | | 7,861 | | | | — | | | | 7,861 | | | | — | | | | | | | | | | | | | |
Loans held for sale | | | 632 | | | | 632 | | | | — | | | | — | | | | | | | | | | | | | |
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| | (Amounts in thousands) | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements at December 31, 2013 Using | | | | | | | | | | | | | |
Description | | December 31, | | | Quoted Prices in | | | Significant Other | | | Significant | | | | | | | | | | | | | |
2013 | Active Markets for | Observable Inputs | Unobservable Inputs | | | | | | | | | | | | |
| Identical Assets | (Level 2) | (Level 3) | | | | | | | | | | | | |
| (Level 1) | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 112 | | | $ | — | | | $ | 112 | | | $ | — | | | | | | | | | | | | | |
U.S. Government agencies and corporations | | | 8,947 | | | | — | | | | 8,947 | | | | — | | | | | | | | | | | | | |
Obligations of states and political subdivisions | | | 43,535 | | | | — | | | | 43,535 | | | | — | | | | | | | | | | | | | |
U.S. Government-sponsored mortgage-backed securities | | | 78,022 | | | | — | | | | 78,022 | | | | — | | | | | | | | | | | | | |
U.S. Government-sponsored collateralized mortgage obligations | | | 17,085 | | | | — | | | | 17,085 | | | | — | | | | | | | | | | | | | |
Trust preferred securities | | | 10,136 | | | | — | | | | — | | | | 10,136 | | | | | | | | | | | | | |
Regulatory stock | | | 3,049 | | | | 3,049 | | | | — | | | | — | | | | | | | | | | | | | |
Trading securities | | | 7,247 | | | | — | | | | 7,247 | | | | — | | | | | | | | | | | | | |
Loans held for sale | | | 656 | | | | 656 | | | | — | | | | — | | | | | | | | | | | | | |
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The following tables present the changes in the Level 3 fair value category for the years ended December 31, 2014, 2013 and 2012. The Company classifies financial instruments in Level 3 of the fair-value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. |
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| (Amounts in thousands) | | | | | | | | | | | | | | | | | | |
| December 31, | | | | | | | | | | | | | | | | | | |
| 2014 | | | 2013 | | | 2012 | | | | | | | | | | | | | | | | | | |
| Trust preferred | | | Trust preferred | | | Trust preferred securities | | | | | | | | | | | | | | | | | | |
securities | securities | | | | | | | | | | | | | | | | | |
Beginning balance | $ | 10,136 | | | $ | 7,612 | | | $ | 9,145 | | | | | | | | | | | | | | | | | | |
Net realized/unrealized gains/(losses) included in: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest income | | — | | | | (1,954 | ) | | | (171 | ) | | | | | | | | | | | | | | | | | |
Other comprehensive income | | 835 | | | | 4,553 | | | | 2,183 | | | | | | | | | | | | | | | | | | |
Discount accretion (premium amortization) | | 7 | | | | 8 | | | | 2 | | | | | | | | | | | | | | | | | | |
Sales | | (10,044 | ) | | | — | | | | (3,531 | ) | | | | | | | | | | | | | | | | | |
Purchases, issuance, and settlements | | (155 | ) | | | (83 | ) | | | (16 | ) | | | | | | | | | | | | | | | | | |
Ending balance | $ | 779 | | | $ | 10,136 | | | $ | 7,612 | | | | | | | | | | | | | | | | | | |
Losses included in net income for the period relating | $ | — | | | $ | (1,954 | ) | | $ | (90 | ) | | | | | | | | | | | | | | | | | |
to assets held at period end | | | | | | | | | | | | | | | | | |
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The Company conducts OTTI analyses on a quarterly basis. The initial indication of other-than-temporary impairment for both debt and equity securities is a decline in the fair value below the amount recorded for an investment. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the consolidated statements of income. In determining whether an impairment is other than temporary, the Company considers a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, and a determination that the Company does not intend to sell those investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of its amortized cost basis less any current period credit loss. Among the factors that are considered in determining the Company’s intent and ability is a review of its capital adequacy, interest rate risk position and liquidity. |
The Company also considers the issuer’s financial condition, capital strength and near-term prospects. In addition, for debt securities the Company considers the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), current ability to make future payments in a timely manner and the issuer’s ability to service debt, the assessment of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations and the Company’s intent and ability to retain the security. All of the foregoing require considerable judgment. |
Trust Preferred Securities |
Trust preferred securities are accounted for under FASB ASC Topic 325 Investments Other. The Company evaluates current available information in estimating the future cash flows of securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected. The Company considers the structure and term of the pool and the financial condition of the underlying issuers. Specifically, the evaluation incorporates factors such as interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments to the various note classes. Current estimates of cash flows are based on the most recent trustee reports, announcements of deferrals or defaults, expected future default rates and other relevant market information. |
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The Company holds trust preferred securities that are backed by pooled trust preferred debt issued by banks, thrifts and insurance companies. These securities were all rated investment grade at inception. Beginning the second half of 2008 and into 2014, factors outside the Company’s control impacted the fair value of these securities and will likely continue to do so for the foreseeable future. These factors include, but are not limited to, the following: guidance on fair value accounting, issuer credit deterioration, issuer deferral and default rates, potential failure or government seizure of underlying financial institutions or insurance companies, ratings agency actions, or regulatory actions. As a result of changes in these and various other factors during 2009 and into 2014, Moody’s Investors Service, Fitch Ratings and Standards and Poor’s downgraded multiple trust preferred securities, including securities held by the Company. All of the trust preferred securities held by the Company are now considered to be below investment grade. The deteriorating economic, credit and financial conditions experienced in 2008 and through 2014 have resulted in illiquid and inactive financial markets and severely depressed prices for these securities. As referenced in Note 2, Investment Securities, with the release of the Volcker Rule in December 2013, the Company could no longer support the ability to hold certain trust preferred securities comprised of obligations issued by insurance companies. The inability to hold the investments triggered a $2.0 million OTTI recognition reflecting the estimated fair value of the securities at December 31, 2013. For the remaining bank-issued trust preferred securities, the Company does not intend to sell the securities and it is more-likely-than-not that the Company will not be required to sell the securities before recovery of its amortized cost basis. There is a risk that subsequent evaluations could result in recognition of OTTI charges in the future. The securities had life-to-date impairment losses as presented below. |
The following table details the breakdown of trust preferred securities for the periods indicated: |
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| (Dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | | 2013 | | | | | | | | | | | | | | | | | | | | | | |
Total number of trust preferred securities | | 2 | | | | 12 | | | | | | | | | | | | | | | | | | | | | | |
Par value | $ | 1,802 | | | $ | 14,366 | | | | | | | | | | | | | | | | | | | | | | |
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Number not considered OTTI | | 1 | | | | 1 | | | | | | | | | | | | | | | | | | | | | | |
Par value | $ | 802 | | | $ | 956 | | | | | | | | | | | | | | | | | | | | | | |
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Number considered OTTI | | 1 | | | | 11 | | | | | | | | | | | | | | | | | | | | | | |
Par value | $ | 1,000 | | | $ | 13,410 | | | | | | | | | | | | | | | | | | | | | | |
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Life-to-date impairment recognized in earnings | $ | 140 | | | $ | 2,305 | | | | | | | | | | | | | | | | | | | | | | |
Life-to-date impairment recognized in other | | 883 | | | | 1,718 | | | | | | | | | | | | | | | | | | | | | | |
comprehensive income | | | | | | | | | | | | | | | | | | | | | |
Total life-to-date impairment | $ | 1,023 | | | $ | 4,023 | | | | | | | | | | | | | | | | | | | | | | |
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The following table details the one debt security with other-than-temporary impairment, its credit rating at December 31, 2014 and the related loss recognized in earnings: |
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| | (Amounts in thousands) | | | |
| | Moody’s/Fitch | | Amount of | | | Additions in QTD March 31, | | | Additions in QTD June 30, | | | Additions in QTD September 30, | | | Additions in QTD December 31, | | | Amount of | | | |
Rating | OTTI | 2014 | 2014 | 2014 | 2014 | OTTI | | |
| related to | | | | | related to | | |
| credit loss at | | | | | credit loss at | | |
| January 1, | | | | | December 31, | | |
| 2014 | | | | | 2014 | | |
Trapeza IX B-1 | | Ca/CC | | $ | 140 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 140 | | | |
Total | | | | $ | 140 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 140 | | | |
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The following table details the 11 debt securities with other-than-temporary impairment, their credit ratings at December 31, 2013 and the related losses recognized in earnings: |
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| | (Amounts in thousands) | | | |
| | Moody’s/Fitch | | Amount of | | | Additions in QTD March 31, | | | Additions in QTD June 30, | | | Additions in QTD September 30, | | | Additions in QTD December 31, | | | Amount of | | | |
Rating | OTTI | 2013 | 2013 | 2013 | 2013 | OTTI | | |
| related to | | | | | related to | | |
| credit loss at | | | | | credit loss at | | |
| January 1, | | | | | December 31, | | |
| 2013 | | | | | 2013 | | |
PreTSL XXIII Class C-FP | | Ca/C | | $ | 211 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 211 | | | |
I-PreTSL I | | NR/CCC | | | — | | | | — | | | | — | | | | — | | | | 216 | | | | 216 | | | |
I-PreTSL I | | NR/CCC | | | — | | | | — | | | | — | | | | — | | | | 230 | | | | 230 | | | |
I-PreTSL I | | NR/CCC | | | — | | | | — | | | | — | | | | — | | | | 230 | | | | 230 | | | |
I-PreTSL II | | NR/B | | | — | | | | — | | | | — | | | | — | | | | 291 | | | | 291 | | | |
I-PreTSL III | | Ba3/CCC | | | — | | | | — | | | | — | | | | — | | | | 130 | | | | 130 | | | |
I-PreTSL III | | NR/CCC | | | — | | | | — | | | | — | | | | — | | | | 380 | | | | 380 | | | |
I-PreTSL IV | | Ba2/B | | | — | | | | — | | | | — | | | | — | | | | 140 | | | | 140 | | | |
I-PreTSL IV | | Ba2/B | | | — | | | | — | | | | — | | | | — | | | | 140 | | | | 140 | | | |
I-PreTSL IV | | Caa1/CCC | | | — | | | | — | | | | — | | | | — | | | | 197 | | | | 197 | | | |
Trapeza IX B-1 | | Ca/CC | | | 140 | | | | — | | | | — | | | | — | | | | — | | | | 140 | | | |
Total | | | | $ | 351 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,954 | | | $ | 2,305 | | | |
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The following table provides additional information related to the Company’s trust preferred securities as of December 31, 2014 used to evaluate other-than-temporary impairments: |
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| | (Amounts in thousands) | |
Deal | | Class | | Amortized Cost | | | Fair Value | | | Unrealized | | | Moody’s/ | | Number of | | | Deferrals and | | | Excess | |
Gain/(Loss) | Fitch Rating | Issuers | Defaults as a % | Subordination as a |
| | Currently | of Current | % of Current |
| | Performing | Collateral | Performing |
| | | | Collateral |
PreTSL XXIII | | C-2 | | $ | 802 | | | $ | 313 | | | $ | (489 | ) | | B2/C | | | 91 | | | | 25.2 | % | | | — | % |
Trapeza IX | | B-1 | | | 860 | | | | 466 | | | | (394 | ) | | Ca/CC | | | 33 | | | | 18.1 | | | | — | |
Total | | | | $ | 1,662 | | | $ | 779 | | | $ | (883 | ) | | | | | | | | | | | | | | |
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The following table provides additional information related to the Company’s trust preferred securities as of December 31, 2013 used to evaluate other-than-temporary impairments: |
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| | (Amounts in thousands) | |
Deal | | Class | | Amortized Cost | | | Fair Value | | | Unrealized | | | Moody’s/ | | Number of | | | Deferrals and | | | Excess | |
Gain/(Loss) | Fitch Rating | Issuers | Defaults as a % | Subordination as a |
| | Currently | of Current | % of Current |
| | Performing | Collateral | Performing |
| | | | Collateral |
PreTSL XXIII | | C-2 | | $ | 956 | | | $ | 392 | | | $ | (564 | ) | | Ca/C | | | 93 | | | | 24.2 | % | | | — | % |
PreTSL XXIII | | C-FP | | | 1,535 | | | | 811 | | | | (724 | ) | | Ca/C | | | 93 | | | | 24.2 | | | | — | |
I-PreTSL I | | B-1 | | | 770 | | | | 770 | | | | — | | | NR/CCC | | | 14 | | | | 17.3 | | | | 7.78 | |
I-PreTSL I | | B-2 | | | 770 | | | | 770 | | | | — | | | NR/CCC | | | 14 | | | | 17.3 | | | | 7.78 | |
I-PreTSL I | | B-3 | | | 770 | | | | 770 | | | | — | | | NR/CCC | | | 14 | | | | 17.3 | | | | 7.78 | |
I-PreTSL II | | B-3 | | | 2,700 | | | | 2,700 | | | | — | | | NR/B | | | 21 | | | | 8 | | | | 18.03 | |
I-PreTSL III | | B-2 | | | 870 | | | | 870 | | | | — | | | Ba3/CCC | | | 20 | | | | 14.1 | | | | 14.74 | |
I-PreTSL III | | C | | | 620 | | | | 620 | | | | — | | | NR/CCC | | | 20 | | | | 14.1 | | | | 4.7 | |
I-PreTSL IV | | B-1 | | | 860 | | | | 860 | | | | — | | | Ba2/B | | | 30 | | | | — | | | | 17.67 | |
I-PreTSL IV | | B-2 | | | 860 | | | | 860 | | | | — | | | Ba2/B | | | 30 | | | | — | | | | 17.67 | |
I-PreTSL IV | | C | | | 283 | | | | 283 | | | | — | | | Caa1/CCC | | | 30 | | | | — | | | | 11.16 | |
Trapeza IX | | B-1 | | | 860 | | | | 430 | | | | (430 | ) | | Ca/CC | | | 32 | | | | 20.9 | | | | — | |
Total | | | | $ | 11,854 | | | $ | 10,136 | | | $ | (1,718 | ) | | | | | | | | | | | | | | |
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The market for these securities at December 31, 2014 and December 31, 2013 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which trust preferred securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive as no new trust preferred securities have been issued since 2007. There are currently very few market participants who are willing and/or able to transact for these securities. The pooled market value for these securities remains very depressed relative to historical levels. Although there has been marked improvement in the credit spread premium in the corporate bond space, no such improvement has been noted in the market for trust preferred securities. |
Given conditions in the debt markets today and the absence of observable transactions in the secondary and the new issue markets, the Company determined the following: |
— | The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at December 31, 2014; | | | | | | | | | | | | | | | | | | | | | | | | | | | |
— | An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at measurement dates prior to 2008; and | | | | | | | | | | | | | | | | | | | | | | | | | | | |
— | The trust preferred securities will be classified within Level 3 of the fair value hierarchy because the Company determined that significant judgments are required to determine fair value at the measurement date. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Company enlisted the aid of an independent third party to perform the trust preferred security valuations. The approach to determining fair value involved the following process: |
1 | Estimate the credit quality of the collateral using average probability of default values for each issuer (adjusted for rating levels). | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2 | Consider the potential for correlation among issuers within the same industry for default probabilities (e.g. banks with other banks). | | | | | | | | | | | | | | | | | | | | | | | | | | | |
3 | Forecast the cash flows for the underlying collateral and apply to each trust preferred security tranche to determine the resulting distribution among the securities, including prepayment and cures. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
4 | Discount the expected cash flows to calculate the present value of the security. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The effective discount rates on an overall basis generally range from 10.24% to 15.75% and are highly dependent upon the credit quality of the collateral, the relative position of the tranche in the capital structure of the trust preferred security and the prepayment assumptions. |
With the passage of the Dodd-Frank Act, trust preferred securities issued by institutions with assets greater than $15.0 billion will no longer be included in Tier 1 capital after 2013. As a result, prepayment assumptions were adjusted to include early redemptions by all institutions meeting this criteria. As the vast majority of institutions in the trust preferred securities collateral base fall below this threshold, the revised assumption did not materially impact the valuation results. |
The following table presents the assets measured on a nonrecurring basis on the consolidated balance sheets at their fair value as of December 31, 2014 and December 31, 2013, by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include: quoted market prices for identical assets classified as Level 1 inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level 2 inputs. In cases where valuation techniques include inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level 3 inputs. |
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| (Amounts in thousands) | | | | | | | | | | | | | | |
| 31-Dec-14 | | | | | | | | | | | | | | |
| Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | |
Assets measured on a nonrecurring basis: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired loans | $ | — | | | $ | — | | | $ | 6,288 | | | $ | 6,288 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other real estate owned | $ | — | | | $ | — | | | $ | 40 | | | $ | 40 | | | | | | | | | | | | | | |
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| (Amounts in thousands) | | | | | | | | | | | | | | |
| 31-Dec-13 | | | | | | | | | | | | | | |
| Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | |
Assets measured on a nonrecurring basis: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired loans | $ | — | | | $ | — | | | $ | 5,251 | | | $ | 5,251 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other real estate owned | $ | — | | | $ | — | | | $ | 33 | | | $ | 33 | | | | | | | | | | | | | | |
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Financial Instruments |
The Company discloses fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. |
Such techniques and assumptions, as they apply to individual categories of the financial instruments, are as follows: |
Cash and cash equivalents – The carrying amounts for cash and cash equivalents are a reasonable estimate of those assets’ fair value. |
Investment securities – Fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Prices on trust preferred securities were calculated using a discounted cash-flow technique. Cash flows were estimated based on credit and prepayment assumptions. The present value of the projected cash flows was calculated using a discount rate equal to the current yield used to accrete the beneficial interest. |
Loans held for sale – Loans held for sale consist of residential mortgage loans originated for sale. Loans held for sale are recorded at fair value based on what the secondary markets are currently offering for loans with similar characteristics. |
Loans, net of allowance for loan losses – Market quotations are generally not available for loan portfolios. The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. |
Bank-owned life insurance – The fair value is based upon the cash surrender value of the underlying policies and matches the book value. |
Accrued interest receivable – The carrying amount is a reasonable estimate of these assets’ fair value. |
Demand, savings and money market deposits – Demand, savings, and money market deposit accounts are valued at the amount payable on demand. |
Time deposits – The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rates are estimated using market rates currently offered for similar instruments with similar remaining maturities. |
FHLB advances – The fair value for fixed rate advances is estimated by discounting the future cash flows using rates at which advances would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value for the fixed rate advances that are convertible to quarterly LIBOR floating rate advances on or after certain specified dates at the option of the FHLB and the FHLB fixed rate advances that are putable on or after certain specified dates at the option of the FHLB are priced using the FHLB of Cincinnati’s model. |
Short-term borrowings – Short-term borrowings generally have an original term to maturity of one year or less. Consequently, their carrying value is a reasonable estimate of fair value. |
Subordinated debt – The floating issuances curves to maturity are averaged to obtain an index. The spread between BBB-rated bank debt and 25-year swap rates is determined to calculate the spread on outstanding trust preferred securities. The discount margin is then added to the index to arrive at a discount rate, which determines the present value of projected cash flows. |
Accrued interest payable – The carrying amount is a reasonable estimate of these liabilities’ fair value. The fair value of unrecorded commitments at December 31, 2014 and December 31, 2013 is not material. |
In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earning power of core deposit accounts, the trained work force, customer goodwill and similar items. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. |
|
The carrying amounts and estimated fair values of the Company’s financial instruments are as follows: |
|
| (Amounts in thousands) | | | | | | | | | | |
| 31-Dec-14 | | | | | | | | | | |
| Carrying | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | | | | | |
Amount | Fair Value | | | | | | | | | |
ASSETS: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 10,569 | | | $ | 10,569 | | | $ | — | | | $ | — | | | $ | 10,569 | | | | | | | | | | |
Investment securities available-for-sale | | 162,247 | | | | 3,049 | | | | 158,419 | | | | 779 | | | | 162,247 | | | | | | | | | | |
Trading securities | | 7,861 | | | | — | | | | 7,861 | | | | — | | | | 7,861 | | | | | | | | | | |
Loans held for sale | | 632 | | | | 632 | | | | — | | | | — | | | | 632 | | | | | | | | | | |
Loans, net of allowance for loan losses | | 354,983 | | | | — | | | | — | | | | 359,518 | | | | 359,518 | | | | | | | | | | |
Bank-owned life insurance | | 16,990 | | | | 16,990 | | | | — | | | | — | | | | 16,990 | | | | | | | | | | |
Accrued interest receivable | | 1,723 | | | | 1,723 | | | | — | | | | — | | | | 1,723 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand, savings and money market deposits | $ | 326,554 | | | $ | 326,554 | | | $ | — | | | $ | — | | | $ | 326,554 | | | | | | | | | | |
Time deposits | | 130,207 | | | | — | | | | — | | | | 133,171 | | | | 133,171 | | | | | | | | | | |
Short-term borrowings | | 4,259 | | | | 4,259 | | | | — | | | | — | | | | 4,259 | | | | | | | | | | |
Federal Home Loan Bank advances - short term | | 15,500 | | | | 6,000 | | | | — | | | | 9,490 | | | | 15,490 | | | | | | | | | | |
Federal Home Loan Bank advances - long term | | 25,000 | | | | — | | | | — | | | | 26,194 | | | | 26,194 | | | | | | | | | | |
Subordinated debt | | 5,155 | | | | — | | | | — | | | | 4,573 | | | | 4,573 | | | | | | | | | | |
Accrued interest payable | | 248 | | | | 248 | | | | — | | | | — | | | | 248 | | | | | | | | | | |
|
| (Amounts in thousands) | | | | | | | | | | |
| 31-Dec-13 | | | | | | | | | | |
| Carrying | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | | | | | | | | | | |
Amount | | | | | | | | | |
ASSETS: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 12,396 | | | $ | 12,396 | | | $ | — | | | $ | — | | | $ | 12,396 | | | | | | | | | | |
Investment securities available-for-sale | | 160,886 | | | | 3,049 | | | | 147,701 | | | | 10,136 | | | | 160,886 | | | | | | | | | | |
Trading securities | | 7,247 | | | | — | | | | 7,247 | | | | — | | | | 7,247 | | | | | | | | | | |
Loans held for sale | | 656 | | | | 656 | | | | — | | | | — | | | | 656 | | | | | | | | | | |
Loans, net of allowance for loan losses | | 343,069 | | | | — | | | | — | | | | 349,190 | | | | 349,190 | | | | | | | | | | |
Bank-owned life insurance | | 15,049 | | | | 15,049 | | | | — | | | | — | | | | 15,049 | | | | | | | | | | |
Accrued interest receivable | | 1,675 | | | | 1,675 | | | | — | | | | — | | | | 1,675 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand, savings and money market deposits | $ | 316,708 | | | $ | 316,708 | | | $ | — | | | $ | — | | | $ | 316,708 | | | | | | | | | | |
Time deposits | | 131,961 | | | | — | | | | — | | | | 135,712 | | | | 135,712 | | | | | | | | | | |
Short-term borrowings | | 3,804 | | | | 3,804 | | | | — | | | | — | | | | 3,804 | | | | | | | | | | |
Federal Home Loan Bank advances - short term | | 8,100 | | | | 8,100 | | | | — | | | | — | | | | 8,100 | | | | | | | | | | |
Federal Home Loan Bank advances - long term | | 34,500 | | | | — | | | | — | | | | 36,646 | | | | 36,646 | | | | | | | | | | |
Subordinated debt | | 5,155 | | | | — | | | | — | | | | 4,694 | | | | 4,694 | | | | | | | | | | |
Accrued interest payable | | 290 | | | | 290 | | | | — | | | | — | | | | 290 | | | | | | | | | | |
|
|
|
|
The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at December 31, 2014. |
|
| (Amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair value at | | | Valuation | | Significant | | Description of Inputs | | | | | | | | | | | | | | | | | | |
December 31, | Technique | Unobservable Input | | | | | | | | | | | | | | | | | |
2014 | | | | | | | | | | | | | | | | | | | |
Trust preferred securities | $ | 779 | | | Discounted Cash Flow | | Projected | | 1) Trust preferred securities issued by banks subject to Dodd-Frank's phase-out of trust preferred securities from Tier 1 Capital. All fixed rate within one year; variable rate at increasing intervals depending on spread. | | | | | | | | | | | | | | | | | | |
Prepayments | 2) Trust preferred securities issued by healthy, well capitalized banks that have fixed rate coupons greater than 8%. | | | | | | | | | | | | | | | | | |
| 3) 1% annually for all other fixed rate issues and all variable rate issues. | | | | | | | | | | | | | | | | | |
| 4) Zero for collateral issued by REITs and 2% for insurance companies. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Projected | | 1) All deferring issuers that do not meet the criteria for curing, as described below, are projected to default immediately. | | | | | | | | | | | | | | | | | | |
Defaults | 2) Banks with high, near team default risk are identified using a CAMELS model, and projected to default immediately. Healthy banks are projected to default at a rate of 2% annually for 2 years, and 0.36% annually thereafter. | | | | | | | | | | | | | | | | | |
| 3) Insurance and REIT defaults are projected according to the historical default rates exhibited by companies with the same credit ratings. Historical default rates are doubled in each of the first two years of the projection to account for current economic conditions. Unrated issuers are assumed to have CCC- ratings. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Projected Cures | | 1) Deferring issuers that have definitive agreements to either be acquired or recapitalized. | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Projected | | 1) Zero for insurance companies, REITs and insolvent banks, and 10% for projected bank deferrals lagged 2 years. | | | | | | | | | | | | | | | | | | |
Recoveries | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Discount Rates | | 1) Ranging from ~10.24% to ~15.75%, depending on each bond's seniority and remaining subordination after projected losses. | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired loans | | 6,288 | | | Appraisal of | | Appraisal | | Range (0)% to (40)% | | | | | | | | | | | | | | | | | | |
Collateral (1) | Adjustments (2) | Weighted average (23)% | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Liquidation | | Range (0)% to (33)% | | | | | | | | | | | | | | | | | | |
Expenses (2) | Weighted average (6)% | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other real estate owned | | 40 | | | Appraisal of | | Appraisal | | | 0% | | | | | | | | | | | | | | | | | | |
Collateral (1), (3) | Adjustments (2) | | | | | | | | | | | | | | | | | |
|
-1 | Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
-2 | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses are presented as a percent of the appraisal. The adjustment of appraised value is measured as the effect on fair value as a percentage of unpaid principal. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
-3 | Includes qualitative adjustments by management and estimated liquidation expenses. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at December 31, 2013. |
|
| (Amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair value at | | | Valuation Technique | | Significant | | Description of Inputs | | | | | | | | | | | | | | | | | | |
December 31, | Unobservable Input | | | | | | | | | | | | | | | | | |
2013 | | | | | | | | | | | | | | | | | | |
Trust preferred securities | $ | 10,136 | | | Discounted Cash Flow | | Projected | | 1) Trust preferred securities issued by banks subject to Dodd-Frank's phase-out of trust preferred securities from Tier 1 Capital. All fixed rate within one year; variable rate at increasing intervals depending on spread. | | | | | | | | | | | | | | | | | | |
Prepayments | 2) Trust preferred securities issued by healthy, well capitalized banks that have fixed rate coupons greater than 8%. | | | | | | | | | | | | | | | | | |
| 3) 1% annually for all other fixed rate issues and all variable rate issues. | | | | | | | | | | | | | | | | | |
| 4) Zero for collateral issued by REITs and 2% for insurance companies. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Projected | | 1) All deferring issuers that do not meet the criteria for curing, as described below, are projected to default immediately. | | | | | | | | | | | | | | | | | | |
Defaults | 2) Banks with high, near team default risk are identified using a CAMELS model, and projected to default immediately. Healthy banks are projected to default at a rate of 2% annually for 2 years, and 0.36% annually thereafter. | | | | | | | | | | | | | | | | | |
| 3) Insurance and REIT defaults are projected according to the historical default rates exhibited by companies with the same credit ratings. Historical default rates are doubled in each of the first two years of the projection to account for current economic conditions. Unrated issuers are assumed to have CCC- ratings. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Projected Cures | | 1) Deferring issuers that have definitive agreements to either be acquired or recapitalized. | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Projected | | 1) Zero for insurance companies, REITs and insolvent banks, and 10% for projected bank deferrals lagged 2 years. | | | | | | | | | | | | | | | | | | |
Recoveries | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Discount Rates | | 1) Ranging from ~5.65% to ~17.85%, depending on each bond's seniority and remaining subordination after projected losses. | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired loans | | 5,251 | | | Appraisal of | | Appraisal | | Range (7)% to (30)% | | | | | | | | | | | | | | | | | | |
Collateral (1) | Adjustments (2) | Weighted average (21)% | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Liquidation | | Range (0)% to (26)% | | | | | | | | | | | | | | | | | | |
Expenses (2) | Weighted average (6)% | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other real estate owned | | 33 | | | Appraisal of | | Appraisal | | | 0% | | | | | | | | | | | | | | | | | | |
Collateral (1), (3) | Adjustments (2) | | | | | | | | | | | | | | | | | |
-1 | Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
-2 | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses are presented as a percent of the appraisal. The adjustment of appraised value is measured as the effect on fair value as a percentage of unpaid principal. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
-3 | Includes qualitative adjustments by management and estimated liquidation expenses. | | | | | | | | | | | | | | | | | | | | | | | | | | | |