Enter Agreement, Regulation FD, Other Events, Exhibits
8-K
2019-05-21
Shareholder Vote
8-K
2019-05-20
Regulation FD, Exhibits
8-K
2019-05-17
Officers
8-K
2019-05-06
Officers
8-K
2019-05-06
Regulation FD, Exhibits
8-K
2019-04-18
Earnings, Other Events, Exhibits
8-K
2019-02-12
Regulation FD, Exhibits
8-K
2019-01-31
Earnings, Regulation FD, Other Events, Exhibits
8-K
2019-01-30
Officers, Amend Bylaw, Exhibits
8-K
2019-01-07
Officers, Exhibits
8-K
2018-12-07
Regulation FD, Exhibits
8-K
2018-11-13
Regulation FD, Exhibits
8-K
2018-10-18
Earnings, Other Events, Exhibits
8-K
2018-08-15
Regulation FD, Exhibits
8-K
2018-08-01
Accountant
8-K
2018-07-19
Earnings, Other Events, Exhibits
8-K
2018-06-07
Accountant, Exhibits
8-K
2018-06-01
Regulation FD
8-K
2018-05-24
Shareholder Vote
8-K
2018-05-22
Officers, Exhibits
8-K
2018-05-21
Regulation FD, Exhibits
8-K
2018-05-08
Regulation FD, Exhibits
8-K
2018-04-16
Earnings, Other Events, Exhibits
8-K
2018-03-22
Other Events, Exhibits
8-K
2018-02-07
Regulation FD, Exhibits
8-K
2018-02-06
Exhibits
8-K
2018-01-22
Earnings, Regulation FD, Other Events, Exhibits
8-K
2018-01-12
Earnings, Other Events
Comparables
ERIC
Ericsson Lm Telephone
30,370
GRFS
Grifols
12,660
ALGT
Allegiant Travel
2,320
INSP
Inspire Medical Systems
1,260
OEC
Orion Engineered Carbons
1,190
DSX
Diana Shipping
335
CRMD
Cormedix
178
UDN
Invesco DB US Dollar Index Bearish Fund
0
PCFG
Pacific Gold & Royalty
0
BMIX
Brazil Minerals
0
STBA 2019-03-31
Content
Note 1. Basis of Presentation
Note 2. Earnings per Share
Note 3. Fair Value Measurements
Note 4. Securities
Note 5. Loans and Loans Held for Sale
Note 6. Allowance for Loan Losses
Note 7. Right-Of-Use Assets and Lease Liabilities
Note 8. Derivative Instruments and Hedging Activities
Note 9. Borrowings
Note 10. Commitments and Contingencies
Note 11. Revenue From Contracts with Customers
Note 12. Other Comprehensive Income/(Loss)
Note 13. Employee Benefits
Note 14. Qualified Affordable Housing Projects
Note 15. Sale of A Majority Interest of Insurance Business
Note 16. Share Repurchase Plan
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-31.1
exhibit311q1-2019.htm
EX-31.2
exhibit312q1-2019.htm
EX-32
exhibit32q1-2019.htm
S&T Bancorp Earnings 2019-03-31
STBA 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 stba-201933110q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________________________________
FORM 10-Q
______________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-12508
______________________________________
S&T BANCORP, INC.
(Exact name of registrant as specified in its charter)
______________________________________
Pennsylvania
25-1434426
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
800 Philadelphia Street, Indiana, PA
15701
(Address of principal executive offices)
(zip code)
800-325-2265
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
Common Stock, $2.50 Par Value - 34,329,717 shares as of April 30, 2019
Cash and due from banks, including interest-bearing deposits of $61,327 and $82,740 at March 31, 2019 and December 31, 2018
$
116,820
$
155,489
Securities, at fair value
680,420
684,872
Loans held for sale
2,706
2,371
Portfolio loans, net of unearned income
5,935,452
5,946,648
Allowance for loan losses
(61,409
)
(60,996
)
Portfolio loans, net
5,874,043
5,885,652
Bank owned life insurance
74,401
73,900
Premises and equipment, net
42,199
41,730
Federal Home Loan Bank and other restricted stock, at cost
19,959
29,435
Goodwill
287,446
287,446
Other intangible assets, net
2,418
2,601
Other assets
128,850
88,725
Total Assets
$
7,229,262
$
7,252,221
LIABILITIES
Deposits:
Noninterest-bearing demand
$
1,423,436
$
1,421,156
Interest-bearing demand
541,053
573,693
Money market
1,700,964
1,482,065
Savings
767,175
784,970
Certificates of deposit
1,400,773
1,412,038
Total Deposits
5,833,401
5,673,922
Securities sold under repurchase agreements
23,427
18,383
Short-term borrowings
235,000
470,000
Long-term borrowings
70,418
70,314
Junior subordinated debt securities
45,619
45,619
Other liabilities
78,241
38,222
Total Liabilities
6,286,106
6,316,460
SHAREHOLDERS’ EQUITY
Common stock ($2.50 par value) Authorized—50,000,000 shares Issued—36,130,480 shares at March 31, 2019 and at December 31, 2018 Outstanding— 34,330,136 shares at March 31, 2019 and 34,683,874 shares at December 31, 2018
90,326
90,326
Additional paid-in capital
210,949
210,345
Retained earnings
716,078
701,819
Accumulated other comprehensive loss
(16,931
)
(23,107
)
Treasury stock (1,800,344 shares at March 31, 2019 and 1,446,606 shares at December 31, 2018, at cost)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(dollars in thousands, except share and per share data)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive (Loss)/Income
Treasury
Stock
Total
Balance at January 1, 2018
$
90,326
$
216,106
$
628,107
$
(18,427
)
$
(32,081
)
$
884,031
Net income for the three months ended March 31, 2018
—
—
26,163
—
—
26,163
Other comprehensive income (loss), net of tax
—
—
—
(6,973
)
—
(6,973
)
Reclassification of tax effects from the Tax Act(1)
—
—
3,691
(3,691
)
—
—
Reclassification of net unrealized gains on equity securities(2)
—
—
862
(862
)
—
—
Cash dividends declared ($0.22 per share)
—
—
(7,669
)
—
—
(7,669
)
Treasury stock issued for restricted awards (66,165 shares, net of 37,592 forfeitures)
—
—
(1,229
)
—
572
(657
)
Recognition of restricted stock compensation expense
—
512
—
—
—
512
Balance at March 31, 2018
$
90,326
$
216,618
$
649,925
$
(29,953
)
$
(31,509
)
$
895,407
Balance at January 1, 2019
$
90,326
$
210,345
$
701,819
$
(23,107
)
$
(43,622
)
$
935,761
Net Income for the three months ended March 31, 2019
—
—
22,928
—
—
22,928
Other comprehensive income (loss), net of tax
—
—
—
6,176
—
6,176
Impact of new lease standard
167
167
Cash dividends declared ($0.27 per share)
—
—
(9,317
)
—
—
(9,317
)
Forfeitures of restricted stock awards (39,834 shares)
—
—
481
—
(1,357
)
(876
)
Repurchase of S&T Stock (313,904 shares)
—
—
—
—
(12,287
)
(12,287
)
Recognition of restricted stock compensation expense
—
604
—
—
—
604
Balance at March 31, 2019
$
90,326
$
210,949
$
716,078
$
(16,931
)
$
(57,266
)
$
943,156
See Notes to Consolidated Financial Statements
(1)Reclassification due to the adoption of ASU No. 2018-02, $(3,924) relates to funded status of pension and $233 relates to net unrealized gains on available-for-sale securities.
(2)Reclassification due to the adoption of ASU No. 2016-01.
The interim Consolidated Financial Statements include the accounts of S&T Bancorp, Inc., or S&T, and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Investments of 20 percent to 50 percent of the outstanding common stock of investees are accounted for using the equity method of accounting.
Basis of Presentation
The accompanying unaudited interim Consolidated Financial Statements of S&T have been prepared in accordance with generally accepted accounting principles, or GAAP, in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission, or SEC, on February 21, 2019. In the opinion of management, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.
On January 1, 2018, we sold a 70 percent majority interest in the assets of our wholly-owned subsidiary S&T Evergreen Insurance, LLC. We transferred our remaining 30 percent ownership interest in the net assets of S&T Evergreen Insurance, LLC to a new entity for a 30 percent ownership interest in a new insurance entity (see Note 15: Sale of a Majority Interest of Insurance Business). We use the equity method of accounting to recognize our partial ownership interest in the new entity.
Reclassification
Amounts in prior period financial statements and footnotes are reclassified whenever necessary to conform to the current period presentation. Reclassifications had no effect on our results of operations or financial condition.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Recently Adopted Accounting Standards Updates, or ASU or Update
Leases - Section A-Amendments to the FASB Accounting Standards Codification, Section B-Conforming Amendments Related to Leases and Section C-Background Information and Basis for Conclusions
In February 2016, the Financial Accounting Standards Board, or FASB, established ASC Topic 842, by issuing ASU No. 2016-02, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use, or ROU, model that requires a lessee to recognize ROU assets and lease liabilities on the balance sheet. Leases will be classified as finance or operating leases, with classification affecting the pattern and classification of expense recognition in the statement of operations. We adopted the new standard on January 1, 2019 (see Note 7: Right-of-Use Assets and Lease Liabilities).
The new standard provides a number of optional practical expedients in transition. We have elected the "package of practical expedients," which permit us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the "use-of-hindsight" practical expedient which allows us to use hindsight in judgments that impact the lease term. We have also elected an accounting policy not to restate comparative periods upon adoption.
The most significant effects of adopting the new standard relate to the recognition of ROU assets and lease liabilities on our balance sheet for our real estate leases and providing significant new disclosures about our leasing activities.
Upon adoption, we recognized additional finance lease liabilities of approximately $1.2 million and operating lease liabilities, net of deferred rent, of approximately $33.7 million based on the present value of the remaining minimum rental
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 1. BASIS OF PRESENTATION - continued
payments under current leasing standards for existing leases. We also recognized corresponding finance ROU assets of $1.2 million and operating ROU assets of approximately $33.4 million. The adoption had no material impact on the Consolidated Statements of Comprehensive Income.
The new standard also provides practical expedients for our ongoing lease accounting. We elected the short-term lease recognition exemption for all leases with terms of 12 months or less. This means that we will not recognize ROU assets or lease liabilities for existing short-term leases of those assets in transition. Beginning in 2019, we made changes to our disclosed lease recognition policies and practices, as well as to other related financial statement disclosures due to the adoption of this standard (See Note 7: Right-of-Use Assets and Lease Liabilities).
Leases - Land Easement Practical Expedient for Transition to Topic 842
In January 2018, the FASB issued ASU No. 2018-01, Leases - Land Easement Practical Expedient for Transition to Topic 842. The amendments in this ASU permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that existed or expired before the entity's adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. We have one land easement lease that we previously accounted for under Topic 840; as such, this lease has been recognized as an operating lease under Topic 842. We adopted the amendments in this ASU in conjunction with the adoption of the new lease standard, ASU 2016-02.
Accounting Standards Issued But Not Yet Adopted
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU apply to an entity that is a customer in a hosting arrangement that is a service contract. These amendments relate to accounting for implementation costs (e.g., implementation, setup and other upfront costs.) These amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which costs to capitalize and which costs to expense. These amendments require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This ASU is effective for annual and interim periods beginning after December 15, 2019. Early adoption of the amendments is permitted, including adoption in any interim period. We are evaluating the amendments in this ASU; however, we do not anticipate that these amendments will materially impact our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU apply to all employers that sponsor defined benefit pension or other postretirement plans. These amendments remove certain disclosures from Topic 715-20 and require additional disclosures. The amendments in this ASU will require S&T to update our employee benefits disclosures beginning with our Form 10-Q for the period ended March 31, 2021. The amendments in this ASU will have no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove certain disclosures from Topic 820, modify disclosures and/or require additional disclosures. The amendments in this Update will require us to change our Fair Value disclosures beginning with our Form 10-Q for the period ended March 31, 2020. The amendments in this ASU will have no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 1. BASIS OF PRESENTATION - continued
Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment (Topic 350). The main objective of this ASU is to simplify the current requirements for testing goodwill for impairment by eliminating step two from the goodwill impairment test. The amendments are expected to reduce the complexity and costs associated with performing the goodwill impairment test, which could result in recording impairment charges sooner than under the current guidance. This Update is effective for any interim and annual impairment tests in reporting periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU is not expected to have any impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments of this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as CECL, or current expected credit loss, model. This Update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We have created a CECL Committee to govern the implementation of these amendments consisting of key stakeholders from Credit Administration, Finance, Risk Management and Internal Audit. We have engaged a third-party to assist us in developing our CECL methodology. We continue to evaluate the provisions of this ASU to determine the potential impact on our Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 2. EARNINGS PER SHARE
Diluted earnings per share is calculated using both the two-class and the treasury stock methods with the more dilutive method used to determine diluted earnings per share. For the three months ended March 31, 2019, the treasury stock method is more dilutive and was used to determine diluted earnings per share. The following table reconciles the numerators and denominators of basic and diluted earnings per share calculations for the periods presented.
Three Months Ended March 31,
(in thousands, except share and per share data)
2019
2018
Numerator for Earnings per Share—Basic:
Net income
$
22,928
$
26,163
Less: Income allocated to participating shares
62
80
Net Income Allocated to Shareholders
$
22,866
$
26,083
Numerator for Earnings per Share—Diluted:
Net income
$
22,928
$
26,163
Net Income Available to Shareholders
$
22,928
$
26,163
Denominators for Earnings per Share:
Weighted Average Shares Outstanding—Basic
34,414,555
34,756,726
Add: Potentially dilutive shares
128,256
242,439
Denominator for Treasury Stock Method—Diluted
34,542,811
34,999,165
Weighted Average Shares Outstanding—Basic
34,414,555
34,756,726
Add: Average participating shares outstanding
92,659
106,722
Denominator for Two-Class Method—Diluted
34,507,214
34,863,448
Earnings per share—basic
$
0.67
$
0.75
Earnings per share—diluted
$
0.66
$
0.75
Warrants considered anti-dilutive excluded from potentially dilutive shares - exercise price $31.53 per share, expires January 2019 (1)
—
400,722
Restricted stock considered anti-dilutive excluded from potentially dilutive shares
68,314
90,298
(1)We repurchased our outstanding warrant on September 11, 2018 for $7.7 million. Prior to the repurchase, the warrant provided the holder the right to 517,012 shares of common stock at a strike price of $31.53 per share via cashless exercise.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 3. FAIR VALUE MEASUREMENTS
We use fair value measurements when recording and disclosing certain financial assets and liabilities. Debt securities, equity securities and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans, other real estate owned, or OREO, and other repossessed assets, mortgage servicing rights, or MSRs, and certain other assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data that we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.
Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining 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. Our policy is to recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.
The following are descriptions of the valuation methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis.
Recurring Basis
Debt Securities Available-for-Sale
We obtain fair values for debt securities from a third-party pricing service which utilizes several sources for valuing fixed-income securities. We validate prices received from our pricing service through comparison to a secondary pricing service and broker quotes. We review the methodologies of the pricing services which provide us with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of our debt securities. The market valuation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and conditions databases, and extensive quality control programs.
Equity Securities
Marketable equity securities that have an active, quotable market are classified as Level 1. Marketable equity securities that are quotable, but are thinly traded or inactive, are classified as Level 2. Marketable equity securities that are not readily traded and do not have a quotable market are classified as Level 3.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 3. FAIR VALUE MEASUREMENTS – continued
Deferred Compensation Plan Assets
We use quoted market prices to determine the fair value of our equity security assets. These securities are reported at fair value with the gains and losses included in noninterest income in our Consolidated Statements of Comprehensive Income. These assets are held in a deferred compensation plan and are invested in readily quoted mutual funds. Accordingly, these assets are classified as Level 1. Deferred compensation plan assets are reported in other assets in the Consolidated Balance Sheets.
Derivative Financial Instruments
We use derivative instruments, including interest rate swaps for commercial loans with our customers, interest rate lock commitments and the sale of mortgage loans in the secondary market. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. Accordingly, derivatives are classified as Level 2. We incorporate credit valuation adjustments into the valuation models to appropriately reflect both our own nonperformance risk and the respective counterparties’ nonperformance risk in calculating fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements and collateral postings.
Nonrecurring Basis
Loans Held for Sale
Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and, from time to time, certain loans transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. The fair value of 1-4 family residential loans is based on the principal or most advantageous market currently offered for similar loans using observable market data. The fair value of the loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions. Loans held for sale carried at fair value are classified as Level 3.
Impaired Loans
Impaired loans are carried at the lower of carrying value or fair value. Fair value is determined as the recorded investment balance less any specific reserve. We establish specific reserves based on the following three impairment methods: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent and we expect to liquidate the collateral. However, if repayment is expected to come from the operation of the collateral, rather than liquidation, then we do not consider estimated selling costs in determining the fair value of the collateral. Collateral values are generally based upon appraisals by approved, independent state certified appraisers. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3.
OREO and Other Repossessed Assets
OREO and other repossessed assets obtained in partial or total satisfaction of a loan are recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Like impaired loans, appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets carried at fair value are classified as Level 3.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 3. FAIR VALUE MEASUREMENTS – continued
Mortgage Servicing Rights
The fair value of MSRs is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. The valuation model includes significant unobservable inputs; therefore, MSRs are classified as Level 3. MSRs are reported in other assets in the Consolidated Balance Sheets and are amortized into noninterest income in the Consolidated Statements of Comprehensive Income.
Other Assets
We measure certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write-downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above.
Financial Instruments
In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and a willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks, including interest-bearing deposits, approximate fair value.
Loans
With the adoption of ASU No. 2016-01, Accounting for Financial Instruments - Overall: Classification and Measurement, on January 1, 2018, we refined our methodology to estimate the fair value of our loan portfolio to use the exit price notion as required by the standard. The guidance was applied on a prospective basis resulting in prior periods no longer being comparable.
The fair value of variable rate loans that may reprice frequently at short-term market rates is based on carrying values adjusted for liquidity and credit risk. The fair value of variable rate loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for liquidity and credit risk. The fair value of fixed rate loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk.
Bank Owned Life Insurance
Fair value approximates net cash surrender value of bank owned life insurance, or BOLI.
Federal Home Loan Bank, or FHLB, and Other Restricted Stock
It is not practical to determine the fair value of our FHLB and other restricted stock due to the restrictions placed on the transferability of these stocks; it is presented at carrying value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 3. FAIR VALUE MEASUREMENTS – continued
Deposits
The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates fair value.
Short-Term Borrowings
The carrying amounts of securities sold under repurchase agreements, or REPOs, and other short-term borrowings approximate their fair values.
Long-Term Borrowings
The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values.
Junior Subordinated Debt Securities
The interest rate on the variable rate junior subordinated debt securities is reset quarterly; therefore, the carrying values approximate their fair values.
Loan Commitments and Standby Letters of Credit
Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
Other
Estimates of fair value are not made for items that are not defined as financial instruments, including such items as our core deposit intangibles and the value of our trust operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 3. FAIR VALUE MEASUREMENTS – continued
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at March 31, 2019 and December 31, 2018. There were no transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.
March 31, 2019
(dollars in thousands)
Level 1
Level 2
Level 3
Total
ASSETS
Debt securities available-for-sale:
U.S. Treasury securities
$
—
$
9,837
$
—
$
9,837
Obligations of U.S. government corporations and agencies
—
129,369
—
129,369
Collateralized mortgage obligations of U.S. government corporations and agencies
—
154,159
—
154,159
Residential mortgage-backed securities of U.S. government corporations and agencies
—
22,514
—
22,514
Commercial mortgage-backed securities of U.S. government corporations and agencies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 3. FAIR VALUE MEASUREMENTS – continued
December 31, 2018
(dollars in thousands)
Level 1
Level 2
Level 3
Total
ASSETS
Debt securities available-for-sale:
U.S. Treasury securities
$
—
$
9,736
$
—
$
9,736
Obligations of U.S. government corporations and agencies
—
128,261
—
128,261
Collateralized mortgage obligations of U.S. government corporations and agencies
—
148,659
—
148,659
Residential mortgage-backed securities of U.S. government corporations and agencies
—
24,350
—
24,350
Commercial mortgage-backed securities of U.S. government corporations and agencies
—
246,784
—
246,784
Obligations of states and political subdivisions
—
122,266
—
122,266
Total Debt Securities Available-for-Sale
—
680,056
—
680,056
Marketable equity securities
—
4,816
—
4,816
Total Securities
—
684,872
—
684,872
Securities held in a deferred compensation plan
4,725
—
—
4,725
Derivative financial assets:
Interest rate swaps
—
5,504
—
5,504
Interest rate lock commitments
—
251
—
251
Forward sale contracts - Mortgage Loans
—
55
—
55
Total Assets
$
4,725
$
690,682
$
—
$
695,407
LIABILITIES
Derivative financial liabilities:
Interest rate swaps
$
—
$
5,340
$
—
$
5,340
Total Liabilities
$
—
$
5,340
$
—
$
5,340
Assets Recorded at Fair Value on a Nonrecurring Basis
We may be required to measure certain assets and liabilities at fair value on a nonrecurring basis. Nonrecurring assets are recorded at the lower of cost or fair value in our financial statements. There were no liabilities measured at fair value on a nonrecurring basis at either March 31, 2019 or December 31, 2018.
The following table presents our assets that are measured at fair value on a nonrecurring basis by the fair value hierarchy level as of the dates presented:
March 31, 2019
December 31, 2018
(dollars in thousands)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
ASSETS(1)
Loans held for sale
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Impaired loans
—
—
30,601
30,601
—
—
21,441
21,441
Other real estate owned
—
—
2,613
2,613
—
—
2,826
2,826
Mortgage servicing rights
—
—
1,089
1,089
—
—
1,197
1,197
Total Assets
$
—
$
—
$
34,303
$
34,303
$
—
$
—
$
25,464
$
25,464
(1)This table presents only the nonrecurring items that are recorded at fair value in our financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 4. SECURITIES
The following table presents the fair values of our securities portfolio at the dates presented:
(dollars in thousands)
March 31, 2019
December 31, 2018
Debt securities available-for-sale
$
675,922
$
680,056
Marketable equity securities
4,498
4,816
Total Securities
$
680,420
$
684,872
Debt Securities Available-for-Sale
The following tables present the amortized cost and fair value of debt securities available-for-sale as of the dates presented:
March 31, 2019
December 31, 2018
(dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. Treasury securities
$
9,961
$
—
$
(124
)
$
9,837
$
9,958
$
—
$
(222
)
$
9,736
Obligations of U.S. government corporations and agencies
129,263
373
(267
)
129,369
129,267
68
(1,074
)
128,261
Collateralized mortgage obligations of U.S. government corporations and agencies
153,717
1,608
(1,166
)
154,159
149,849
795
(1,985
)
148,659
Residential mortgage-backed securities of U.S. government corporations and agencies
22,481
229
(196
)
22,514
24,564
203
(417
)
24,350
Commercial mortgage-backed securities of U.S. government corporations and agencies
239,196
272
(1,914
)
237,554
251,660
—
(4,876
)
246,784
Obligations of states and political subdivisions
119,020
3,480
(11
)
122,489
119,872
2,448
(54
)
122,266
Total Debt Securities Available-for-Sale
$
673,638
$
5,962
$
(3,678
)
$
675,922
$
685,170
$
3,514
$
(8,628
)
$
680,056
The following tables present the fair value and the age of gross unrealized losses on debt securities available-for-sale by investment category as of the dates presented:
March 31, 2019
Less Than 12 Months
12 Months or More
Total
(dollars in thousands)
Number of Securities
Fair Value
Unrealized Losses
Number of Securities
Fair Value
Unrealized Losses
Number of Securities
Fair Value
Unrealized Losses
U.S. Treasury securities
—
$
—
$
—
1
$
9,837
$
(124
)
1
$
9,837
$
(124
)
Obligations of U.S. government corporations and agencies
—
—
—
8
65,828
(267
)
8
65,828
(267
)
Collateralized mortgage obligations of U.S. government corporations and agencies
1
2,367
(5
)
14
72,936
(1,161
)
15
75,303
(1,166
)
Residential mortgage-backed securities of U.S. government corporations and agencies
—
—
—
5
11,297
(196
)
5
11,297
(196
)
Commercial mortgage-backed securities of U.S. government corporations and agencies