What changed in this filing

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Item 1. Financial Statements

2020-07-24 compared with 2020-04-24 · 181 added, 141 removed, 929 unchanged (26% of the section changed)

25 unchanged sentences

Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or outstanding

Common stock, $0.01 par value, 25,000,000 shares authorized, 9,226,404 and 9,162,720 shares issued, 8,571,134 and 8,566,044 shares outstanding at March 31, 2020 and December 31, 2019, respectively

Common stock, $0.01 par value, 25,000,000 shares authorized, 9,231,761 and 9,162,720 shares issued, 8,575,134 and 8,566,044 shares outstanding at June 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

1 unchanged sentence

Accumulated other comprehensive loss

Treasury stock, 655,270 and 596,676 shares at March 31, 2020 and December 31, 2019, respectively, at cost

Treasury stock, 656,627 and 596,676 shares at June 30, 2020 and December 31, 2019, respectively, at cost

Total stockholders’ equity

3 unchanged sentences

Consolidated Statements of Income (Unaudited)

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(In Thousands, Except Per Share Data)

25 unchanged sentences

Collateral liquidation costs (recovery)

Net loss on foreclosed properties

Net loss (gain) on foreclosed properties

Tax credit investment impairment

SBA recourse provision

SBA recourse (benefit) provision

Loss on early extinguishment of debt

Other non-interest expense

Total non-interest expense

Income before income tax expense (benefit)

Income tax expense (benefit)

Income before income tax benefit

Income tax benefit

Earnings per common share

3 unchanged sentences

Consolidated Statements of Comprehensive Income (Unaudited)

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(In Thousands)

1 unchanged sentence

Securities available-for-sale:

Unrealized securities gains arising during the period

Unrealized securities (losses) gains arising during the period

Reclassification adjustment for net loss realized in net income

3 unchanged sentences

Unrealized losses on interest rate swaps arising during the period

Income tax expense

Total other comprehensive income

Income tax benefit (expense)

Total other comprehensive (loss) income

Comprehensive income

12 unchanged sentences

Balance at March 31, 2019

Other comprehensive income

Share-based compensation - restricted shares, net

Cash dividends ($0.15 per share)

Treasury stock purchased

Balance at June 30, 2019

Common Shares Outstanding

7 unchanged sentences

Balance at March 31, 2020

Other comprehensive loss

Share-based compensation - restricted shares, net

Cash dividends ($0.165 per share)

Treasury stock purchased

Balance at June 30, 2020

See accompanying Notes to Unaudited Consolidated Financial Statements.

1 unchanged sentence

Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended March 31,

For the Six Months Ended June 30,

(In Thousands)

4 unchanged sentences

Provision for loan and lease losses

SBA recourse provision

SBA recourse (benefit) provision

Depreciation, amortization and accretion, net

5 unchanged sentences

Gain on sale of SBA loans

Net loss on foreclosed properties, including impairment valuation

Excess tax expense (benefit) from share-based compensation

Net loss (gain) on foreclosed properties, including impairment valuation

Excess tax benefit from share-based compensation

Payments on operating leases

10 unchanged sentences

Net increase in loans and leases

Investments in limited partnerships

Returns of investments in limited partnerships

7 unchanged sentences

Financing activities

Net (decrease) increase in deposits

Repayment of Federal Home Loan Bank advances

Net increase in deposits

Proceeds from Federal Home Loan Bank advances

Repayment of Federal Home Loan Bank advances

Loss on early extinguishment of debt

Proceeds from the Federal Reserve Paycheck Protection Program Lending Facility

Net increase in long-term borrowed funds

2 unchanged sentences

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents at the beginning of the period

3 unchanged sentences

Interest paid on deposits and borrowings

Income taxes received

Income taxes paid

Non-cash investing and financing activities:

Right-of-use assets obtained in exchange for operating lease liabilities

Transfer from loans and leases to foreclosed properties

See accompany Notes to Unaudited Consolidated Financial Statements

5 unchanged sentences

generally accepted accounting principles (“GAAP”).

FBB operates as a commercial banking institution primarily in Wisconsin and greater the greater Kansas City Metro.

FBB operates as a commercial banking institution primarily in Wisconsin and 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.

15 unchanged sentences

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.

The results of operations for the three and six months ended June 30, 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 .

C ertain amounts in prior periods may have been reclassified to conform to the current presentation.

S ubsequent 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

9 unchanged sentences

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.

The Corporation has established a cross-functional committee and has implemented a third-party software solution to assist with the adoption of the

Management has gathered all necessary data and reviewed potential methods to calculate the expected credit losses.

1 unchanged sentence

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

3 unchanged sentences

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 Corporation has not incurred any significant disruptions to its business activities.

The full impact of COVID-19 is unknown and rapidly evolving.

1 unchanged sentence

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

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.

The outbreak is having a significant adverse impact on certain industries the Corporation serves, including retail, hospitality, entertainment, and restaurants and food services.

As of June 30, 2020 , the Corporation’s aggregate outstanding exposure in these segments was $ 185.1 million , or 10.7 % of the Corporation’s gross loans and leases.

Based on management’s current assessment of the increased inherent risk in the loan portfolio, the allowance for loan and leases losses increased $ 7.9 million , or 40.7 % , compared to December 31, 2019.

The increase in the allowance for loan and lease losses was in large part due to an increase in several qualitative factors.

Most notably, a $ 4.3 million increase was due to the economic conditions caused by the pandemic, including the increase in the unemployment rate, and an additional $ 953,000 stemmed from the other qualitative factors, such as management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, and the level of loans and leases subject to more frequent review by management.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its 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.

The Corporation provided loan modifications up to six months to certain borrowers impacted by COVID-19 who were current in their payments at the inception of the Corporation’s loan modification program.

As of June 30, 2020 , the Corporation had processed 448 deferral requests, representing $ 323.2 million in total loans outstanding.

Loan deferrals of six months accounted for 60.2 % of the total $ 323.2 million in deferral requests and the remaining balance were primarily for three months.

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.

3 unchanged sentences

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.

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 (“SBA”) and Treasury Department.

On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was signed into law, adding an additional $320 billion of funding to the PPP.

The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities.

1 unchanged sentence

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”).

As of June 30, 2020 , the Corporation had processed over 700 applications from existing and new clients, disbursed $ 327.9 million in funds, and received processing fee income from the SBA of $ 8.7 million .

The processing fee income is deferred and amortized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method.

During the three months ended June 30, 2020 , $ 859,000 was recognized in loans and leases interest income in the unaudited Consolidated Statements of Income.

The SBA provides a guaranty to the lender of 100% of principal and interest, unless the lender violated an obligation under the agreement.

As loan losses are expected to be immaterial, if any at all, due to the guaranty, management excluded the PPP loans from the allowance for loan and lease losses calculation.

Management funded these short-term loans through a combination of excess cash held at the Federal Reserve and from an increase in in-market deposits.

Note 3 — Earnings per Common Share

4 unchanged sentences

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,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(Dollars in Thousands, Except Share Data)

11 unchanged sentences

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.

As of June 30, 2020 , 147,489 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.

14 unchanged sentences

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:

Restricted stock activity for the year ended December 31, 2019 and the six months ended June 30, 2020 was as follows:

Restricted Shares/Units

2 unchanged sentences

Nonvested balance as of December 31, 2019

Nonvested balance as of March 31, 2020

Nonvested balance as of June 30, 2020

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.

As of June 30, 2020 , the Corporation had $ 4.3 million of unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.50 years.

Share-based compensation expense related to restricted stock included in the unaudited Consolidated Statements of Income was as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(In Thousands)

Share-based compensation expense

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

As of June 30, 2020

Amortized Cost

24 unchanged sentences

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

As of June 30, 2020

Amortized Cost

22 unchanged sentences

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.

There were no sales of available-for-sale securities that occurred during the three months ended June 30, 2020 and one sale that occurred during the six months ended June 30, 2020 .

There were nine sales of available-for-sale securities that occurred during the three and six months ended June 30, 2019 .

At June 30, 2020 and December 31, 2019 , securities with a fair value of $ 182.0 million and $ 30.3 million , respectively, were pledged to secure various obligations, including interest rate swap contracts, outstanding FHLB advances, additional FHLB availability, the Federal Reserve Discount Window, and municipal deposits.

At June 30, 2020 , pledged securities with a fair value of $106.9 million were unencumbered.

No pledged securities were unencumbered as of December 31, 2019 .

The amortized cost and fair value of securities by contractual maturity at June 30, 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.

8 unchanged sentences

Due in over ten years

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.

At June 30, 2020 , the Corporation held six 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.

At June 30, 2020 , the Corporation held zero 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.

2 unchanged sentences

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 .

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and six months ended June 30, 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

As of June 30, 2020

Less than 12 Months

3 unchanged sentences

government agency securities - government-sponsored enterprises

Commercial mortgage-backed securities - government issued

As of December 31, 2019

8 unchanged sentences

Commercial mortgage-backed securities - government-sponsored enterprises

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.

At June 30, 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 .

There were no held-to-maturity securities that had been in a continuous loss position for twelve months or greater as of June 30, 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 .

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and six months ended June 30, 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

As of June 30, 2020

Less than 12 Months

33 unchanged sentences

SBA Express loans and lines of credit

SBA PPP loans

Total SBA loans

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.

As of June 30, 2020 and December 31, 2019 , $ 9.7 million and $ 12.1 million of SBA loans were considered impaired, respectively.

Loans transferred to third parties consist of the guaranteed portions of SBA 7(a) 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 7(a) loans sold during the three months ended June 30, 2020 , and 2019 , was $ 6.5 million and $ 3.3 million , respectively.

The total principal amount of the guaranteed portions of SBA 7(a) loans sold during the six months ended June 30, 2020 , and 2019 , was $ 9.2 million and $ 5.6 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 and six months ended June 30, 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.

The total outstanding balance of sold SBA loans at June 30, 2020 , and December 31, 2019 , was $ 69.9 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 June 30, 2020 , and 2019 , was $ 10.3 million and $ 17.2 million , respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the six months ended June 30, 2020 , and 2019 , was $ 22.2 million and $ 34.4 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 total outstanding balance of these transferred loans at June 30, 2020 , and December 31, 2019 , was $ 149.4 million and $ 142.8 million , respectively.

As of June 30, 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 $ 266.1 million and $ 244.6 million , respectively.

No loans in this participation portfolio were considered impaired as of June 30, 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 total amount of loan participations purchased on the unaudited Consolidated Balance Sheets as of June 30, 2020 , and December 31, 2019 , was $ 452,000 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

June 30, 2020

(Dollars in Thousands)

48 unchanged sentences

The delinquency aging of the loan and lease portfolio by class of receivable was as follows:

March 31, 2020

June 30, 2020

Days Past Due

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Allowance for loan and lease losses to non-accrual loans and leases

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 .

As of June 30, 2020 , and December 31, 2019 , $ 16.3 million and $ 15.6 million of the non-accrual loans and leases were considered troubled debt restructurings, respectively.

The Corporation has allocated $ 4.8 million and $ 2.7 million of specific reserves to troubled debt restructurings as of June 30, 2020 and December 31, 2019 , respectively.

There were no unfunded commitments associated with troubled debt restructured loans and leases as of June 30, 2020 .

All loans and leases modified as a troubled debt restructuring are measured for impairment.

1 unchanged sentence

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,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Number of Loans

8 unchanged sentences

Commercial and industrial

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Number of Loans

Pre-Modification

Post-Modification

Number of Loans

Pre-Modification

Post-Modification

(Dollars in Thousands)

Commercial and industrial

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 .

During the three and six months ended June 30, 2020 , and 2019 , the modification of terms primarily consisted of payment schedule modifications or principal reductions.

There were two commercial and industrial loans for a total of $ 2.7 million and four owner-occupied commercial real estate loans for a total of $ 3.8 million modified in troubled debt restructurings during the previous 12 months which subsequently defaulted during the three and six months ended June 30, 2020 .

There were two commercial and industrial loans modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the three and six months ended June 30, 2019 in the amount of $ 2.8 million .

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

As of and for the Six Months Ended June 30, 2020

Investment (1)

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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.

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 June 30, 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 $ 49,000 and $ 140,000 of loans as of June 30, 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.

7 unchanged sentences

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

As of and for the Three Months Ended June 30, 2020

(In Thousands)

Beginning balance

Net recoveries (charge-offs)

Net charge-offs

Provision for loan and lease losses

Ending balance

As of and for the Three Months Ended March 31, 2019

As of and for the Three Months Ended June 30, 2019

(In Thousands)

Beginning balance

Net recoveries (charge-offs)

Net recoveries

Provision for loan and lease losses

Ending balance

As of and for the Six Months Ended June 30, 2020

(In Thousands)

Beginning balance

Net charge-offs

Provision for loan and lease losses

Ending balance

As of and for the Six Months Ended June 30, 2019

(In Thousands)

Beginning balance

Net recoveries

Provision for loan and lease losses

Ending balance

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

As of June 30, 2020

(In Thousands)

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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 leases various office spaces and specialty financing production offices under non-cancellable operating leases which expire on various dates through 2028.

The Corporation also leases office equipment.

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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,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(In Thousands)

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Quantitative information regarding the Corporation’s operating leases was as follows:

March 31, 2020

June 30, 2020

December 31, 2019

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A summary of accrued interest receivable and other assets was as follows:

March 31, 2020

June 30, 2020

December 31, 2019

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Average balances represent year to date averages.

March 31, 2020

June 30, 2020

December 31, 2019

9 unchanged sentences

Average balances represent year to date averages.

March 31, 2020

June 30, 2020

December 31, 2019

3 unchanged sentences

Federal funds purchased

Federal Reserve PPPLF

FHLB advances

5 unchanged sentences

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 .

During the three months ended June 30, 2020 , the Corporation prepaid $ 59.5 million of short-term FHLB advances that had a weighted average interest rate of 2.34 % .

The transaction was accounted for as an early debt extinguishment resulting in a pre-tax loss of $ 744,000 during the three months ended June 30, 2020 .

As of June 30, 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 fee on this line of credit.

During the six months ended June 30, 2020 and 2019 , the Corporation incurred interest expense due to this fee of $ 7,000 and $ 6,000 , respectively.

Note 11 — Commitments and Contingencies

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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 sells the guaranteed portions of SBA 7(a) 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.

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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.

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 $ 1.0 million at June 30, 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,

As of and for the Three Months Ended June 30,

As of and for the Six Months Ended June 30,

(In Thousands)

Balance at the beginning of the period

SBA recourse provision

SBA recourse (benefit) provision

Charge-offs, net

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Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:

March 31, 2020

June 30, 2020

Fair Value Measurements Using

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Interest rate swaps

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.

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three and six months ended June 30, 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

June 30, 2020

Fair Value Measurements Using

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Loan servicing rights

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.

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 13.2 million and $ 15.7 million at June 30, 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 quantification of unobservable inputs for Level 3 impaired loan values range from 5 % - 93 % as of the measurement date of June 30, 2020 .

The weighted average of those unobservable inputs was 21 % .

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Fair value estimates, methods, and assumptions, consistent with exit price concepts for fair value measurements, are set forth below:

March 31, 2020

June 30, 2020

(In Thousands)

49 unchanged sentences

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.

Loans held for sale, which consist of the guaranteed portions of SBA 7(a) 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.

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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 .

At June 30, 2020 , the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was $ 467.1 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 .

These interest rate swaps mature between March 2021 and May 2037.

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 $ 58.8 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 .

As of June 30, 2020 , no interest rate swaps were in default.

At June 30, 2020 , the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also $ 467.1 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 .

These interest rate swaps mature in March 2021 through May 2037 .

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 $ 58.8 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 $ 58.8 million and no gross derivative asset.

No right of offset existed with dealer counterparty swaps as of March 31, 2020 .

No right of offset existed with dealer counterparty swaps as of June 30, 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.

Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three and six months ended June 30, 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.

2 unchanged sentences

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 .

As of June 30, 2020 , the aggregate notional value of interest rate swaps designated as cash flow hedges was $ 114.0 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.

A pre-tax unrealized loss of $ 418,000 and $4.0

million was recognized in other comprehensive income for the three and six months ended June 30, 2020 , respectively, 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:

6 unchanged sentences

Derivatives not designated as hedging instruments

March 31, 2020

June 30, 2020

Accrued interest receivable and other assets

4 unchanged sentences

Derivatives designated as hedging instruments

March 31, 2020

June 30, 2020

Accumulated other comprehensive income (1)

18 unchanged sentences

(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.

The Bank is also subject to certain legal, regulatory, and other restrictions on its 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.

2 unchanged sentences

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.

As of June 30, 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:

As of March 31, 2020

As of June 30, 2020

Minimum Required for Capital Adequacy Purposes

34 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements