Junior Subordinated Debt/Trust Preferred Securities

6 Months Ended

Jun. 30, 2023

Junior Subordinated Debt/Trust Preferred Securities [Abstract]

Junior Subordinated Debt/Trust Preferred Securities

Junior Subordinated Debt/Trust Preferred Securities

The contractual principal balance of the Company’s debentures relating to its trust preferred securities is $12.0 million as of June 30, 2023 and December 31, 2022. 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 consolidated balance sheet. As of June 30, 2023, 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 June 30, 2023, the Company performed a fair value measurement analysis on its junior subordinated debt using a cash flow model approach to determine its present value. The cash flow model approach utilizes the forward three-month SOFR curve to estimate future quarterly interest payments due over the life of the debt instrument. Cash flows were discounted at a rate based on current market rates for similar-term debt instruments and adjusted for additional credit and liquidity risks associated with the junior subordinated debt. The 6.56% discount rate used represents an investor yield based on current market assumptions. At June 30, 2023, the total cumulative gain recorded on the debt was $1.94 million.

The net fair value calculation performed as of June 30, 2023 resulted in a net pretax gain adjustment of $205,000 for the six months ended June 30, 2023 compared to a net pretax gain adjustment of $725,000 for the six months ended June 30, 2022.

For the six months ended June 30, 2023, the net $205,000 fair value gain adjustment was separately presented as a $258,000 gain ($182,000, net of tax) recognized on the consolidated statements of income, and a $53,000 loss ($37,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the six months ended June 30, 2022, the net $725,000 fair value gain adjustment was separately presented as a $2,594,000 gain ($1,827,000, net of tax) recognized on the consolidated statements of income, and a $1,869,000 loss ($1,317,000, 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 indicated.

The net fair value calculation performed as of June 30, 2023 resulted in a net pretax gain adjustment of $312,000 for the quarter ended June 30, 2023 compared to a net pretax gain adjustment of $422,000 for the quarter ended June 30, 2022.

For the quarter ended June 30, 2023, the net $312,000 fair value gain adjustment was separately presented as a $75,000 gain ($53,000, net of tax) recognized on the consolidated statements of income, and a $387,000 gain ($273,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the quarter ended June 30, 2022, the net $422,000 fair value gain adjustment was separately presented as a $869,000 loss ($612,000, net of tax) recognized on the consolidated statements of income, and a $1.3 million gain ($910,000, 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 indicated.