Notes to Unaudited Consolidated Financial Statements
Note 1 — Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
The accounting and reporting practices of First Business Financial Services, Inc. (“FBFS” or the “Corporation”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in Wisconsin and greater the greater Kansas City Metro. FBB also offers private wealth management services through First Business Trust & Investments (“FBTI”) and bank consulting services through First Business Consulting Services (“FBCS”), both divisions of FBB. The Bank provides a full range of financial services to businesses, business owners, executives, professionals, and high net worth individuals. The Bank is subject to competition from other financial institutions and service providers and is also subject to state and federal regulations. FBB has the following wholly owned subsidiaries: First Business Capital Corp. (“FBCC”), First Madison Investment Corp. (“FMIC”), First Business Equipment Finance, LLC (“FBEF”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), Rimrock Road Investment Fund, LLC (“Rimrock Road”), BOC Investment, LLC (“BOC”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment LLC (“FBB Tax Credit”). FMIC is located in and was formed under the laws of the state of Nevada.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 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 Corporation’s Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 810, the Corporation’s ownership interest in FBFS Statutory Trust II (“Trust II”) has not been consolidated into the financial statements.
Management of the Corporation is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for loan and lease losses, lease residuals, property under operating leases, goodwill, level of the Small Business Administration (“SBA”) recourse reserve, and income taxes. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2020. Certain amounts in prior periods may have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.
The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2019.
Adoption of New Accounting Standards
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, “Intangibles - Goodwill and Other (Topic 350).” The ASU amended existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The Corporation adopted the accounting standard during the first quarter of 2020. The adoption of the standard did not have a material impact on the Corporation’s results of operations, financial position, and liquidity.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other Internal-Use Software (Subtopic 350-40).” The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Implementation costs incurred in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. The amendment also requires entities to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and in the same income statement line item as the fees associated with the hosting element. The Corporation adopted the accounting standard during the first quarter of 2020. The adoption of the standard did not have a material impact on the Corporation’s results of operations, financial position, and liquidity.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments- Credit Losses (Topic 326),” which is often referred to as CECL. The ASU replaces the incurred loss impairment methodology for recognizing credit losses with a methodology that reflects all expected credit losses. The ASU also requires consideration of a broader range of information to inform credit loss estimates, including such factors as past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, and any other financial asset not excluded from the scope under which the Corporation has the contractual right to receive cash. Entities will apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” The ASU delays the effective date for the credit losses standard from January 2020 to January 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Corporation is eligible for the delay and will be deferring adoption. The Corporation has established a cross-functional committee and has implemented a third-party software solution to assist with the adoption of the standard. Management has gathered all necessary data and reviewed potential methods to calculate the expected credit losses. Management is currently calculating sample expected loss computations and developing the allowance methodology and assumptions that will be used under the new standard. Management will continue to progress on its implementation project plan and improve the Corporation’s approach throughout the deferral period.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848).” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU is effective as of March 12, 2020 through December 31, 2022. The Corporation is in the process of evaluating the impact of this standard but does not expect this standard to have a material impact on its results of operations, financial position, and liquidity.
Note 2 — Significant Events
On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic as a result of the global spread of the coronavirus illness. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing. The Corporation activated its Pandemic Preparedness Plan to protect the health of employees and clients, which includes temporarily limiting lobby hours and transitioning the vast majority of the Corporation’s workforce to remote work. Nonetheless, the Corporation has not incurred any significant disruptions to its business activities.
The full impact of COVID-19 is unknown and rapidly evolving. It has caused substantial disruption in international and U.S. economies, markets, and employment. The outbreak may have a significant adverse impact on certain industries the Corporation serves, including retail, hospitality, entertainment and restaurants and food services. As of March 31, 2020, the Corporation’s aggregate outstanding exposure in these segments was $171.2 million, or 9.8% of the Corporation’s gross loans and leases. Based on management’s current assessment of the increased inherit risk in the loan portfolio, first quarter 2020 results included an additional $3.1 million in provision for loan and lease losses, pre-tax. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Corporation’s loan portfolio.
To work with clients impacted by COVID-19, the Corporation is offering short-term (i.e., six months or less) loan modifications on a case by case basis to borrowers who were current in their payments at the inception of the loan modification
program. As of March 31, 2020, the Corporation entered into 64 loan modification agreements with respect to $59.8 million of loans outstanding. As of April 22, 2020, the Corporation entered into 267 loan modification agreements with respect to $196.6 million of loans outstanding. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payment at the end of the modification period and the deferred amounts will be moved to the end of the loan term. The loan will not be reported as past due during the deferral period.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act is a $2 trillion stimulus package to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes a $349 billion fund for the creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration and Treasury Department. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020. As of April 22, 2020, the Corporation had received over 600 applications from existing clients, received conditional approval from the SBA in excess of $300 million, disbursed approximately $280 million in funds, and is expected to generate processing fee income of approximately $8.5 million. Management expects to fund these short-term loans through a combination of excess cash held at the Federal Reserve, short-term Federal Home Loan Bank (“FHLB”) advances, and participation in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”).
Note 3 — Earnings per Common Share
Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income allocated to common shares by the weighted-average number of shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends, or dividend equivalents, at the same rate as holders of the Corporation’s common stock. Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
|
(Dollars in Thousands, Except Share Data)
|
Basic earnings per common share
|
|
|
|
|
Net income
|
|
$
|
3,278
|
|
|
$
|
5,899
|
|
Less: earnings allocated to participating securities
|
|
78
|
|
|
108
|
|
Basic earnings allocated to common stockholders
|
|
$
|
3,200
|
|
|
$
|
5,791
|
|
Weighted-average common shares outstanding, excluding participating securities
|
|
8,388,666
|
|
|
8,621,221
|
|
Basic earnings per common share
|
|
$
|
0.38
|
|
|
$
|
0.67
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
|
|
|
Earnings allocated to common stockholders, diluted
|
|
$
|
3,200
|
|
|
$
|
5,791
|
|
Weighted-average diluted common shares outstanding, excluding participating securities
|
|
8,388,666
|
|
|
8,621,221
|
|
Diluted earnings per common share
|
|
$
|
0.38
|
|
|
$
|
0.67
|
|
Note 4 — Share-Based Compensation
The Corporation adopted the 2019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2019. The Plan is administered by the Compensation Committee of the Board of Directors of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options, restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan. As of March 31, 2020, 153,381 shares were available for future grants under the Plan. Shares covered by awards that expire, terminate, or lapse will again be available for the grant of awards under the Plan. The Corporation may issue new shares and shares from its treasury stock for shares delivered under the Plan.
Restricted Stock
Under the Plan, the Corporation may grant restricted stock awards, restricted stock units, and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, restricted stock award participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares. Restricted stock units do not have voting rights and are provided dividend equivalents. The restricted stock granted under the Plan is typically subject to a vesting period. Compensation expense for restricted stock is recognized over the requisite service period of generally four years for the entire award on a straight-line basis. Upon vesting of restricted stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the unaudited Consolidated Statements of Income.
The Corporation also issues a combination of performance based restricted stock units and restricted stock awards to its executive officers. Vesting of the performance based restricted stock units will be measured on Total Shareholder Return (“TSR”) and Return on Average Equity (“ROAE”) and will cliff-vest after a three-year measurement period based on the Corporation’s performance relative to a custom peer group. At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts. The restricted stock awards issued to executive officers will vest ratably over a three-year period. Compensation expense is recognized for performance based restricted stock units over the requisite service and performance period of generally three years for the entire expected award on a straight-line basis. The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the ROAE metric will be adjusted if there is a change in the expectation of ROAE. The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the TSR metric are never adjusted, and are amortized utilizing the accounting fair value provided using a Monte Carlo pricing model.
Restricted stock activity for the year ended December 31, 2019 and the three months ended March 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Shares/Units
|
|
Weighted Average
Grant-Date
Fair Value
|
Nonvested balance as of January 1, 2019
|
|
131,621
|
|
|
$
|
21.02
|
|
Granted
|
|
95,265
|
|
|
23.64
|
|
Vested
|
|
(48,207
|
)
|
|
20.62
|
|
Forfeited
|
|
(1,744
|
)
|
|
23.67
|
|
Nonvested balance as of December 31, 2019
|
|
176,935
|
|
|
22.51
|
|
Granted (1)
|
|
68,845
|
|
|
27.26
|
|
Vested
|
|
(14,239
|
)
|
|
22.21
|
|
Forfeited
|
|
(5,696
|
)
|
|
22.22
|
|
Nonvested balance as of March 31, 2020
|
|
225,845
|
|
|
$
|
23.98
|
|
|
|
(1)
|
The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved related to the performance based restricted stock units. The number of shares actually issued may vary.
|
As of March 31, 2020, the Corporation had $4.7 million of unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.71 years.
For the three months ended March 31, 2020 and 2019, share-based compensation expense related to restricted stock included in the unaudited Consolidated Statements of Income was $417,000 and $318,000, respectively.
Note 5 — Securities
The amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
Amortized Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Fair Value
|
|
|
(In Thousands)
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. government agency securities - government-sponsored enterprises
|
|
$
|
23,089
|
|
|
$
|
143
|
|
|
$
|
(15
|
)
|
|
$
|
23,217
|
|
Municipal securities
|
|
4,862
|
|
|
116
|
|
|
—
|
|
|
4,978
|
|
Residential mortgage-backed securities - government issued
|
|
13,267
|
|
|
667
|
|
|
—
|
|
|
13,934
|
|
Residential mortgage-backed securities - government-sponsored enterprises
|
|
108,507
|
|
|
3,633
|
|
|
—
|
|
|
112,140
|
|
Commercial mortgage-backed securities - government issued
|
|
6,411
|
|
|
85
|
|
|
(30
|
)
|
|
6,466
|
|
Commercial mortgage-backed securities - government-sponsored enterprises
|
|
11,904
|
|
|
674
|
|
|
—
|
|
|
12,578
|
|
Other securities
|
|
2,205
|
|
|
46
|
|
|
—
|
|
|
2,251
|
|
|
|
$
|
170,245
|
|
|
$
|
5,364
|
|
|
$
|
(45
|
)
|
|
$
|
175,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Amortized Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Fair Value
|
|
|
(In Thousands)
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. government agency securities - government-sponsored enterprises
|
|
$
|
23,616
|
|
|
$
|
152
|
|
|
$
|
(10
|
)
|
|
$
|
23,758
|
|
Municipal securities
|
|
160
|
|
|
—
|
|
|
—
|
|
|
160
|
|
Residential mortgage-backed securities - government issued
|
|
16,119
|
|
|
234
|
|
|
(5
|
)
|
|
16,348
|
|
Residential mortgage-backed securities - government-sponsored enterprises
|
|
111,561
|
|
|
847
|
|
|
(406
|
)
|
|
112,002
|
|
Commercial mortgage-backed securities - government issued
|
|
6,705
|
|
|
45
|
|
|
(87
|
)
|
|
6,663
|
|
Commercial mortgage-backed securities - government-sponsored enterprises
|
|
11,953
|
|
|
23
|
|
|
(9
|
)
|
|
11,967
|
|
Other securities
|
|
2,205
|
|
|
30
|
|
|
—
|
|
|
2,235
|
|
|
|
$
|
172,319
|
|
|
$
|
1,331
|
|
|
$
|
(517
|
)
|
|
$
|
173,133
|
|
The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
Amortized Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Fair Value
|
|
|
(In Thousands)
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
18,800
|
|
|
$
|
299
|
|
|
$
|
(36
|
)
|
|
$
|
19,063
|
|
Residential mortgage-backed securities - government issued
|
|
5,336
|
|
|
151
|
|
|
—
|
|
|
5,487
|
|
Residential mortgage-backed securities - government-sponsored enterprises
|
|
4,624
|
|
|
151
|
|
|
—
|
|
|
4,775
|
|
Commercial mortgage-backed securities - government-sponsored enterprises
|
|
2,014
|
|
|
273
|
|
|
—
|
|
|
2,287
|
|
|
|
$
|
30,774
|
|
|
$
|
874
|
|
|
$
|
(36
|
)
|
|
$
|
31,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Amortized Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Fair Value
|
|
|
(In Thousands)
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
19,727
|
|
|
$
|
335
|
|
|
$
|
(8
|
)
|
|
$
|
20,054
|
|
Residential mortgage-backed securities - government issued
|
|
5,776
|
|
|
19
|
|
|
(9
|
)
|
|
5,786
|
|
Residential mortgage-backed securities - government-sponsored enterprises
|
|
5,183
|
|
|
51
|
|
|
(23
|
)
|
|
5,211
|
|
Commercial mortgage-backed securities - government-sponsored enterprises
|
|
2,014
|
|
|
123
|
|
|
—
|
|
|
2,137
|
|
|
|
$
|
32,700
|
|
|
$
|
528
|
|
|
$
|
(40
|
)
|
|
$
|
33,188
|
|
U.S. government agency securities - government-sponsored enterprises represent securities issued by the Federal National Mortgage Association (“FNMA”) and the SBA. Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by the Government National Mortgage Association. Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB. Other securities represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months. There were one and no sales of available-for-sale securities that occurred during the three months ended March 31, 2020 and 2019, respectively.
At March 31, 2020 and December 31, 2019, securities with a fair value of $67.9 million and $30.3 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.
The amortized cost and fair value of securities by contractual maturity at March 31, 2020 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
Held-to-Maturity
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
|
|
(In Thousands)
|
Due in one year or less
|
|
$
|
1,160
|
|
|
$
|
1,167
|
|
|
$
|
1,465
|
|
|
$
|
1,471
|
|
Due in one year through five years
|
|
7,264
|
|
|
7,459
|
|
|
12,613
|
|
|
12,750
|
|
Due in five through ten years
|
|
33,217
|
|
|
34,677
|
|
|
12,654
|
|
|
13,198
|
|
Due in over ten years
|
|
128,604
|
|
|
132,261
|
|
|
4,042
|
|
|
4,193
|
|
|
|
$
|
170,245
|
|
|
$
|
175,564
|
|
|
$
|
30,774
|
|
|
$
|
31,612
|
|
The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual investments were in a continuous loss position at March 31, 2020 and December 31, 2019. At March 31, 2020, the Corporation held four available-for-sale securities that were in an unrealized loss position. Such securities have not experienced credit rating downgrades; however, they have generally declined in value due to the current interest rate environment. At March 31, 2020, the Corporation held three available-for-sale securities that had been in a continuous unrealized loss position for twelve months or greater.
The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities. The Corporation reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment. Consideration is given to such factors as the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, and an evaluation of the present value of expected future cash flows, if necessary. Based on the Corporation’s evaluation, it is expected that the Corporation will recover the entire amortized cost basis of each security. Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three months ended March 31, 2020 and 2019.
A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
|
(In Thousands)
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities - government-sponsored enterprises
|
|
$
|
4,318
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,318
|
|
|
$
|
15
|
|
Commercial mortgage-backed securities - government issued
|
|
—
|
|
|
—
|
|
|
3,962
|
|
|
30
|
|
|
3,962
|
|
|
30
|
|
|
|
$
|
4,318
|
|
|
$
|
15
|
|
|
$
|
3,962
|
|
|
$
|
30
|
|
|
$
|
8,280
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
|
(In Thousands)
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities - government-sponsored enterprises
|
|
$
|
4,363
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,363
|
|
|
$
|
10
|
|
Residential mortgage-backed securities - government issued
|
|
4,619
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
4,619
|
|
|
5
|
|
Residential mortgage-backed securities - government-sponsored enterprises
|
|
36,972
|
|
|
253
|
|
|
11,304
|
|
|
153
|
|
|
48,276
|
|
|
406
|
|
Commercial mortgage-backed securities - government issued
|
|
—
|
|
|
—
|
|
|
4,727
|
|
|
87
|
|
|
4,727
|
|
|
87
|
|
Commercial mortgage-backed securities - government-sponsored enterprises
|
|
2,245
|
|
|
4
|
|
|
1,047
|
|
|
5
|
|
|
3,292
|
|
|
9
|
|
|
|
$
|
48,199
|
|
|
$
|
272
|
|
|
$
|
17,078
|
|
|
$
|
245
|
|
|
$
|
65,277
|
|
|
$
|
517
|
|
The tables below show the Corporation’s gross unrealized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at March 31, 2020 and December 31, 2019. At March 31, 2020, the Corporation held two held-to-maturity securities that were in an unrealized loss position. Such securities have not experienced credit rating downgrades; however, they have generally declined in value due to the current interest rate environment. There were no held-to-maturity securities that had been in a continuous loss position for twelve months or greater as of March 31, 2020. It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors. Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three months ended March 31, 2020 and 2019.
A summary of unrealized loss information for securities held-to-maturity, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
|
(In Thousands)
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
470
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
470
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
|
(In Thousands)
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
499
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
499
|
|
|
$
|
8
|
|
Residential mortgage-backed securities - government issued
|
|
—
|
|
|
—
|
|
|
1,887
|
|
|
9
|
|
|
1,887
|
|
|
9
|
|
Residential mortgage-backed securities - government-sponsored enterprises
|
|
1,364
|
|
|
5
|
|
|
2,144
|
|
|
18
|
|
|
3,508
|
|
|
23
|
|
|
|
$
|
1,863
|
|
|
$
|
13
|
|
|
$
|
4,031
|
|
|
$
|
27
|
|
|
$
|
5,894
|
|
|
$
|
40
|
|
Note 6 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses
Loan and lease receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
|
(In Thousands)
|
Commercial real estate:
|
|
|
|
|
Commercial real estate — owner occupied
|
|
$
|
224,075
|
|
|
$
|
226,614
|
|
Commercial real estate — non-owner occupied
|
|
511,363
|
|
|
516,652
|
|
Land development
|
|
48,045
|
|
|
51,097
|
|
Construction
|
|
131,060
|
|
|
109,057
|
|
Multi-family
|
|
211,594
|
|
|
217,322
|
|
1-4 family
|
|
34,220
|
|
|
33,359
|
|
Total commercial real estate
|
|
1,160,357
|
|
|
1,154,101
|
|
Commercial and industrial
|
|
519,900
|
|
|
503,402
|
|
Direct financing leases, net
|
|
26,833
|
|
|
28,203
|
|
Consumer and other:
|
|
|
|
|
Home equity and second mortgages
|
|
6,513
|
|
|
7,006
|
|
Other
|
|
30,416
|
|
|
22,664
|
|
Total consumer and other
|
|
36,929
|
|
|
29,670
|
|
Total gross loans and leases receivable
|
|
1,744,019
|
|
|
1,715,376
|
|
Less:
|
|
|
|
|
Allowance for loan and lease losses
|
|
22,748
|
|
|
19,520
|
|
Deferred loan fees
|
|
620
|
|
|
741
|
|
Loans and leases receivable, net
|
|
$
|
1,720,651
|
|
|
$
|
1,695,115
|
|
The total amount of the Corporation’s ownership of SBA loans comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
|
(In Thousands)
|
SBA 7(a) loans
|
|
$
|
41,642
|
|
|
$
|
40,402
|
|
SBA 504 loans
|
|
22,275
|
|
|
20,592
|
|
SBA Express loans and lines of credit
|
|
1,759
|
|
|
1,781
|
|
Total SBA loans
|
|
$
|
65,676
|
|
|
$
|
62,775
|
|
As of March 31, 2020 and December 31, 2019, $13.9 million and $12.1 million of SBA loans were considered impaired, respectively.
Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans. The total principal amount of the guaranteed portions of SBA loans sold during the three months ended March 31, 2020 and 2019 was $2.7 million and $2.3 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three months ended March 31, 2020 and 2019 have been derecognized in the unaudited Consolidated Financial Statements. The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements. The total outstanding balance of sold SBA loans at March 31, 2020 and December 31, 2019 was $69.6 million and $73.8 million, respectively.
The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended March 31, 2020 and 2019 was $11.9 million and $6.8 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of these transferred loans at March 31, 2020 and December 31, 2019 was $149.7 million and $142.8 million, respectively. As of March 31, 2020 and December 31, 2019, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $255.4 million and $244.6 million, respectively. No loans in this participation portfolio were considered impaired as of March 31, 2020 and December 31, 2019. The Corporation does not share in the participant’s portion of any potential charge-offs. The total amount of loan participations purchased on the unaudited Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 was $472,000 and $492,000, respectively.
The following tables illustrate ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Category
|
|
|
|
|
I
|
|
II
|
|
III
|
|
IV
|
|
Total
|
|
|
(Dollars in Thousands)
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate — owner occupied
|
|
$
|
177,478
|
|
|
$
|
19,051
|
|
|
$
|
19,552
|
|
|
$
|
7,994
|
|
|
$
|
224,075
|
|
Commercial real estate — non-owner occupied
|
|
446,724
|
|
|
49,496
|
|
|
15,143
|
|
|
—
|
|
|
511,363
|
|
Land development
|
|
46,161
|
|
|
432
|
|
|
—
|
|
|
1,452
|
|
|
48,045
|
|
Construction
|
|
130,972
|
|
|
—
|
|
|
88
|
|
|
—
|
|
|
131,060
|
|
Multi-family
|
|
200,050
|
|
|
11,544
|
|
|
—
|
|
|
—
|
|
|
211,594
|
|
1-4 family
|
|
30,178
|
|
|
1,828
|
|
|
1,604
|
|
|
610
|
|
|
34,220
|
|
Total commercial real estate
|
|
1,031,563
|
|
|
82,351
|
|
|
36,387
|
|
|
10,056
|
|
|
1,160,357
|
|
Commercial and industrial
|
|
400,587
|
|
|
30,770
|
|
|
70,704
|
|
|
17,839
|
|
|
519,900
|
|
Direct financing leases, net
|
|
19,752
|
|
|
463
|
|
|
6,618
|
|
|
—
|
|
|
26,833
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
5,822
|
|
|
605
|
|
|
86
|
|
|
—
|
|
|
6,513
|
|
Other
|
|
30,280
|
|
|
—
|
|
|
—
|
|
|
136
|
|
|
30,416
|
|
Total consumer and other
|
|
36,102
|
|
|
605
|
|
|
86
|
|
|
136
|
|
|
36,929
|
|
Total gross loans and leases receivable
|
|
$
|
1,488,004
|
|
|
$
|
114,189
|
|
|
$
|
113,795
|
|
|
$
|
28,031
|
|
|
$
|
1,744,019
|
|
Category as a % of total portfolio
|
|
85.32
|
%
|
|
6.55
|
%
|
|
6.52
|
%
|
|
1.61
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Category
|
|
|
|
|
I
|
|
II
|
|
III
|
|
IV
|
|
Total
|
|
|
(Dollars in Thousands)
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate — owner occupied
|
|
$
|
187,728
|
|
|
$
|
18,455
|
|
|
$
|
16,399
|
|
|
$
|
4,032
|
|
|
$
|
226,614
|
|
Commercial real estate — non-owner occupied
|
|
459,821
|
|
|
55,524
|
|
|
1,307
|
|
|
—
|
|
|
516,652
|
|
Land development
|
|
49,132
|
|
|
439
|
|
|
—
|
|
|
1,526
|
|
|
51,097
|
|
Construction
|
|
108,959
|
|
|
—
|
|
|
98
|
|
|
—
|
|
|
109,057
|
|
Multi-family
|
|
205,750
|
|
|
11,572
|
|
|
—
|
|
|
—
|
|
|
217,322
|
|
1-4 family
|
|
29,284
|
|
|
1,843
|
|
|
1,759
|
|
|
473
|
|
|
33,359
|
|
Total commercial real estate
|
|
1,040,674
|
|
|
87,833
|
|
|
19,563
|
|
|
6,031
|
|
|
1,154,101
|
|
Commercial and industrial
|
|
398,445
|
|
|
34,478
|
|
|
55,904
|
|
|
14,575
|
|
|
503,402
|
|
Direct financing leases, net
|
|
21,282
|
|
|
579
|
|
|
6,342
|
|
|
—
|
|
|
28,203
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
6,307
|
|
|
610
|
|
|
89
|
|
|
—
|
|
|
7,006
|
|
Other
|
|
22,517
|
|
|
—
|
|
|
—
|
|
|
147
|
|
|
22,664
|
|
Total consumer and other
|
|
28,824
|
|
|
610
|
|
|
89
|
|
|
147
|
|
|
29,670
|
|
Total gross loans and leases receivable
|
|
$
|
1,489,225
|
|
|
$
|
123,500
|
|
|
$
|
81,898
|
|
|
$
|
20,753
|
|
|
$
|
1,715,376
|
|
Category as a % of total portfolio
|
|
86.82
|
%
|
|
7.20
|
%
|
|
4.77
|
%
|
|
1.21
|
%
|
|
100.00
|
%
|
Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated financial information from the Corporation’s borrowers, or as other circumstances dictate. The Corporation primarily uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk
rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan. Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management.
Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrowers’ management team, or the industry in which the borrower operates. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers, and continued review of such borrowers’ compliance with the terms of their respective agreements.
Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends, or collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned business development officer and by asset quality review committees.
Category III — Loans and leases in this category are identified by management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Bank. Category III loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry, or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and asset quality review committees on a monthly basis.
Category IV — Loans and leases in this category are considered to be impaired. Impaired loans and leases, with the exception of performing troubled debt restructurings, have been placed on non-accrual as management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement. Impaired loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases. External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals. To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded to reflect the magnitude of the impairment. Loans and leases in this category are monitored by management and asset quality review committees on a monthly basis.
The delinquency aging of the loan and lease portfolio by class of receivable was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
30-59
Days Past Due
|
|
60-89
Days Past Due
|
|
Greater
Than 90 Days Past Due
|
|
Total Past Due
|
|
Current
|
|
Total Loans and Leases
|
|
|
(Dollars in Thousands)
|
Accruing loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
216,081
|
|
|
$
|
216,081
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
511,363
|
|
|
511,363
|
|
Land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,593
|
|
|
46,593
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
131,060
|
|
|
131,060
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
211,594
|
|
|
211,594
|
|
1-4 family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,744
|
|
|
33,744
|
|
Commercial and industrial
|
|
2,970
|
|
|
221
|
|
|
—
|
|
|
3,191
|
|
|
498,870
|
|
|
502,061
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,833
|
|
|
26,833
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,513
|
|
|
6,513
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,280
|
|
|
30,280
|
|
Total
|
|
2,970
|
|
|
221
|
|
|
—
|
|
|
3,191
|
|
|
1,712,931
|
|
|
1,716,122
|
|
Non-accruing loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
—
|
|
|
—
|
|
|
3,892
|
|
|
3,892
|
|
|
4,102
|
|
|
7,994
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,452
|
|
|
1,452
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
—
|
|
|
—
|
|
|
476
|
|
|
476
|
|
|
—
|
|
|
476
|
|
Commercial and industrial
|
|
1,841
|
|
|
—
|
|
|
9,416
|
|
|
11,257
|
|
|
6,582
|
|
|
17,839
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
—
|
|
|
—
|
|
|
136
|
|
|
136
|
|
|
—
|
|
|
136
|
|
Total
|
|
1,841
|
|
|
—
|
|
|
13,920
|
|
|
15,761
|
|
|
12,136
|
|
|
27,897
|
|
Total loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
—
|
|
|
—
|
|
|
3,892
|
|
|
3,892
|
|
|
220,183
|
|
|
224,075
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
511,363
|
|
|
511,363
|
|
Land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
48,045
|
|
|
48,045
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
131,060
|
|
|
131,060
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
211,594
|
|
|
211,594
|
|
1-4 family
|
|
—
|
|
|
—
|
|
|
476
|
|
|
476
|
|
|
33,744
|
|
|
34,220
|
|
Commercial and industrial
|
|
4,811
|
|
|
221
|
|
|
9,416
|
|
|
14,448
|
|
|
505,452
|
|
|
519,900
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,833
|
|
|
26,833
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,513
|
|
|
6,513
|
|
Other
|
|
—
|
|
|
—
|
|
|
136
|
|
|
136
|
|
|
30,280
|
|
|
30,416
|
|
Total
|
|
$
|
4,811
|
|
|
$
|
221
|
|
|
$
|
13,920
|
|
|
$
|
18,952
|
|
|
$
|
1,725,067
|
|
|
$
|
1,744,019
|
|
Percent of portfolio
|
|
0.28
|
%
|
|
0.01
|
%
|
|
0.80
|
%
|
|
1.09
|
%
|
|
98.91
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
30-59
Days Past Due
|
|
60-89
Days Past Due
|
|
Greater
Than 90 Days Past Due
|
|
Total Past Due
|
|
Current
|
|
Total Loans and Leases
|
|
|
(Dollars in Thousands)
|
Accruing loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
222,582
|
|
|
$
|
222,582
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
516,652
|
|
|
516,652
|
|
Land development
|
|
—
|
|
|
990
|
|
|
—
|
|
|
990
|
|
|
48,581
|
|
|
49,571
|
|
Construction
|
|
309
|
|
|
—
|
|
|
—
|
|
|
309
|
|
|
108,748
|
|
|
109,057
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
217,322
|
|
|
217,322
|
|
1-4 family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,026
|
|
|
33,026
|
|
Commercial and industrial
|
|
2,707
|
|
|
52
|
|
|
—
|
|
|
2,759
|
|
|
486,068
|
|
|
488,827
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28,203
|
|
|
28,203
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,006
|
|
|
7,006
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22,517
|
|
|
22,517
|
|
Total
|
|
3,016
|
|
|
1,042
|
|
|
—
|
|
|
4,058
|
|
|
1,690,705
|
|
|
1,694,763
|
|
Non-accruing loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
—
|
|
|
—
|
|
|
342
|
|
|
342
|
|
|
3,690
|
|
|
4,032
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,526
|
|
|
1,526
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
—
|
|
|
333
|
|
|
—
|
|
|
333
|
|
|
—
|
|
|
333
|
|
Commercial and industrial
|
|
4,368
|
|
|
2,717
|
|
|
3,123
|
|
|
10,208
|
|
|
4,367
|
|
|
14,575
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
—
|
|
|
—
|
|
|
147
|
|
|
147
|
|
|
—
|
|
|
147
|
|
Total
|
|
4,368
|
|
|
3,050
|
|
|
3,612
|
|
|
11,030
|
|
|
9,583
|
|
|
20,613
|
|
Total loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
—
|
|
|
—
|
|
|
342
|
|
|
342
|
|
|
226,272
|
|
|
226,614
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
516,652
|
|
|
516,652
|
|
Land development
|
|
—
|
|
|
990
|
|
|
—
|
|
|
990
|
|
|
50,107
|
|
|
51,097
|
|
Construction
|
|
309
|
|
|
—
|
|
|
—
|
|
|
309
|
|
|
108,748
|
|
|
109,057
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
217,322
|
|
|
217,322
|
|
1-4 family
|
|
—
|
|
|
333
|
|
|
—
|
|
|
333
|
|
|
33,026
|
|
|
33,359
|
|
Commercial and industrial
|
|
7,075
|
|
|
2,769
|
|
|
3,123
|
|
|
12,967
|
|
|
490,435
|
|
|
503,402
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28,203
|
|
|
28,203
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,006
|
|
|
7,006
|
|
Other
|
|
—
|
|
|
—
|
|
|
147
|
|
|
147
|
|
|
22,517
|
|
|
22,664
|
|
Total
|
|
$
|
7,384
|
|
|
$
|
4,092
|
|
|
$
|
3,612
|
|
|
$
|
15,088
|
|
|
$
|
1,700,288
|
|
|
$
|
1,715,376
|
|
Percent of portfolio
|
|
0.43
|
%
|
|
0.24
|
%
|
|
0.21
|
%
|
|
0.88
|
%
|
|
99.12
|
%
|
|
100.00
|
%
|
The Corporation’s total impaired assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
|
(In Thousands)
|
Non-accrual loans and leases
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
Commercial real estate — owner occupied
|
|
$
|
7,994
|
|
|
$
|
4,032
|
|
Commercial real estate — non-owner occupied
|
|
—
|
|
|
—
|
|
Land development
|
|
1,452
|
|
|
1,526
|
|
Construction
|
|
—
|
|
|
—
|
|
Multi-family
|
|
—
|
|
|
—
|
|
1-4 family
|
|
476
|
|
|
333
|
|
Total non-accrual commercial real estate
|
|
9,922
|
|
|
5,891
|
|
Commercial and industrial
|
|
17,839
|
|
|
14,575
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
Other
|
|
136
|
|
|
147
|
|
Total non-accrual consumer and other loans
|
|
136
|
|
|
147
|
|
Total non-accrual loans and leases
|
|
27,897
|
|
|
20,613
|
|
Foreclosed properties, net
|
|
1,669
|
|
|
2,919
|
|
Total non-performing assets
|
|
29,566
|
|
|
23,532
|
|
Performing troubled debt restructurings
|
|
134
|
|
|
140
|
|
Total impaired assets
|
|
$
|
29,700
|
|
|
$
|
23,672
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
Total non-accrual loans and leases to gross loans and leases
|
|
1.60
|
%
|
|
1.20
|
%
|
Total non-performing assets to total gross loans and leases plus foreclosed properties, net
|
|
1.69
|
|
|
1.37
|
|
Total non-performing assets to total assets
|
|
1.35
|
|
|
1.12
|
|
Allowance for loan and lease losses to gross loans and leases
|
|
1.30
|
|
|
1.14
|
|
Allowance for loan and lease losses to non-accrual loans and leases
|
|
81.54
|
|
|
94.70
|
|
As of March 31, 2020 and December 31, 2019, $18.3 million and $15.6 million of the non-accrual loans and leases were considered troubled debt restructurings, respectively. The Corporation has allocated $3.2 million and $2.7 million of specific reserves to troubled debt restructurings as of March 31, 2020 and December 31, 2019, respectively. There were no unfunded commitments associated with troubled debt restructured loans and leases as of March 31, 2020.
All loans and leases modified as a troubled debt restructuring are measured for impairment. The nature and extent of the impairment of restructured loans, including those which have experienced a default, is considered in the determination of an appropriate level of the allowance for loan and lease losses.
The following table provides the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
|
Number of Loans
|
|
Pre-Modification
Recorded
Investment
|
|
Post-Modification
Recorded
Investment
|
|
Number of Loans
|
|
Pre-Modification
Recorded
Investment
|
|
Post-Modification
Recorded
Investment
|
|
|
(Dollars in Thousands)
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate — owner occupied
|
|
2
|
|
|
$
|
299
|
|
|
$
|
299
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial and industrial
|
|
4
|
|
|
1,426
|
|
|
1,413
|
|
|
4
|
|
|
2,077
|
|
|
2,077
|
|
Total
|
|
6
|
|
|
$
|
1,725
|
|
|
$
|
1,712
|
|
|
4
|
|
|
$
|
2,077
|
|
|
$
|
2,077
|
|
Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, principal reduction, or some combination of these concessions. During the three months ended March 31, 2020 and 2019, the modification of terms primarily consisted of payment schedule modifications or principal reductions.
There was one commercial and industrial loan for $2.1 million and two owner-occupied commercial real estate loans for $3.6 million modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the three months ended March 31, 2020. There were no loans and leases modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the three months ended March 31, 2019.
The following represents additional information regarding the Corporation’s impaired loans and leases, including performing troubled debt restructurings, by class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended March 31, 2020
|
|
|
Recorded
Investment(1)
|
|
Unpaid
Principal
Balance
|
|
Impairment
Reserve
|
|
Average
Recorded
Investment(2)
|
|
Foregone
Interest
Income
|
|
Interest
Income
Recognized
|
|
Net
Foregone
Interest
Income
|
|
|
(In Thousands)
|
With no impairment reserve recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
4,320
|
|
|
$
|
4,320
|
|
|
$
|
—
|
|
|
$
|
3,218
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
28
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Land development
|
|
1,452
|
|
|
5,749
|
|
|
—
|
|
|
1,491
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
610
|
|
|
615
|
|
|
—
|
|
|
470
|
|
|
10
|
|
|
4
|
|
|
6
|
|
Commercial and industrial
|
|
6,488
|
|
|
8,261
|
|
|
—
|
|
|
13,313
|
|
|
181
|
|
|
5
|
|
|
176
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
136
|
|
|
802
|
|
|
—
|
|
|
141
|
|
|
11
|
|
|
—
|
|
|
11
|
|
Total
|
|
13,006
|
|
|
19,747
|
|
|
—
|
|
|
18,633
|
|
|
240
|
|
|
9
|
|
|
231
|
|
With impairment reserve recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
3,674
|
|
|
5,034
|
|
|
1,206
|
|
|
1,124
|
|
|
101
|
|
|
—
|
|
|
101
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Land development
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
Construction
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial and industrial
|
|
11,351
|
|
|
12,947
|
|
|
2,596
|
|
|
2,387
|
|
|
260
|
|
|
—
|
|
|
260
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
15,025
|
|
|
17,981
|
|
|
3,802
|
|
|
3,511
|
|
|
361
|
|
|
—
|
|
|
361
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
7,994
|
|
|
9,354
|
|
|
1,206
|
|
|
4,342
|
|
|
129
|
|
|
—
|
|
|
129
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Land development
|
|
1,452
|
|
|
5,749
|
|
|
—
|
|
|
1,491
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
610
|
|
|
615
|
|
|
—
|
|
|
470
|
|
|
10
|
|
|
4
|
|
|
6
|
|
Commercial and industrial
|
|
17,839
|
|
|
21,208
|
|
|
2,596
|
|
|
15,700
|
|
|
441
|
|
|
5
|
|
|
436
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
136
|
|
|
802
|
|
|
—
|
|
|
141
|
|
|
11
|
|
|
—
|
|
|
11
|
|
Grand total
|
|
$
|
28,031
|
|
|
$
|
37,728
|
|
|
$
|
3,802
|
|
|
$
|
22,144
|
|
|
$
|
601
|
|
|
$
|
9
|
|
|
$
|
592
|
|
|
|
(1)
|
The recorded investment represents the unpaid principal balance net of any partial charge-offs.
|
|
|
(2)
|
Average recorded investment is calculated primarily using daily average balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, 2019
|
|
|
Recorded
Investment(1)
|
|
Unpaid
Principal
Balance
|
|
Impairment
Reserve
|
|
Average
Recorded
Investment(2)
|
|
Foregone
Interest
Income
|
|
Interest
Income
Recognized
|
|
Net
Foregone
Interest
Income
|
|
|
(In Thousands)
|
With no impairment reserve recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
387
|
|
|
$
|
387
|
|
|
$
|
—
|
|
|
$
|
3,285
|
|
|
$
|
64
|
|
|
$
|
355
|
|
|
$
|
(291
|
)
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
58
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Land development
|
|
1,526
|
|
|
5,823
|
|
|
—
|
|
|
1,843
|
|
|
52
|
|
|
6
|
|
|
46
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
473
|
|
|
478
|
|
|
—
|
|
|
356
|
|
|
19
|
|
|
46
|
|
|
(27
|
)
|
Commercial and industrial
|
|
4,779
|
|
|
6,549
|
|
|
—
|
|
|
14,479
|
|
|
1,073
|
|
|
379
|
|
|
694
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
(7
|
)
|
Other
|
|
147
|
|
|
813
|
|
|
—
|
|
|
191
|
|
|
48
|
|
|
—
|
|
|
48
|
|
Total
|
|
7,312
|
|
|
14,050
|
|
|
—
|
|
|
20,212
|
|
|
1,257
|
|
|
793
|
|
|
464
|
|
With impairment reserve recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
3,645
|
|
|
5,004
|
|
|
1,082
|
|
|
1,511
|
|
|
414
|
|
|
—
|
|
|
414
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial and industrial
|
|
9,796
|
|
|
11,179
|
|
|
2,283
|
|
|
2,367
|
|
|
1,022
|
|
|
—
|
|
|
1,022
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
13,441
|
|
|
16,183
|
|
|
3,365
|
|
|
3,878
|
|
|
1,436
|
|
|
—
|
|
|
1,436
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
4,032
|
|
|
5,391
|
|
|
1,082
|
|
|
4,796
|
|
|
478
|
|
|
355
|
|
|
123
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
58
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Land development
|
|
1,526
|
|
|
5,823
|
|
|
—
|
|
|
1,843
|
|
|
52
|
|
|
6
|
|
|
46
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
473
|
|
|
478
|
|
|
—
|
|
|
356
|
|
|
19
|
|
|
46
|
|
|
(27
|
)
|
Commercial and industrial
|
|
14,575
|
|
|
17,728
|
|
|
2,283
|
|
|
16,846
|
|
|
2,095
|
|
|
379
|
|
|
1,716
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
(7
|
)
|
Other
|
|
147
|
|
|
813
|
|
|
—
|
|
|
191
|
|
|
48
|
|
|
—
|
|
|
48
|
|
Grand total
|
|
$
|
20,753
|
|
|
$
|
30,233
|
|
|
$
|
3,365
|
|
|
$
|
24,090
|
|
|
$
|
2,693
|
|
|
$
|
793
|
|
|
$
|
1,900
|
|
|
|
(1)
|
The recorded investment represents the unpaid principal balance net of any partial charge-offs.
|
|
|
(2)
|
Average recorded investment is calculated primarily using daily average balances.
|
The difference between the recorded investment of loans and leases and the unpaid principal balance of $9.7 million and $9.5 million as of March 31, 2020 and December 31, 2019, respectively, represents partial charge-offs of loans and leases resulting from losses due to the appraised value of the collateral securing the loans and leases being below the carrying values of the loans and leases. Impaired loans and leases also included $134,000 and $140,000 of loans as of March 31, 2020 and December 31, 2019, respectively, that were performing troubled debt restructurings, and although not on non-accrual, were reported as impaired due to the concession in terms. When a loan is placed on non-accrual, interest accrual is discontinued and previously accrued but uncollected interest is deducted from interest income. Cash payments collected on non-accrual loans are first applied to such loan’s principal. Foregone interest represents the interest that was contractually due on the loan but not received or recorded. To the extent the amount of principal on a non-accrual loan is fully collected and additional cash is received, the Corporation will recognize interest income.
To determine the level and composition of the allowance for loan and lease losses, the Corporation categorizes the portfolio into segments with similar risk characteristics. First, the Corporation evaluates loans and leases for potential impairment classification. The Corporation analyzes each loan and lease determined to be impaired on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows. The Corporation applies historical trends from established risk factors to each category of loans and leases that has not been individually evaluated for the purpose of establishing the general portion of the allowance.
A summary of the activity in the allowance for loan and lease losses by portfolio segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended March 31, 2020
|
|
|
Commercial
Real Estate
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
|
|
(In Thousands)
|
Beginning balance
|
|
$
|
10,852
|
|
|
$
|
8,078
|
|
|
$
|
590
|
|
|
$
|
19,520
|
|
Charge-offs
|
|
—
|
|
|
(125
|
)
|
|
(6
|
)
|
|
(131
|
)
|
Recoveries
|
|
1
|
|
|
176
|
|
|
—
|
|
|
177
|
|
Net recoveries (charge-offs)
|
|
1
|
|
|
51
|
|
|
(6
|
)
|
|
46
|
|
Provision for loan and lease losses
|
|
1,744
|
|
|
1,193
|
|
|
245
|
|
|
3,182
|
|
Ending balance
|
|
$
|
12,597
|
|
|
$
|
9,322
|
|
|
$
|
829
|
|
|
$
|
22,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended March 31, 2019
|
|
|
Commercial
Real Estate
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
|
|
(In Thousands)
|
Beginning balance
|
|
$
|
11,662
|
|
|
$
|
8,079
|
|
|
$
|
684
|
|
|
$
|
20,425
|
|
Charge-offs
|
|
—
|
|
|
(48
|
)
|
|
—
|
|
|
(48
|
)
|
Recoveries
|
|
1
|
|
|
19
|
|
|
3
|
|
|
23
|
|
Net recoveries (charge-offs)
|
|
1
|
|
|
(29
|
)
|
|
3
|
|
|
(25
|
)
|
Provision for loan and lease losses
|
|
(458
|
)
|
|
435
|
|
|
72
|
|
|
49
|
|
Ending balance
|
|
$
|
11,205
|
|
|
$
|
8,485
|
|
|
$
|
759
|
|
|
$
|
20,449
|
|
The following tables provide information regarding the allowance for loan and lease losses and balances by type of allowance methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
Commercial
Real Estate
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
|
|
(In Thousands)
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
11,391
|
|
|
$
|
6,726
|
|
|
$
|
829
|
|
|
$
|
18,946
|
|
Individually evaluated for impairment
|
|
1,206
|
|
|
2,596
|
|
|
—
|
|
|
3,802
|
|
Total
|
|
$
|
12,597
|
|
|
$
|
9,322
|
|
|
$
|
829
|
|
|
$
|
22,748
|
|
Loans and lease receivables:
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
1,150,301
|
|
|
$
|
528,894
|
|
|
$
|
36,793
|
|
|
$
|
1,715,988
|
|
Individually evaluated for impairment
|
|
10,056
|
|
|
17,839
|
|
|
136
|
|
|
28,031
|
|
Total
|
|
$
|
1,160,357
|
|
|
$
|
546,733
|
|
|
$
|
36,929
|
|
|
$
|
1,744,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Commercial
Real Estate
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
|
|
(In Thousands)
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
9,770
|
|
|
$
|
5,795
|
|
|
$
|
590
|
|
|
$
|
16,155
|
|
Individually evaluated for impairment
|
|
1,082
|
|
|
2,283
|
|
|
—
|
|
|
3,365
|
|
Total
|
|
$
|
10,852
|
|
|
$
|
8,078
|
|
|
$
|
590
|
|
|
$
|
19,520
|
|
Loans and lease receivables:
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
1,148,070
|
|
|
$
|
517,030
|
|
|
$
|
29,523
|
|
|
$
|
1,694,623
|
|
Individually evaluated for impairment
|
|
6,031
|
|
|
14,575
|
|
|
147
|
|
|
20,753
|
|
Total
|
|
$
|
1,154,101
|
|
|
$
|
531,605
|
|
|
$
|
29,670
|
|
|
$
|
1,715,376
|
|
Note 7 — Leases
The Corporation leases various office spaces, loan production offices, and specialty financing production offices under non-cancelable operating leases which expire on various dates through 2028. The Corporation also leases office equipment. The Corporation recognizes a right-of-use asset and an operating lease liability for all leases, with the exception of short-term leases. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term.
The Corporation entered into a sublease for vacated office space which expires in 2023. As a result, the Corporation recognized an impairment of the corresponding right-of-use asset of $299,000 during the year ended December 31, 2019.
The components of total lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
|
(In Thousands)
|
Operating lease cost
|
|
$
|
372
|
|
|
$
|
391
|
|
Short-term lease cost
|
|
74
|
|
|
71
|
|
Variable lease cost
|
|
127
|
|
|
133
|
|
Less: sublease income
|
|
(28
|
)
|
|
—
|
|
Total lease cost, net
|
|
$
|
545
|
|
|
$
|
595
|
|
Quantitative information regarding the Corporation’s operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Weighted-average remaining lease term (in years)
|
|
6.39
|
|
|
6.56
|
|
Weighted-average discount rate
|
|
3.09
|
%
|
|
3.09
|
%
|
The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating leases liabilities:
|
|
|
|
|
(In Thousands)
|
|
2020
|
$
|
1,155
|
|
2021
|
1,382
|
|
2022
|
1,373
|
|
2023
|
1,015
|
|
2024
|
756
|
|
Thereafter
|
2,307
|
|
Total undiscounted cash flows
|
7,988
|
|
Discount on cash flows
|
(777
|
)
|
Total lease liability
|
$
|
7,211
|
|
Note 8 — Other Assets
A summary of accrued interest receivable and other assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
(In Thousands)
|
Accrued interest receivable
|
|
$
|
5,298
|
|
|
$
|
5,760
|
|
Net deferred tax asset
|
|
5,156
|
|
|
5,353
|
|
Investment in historic development entities
|
|
2,445
|
|
|
2,216
|
|
Investment in a community development entity
|
|
5,444
|
|
|
5,571
|
|
Investment in limited partnerships
|
|
4,938
|
|
|
4,476
|
|
Investment in Trust II
|
|
315
|
|
|
315
|
|
Fair value of interest rate swaps
|
|
53,096
|
|
|
18,346
|
|
Prepaid expenses
|
|
2,674
|
|
|
2,285
|
|
Other assets
|
|
5,355
|
|
|
4,184
|
|
Total accrued interest receivable and other assets
|
|
$
|
84,721
|
|
|
$
|
48,506
|
|
Note 9 — Deposits
The composition of deposits is shown below. Average balances represent year to date averages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
Balance
|
|
Average
Balance
|
|
Average Rate
|
|
Balance
|
|
Average
Balance
|
|
Average Rate
|
|
|
(Dollars in Thousands)
|
Non-interest-bearing transaction accounts
|
|
$
|
301,657
|
|
|
$
|
291,178
|
|
|
—
|
%
|
|
$
|
293,573
|
|
|
$
|
275,495
|
|
|
—
|
%
|
Interest-bearing transaction accounts
|
|
343,064
|
|
|
271,531
|
|
|
0.95
|
|
|
273,909
|
|
|
222,244
|
|
|
1.53
|
|
Money market accounts
|
|
609,883
|
|
|
669,482
|
|
|
1.12
|
|
|
674,409
|
|
|
617,341
|
|
|
1.71
|
|
Certificates of deposit
|
|
128,695
|
|
|
134,000
|
|
|
2.24
|
|
|
137,012
|
|
|
156,048
|
|
|
2.47
|
|
Wholesale deposits
|
|
116,827
|
|
|
132,468
|
|
|
2.57
|
|
|
151,476
|
|
|
225,302
|
|
|
2.27
|
|
Total deposits
|
|
$
|
1,500,126
|
|
|
$
|
1,498,659
|
|
|
1.10
|
|
|
$
|
1,530,379
|
|
|
$
|
1,496,430
|
|
|
1.53
|
|
Note 10 — FHLB Advances, Other Borrowings and Junior Subordinated Notes
The composition of borrowed funds is shown below. Average balances represent year to date averages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
Balance
|
|
Weighted Average
Balance
|
|
Weighted
Average Rate
|
|
Balance
|
|
Weighted Average
Balance
|
|
Weighted
Average Rate
|
|
|
(Dollars in Thousands)
|
Federal funds purchased
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
$
|
59
|
|
|
2.45
|
%
|
FHLB advances
|
|
388,500
|
|
|
325,929
|
|
|
1.91
|
|
|
295,000
|
|
|
286,464
|
|
|
2.17
|
|
Other borrowings
|
|
675
|
|
|
675
|
|
|
8.09
|
|
|
675
|
|
|
675
|
|
|
8.11
|
|
Subordinated notes payable(1)
|
|
23,717
|
|
|
23,710
|
|
|
5.95
|
|
|
23,707
|
|
|
24,502
|
|
|
7.45
|
|
Junior subordinated notes
|
|
10,051
|
|
|
10,048
|
|
|
11.04
|
|
|
10,047
|
|
|
10,040
|
|
|
11.08
|
|
|
|
$
|
422,943
|
|
|
$
|
360,362
|
|
|
2.45
|
|
|
$
|
329,429
|
|
|
$
|
321,740
|
|
|
2.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
162,000
|
|
|
|
|
|
|
$
|
118,500
|
|
|
|
|
|
Long-term borrowings
|
|
260,943
|
|
|
|
|
|
|
210,929
|
|
|
|
|
|
|
|
$
|
422,943
|
|
|
|
|
|
|
$
|
329,429
|
|
|
|
|
|
|
|
(1)
|
Weighted average rate of subordinated notes payable reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of a subordinated note during the third quarter of 2019.
|
As of March 31, 2020 and December 31, 2019, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit. Per the promissory note dated February 19, 2020, the Corporation pays a commitment fee on this line of credit. During both the three months ended March 31, 2020 and 2019, the Corporation incurred interest expense due to this fee of $3,000.
Note 11 — Commitments and Contingencies
In the normal course of business, various legal proceedings involving the Corporation are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, and cash flows.
The Corporation sells the guaranteed portions of SBA loans, as well as participation interests in other, non-SBA originated, loans to third parties. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management and servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program and standard representations and warranties related to sold amounts. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults.
Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies, and determined a recourse reserve based on the probability of future losses for these loans to be $1.1 million at March 31, 2020, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets.
The summary of the activity in the SBA recourse reserve is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
|
(In Thousands)
|
Balance at the beginning of the period
|
|
$
|
1,345
|
|
|
$
|
2,956
|
|
SBA recourse provision
|
|
25
|
|
|
481
|
|
Charge-offs, net
|
|
(284
|
)
|
|
(161
|
)
|
Balance at the end of the period
|
|
$
|
1,086
|
|
|
$
|
3,276
|
|
Note 12 — Fair Value Disclosures
The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices. Fair value includes assumptions about risk, such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value.
Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2 — Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, 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 for substantially the full term of the assets or liabilities.
Level 3 — Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In Thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. government agency securities - government-sponsored enterprises
|
|
$
|
—
|
|
|
$
|
23,217
|
|
|
$
|
—
|
|
|
$
|
23,217
|
|
Municipal securities
|
|
—
|
|
|
4,978
|
|
|
—
|
|
|
4,978
|
|
Residential mortgage-backed securities - government issued
|
|
—
|
|
|
13,934
|
|
|
—
|
|
|
13,934
|
|
Residential mortgage-backed securities - government-sponsored enterprises
|
|
—
|
|
|
112,140
|
|
|
—
|
|
|
112,140
|
|
Commercial mortgage-backed securities - government issued
|
|
—
|
|
|
6,466
|
|
|
—
|
|
|
6,466
|
|
Commercial mortgage-backed securities - government-sponsored enterprises
|
|
—
|
|
|
12,578
|
|
|
—
|
|
|
12,578
|
|
Other securities
|
|
—
|
|
|
2,251
|
|
|
—
|
|
|
2,251
|
|
Interest rate swaps
|
|
—
|
|
|
53,096
|
|
|
—
|
|
|
53,096
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
—
|
|
|
59,260
|
|
|
—
|
|
|
59,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In Thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. government agency securities - government-sponsored enterprises
|
|
$
|
—
|
|
|
$
|
23,758
|
|
|
$
|
—
|
|
|
$
|
23,758
|
|
Municipal securities
|
|
—
|
|
|
160
|
|
|
—
|
|
|
160
|
|
Residential mortgage-backed securities - government issued
|
|
—
|
|
|
16,348
|
|
|
—
|
|
|
16,348
|
|
Residential mortgage-backed securities - government-sponsored enterprises
|
|
—
|
|
|
112,002
|
|
|
—
|
|
|
112,002
|
|
Commercial mortgage-backed securities - government issued
|
|
—
|
|
|
6,663
|
|
|
—
|
|
|
6,663
|
|
Commercial mortgage-backed securities - government-sponsored enterprises
|
|
—
|
|
|
11,967
|
|
|
—
|
|
|
11,967
|
|
Other securities
|
|
—
|
|
|
2,235
|
|
|
—
|
|
|
2,235
|
|
Interest rate swaps
|
|
—
|
|
|
18,346
|
|
|
—
|
|
|
18,346
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
—
|
|
|
20,885
|
|
|
—
|
|
|
20,885
|
|
For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three months ended March 31, 2020 or the year ended December 31, 2019 related to the above measurements.
Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In Thousands)
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,028
|
|
|
$
|
18,028
|
|
Foreclosed properties
|
|
—
|
|
|
—
|
|
|
1,669
|
|
|
1,669
|
|
Loan servicing rights
|
|
—
|
|
|
—
|
|
|
1,154
|
|
|
1,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In Thousands)
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,699
|
|
|
$
|
15,699
|
|
Foreclosed properties
|
|
—
|
|
|
—
|
|
|
2,919
|
|
|
2,919
|
|
Loan servicing rights
|
|
—
|
|
|
—
|
|
|
1,195
|
|
|
1,195
|
|
Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $18.0 million and $15.7 million at March 31, 2020 and December 31, 2019, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans. Valuation techniques consistent with the market approach, income approach, or cost approach were used to measure fair value. These techniques included observable inputs for the individual impaired loans being evaluated, such as current appraisals, recent sales of similar assets, or other observable market data, and unobservable inputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable values. The quantification of unobservable inputs for Level 3 impaired loan values range from 5% - 91% as of the measurement date of March 31, 2020. The weighted average of those unobservable inputs was 26%. The majority of the impaired loans are considered collateral dependent loans or are supported by a SBA guaranty.
Foreclosed properties, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and lease losses, if deemed necessary, based upon the fair value of the foreclosed property. The fair value of a foreclosed property, upon initial recognition, is estimated using a market approach or based on observable market data, typically a current appraisal, or based upon assumptions specific to the individual property or equipment, such as management applied discounts used to further reduce values to a net realizable value when observable inputs become stale.
Loan servicing rights represent the asset retained upon sale of the guaranteed portion of certain SBA loans. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The servicing rights are subsequently measured using the amortization method, which requires amortization into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio. Loan servicing rights do not trade in an active, open market with readily observable prices. While sales of loan servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its loan servicing rights. The valuation model incorporates prepayment assumptions to project loan servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the loan servicing rights. The valuation model considers portfolio characteristics of the underlying serviced portion of the SBA loans and uses the following significant unobservable inputs: (1) constant prepayment rate (“CPR”) assumptions based on the SBA sold pools historical CPR as quoted in Bloomberg and (2) a discount rate. Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments
The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions, consistent with exit price concepts for fair value measurements, are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(In Thousands)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
94,986
|
|
|
$
|
94,986
|
|
|
$
|
89,086
|
|
|
$
|
5,900
|
|
|
$
|
—
|
|
Securities available-for-sale
|
|
175,564
|
|
|
175,564
|
|
|
—
|
|
|
175,564
|
|
|
—
|
|
Securities held-to-maturity
|
|
30,774
|
|
|
31,612
|
|
|
—
|
|
|
31,612
|
|
|
—
|
|
Loans held for sale
|
|
6,331
|
|
|
6,901
|
|
|
—
|
|
|
6,901
|
|
|
—
|
|
Loans and lease receivables, net
|
|
1,720,651
|
|
|
1,732,650
|
|
|
—
|
|
|
—
|
|
|
1,732,650
|
|
Federal Home Loan Bank stock
|
|
9,733
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Accrued interest receivable
|
|
5,298
|
|
|
5,298
|
|
|
5,298
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
53,096
|
|
|
53,096
|
|
|
—
|
|
|
53,096
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,500,126
|
|
|
1,501,956
|
|
|
1,254,605
|
|
|
247,351
|
|
|
—
|
|
Federal Home Loan Bank advances and other borrowings
|
|
412,892
|
|
|
415,486
|
|
|
—
|
|
|
415,486
|
|
|
—
|
|
Junior subordinated notes
|
|
10,051
|
|
|
9,974
|
|
|
—
|
|
|
—
|
|
|
9,974
|
|
Accrued interest payable
|
|
1,954
|
|
|
1,954
|
|
|
1,954
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
59,260
|
|
|
59,260
|
|
|
—
|
|
|
59,260
|
|
|
—
|
|
Off-balance sheet items:
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
51
|
|
|
51
|
|
|
—
|
|
|
—
|
|
|
51
|
|
N/A = The fair value is not applicable due to restrictions placed on transferability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(In Thousands)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
67,102
|
|
|
$
|
67,102
|
|
|
$
|
61,202
|
|
|
$
|
5,900
|
|
|
$
|
—
|
|
Securities available-for-sale
|
|
173,133
|
|
|
173,133
|
|
|
—
|
|
|
173,133
|
|
|
—
|
|
Securities held-to-maturity
|
|
32,700
|
|
|
33,188
|
|
|
—
|
|
|
33,188
|
|
|
—
|
|
Loans held for sale
|
|
5,205
|
|
|
5,673
|
|
|
—
|
|
|
5,673
|
|
|
—
|
|
Loans and lease receivables, net
|
|
1,695,115
|
|
|
1,706,201
|
|
|
—
|
|
|
—
|
|
|
1,706,201
|
|
Federal Home Loan Bank stock
|
|
7,953
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Accrued interest receivable
|
|
5,760
|
|
|
5,760
|
|
|
5,760
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
18,346
|
|
|
18,346
|
|
|
—
|
|
|
18,346
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,530,379
|
|
|
1,532,517
|
|
|
1,241,891
|
|
|
290,626
|
|
|
—
|
|
Federal Home Loan Bank advances and other borrowings
|
|
319,382
|
|
|
319,507
|
|
|
—
|
|
|
319,507
|
|
|
—
|
|
Junior subordinated notes
|
|
10,047
|
|
|
9,970
|
|
|
—
|
|
|
—
|
|
|
9,970
|
|
Accrued interest payable
|
|
2,882
|
|
|
2,282
|
|
|
2,282
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
20,885
|
|
|
20,885
|
|
|
—
|
|
|
20,885
|
|
|
—
|
|
Off-balance sheet items:
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
63
|
|
|
63
|
|
|
—
|
|
|
—
|
|
|
63
|
|
N/A = The fair value is not applicable due to restrictions placed on transferability
Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the unaudited Consolidated Balance Sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation.
Securities: The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information, and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy.
Loans Held for Sale: Loans held for sale, which consist of the guaranteed portions of SBA loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.
Interest Rate Swaps: The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the
respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Limitations: Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates.
Note 13 — Derivative Financial Instruments
The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds, and guarantees.
At March 31, 2020, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was $397.7 million. The Corporation receives fixed rates and pays floating rates based upon LIBOR on the swaps with commercial borrowers. These interest rate swaps mature between March 2021 and October 2036. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. These commercial borrower swaps were reported on the unaudited Consolidated Balance Sheet as a derivative asset of $53.1 million, included in accrued interest receivable and other assets. As of March 31, 2020, no interest rate swaps were in default.
At March 31, 2020, the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also $397.7 million. The Corporation pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties. These interest rate swaps mature in March 2021 through October 2036. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the unaudited Consolidated Balance Sheet as a net derivative liability of $53.1 million, included in accrued interest payable and other liabilities. The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of $53.1 million and no gross derivative asset. No right of offset existed with dealer counterparty swaps as of March 31, 2020.
All changes in the fair value of these instruments are recorded in other non-interest income. Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three months ended March 31, 2020 and 2019 had an insignificant impact on the unaudited Consolidated Statements of Income.
The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affects earnings.
As of March 31, 2020, the aggregate notional value of interest rate swaps designated as cash flow hedges was $84.0 million. These interest rate swaps mature between December 2021 and December 2027. A pre-tax unrealized loss of $3.6 million was
recognized in other comprehensive income for the three months ended March 31, 2020, and there was no ineffective portion of these hedges.
Information about the balance sheet location and fair value of the Corporation’s derivative instruments below:
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|
|
|
|
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|
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|
|
|
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Interest Rate Swap Contracts
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|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
(In Thousands)
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Accrued interest receivable and other assets
|
|
$
|
53,096
|
|
|
Accrued interest payable and other liabilities
|
|
$
|
53,096
|
|
December 31, 2019
|
|
Accrued interest receivable and other assets
|
|
$
|
18,346
|
|
|
Accrued interest payable and other liabilities
|
|
$
|
18,346
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Accumulated other comprehensive income (1)
|
|
$
|
6,164
|
|
|
Accrued interest payable and other liabilities
|
|
$
|
6,164
|
|
December 31, 2019
|
|
Accumulated other comprehensive income (1)
|
|
$
|
2,539
|
|
|
Accrued interest payable and other liabilities
|
|
$
|
2,539
|
|
|
|
(1)
|
The fair value of derivatives designated as hedging instruments included in accumulated other comprehensive income represent pre-tax amounts, which are reported net of tax on the unaudited Consolidated Balance Sheets.
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Note 14 — Regulatory Capital
The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal and Wisconsin banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions on the part of regulators, that if undertaken, could have a direct material effect on the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory practices. The Corporation’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plan, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank. The Corporation’s and the Bank’s Boards of Directors and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.
As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”). Federal Reserve guidance urges financial institutions to strongly consider eliminating, deferring, or significantly reducing dividends if: (i) net income available to common stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend; (ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios. Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends. As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would: (i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any stockholders with preferential rights superior to those stockholders receiving the dividend.
The Bank is also subject to certain legal, regulatory, and other restrictions on their ability to pay dividends to the Corporation. As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments. Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time.
Qualitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted total assets. These risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations.
As of March 31, 2020, the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework. The following tables summarize both the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
Actual
|
|
Minimum Required for Capital Adequacy Purposes
|
|
For Capital Adequacy Purposes Plus Capital Conservation Buffer
|
|
Minimum Required to Be Well
Capitalized Under Prompt Corrective Action Requirements
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in Thousands)
|
Total capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
242,869
|
|
|
11.74
|
%
|
|
$
|
165,436
|
|
|
8.00
|
%
|
|
$
|
217,135
|
|
|
10.50
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
234,506
|
|
|
11.41
|
|
|
164,397
|
|
|
8.00
|
|
|
215,771
|
|
|
10.50
|
|
|
205,496
|
|
|
10.00
|
%
|
Tier 1 capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
195,318
|
|
|
9.45
|
%
|
|
$
|
124,077
|
|
|
6.00
|
%
|
|
$
|
175,776
|
|
|
8.50
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
210,672
|
|
|
10.25
|
|
|
123,298
|
|
|
6.00
|
|
|
174,672
|
|
|
8.50
|
|
|
164,397
|
|
|
8.00
|
|
Common equity tier 1 capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
185,267
|
|
|
8.96
|
%
|
|
$
|
93,058
|
|
|
4.50
|
%
|
|
$
|
144,756
|
|
|
7.00
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
210,672
|
|
|
10.25
|
|
|
92,473
|
|
|
4.50
|
|
|
143,847
|
|
|
7.00
|
|
|
133,572
|
|
|
6.50
|
|
Tier 1 leverage capital
(to adjusted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
195,318
|
|
|
9.33
|
%
|
|
$
|
83,754
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|
|
4.00
|
%
|
|
$
|
83,754
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|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
210,672
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|
|
10.09
|
|
|
83,525
|
|
|
4.00
|
|
|
83,525
|
|
|
4.00
|
|
|
104,406
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Actual
|
|
Minimum Required for Capital Adequacy Purposes
|
|
For Capital Adequacy Purposes Plus Capital Conservation Buffer
|
|
Minimum Required to Be Well
Capitalized Under Prompt Corrective Action Requirements
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in Thousands)
|
Total capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
239,029
|
|
|
12.01
|
%
|
|
$
|
159,185
|
|
|
8.00
|
%
|
|
$
|
208,930
|
|
|
10.50
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
233,181
|
|
|
11.79
|
|
|
158,177
|
|
|
8.00
|
|
|
207,607
|
|
|
10.50
|
|
|
197,721
|
|
|
10.00
|
%
|
Tier 1 capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
194,456
|
|
|
9.77
|
%
|
|
$
|
119,388
|
|
|
6.00
|
%
|
|
$
|
169,134
|
|
|
8.50
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
212,315
|
|
|
10.74
|
|
|
118,633
|
|
|
6.00
|
|
|
168,063
|
|
|
8.50
|
|
|
158,177
|
|
|
8.00
|
|
Common equity tier 1 capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
184,409
|
|
|
9.27
|
%
|
|
$
|
89,541
|
|
|
4.50
|
%
|
|
$
|
139,286
|
|
|
7.00
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
212,315
|
|
|
10.74
|
|
|
88,974
|
|
|
4.50
|
|
|
138,405
|
|
|
7.00
|
|
|
128,519
|
|
|
6.50
|
|
Tier 1 leverage capital
(to adjusted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
194,456
|
|
|
9.27
|
%
|
|
$
|
83,950
|
|
|
4.00
|
%
|
|
$
|
83,950
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
212,315
|
|
|
10.18
|
|
|
83,414
|
|
|
4.00
|
|
|
83,414
|
|
|
4.00
|
|
|
104,268
|
|
|
5.00
|
|