Junior Subordinated Debt/Trust Preferred Securities

9 Months Ended

Sep. 30, 2020

Debt Disclosure [Abstract]

Junior Subordinated Debt/Trust Preferred Securities

Junior Subordinated Debt/Trust Preferred Securities

Effective September 30, 2009 and beginning with the interest payment due October 1, 2009, the Company elected to defer interest payments on the Company's $15.0 million of junior subordinated debentures relating to its trust preferred securities for the allowable five-year period. Interest payments were subsequently resumed at the end of the allowable deferment. In September 2015, the Company redeemed $3.0 million at par value. The contractual principal balance of the Company's debentures relating to its trust preferred securities is $12.0 million as of September 30, 2020. The Company may redeem the junior subordinated debentures at any time at par.

The Company accounts for its junior subordinated debt issued under USB Capital Trust II at fair value. The Company believes the election of fair value accounting for the junior subordinated debentures better reflects the true economic value of the debt instrument on the balance sheet. As of September 30, 2020, the rate paid on the junior subordinated debt issued under USB Capital Trust II is 3-month LIBOR plus 129 basis points, and is adjusted quarterly.

At September 30, 2020, the Company performed a fair value measurement analysis on its junior subordinated debt using a cash flow model approach to determine the present value of those cash flows. The cash flow model utilizes the forward 3-month LIBOR curve to estimate future quarterly interest payments due over the life of the debt instrument. These cash flows were discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for additional credit and liquidity risks associated with the junior subordinated debt. We believe the 3.83% discount rate used represents what a market participant would consider under the circumstances based on current market assumptions. At September 30, 2020, the total cumulative gain recorded on the debt is $2,432,000.

The net fair value calculation performed as of September 30, 2020 resulted in a net pretax gain adjustment of $672,000 ($473,000, net of tax) for the nine months ended September 30, 2020 compared to a net pretax loss adjustment of $177,000 ($126,000, net of tax) for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, the net $672,000 ($473,000, net of tax) fair value gain adjustment was separately presented as a $1,451,000 gain ($1,022,000, net of tax) recognized on the consolidated statements of income, and a $779,000 loss ($549,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the nine months ended September 30, 2019, the net $177,000 ($126,000, net of tax) fair value loss adjustment was separately presented as a $1,571,000 gain ($1,107,000, net of tax) recognized on the consolidated statements of income, and a $1,748,000 loss ($1,233,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods ended.

The net fair value calculation performed as of September 30, 2020 resulted in a net pretax loss adjustment of $344,000 ($243,000, net of tax) for the quarter ended September 30, 2020 compared to a net pretax gain adjustment of $159,000 ($112,000, net of tax) for the quarter ended September 30, 2019.

For the quarter ended September 30, 2020, the net $344,000 ($243,000, net of tax) fair value loss adjustment was separately presented as a $18,000 loss ($13,000, net of tax) recognized on the consolidated statements of income, and a $326,000 loss ($230,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the quarter ended September 30, 2019, the net $159,000 ($112,000, net of tax) fair value gain adjustment was separately presented as a $660,000 gain ($465,000, net of tax) recognized on the consolidated statements of income, and a $501,000 loss ($353,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods ended.