Park Sterling Corp - 10-K filing on 2017-03-10

Note 18 - Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2016

NOTE

– FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. These fair value estimates are made at each balance sheet date, based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or the price for which a liability could be settled in an orderly transaction between market participants at the measurement date. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The methodologies used for estimating the fair value of financial assets and financial liabilities are discussed below:

Cash and Cash Equivalents

–

Cash and cash equivalents, which are comprised of cash and due from banks, interest-earning balances at banks and Federal funds sold, approximate their fair value.

PARK STERLING CORP

NOTES TO

CONSOLIDATED

FINANCIAL

STATEMENTS

(table amounts in thousands, except share data and per share amounts)

Investment Securities

Available-for-Sale

and Investment Securities Held-to-Maturity

Fair value for investment securities is based on the quoted market price if such information is available. If a quoted market price is not available, fair values are based on quoted market prices of comparable instruments.

Nonmarketable Equity Securities

–

Cost is a reasonable estimate of fair value for nonmarketable equity securities because no quoted market prices are available and the securities are not readily marketable. The carrying amount is adjusted for any other than temporary declines in value.

Loans Held for Sale

For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.

Loans, net of allowance

The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Further adjustments are made to reflect current market conditions. There is no discount for liquidity included in the expected cash flow assumptions.

FDIC Indemnification Asset –

The fair values for the FDIC indemnification asset are estimated based on discounted future cash flows using current discount rates.

Accrued Interest Receivable

The carrying amount is a reasonable estimate of fair value.

Deposits

The fair value of deposits with no stated maturities, including demand deposits, savings, money market and NOW accounts, is the amount payable on demand at the reporting date. The fair value of deposits that have stated maturities, primarily time deposits, is estimated by discounting expected cash flows using the rates currently offered for instruments of similar remaining maturities.

Borrowings

The fair values of short-term and long-term borrowings are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.

Junior

Subordinated Debentures –

The fair value of fixed rate junior subordinated debentures is estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate. The carrying amounts of variable rate junior subordinated debentures are reasonable estimates of fair value because they can reprice frequently.

Accrued Interest Payable

The carrying amount is a reasonable estimate of fair value.

Derivative Instruments

– Fair value for derivative instruments, including interest rate swaps and swap fair value hedges, are recorded at fair value on a recurring basis. Fair value measurement is based on discounted cash flow models. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date.

Financial Instruments with Off-Balance Sheet Risk

With regard to financial instruments with off-balance sheet risk discussed in Note

– Off-Balance Sheet Risk, it is not practicable to estimate the fair value of future financing commitments.

The Company utilizes fair value measurements both to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company

may

be required to record other assets at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

The Company groups assets and liabilities at fair value in

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.

Level

Valuation is based upon quoted prices for identical instruments traded in active markets.

Level

Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

PARK STERLING CORP

NOTES TO

CONSOLIDATED

FINANCIAL

STATEMENTS

(table amounts in thousands, except share data and per share amounts)

Level

Valuation is generated from model-based techniques that use at least

one

significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques

may

include the use of option pricing models, discounted cash flow models and similar techniques.

The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at

December

31:

					Fair Value Measurements
	Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2016:
Financial assets:
Cash and cash equivalents	$	83,614	$	83,614	$	83,614	$	-	$	-
Investment securities available-for-sale		402,501		402,501				401,181		1,320
Investment securities held-to-maturity		91,752		92,828		-		92,828		-
Nonmarketable equity securities		17,501		17,501		-		17,501		-
Loans held for sale		7,996		7,996		-		7,996		-
Loans, net of allowance		2,400,061		2,321,390		-		27,941		2,293,449
Accrued interest receivable		6,799		6,799		-		6,799		-
Derivative instruments		2,290		2,290		-		2,290		-


Financial liabilities:
Deposits with no stated maturity		1,772,680		1,772,680		-		1,772,680		-
Deposits with stated maturities		741,072		744,062		-		744,062		-
Short-term borrowings		285,000		285,000		-		285,000		-
Long-term borrowings		29,736		29,736		-		29,736		-
Subordinated loan and junior subordinated debt		33,501		33,501		-		33,501		-
Accrued interest payable		541		541		-		541		-
Derivative instruments		3,149		3,149		-		3,149		-


December 31, 2015:
Financial assets:
Cash and cash equivalents	$	70,526	$	70,526	$	70,526	$	-	$	-
Investment securities available-for-sale		384,934		384,934				383,434		1,500
Investment securities held-to-maturity		106,458		107,629		-		107,629		-
Nonmarketable equity securities		11,366		11,366		-		11,366		-
Loans held for sale		4,943		4,943		-		4,943		-
Loans, net of allowance		1,732,751		1,674,081		-		32,117		1,641,964
FDIC indemnification asset		943		925		-		-		925
Accrued interest receivable		5,082		5,082		-		5,082		-


Financial liabilities:
Deposits with no stated maturity		1,412,882		1,412,882		-		1,412,882		-
Deposits with stated maturities		539,780		541,823		-		541,823		-
Short-term borrowings		185,000		185,000		-		185,000		-
Long-term borrowings		30,000		30,000		-		30,000		-
Subordinated loan and junior subordinated debt		24,262		24,262		-		24,262		-
Accrued interest payable		515		515		-		515		-
Derivative instruments		7,325		7,325		-		7,325		-

PARK STERLING CORP

NOTES TO

CONSOLIDATED

FINANCIAL

STATEMENTS

(table amounts in thousands, except share data and per share amounts)

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investment Securities

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level

securities include those traded on an active exchange, such as the New York Stock Exchange, United States Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level

securities include MBS issued by government-sponsored entities or private label entities, municipal bonds and corporate debt securities that are valued using quoted prices for similar instruments in active markets. Securities classified as Level

include a corporate debt security in a less liquid market whose value is determined by reference to the going rate of a similar debt security if it were to enter the market at period end. The derived market value requires significant management judgment and is further substantiated by discounted cash flow methodologies.

Derivative Instruments

–

Derivative instruments are recorded at fair value on a recurring basis. Derivative instruments held or issued by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company uses a

third

party to measure the fair value on a recurring basis. The Company classifies derivative instruments held or issued for risk management purposes as Level

As of both

December

31,

2016

and

December

31,

2015,

the Company’s derivative instruments consist of interest rate swaps, swap fair value hedges and foreign exchange contracts.

Loans -

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures it for the estimated impairment. The fair value of impaired loans is estimated using

one

of several methods, including collateral value, discounted cash flows or a pooled probability of default and loss given default calculation. Those impaired loans not requiring a specific allowance represent loans for which the fair value exceeds the recorded investments in such loans. Impaired loans where a specific allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records such impaired loans as nonrecurring Level

The Company records loans involved in fair value hedges at fair market value on a recurring basis. The Company does not record other loans at fair value on a recurring basis.

Loans held for sale

–

Loans held for sale are adjusted to lower of cost or market upon transfer from the loan portfolio to loans held for sale. Subsequently, loans held for sale are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral, management’s estimation of the value of the collateral or commitments on hand from investors within the

secondary

market for loans with similar characteristics. The fair value adjustments for loans held for sale are recorded as nonrecurring Level

Other real estate owned -

OREO is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value less costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is measured due to further deterioration in the value of the OREO since initial recognition, the Company records the foreclosed asset as nonrecurring Level

PARK STERLING CORP

NOTES TO

CONSOLIDATED

FINANCIAL

STATEMENTS

(table amounts in thousands, except share data and per share amounts)

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following table sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value on a recurring basis at

December

31,

2016

and

2015:

Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Assets/ Liabilities at Fair Value

2016 recurring
U.S. Government agencies	$	-	$	-	$	-	$	-
Municipal securities		-		13,319		-		13,319
Residential agency pass-through securities		-		192,765		-		192,765
Residential collateralized mortgage obligations		-		94,410		-		94,410
Commercial mortgage-backed obligations		-		15,497		-		15,497
Asset-backed securities		-		83,951		-		83,951
Corporate and other securities		-		-		1,320		1,320
All other equity securities		1,239		-		-		1,239
Fair value loans		-		27,941		-		27,941
Derivative assets		-		2,290		-		2,290
Derivative liabilities		-		3,149		-		3,149

2015 recurring
U.S. Government agencies	$	-	$	514	$	-	$	514
Municipal securities		-		14,796		-		14,796
Residential agency pass-through securities		-		131,460		-		131,460
Residential collateralized mortgage obligations		-		151,631		-		151,631
Commercial mortgage-backed obligations		-		4,756		-		4,756
Asset-backed securities		-		79,120		-		79,120
Corporate and other securities		-		-		1,500		1,500
All other equity securities		1,157		-		-		1,157
Fair value loans		-		32,117		-		32,117
Derivative assets		-		3,193		-		3,193
Derivative liabilities		-		7,325		-		7,325

Securities measured on a Level

recurring basis at

December

31,

2016

include a corporate debt security whose value is determined by the going rate of a similar debt security if it were to enter the market at period end with additional liquidity discounts applied due to a smaller available market. There were no transfers between valuation levels for any accounts for the years ended

December

31,

2016

and

2015.

If different valuation techniques are deemed necessary, the transfers will be considered to occur at the end of the period that the accounts are valued.

The following is a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs (Level

for the years ended

December

31,

2016

and

2015.

	Securities
	Available
	For Sale
Fair value, December 31, 2014	$	1,570
Change in unrealized gain recognized in other comprehensive income		(70	)
Fair value, December 31, 2015	$	1,500
Change in unrealized gain recognized in other comprehensive income		(180	)
Fair value, December 31, 2016	$	1,320

PARK STERLING CORP

NOTES TO

CONSOLIDATED

FINANCIAL

STATEMENTS

(table amounts in thousands, except share data and per share amounts)

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company

may

be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or market accounting or impairment charges of individual assets. Processes are in place for overseeing the valuation procedures for Level

measurements of OREO and impaired loans. The assets are reviewed on a quarterly basis to determine the accuracy of the observable inputs, generally

third

party appraisals, auction values, values derived from trade publications and data submitted by the borrower, and the appropriateness of the unobservable inputs, generally discounts due to current market conditions and collection issues. Discounts are based on asset type and valuation source; deviations from the standard are documented. The discounts are periodically reviewed to determine whether they remain appropriate. Consideration is given to current trends in market values for the asset categories and gain and losses on sales of similar assets.

Discounts range from

100%

depending on the nature of the assets and source of value. Real estate is valued based on appraisals or evaluations, discounted by

at a minimum with higher discounts for property in poor condition or property with characteristics that

may

make it more difficult to market. Commercial loans secured by receivables or non-real estate collateral are generally valued using the discounted cash flow method. Inputs are determined on a borrower-by-borrower basis.

Impaired loans and related write-downs are based on the fair value of the underlying collateral if repayment is expected solely from the collateral or using a pooled probability of default and loss given default calculation. Collateral values are reviewed quarterly and estimated using customized discounting criteria and appraisals.

Other real estate owned is based on the lower of the cost or fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using appraisals and reflect a market value approach. Fair values are reviewed quarterly and new appraisals are generally obtained annually.

PARK STERLING CORP

NOTES TO

CONSOLIDATED

FINANCIAL

STATEMENTS

(table amounts in thousands, except share data and per share amounts)

The following table sets forth by level, within the fair value hierarchy, the Company’s assets at fair value on a nonrecurring basis at

December

31,

2016

and

2015:

Fair Value on a Nonrecurring Basis

	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable		Assets/
	Assets		Inputs		Inputs		(Liabilities)
Description	(Level 1)		(Level 2)		(Level 3)		at Fair Value

December 31, 2016
OREO	$	-	$	-	$	3,332	$	3,332
Impaired loans:
Commercial and industrial		-		-		-		-
CRE - owner-occupied		-		-		1,078		1,078
CRE - investor income producing		-		-		353		353
AC&D - lots, land, & development		-		-		748		748
Other commercial		-		-		211		211
Residential mortgage		-		-		2,077		2,077
HELOC		-		-		2,438		2,438
Residential construction		-		-		243		243
Other loans to individuals		-		-		-		-

December 31, 2015
OREO	$	-	$	-	$	5,451	$	5,451
Impaired loans:
Commercial and industrial		-		-		-		-
CRE - owner-occupied		-		-		-		-
CRE - investor income producing		-		-		365		365
AC&D - lots, land, & development		-		-		-		-
Other commercial		-		-		-		-
Residential mortgage		-		-		725		725
HELOC		-		-		-		-
Residential construction		-		-		251		251
Other loans to individuals		-		-		-		-

The following table presents the decrease in value of OREO, which is measured at fair value on a nonrecurring basis, for which a fair value adjustment has been included in the income statement. These items represent write-downs of OREO based on the appraised value of collateral.

	December 31,
	2016			2015

OREO	$	(444	)	$	(694	)

In accordance with accounting for foreclosed property, the carrying value of OREO is periodically reviewed and written down to fair value and any loss is incurred in earnings. During the year ended

December

31,

2016,

OREO with a carrying value of

$3.7

million was written down by

$444

thousand to

$3.3

million. During the year ended

December

31,

2015,

OREO with a carrying value of

$6.1

million was written down by

$694

thousand to

$5.4

million.

PARK STERLING CORP

NOTES TO

CONSOLIDATED

FINANCIAL

STATEMENTS

(table amounts in thousands, except share data and per share amounts)

The table below presents the valuation methodology and unobservable inputs for Level

assets measured at fair value on a nonrecurring basis at

December

31,

2016.

								Weighted
	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs			Average Discount

OREO	$	3,332	Appraisals	Discount to reflect current market conditions	0%	-	59%		4.91	%


Impaired loans		7,148	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	0%	-	100%		3.22	%
	$	10,480