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ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS | 3 Months Ended
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Mar. 31, 2016
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS |
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS | 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS FASB ASC No. 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes 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 values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Assets and liabilities measured on a recurring basis:
|  |  |  |  | Fair Value Measurements at |
|  |  |  |  | 3/31/2016 |
|  |  |  |  |  |  |  | Significant |  |  |  |
|  |  |  |  | Quoted Prices In |  |  | Other |  |  | Significant |
|  |  |  |  | Active Markets for |  |  | Observable |  |  | Unobservable |
|  | Carrying |  |  | Identical Assets |  |  | Inputs |  |  | Inputs |
(In thousands) |  | Value |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available for sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. GSE securities |  | $ | 67,306 |  |  |  |  |  |  | $ | 67,306 |  |  |  |  |
State and municipal obligations |  |  | 103,679 |  |  |  |  |  |  |  | 103,679 |  |  |  |  |
U.S. GSE residential mortgage-backed securities |  |  | 216,524 |  |  |  |  |  |  |  | 216,524 |  |  |  |  |
U.S. GSE residential collateralized mortgage obligations |  |  | 360,863 |  |  |  |  |  |  |  | 360,863 |  |  |  |  |
U.S. GSE commercial mortgage-backed securities |  |  | 12,656 |  |  |  |  |  |  |  | 12,656 |  |  |  |  |
U.S. GSE commercial collateralized mortgage obligations |  |  | 69,061 |  |  |  |  |  |  |  | 69,061 |  |  |  |  |
Other asset backed securities |  |  | 22,310 |  |  |  |  |  |  |  | 22,310 |  |  |  |  |
Corporate bonds |  |  | 31,227 |  |  |  |  |  |  |  | 31,227 |  |  |  |  |
Total available for sale |  | $ | 883,626 |  |  |  |  |  |  | $ | 883,626 |  |  |  |  |
Derivatives |  | $ | 2,096 |  |  |  |  |  |  | $ | 2,096 |  |  |  |  |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives |  | $ | 5,162 |  |  |  |  |  |  | $ | 5,162 |  |  |  |  |
|  |  |  |  | Fair Value Measurements at |
|  |  |  |  | December 31, 2015 Using: |
|  |  |  |  |  |  |  | Significant |  |  |  |
|  |  |  |  | Quoted Prices In |  |  | Other |  |  | Significant |
|  |  |  |  | Active Markets for |  |  | Observable |  |  | Unobservable |
|  | Carrying |  |  | Identical Assets |  |  | Inputs |  |  | Inputs |
(In thousands) |  | Value |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available for sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. GSE securities |  | $ | 62,674 |  |  |  |  |  |  | $ | 62,674 |  |  |  |  |
State and municipal obligations |  |  | 87,935 |  |  |  |  |  |  |  | 87,935 |  |  |  |  |
U.S. GSE residential mortgage-backed securities |  |  | 200,264 |  |  |  |  |  |  |  | 200,264 |  |  |  |  |
U.S. GSE residential collateralized mortgage obligations |  |  | 317,878 |  |  |  |  |  |  |  | 317,878 |  |  |  |  |
U.S. GSE commercial mortgage-backed securities |  |  | 12,418 |  |  |  |  |  |  |  | 12,418 |  |  |  |  |
U.S. GSE commercial collateralized mortgage obligations |  |  | 64,198 |  |  |  |  |  |  |  | 64,198 |  |  |  |  |
Other Asset backed securities |  |  | 22,371 |  |  |  |  |  |  |  | 22,371 |  |  |  |  |
Corporate bonds |  |  | 32,465 |  |  |  |  |  |  |  | 32,465 |  |  |  |  |
Total available for sale |  | $ | 800,203 |  |  |  |  |  |  | $ | 800,203 |  |  |  |  |
Derivatives |  | $ | 779 |  |  |  |  |  |  | $ | 779 |  |  |  |  |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives |  | $ | 2,073 |  |  |  |  |  |  | $ | 2,073 |  |  |  |  |
Assets measured at fair value on a non-recurring basis are summarized below:
|  |  |  |  | Fair Value Measurements at |
|  |  |  |  | March 31, 2016 Using: |
|  |  |  |  |  |  |  | Significant |  |  |  |
|  |  |  |  | Quoted Prices In |  |  | Other |  |  | Significant |
|  |  |  |  | Active Markets for |  |  | Observable |  |  | Unobservable |
|  | Carrying |  |  | Identical Assets |  |  | Inputs |  |  | Inputs |
(In thousands) |  | Value |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Impaired loans |  | $ | 167 |  |  |  | — |  |  |  | — |  |  | $ | 167 |
|  |  |  |  | Fair Value Measurements at |
|  |  |  |  | December 31, 2015 Using: |
|  |  |  |  |  |  |  | Significant |  |  |  |
|  |  |  |  | Quoted Prices In |  |  | Other |  |  | Significant |
|  |  |  |  | Active Markets for |  |  | Observable |  |  | Unobservable |
|  | Carrying |  |  | Identical Assets |  |  | Inputs |  |  | Inputs |
(In thousands) |  | Value |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Impaired loans |  | $ | 483 |  |  |  | — |  |  |  | — |  |  | $ | 483 |
Other real estate owned |  |  | 250 |  |  |  | — |  |  |  | — |  |  |  | 250 |
Impaired loans with allocated allowance for loan losses at March 31, 2016 had a carrying amount of $0.2 million, which is made up of the outstanding balance of $0.2 million, net of a valuation allowance of $0.02 million. This resulted in an additional provision for loan losses of $0.02 million that is included in the amount reported on the income statement. Impaired loans with allocated allowance for loan losses at December 31, 2015, had a carrying amount of $0.5 million, which is made up of the outstanding balance of $0.5 million, net of a valuation allowance of $0.03 million. This resulted in an additional provision for loan losses of $0.03 million that is included in the amount reported on the Consolidated Statements of Income. There was no other real estate owned at March 31, 2016. Other real estate owned at December 31, 2015 had a carrying amount of $250,000 and no valuation allowance recorded. Accordingly, there was no additional provision for loan losses include in the amount reported on the Consolidated Statements of Income. The Company used the following method and assumptions in estimating the fair value of its financial instruments: Cash and Due from Banks and Federal Funds Sold: Carrying amounts approximate fair value, since these instruments are either payable on demand or have short-term maturities. Cash on hand and non-interest due from bank accounts are Level 1 and interest bearing Cash Due from Banks and Federal Funds Sold are Level 2. Securities Available for Sale and Held to Maturity: The estimated fair values are based on independent dealer quotations on nationally recognized securities exchanges, if available (Level 1). For securities where quoted prices are not available, fair value is based on matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Restricted Securities: It is not practicable to determine the fair value of FHLB, ACBB and FRB stock due to restrictions placed on its transferability. Derivatives: Represents interest rate swaps and the estimated fair values are based on valuation models using observable market data as of measurement date (Level 2). Loans: The estimated fair values of real estate mortgage loans and other loans receivable are based on discounted cash flow calculations that use available market benchmarks when establishing discount factors for the types of loans resulting in a Level 3 classification. Exceptions may be made for adjustable rate loans (with resets of one year or less), which would be discounted straight to their rate index plus or minus an appropriate spread. All nonaccrual loans are carried at their current fair value. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price and therefore, while permissible for presentation purposes under ASC 825-10, do not conform to ASC 820-10. Impaired Loans and Other Real Estate Owned: For impaired loans, the Company evaluates the fair value of the loan in accordance with current accounting guidance. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based upon recent appraised values. The fair value of other real estate owned is also evaluated in accordance with current accounting guidance and determined based upon recent appraised values less the estimated cost to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Adjustments may relate to location, square footage, condition, amenities, market rate of leases as well as timing of comparable sales. All appraisals undergo a second review process to insure that the methodology employed and the values derived are accurate. The fair value of the loan is compared to the carrying value to determine if any write-down or specific reserve is required. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Credit Administration department 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. On a quarterly basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. Management also considers the appraisal values for commercial properties associated with current loan origination activity. Collectively, this information is reviewed to help assess current trends in commercial property values. For each collateral dependent impaired loan, management considers information that relates to the type of commercial property to determine if such properties may have appreciated or depreciated in value since the date of the most recent appraisal. Adjustments to fair value are made only when the analysis indicates a probable decline in collateral values. Adjustments made in the appraisal process are not deemed material to the overall consolidated financial statements given the level of impaired loans measured at fair value on a nonrecurring basis. Deposits: The estimated fair value of certificates of deposits are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for certificates of deposits maturities resulting in a Level 2 classification. Stated value is fair value for all other deposits resulting in a Level 1 classification. Borrowed Funds: The estimated fair value of borrowed funds are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for funding maturities resulting in a Level 2 classification. Subordinated Debentures: The estimated fair value is derived using discounted cash flow methodology based on a spread to the London Interbank Offered Rate (“LIBOR”) curve at the time of issuance and assuming the debt was issued at PAR resulting in a Level 3 classification. Junior Subordinated Debentures: The estimated fair value is based on estimates using market data for similarly risk weighted items and takes into consideration the convertible features of the debentures into common stock of the Company which is an unobservable input resulting in a Level 3 classification. Accrued Interest Receivable and Payable: For these short-term instruments, the carrying amount is a reasonable estimate of the fair value resulting in a Level 1 or 2 classification. Off-Balance-Sheet Liabilities: The fair value of off-balance-sheet commitments to extend credit is estimated using fees currently charged to enter into similar agreements. The fair value is immaterial as of March 31, 2016 and December 31, 2015. Fair value estimates are made at specific points in time and are based on existing on-and off-balance sheet financial instruments. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial instrument or group of financial instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments. The estimated fair values and recorded carrying amounts of the Company’s financial instruments at March 31, 2016 and December 31, 2015 are as follows:
|  |  |  |  | Fair Value Measurements at |  |  |  |
|  |  |  |  | March 31, 2016 Using: |  |  |  |
|  |  |  |  |  |  |  | Significant |  |  |  |  |  |  |
|  |  |  |  | Quoted Prices In |  |  | Other |  |  | Significant |  |  |  |
|  |  |  |  | Active Markets for |  |  | Observable |  |  | Unobservable |  |  |  |
|  | Carrying |  |  | Identical Assets |  |  | Inputs |  |  | Inputs |  |  |  |
(In thousands) |  | Amount |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 44,797 |  |  | $ | 44,797 |  |  | $ | - |  |  | $ | - |  |  | $ | 44,797 |
Interest bearing deposits with banks |  |  | 22,411 |  |  |  | - |  |  |  | 22,411 |  |  |  | - |  |  |  | 22,411 |
Securities available for sale |  |  | 883,626 |  |  |  | - |  |  |  | 883,626 |  |  |  | - |  |  |  | 883,626 |
Securities restricted |  |  | 24,865 |  |  |  | n/a |  |  |  | n/a |  |  |  | n/a |  |  |  | n/a |
Securities held to maturity |  |  | 218,278 |  |  |  | - |  |  |  | 223,535 |  |  |  | - |  |  |  | 223,535 |
Loans, net |  |  | 2,459,448 |  |  |  | - |  |  |  | - |  |  |  | 2,468,721 |  |  |  | 2,468,721 |
Derivatives |  |  | 2,096 |  |  |  |  |  |  |  | 2,096 |  |  |  |  |  |  |  | 2,096 |
Accrued interest receivable |  |  | 9,982 |  |  |  | - |  |  |  | 3,810 |  |  |  | 6,172 |  |  |  | 9,982 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Certificates of deposit |  |  | 267,578 |  |  |  | - |  |  |  | 268,784 |  |  |  | - |  |  |  | 268,784 |
Demand and other deposits |  |  | 2,672,834 |  |  |  | 2,672,834 |  |  |  | - |  |  |  | - |  |  |  | 2,672,834 |
Federal funds purchased |  |  | 135,000 |  |  |  | 135,000 |  |  |  | - |  |  |  | - |  |  |  | 135,000 |
Federal Home Loan Bank term advances |  |  | 299,174 |  |  |  | 199,207 |  |  |  | 102,149 |  |  |  | - |  |  |  | 301,356 |
Repurchase agreements |  |  | 50,965 |  |  |  | - |  |  |  | 52,029 |  |  |  | - |  |  |  | 52,029 |
Subordinated Debentures |  |  | 78,397 |  |  |  | - |  |  |  | - |  |  |  | 82,681 |  |  |  | 82,681 |
Junior Subordinated Debentures |  |  | 15,879 |  |  |  | - |  |  |  | - |  |  |  | 17,464 |  |  |  | 17,464 |
Derivatives |  |  | 5,162 |  |  |  | - |  |  |  | 5,162 |  |  |  | - |  |  |  | 5,162 |
Accrued interest payable |  |  | 568 |  |  |  | 74 |  |  |  | 494 |  |  |  | - |  |  |  | 568 |
|  |  |  |  | Fair Value Measurements at |  |  |  |
|  |  |  |  | December 31, 2015 Using: |  |  |  |
|  |  |  |  |  |  |  | Significant |  |  |  |  |  |  |
|  |  |  |  | Quoted Prices In |  |  | Other |  |  | Significant |  |  |  |
|  |  |  |  | Active Markets for |  |  | Observable |  |  | Unobservable |  |  |  |
|  | Carrying |  |  | Identical Assets |  |  | Inputs |  |  | Inputs |  |  |  |
(In thousands) |  | Amount |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 79,750 |  |  | $ | 79,750 |  |  | $ | - |  |  | $ | - |  |  | $ | 79,750 |
Interest bearing deposits with banks |  |  | 24,808 |  |  |  | - |  |  |  | 24,808 |  |  |  | - |  |  |  | 24,808 |
Securities available for sale |  |  | 800,203 |  |  |  | - |  |  |  | 800,203 |  |  |  | - |  |  |  | 800,203 |
Securities restricted |  |  | 24,788 |  |  |  | n/a |  |  |  | n/a |  |  |  | n/a |  |  |  | n/a |
Securities held to maturity |  |  | 208,351 |  |  |  | - |  |  |  | 210,003 |  |  |  | - |  |  |  | 210,003 |
Loans, net |  |  | 2,390,030 |  |  |  | - |  |  |  | - |  |  |  | 2,379,171 |  |  |  | 2,379,171 |
Derivatives |  |  | 779 |  |  |  |  |  |  |  | 779 |  |  |  |  |  |  |  | 779 |
Accrued interest receivable |  |  | 9,270 |  |  |  | - |  |  |  | 3,228 |  |  |  | 6,042 |  |  |  | 9,270 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Certificates of deposit |  |  | 292,855 |  |  |  | - |  |  |  | 293,368 |  |  |  | - |  |  |  | 293,368 |
Demand and other deposits |  |  | 2,550,770 |  |  |  | 2,550,770 |  |  |  | - |  |  |  | - |  |  |  | 2,550,770 |
Federal funds purchased |  |  | 120,000 |  |  |  | 120,000 |  |  |  | - |  |  |  | - |  |  |  | 120,000 |
Federal Home Loan Bank term advances |  |  | 297,507 |  |  |  | 197,243 |  |  |  | 100,772 |  |  |  | - |  |  |  | 298,015 |
Repurchase agreements |  |  | 50,891 |  |  |  | - |  |  |  | 51,480 |  |  |  | - |  |  |  | 51,480 |
Subordinated Debentures |  |  | 78,363 |  |  |  | - |  |  |  | - |  |  |  | 78,830 |  |  |  | 78,830 |
Junior Subordinated Debentures |  |  | 15,878 |  |  |  | - |  |  |  | - |  |  |  | 16,566 |  |  |  | 16,566 |
Derivatives |  |  | 2,073 |  |  |  | - |  |  |  | 2,073 |  |  |  | - |  |  |  | 2,073 |
Accrued interest payable |  |  | 1,644 |  |  |  | 93 |  |  |  | 1,551 |  |  |  | - |  |  |  | 1,644 |

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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/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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