What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-24 compared with 2020-04-24 · 385 added, 204 removed, 373 unchanged (61% of the section changed)

21 unchanged sentences

These risk factors and uncertainties should be carefully considered by our stockholders and potential investors.

See Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A — Risk Factors for discussion relating to risk factors impacting us.

See Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A — Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, for discussion relating to risk factors impacting us.

Investors should not place undue reliance on any such forward-looking statements, which speak only as of the date made.

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Our products and services include those for business banking, private wealth, and bank consulting.

Within business banking, we offer commercial lending, consumer and other lending, asset-based lending, accounts receivable financing, equipment financing, vendor financing, SBA lending and servicing, treasury management services, and company retirement plans.

Within business banking, we offer commercial lending, consumer and other lending, asset-based lending, accounts receivable financing, equipment financing, vendor financing, floorplan financing, SBA lending and servicing, treasury management services, and company retirement plans.

Our private wealth services for executives and individuals include trust and estate administration, financial planning, investment management, and private banking.

For other banks, our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation.

For other financial institutions, our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation.

We do not utilize a branch network to attract retail clients.

2 unchanged sentences

Operational Summary

Results for the three months ended March 31, 2020 include:

Total assets increased to $2.196 billion as of March 31, 2020 compared to $2.097 billion as of December 31, 2019 .

Net income for the three months ended March 31, 2020 was $3.3 million compared to $5.9 million for the three months ended March 31, 2019 .

Diluted earnings per common share for the three months ended March 31, 2020 were $0.38 compared to $0.67 for the three months ended March 31, 2019 .

Net interest margin decreased 35 basis points to 3.44% for the three months ended March 31, 2020 compared to 3.79% for the three months ended March 31, 2019 .

Top line revenue, the sum of net interest income and non-interest income, increased 4.8% to $23.5 million for the three months ended March 31, 2020 compared to $22.4 million for the three months ended March 31, 2019 .

Annualized return on average assets (“ROAA”) and annualized return on average equity (“ROAE”) were 0.62% and 7.14% , respectively, for the three month period ended March 31, 2020 , compared to 1.20% and 13.67% , respectively, for the same time period in 2019 .

Provision for loan and lease losses was $3.2 million for the three months ended March 31, 2020 compared to $49,000 for the three months ended March 31, 2019 .

Net recoveries for the three months ended March 31, 2020 were $46,000 compared to net charge-offs of $25,000 for the three months ended March 31, 2019 .

SBA recourse provision was $25,000 for the three months ended March 31, 2020 compared to $481,000 for the three months ended March 31, 2019 .

Period-end gross loans and leases receivable increased $28.8 million , or 6.7% annualized, to $1.743 billion at March 31, 2020 from $1.715 billion at December 31, 2019 .

Average gross loans and leases receivable decreased $10.6 million , or 2.4% annualized, to $1.734 billion , for the three months ended March 31, 2020 from $1.744 billion for the three months ended December 31, 2019 .

Non-performing assets increased $6.0 million , or 25.6% , to $29.6 million , or 1.35% of total assets, at March 31, 2020 from $23.5 million , or 1.12% of total assets, at December 31, 2019 .

Period-end in-market deposits increased $4.4 million , or 1.3% annualized, to $1.383 billion at March 31, 2020 from $1.379 billion at December 31, 2019 .

Average in-market deposits increased $16.0 million , or 4.8% annualized, to $1.366 billion at March 31, 2020 from $1.350 billion at December 31, 2019 .

Results as of and for the three and six months ended June 30, 2020 include:

Net income totaled $3.3 million , or diluted earnings per share of $0.38 , for the three months ended June 30, 2020 , compared to $6.6 million , or diluted earnings per share of $0.75 , for the same period in 2019 .

Net income totaled $6.6 million , or diluted earnings per share of $0.77 , for the six months ended June 30, 2020 , compared to $12.5 million , or diluted earnings per share of $1.43 , for the same period in 2019 .

During the second quarter of 2020, the Corporation disbursed $327.9 million in Paycheck Protection Program (“PPP”) loans and received processing fee income from the Small Business Administration (“SBA”) of $8.7 million.

The processing fee income is deferred and recognized over the contractual life of the loan, or accelerated at forgiveness.

During the second quarter of 2020, $859,000 was recognized in interest income.

Record pre-tax, pre-provision adjusted earnings, which excludes certain one-time and discrete items, totaled $9.8 million for the three months ended June 30, 2020 , up 32.4% for the same period in 2019 .

Pre-tax, pre-provision adjusted return on average assets was 1.61% for the three months ended June 30, 2020 , compared 1.46% for the same period in 2019 .

Pre-tax, pre-provision adjusted earnings totaled $17.3 million for the six months ended June 30, 2020 , up 19.3% for the same period in 2019 .

Pre-tax, pre-provision adjusted return on average assets was 1.53% for the six months ended June 30, 2020 , compared 1.46% for the same period in 2019 .

Period-end gross loans and leases receivable were $2.057 billion as of June 30, 2020 , up $342.2 million from December 31, 2019 .

Line of credit utilization was significantly impacted by PPP loan proceeds and was $212.6 million as of June 30, 2020 , down from $281.4 million at December 31, 2019 .

Gross loans and leases receivable, excluding PPP loans and lines of credit, were $1.516 billion as of June 30, 2020 , up 11.6% annualized, from December 31, 2019 .

The allowance for loan and lease losses increased $7.9 million , or 40.7% , compared to December 31, 2019 primarily due to a $4.3 million and $2.1 million increase in the general and specific reserves, respectively, driven by the COVID-19 pandemic.

The allowance for loan and lease losses increased to 1.33% of total loans, compared to 1.14% at December 31, 2019 .

Excluding PPP loans, the allowance for loan and lease losses increased to 1.58% of total loans as of June 30, 2020 .

Provision for loan and lease losses totaled $5.5 million for the three months ended June 30, 2020 , compared to a provision benefit of $784,000 for the same period in 2019 .

Provision for loan and lease losses totaled $8.7 million for the six months ended June 30, 2020 , compared to a provision benefit of $736,000 for the same period in 2019 .

Robust liquidity position includes record in-market deposits of $1.621 billion , total deposits of $1.710 billion , and on-balance sheet liquidity of $611.6 million , defined as total short-term investments, unencumbered securities available-for-sale, and unencumbered pledged loans.

In-market deposit balances were inflated due to PPP loan proceeds.

Net interest margin was 3.34% and 3.39% for the three and six months ended June 30, 2020 , respectively, compared to 3.52% and 3.66% for the three and six months ended June 30, 2019 , respectively.

Adjusted net interest margin, which excludes certain one-time and discrete items, was 3.33% for the three and six months ended June 30, 2020 , respectively, compared to 3.31% and 3.33% for the three and six months ended June 30, 2019 , respectively.

Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $2.3 million and $3.1 million for the three and six months ended June 30, 2020 , respectively, compared to $1.2 million and $3.5 million for the three and six months ended June 30, 2019 , respectively.

Top line revenue, defined as net interest income plus non-interest income, totaled $25.2 million for the three months ended June 30, 2020 , up 11.3% from the same period in 2019 .

Top line revenue totaled $48.7 million for the six months ended June 30, 2020 , up 8.0% from the same period in 2019 .

Non-interest income totaled $6.3 million , or 25.1% of total revenue, or the three months ended June 30, 2020 , surpassing the Corporation’s goal of 25% for the fifth consecutive quarter.

Non-interest income totaled $12.7 million , or 26.2% of total revenue, for the six months ended June 30, 2020 .

Non-interest expense was $18.3 million and $34.5 million for the three and six months ended June 30, 2020 , respectively, compared to $17.5 million and $35.2 million for the three and six months ended June 30, 2019 , respectively.

Operating expense, which excludes certain one-time and discrete items, totaled $15.4 million and $31.3 million for the three and six months ended June 30, 2020 , respectively, compared to $15.3 million and $30.5 million for the three and six months ended June 30, 2019 , respectively.

The Corporation incurred a $744,000 loss on the early extinguishment of $59.5 million in Federal Home Loan Bank (“FHLB”) term advances late in the second quarter of 2020, as the Corporation lowered wholesale funding costs and improved the Corporation’s funding position with the expectation of a low interest rate environment for an extended period of time.

The efficiency ratio improved to 61.22% and 64.36% for the three and six months ended June 30, 2020 , respectively, down from 67.41% and 67.72% for the three and six months ended June 30, 2019 , respectively.

Historic tax credit programs contributed $690,000, or $0.08 per share, during the three months ended June 30, 2020 , compared to $446,000, or $0.05 per share for the same period in 2019 .

COVID-19 Update

First Business’s work to ensure business continuity and responsive client service included proactive engagement by relationship managers with our clients and prospects to address their needs in the short and medium terms, leveraging our comprehensive digital banking and service platforms, and enabling virtually all of our employees to serve their clients remotely from the safety of their homes.

Business Continuity Plan

During March 2020, management activated its previously developed Pandemic Preparedness Plan, taking the following actions to protect the health of employees and clients, while continuing to exceed client needs:

Limited lobby hours.

Increased, proactive communication with employees and clients via phone, video conferencing, email, and other digital tools, while prohibiting business travel.

Transitioned over 90% of employees to remote work.

No furloughs or layoffs have been made to date, nor does management currently anticipate future employee furloughs or layoffs related to COVID-19.

Business Continuity

The Corporation continues to strictly adhere to COVID-19 health and safety-related requirements and best practices across all of our locations.

During the second quarter of 2020, employees slowly resumed business travel, as necessary, while business development efforts have continued to be somewhat negatively affected by limitations on in-person appointments.

Portions of the Corporation’s workforce started returning to the office, subject to local mandates and restrictions, on a rotating basis.

Management will monitor the activity closely and adjust accordingly as the health and safety of our employees and clients remain our highest priority.

The Corporation had no furloughs or layoffs related to COVID-19 to date.

Paycheck Protection Program

A team of nearly 60 employees, over 20% of the Corporation’s workforce, started accepting and processing applications for loans under the Paycheck Protection Program (“PPP”) on Friday, April 3, 2020, when the program was officially launched by the SBA and Treasury Department under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

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”).

During the second quarter of 2020, the Corporation 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 recognized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method.

During the second quarter of 2020, $859,000 was recognized in interest 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 the increase in in-market deposits.

Liquidity Sources

Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized based on available capacity, term flexibility, and cost.

As of March 31, 2020 , the Corporation had the following sources of liquidity (excluding the Corporation’s ability to participate in the PPPLF):

March 31, 2020

Excess cash held at the Federal Reserve

Reciprocal deposits held off-balance sheet

Collateral value of unencumbered pledged loans

Market value of unencumbered securities

Total sources of liquidity

As of June 30, 2020 , the Corporation had the following sources of liquidity, including the Corporation’s ability to participate in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”):

June 30, 2020

(In Thousands)

Short-term investments

PPPLF availability

Collateral value of unencumbered pledged loans (FHLB borrowing availability)

Market value of unencumbered securities (Fed Discount Window and FHLB borrowing availability)

Total sources of liquidity

In addition to the above primary sources of liquidity, as of March 31, 2020 , the Corporation also had access to $53.5 million in federal funds lines with various correspondent banks and significant experience accessing the highly liquid brokered certificate of deposit market.

In addition to the above primary sources of liquidity, as of June 30, 2020 , the Corporation also had access to $53.5 million in federal funds lines with various correspondent banks and significant experience accessing the highly liquid brokered certificate of deposit market.

Capital Strength

The Corporation’s capital ratios continued to exceed the highest required regulatory benchmark levels.

Total capital to risk-weighted assets was 11.74% , tier 1 capital to risk-weighted assets was 9.45% , tier 1 leverage capital to adjusted average assets was 9.33% , and common equity tier 1 capital to risk-weighted assets was 8.96% .

Total capital to risk-weighted assets at June 30, 2020 , was 11.97% , tier 1 capital to risk-weighted assets was 9.57% , tier 1 leverage capital to adjusted average assets was 8.29% , and common equity tier 1 capital to risk-weighted assets was 9.08% .

Tangible common equity to tangible assets was 7.56% .

Effective March 16, 2020, management suspended the Corporation’s current stock repurchase program due to the uncertainty surrounding the COVID-19 pandemic.

Excluding PPP loans, tier 1 leverage capital to adjusted average assets and tangible common equity to tangible assets were 9.19% and 8.72% , respectively.

Management suspended the Corporation’s stock repurchase program in March 2020 due to the uncertainty surrounding the COVID-19 pandemic.

As of March 16, 2020, the Corporation had repurchased 141,137 shares of its common stock at a weighted average price of $24.62 per share, for a total value of $3.5 million.

The Corporation has $1.5 million of buyback authority remaining as of March 16, 2020.

As previously announced, during the first quarter of 2020 , the Corporation’s Board of Directors declared a regular quarterly dividend of $0.165 per share.

The dividend was paid on February 13, 2020 to stockholders of record at the close of business on February 3, 2020 .

Measured against first quarter 2020 diluted earnings per share of $0.38 , the dividend represents a 43.4% payout ratio.

The Corporation has $1.5 million of buyback authority remaining.

As previously announced, during the second quarter of 2020 , the Corporation’s Board of Directors declared a regular quarterly dividend of $0.165 per share.

The dividend was paid on May 14, 2020 to stockholders of record at the close of business on May 4, 2020 .

Measured against second quarter 2020 diluted earnings per share of $0.38 , the dividend represents a 43.4% payout ratio.

The Board of Directors routinely considers dividend declarations as part of its normal course of business.

Deferral Requests

As of March 31, 2020 , the Corporation had processed 64 deferral requests, representing $59.8 million in total outstanding loans.

As of April 22, 2020, the Corporation had processed 267 deferral requests, representing $196.6 million in total outstanding loans.

Management anticipates this activity will continue throughout the second quarter of 2020 and beyond.

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 on loans totaling $323.2 million, or 18.6% of gross loans and leases.

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.

Management anticipates the loan modifications may continue throughout 2020.

The following tables represent a breakdown of the deferred loan balances by industry segment and collateral type:

June 30, 2020

Collateral Type

Industries Description

% Deferred of Total Industry

Non Real Estate

(Dollars in Thousands)

Real Estate and Rental and Leasing

Accommodation and Food Services

Manufacturing

Health Care and Social Assistance

Transportation and Warehousing

Wholesale Trade

Other Services (except Public Administration)

Professional, Scientific, and Technical Services

Administrative and Support and Waste Management and Remediation Services

Finance and Insurance

Arts, Entertainment, and Recreation

Agriculture, Forestry, Fishing and Hunting

Total deferred loan balances

The following table is a further breakdown of the deferred loan balances by certain credit quality indicators.

Please refer to Note 6 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses for the risk category definitions.

June 30, 2020

(Dollars in Thousands)

Total deferred loan balances

The following table is a further breakdown of the deferred loan balances and collateral type for the Real Estate and Rental and Leasing industry:

June 30, 2020

Collateral Type

Real Estate and Rental and Leasing Detail:

% Deferred of Sub-Industry

Non Real Estate

(Dollars in Thousands)

Office - Class A

Retail - Non-Credit Tenant - Shopping Center

Office - Class B

Multi-Family - Market Rent

Retail - Non-Credit Tenant - Strip Center

Multi-Family - Student Housing

Retail - Non-Credit Tenant - Restaurant

Retail - Other

Retail - Non-Credit-Tenant - Big Box

Total Real Estate and Rental and Leasing

The following table is a further breakdown of the deferred loan balances and collateral type for the Accommodation and Food Services industry:

June 30, 2020

Collateral Type

Accommodation and Food Services Detail:

% Deferred of Sub-Industry

Non Real Estate

(Dollars in Thousands)

Hotel - No Flag

Retail - Restaurant/Bar

Total Accommodation and Food Service

Exposure to Stressed Industries

Certain industries are widely expected to be particularly impacted by social distancing, quarantines, and the economic impact of the COVID-19 pandemic, such as the following:

March 31, 2020

Outstanding Exposure

June 30, 2020

% Gross Loans and Leases (1)

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Total outstanding exposure

Excluding PPP loans.

Includes $51.7 million in loans secured by commercial real estate.

As of March 31, 2020 , the Corporation had no meaningful direct exposure to the energy or airline industries and does not participate in shared national credits.

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

As of June 30, 2020 , the Corporation had no meaningful direct exposure to the energy sector, airline industry or retail consumer, and does not participate in shared national credits.

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

Results of Operations

Top Line Revenue

Top line revenue, comprised of net interest income and non-interest income, increased 4.8% for the three months ended March 31, 2020 compared to the same period in the prior year primarily due to an increase in non-interest income driven by an increase in commercial loan interest rate swap fee income and above average returns on investments in mezzanine funds, partially offset by a decrease in net interest income primarily due to decrease in fees in lieu of interest.

Fees in lieu of interest are defined as prepayment fees, asset-based loan fees, and non-accrual interest.

Top line revenue, comprised of net interest income and non-interest income, increased 11.3% for the three months ended June 30, 2020 compared to the same period in the prior year primarily due to an increase in fees in lieu of interest and a reduction in interest rate paid on deposits, partially offset by lower loan yields.

Top line revenue increased 8.0% for the six months ended June 30, 2020 compared to the same period in the prior year primarily due to an increase in commercial loan interest rate swap fee income and a reduction in interest rates paid on deposits, partially offset by lower loan yields and a reduction in fees in lieu of interest.

The components of top line revenue were as follows:

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(Dollars in Thousands)

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Annualized Return on Average Assets and Annualized Return on Average Equity

ROAA for the three months ended March 31, 2020 decreased to 0.62% compared to 1.20% for the three months ended March 31, 2019 .

The decrease in ROAA was primarily due to an increase in the provision for loan and lease losses related to the COVID-19 pandemic and a reduction in net interest income.

This reduction in profitability was partially offset by an increase in commercial loan interest rate swap fee income, above average returns on investments in mezzanine funds, a decrease in SBA recourse provision, and an overall decrease in operating expenses.

ROAA for the three months ended June 30, 2020 decreased to 0.55% compared to 1.30% for the three months ended June 30, 2019 .

ROAA for the six months ended June 30, 2020 decreased to 0.58% compared to 1.25% for the six months ended June 30, 2019 .

The decrease in ROAA was primarily due to an increase in the provision for loan and lease losses related to the COVID-19 pandemic.

This reduction in profitability was partially offset by an increase in commercial loan interest rate swap fee income, a decrease in SBA recourse provision, an overall decrease in operating expenses, and net interest income improvement mainly due to lower rates paid on deposits.

We consider ROAA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed.

ROAA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage which can ultimately influence return on equity measures.

ROAE for the three months ended March 31, 2020 was 7.14% compared to 13.67% for the three months ended March 31, 2019 .

ROAE for the three months ended June 30, 2020 was 6.70% compared to 14.09% for the three months ended June 30, 2019 .

ROAE for the six months ended June 30, 2020 was 6.92% compared to 13.89% for the six months ended June 30, 2019 .

The reasons for the decrease in ROAE are consistent with the explanations discussed above with respect to ROAA.

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Efficiency Ratio

Efficiency ratio is a non-GAAP measure representing non-interest expense excluding the effects of the SBA recourse provision, impairment of tax credit investments, losses on foreclosed properties, amortization of other intangible assets, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized gains or losses on securities, if any.

The efficiency ratio was 67.74% for the three months ended March 31, 2020 compared to 68.04% for the three ended March 31, 2019 .

Operating revenue growth outpaced the change in operating expense for the three months ended March 31, 2020 , resulting in positive operating leverage.

For the three months ended March 31, 2020 compared to the three months ended March 31, 2019 , operating revenue increased 4.8% while operating expense increased 4.3% .

Efficiency ratio is a non-GAAP measure representing non-interest expense excluding the effects of the SBA recourse provision, impairment of tax credit investments, losses on foreclosed properties, amortization of other intangible assets, losses on early extinguishment of debt, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized gains or losses on securities, if any.

The efficiency ratio was 61.22% and 64.36% for the three and six months ended June 30, 2020 compared to 67.41% and 67.72% for the three and six months ended June 30, 2019 .

Operating revenue growth outpaced the change in operating expense for the three and six months ended June 30, 2020 , resulting in positive operating leverage.

Results for the three and six months ended June 30, 2020 have benefited from PPP interest income, PPP loan processing fee recognition, and below average business-related expenses due to the COVID-19 pandemic.

For the three months ended June 30, 2020 compared to the three

months ended June 30, 2019 , operating revenue increased 11.2% while operating expense increased 1.0% .

Similarly, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 , operating revenue increased 8.0% while operating expense increased 2.7% .

We believe we will continue to generate modest positive operating leverage and progress towards enhancing our long-term efficiency ratio at a measured pace as we focus on strategic initiatives directed toward revenue growth;

although this growth may be muted somewhat by the current health crisis and its effect on the economy.

These initiatives include efforts to expand our specialty finance lines of business, increase our commercial banking market share, and scale our private wealth management business in less mature markets.

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Please refer to the Non-Interest Income and Non-Interest Expense sections below for discussion on additional drivers of the year-over-year change in the efficiency ratio.

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(Dollars in Thousands)

Total non-interest expense

Net loss on foreclosed properties

Net loss (gain) on foreclosed properties

Amortization of other intangible assets

SBA recourse provision

SBA recourse (benefit) provision

Tax credit investment impairment

Loss on early extinguishment of debt

Total operating expense

9 unchanged sentences

Net interest income is sensitive to changes in market rates of interest and the asset/liability management processes to prepare for and respond to such changes.

The following table provides information with respect to (1) the change in net interest income attributable to changes in rate (changes in rate multiplied by prior volume) and (2) the change in net interest income attributable to changes in volume (changes in volume multiplied by prior rate) for the three months ended March 31, 2020 compared to the same period in 2019 .

The change in net interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) has been allocated to the rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Increase (Decrease) for the Three Months Ended March 31,

The following table provides information with respect to (1) the change in net interest income attributable to changes in rate (changes in rate multiplied by prior volume) and (2) the change in net interest income attributable to changes in volume (changes in volume multiplied by prior rate) for the three and six months ended June 30, 2020 compared to the same period in 2019 .

The change in net interest income attributable to changes in rate and volume (changes in rate multiplied by changes in

volume) has been allocated to the rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Increase (Decrease) for the Three Months Ended June 30,

Increase (Decrease) for the Six Months Ended June 30,

2020 Compared to 2019

(In Thousands)

17 unchanged sentences

FHLB advances

Federal reserve PPP lending facility

Other borrowings

3 unchanged sentences

The average balances of loans and leases include non-accrual loans and leases and loans held for sale.

The table below shows our average balances, interest, average yields/rates, net interest margin, and the spread between the combined average yields earned on interest-earning assets and average rates on interest-bearing liabilities for the three months ended March 31, 2020 and 2019 .

The average balances are derived from average daily balances.

For the Three Months Ended March 31,

For the Three Months Ended June 30,

Yield/Rate (4)

20 unchanged sentences

FHLB advances

Federal reserve PPPLF

Other borrowings

21 unchanged sentences

Represents annualized yields/rates.

Comparison of Net Interest Income for the Three Months Ended March 31, 2020 and 2019

Net interest income decreased $704,000 , or 4.0% , during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 .

The decline in net interest income reflected a decrease in net interest margin and fees received in lieu of interest, partially offset by an increase in average loans and leases.

Fees in lieu of interest, which can vary from quarter to quarter, totaled $722,000 , compared to $2.2 million .

Excluding fees in lieu of interest, net interest income increased $796,000 , or 5.1% .

Average gross loans and leases for the three months ended March 31, 2020 increased $89.3 million , or 5.4% , compared to the three months ended March 31, 2019 .

The yield on average loans and leases for the three months ended March 31, 2020 declined to 5.04% compared to 5.89% for the three months ended March 31, 2019 .

Both periods were impacted by fees collected in lieu of interest.

Without the impact of these fees, the yield on average loans and leases for the three months ended March 31, 2020 was 4.87% , compared to 5.35% for the three months ended, March 31, 2019 .

Similarly, the yield on average interest-earning assets for the three months ended March 31, 2020 measured 4.72% , compared to 5.48% for the three months ended March 31, 2019 .

Excluding fees collected in lieu of interest, the yield on average interest-earning assets for the three months ended March 31, 2020 was 4.57% , compared to 5.01% for the three months ended March 31, 2019 , reflecting a decrease in LIBOR and Prime.

The average rate paid on total interest-bearing liabilities for the three months ended March 31, 2020 decreased to 1.61% , compared to 2.11% for the three months ended March 31, 2019 .

Total interest-bearing liabilities include interest-bearing deposits, federal funds purchased, FHLB advances, subordinated and junior subordinated notes payable, and other borrowings.

The average rate paid on total in-market deposits — comprised of all transaction accounts, money market accounts, and non-wholesale deposits — for the three months ended March 31, 2020 decreased to 0.96% , down from 1.47% for the three months ended March 31, 2019 .

The average rate paid on total in-market deposits declined as the Corporation decreased deposit rates in response to the Federal Open Market Committee’s (“FOMC”) decision to decrease the target federal funds rate 225 basis points from July 2019 to March 2020.

The average target federal funds rate decreased 207 basis points during this period of comparison.

For the Six Months Ended June 30,

Yield/Rate (4)

(Dollars in Thousands)

Interest-earning assets

Commercial real estate and other mortgage loans (1)

Commercial and industrial loans (1)

Direct financing leases (1)

Consumer and other loans (1)

Total loans and leases receivable (1)

Mortgage-related securities (2)

Other investment securities (3)

FHLB and FRB stock

Short-term investments

Total interest-earning assets

Non-interest-earning assets

Interest-bearing liabilities

Transaction accounts

Money market accounts

Certificates of deposit

Wholesale deposits

Total interest-bearing deposits

FHLB advances

Federal reserve PPPLF

Other borrowings

Junior subordinated notes

Total interest-bearing liabilities

Non-interest-bearing demand deposit accounts

Other non-interest-bearing liabilities

Total liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income

Interest rate spread

Net interest-earning assets

Net interest margin

Average interest-earning assets to average interest-bearing liabilities

Return on average assets (4)

Return on average equity (4)

Average equity to average assets

Non-interest expense to average assets

The average balances of loans and leases include non-accrual loans and leases and loans held for sale.

Interest income related to non-accrual loans and leases is recognized when collected.

Interest income includes net loan fees collected in lieu of interest.

Includes amortized cost basis of assets available-for-sale and held-to-maturity.

Yields on tax-exempt municipal securities are not presented on a tax-equivalent basis in this table.

Represents annualized yields/rates.

Comparison of Net Interest Income for the Three and Six Months Ended June 30, 2020 and 2019

Net interest income increased $2.0 million , or 12.1% , during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 .

The increase in net interest income reflected a reduction in the rate paid on deposits, interest income received from PPP loans, and an increase in fees collected in lieu of interest, partially offset by a decrease in the yield on loans and leases.

Fees in lieu of interest, which can vary from quarter to quarter, totaled $2.3 million , compared to $1.2 million .

Excluding fees in lieu of interest, interest income from PPP loans, and interest expense from Federal Reserve PPPLF advances, net interest income increased $364,000 , or 2.3% .

Average gross loans and leases for the three months ended June 30, 2020 increased $288.8 million , or 17.0% , compared to the three months ended June 30, 2019 .

Excluding PPP loans and lines of credit, average gross loans and leases for the three months ended June 30, 2020 increased $113.0 million , or 8.1% , compared to the three months ended June 30, 2019 .

Net interest income for the six months ended June 30, 2020 increased $1.3 million , or 3.8% , compared to the six months ended June 30, 2019 .

The increase in net interest income reflected a reduction in the rate paid on deposits and interest income received from PPP loans, partially offset by lower loan yields and a decrease in fees collected in lieu of interest.

Fees in lieu of interest totaled $3.1 million for the six months ended June 30, 2020 compared to $3.5 million in the prior year period.

Excluding fees in lieu of interest, interest income from PPP loans, and interest expense from Federal Reserve PPPLF advances, net interest income for the six months ended June 30, 2020 increased $1.2 million , or 3.9% .

Average gross loans and leases for the six months ended June 30, 2020 increased $188.9 million , or 11.3% , compared to the six months ended June 30, 2019 .

Excluding PPP loans and lines of credit, average gross loans and leases for the six months ended June 30, 2020 increased $107.8 million , or 15.6% annualized, compared to the six months ended June 30, 2019 .

The yield on average loans and leases for the three and six months ended June 30, 2020 declined to 4.35% and 4.67% , respectively, compared to 5.64% and 5.76% for the three and six months ended June 30, 2019 , respectively.

Both periods were impacted by fees collected in lieu of interest and the current period was impacted by PPP loan interest income.

Without the impact of these fees and PPP loan interest income, the yield on average loans and leases excluding PPP loans for the three and six months ended June 30, 2020 was 4.33% and 4.59% , respectively, compared to 5.36% and 5.34% for the three and six months ended, June 30, 2019 , respectively.

Similarly, the yield on average interest-earning assets for the three and six months ended June 30, 2020 measured 4.03% and 4.35% , respectively, compared to 5.29% and 5.39% for the three and six months ended June 30, 2019 , respectively.

Excluding fees collected in lieu of interest and PPP loan interest income, the yield on average interest-earning assets excluding PPP loans for the three and six months ended June 30, 2020 was 3.97% and 4.26% , respectively, compared to 5.03% and 5.01% for the three and six months ended June 30, 2019 , reflecting a decrease in LIBOR and Prime.

The average rate paid on total interest-bearing liabilities for the three and six months ended June 30, 2020 decreased to 0.91% and 1.25% , respectively, compared to 2.19% and 2.15% for the three and six months ended June 30, 2019 , respectively.

Total interest-bearing liabilities include interest-bearing deposits, federal funds purchased, FHLB advances, Federal Reserve PPPLF advances, subordinated and junior subordinated notes payable, and other borrowings.

The average rate paid on total in-market deposits — comprised of all transaction accounts, money market accounts, and non-wholesale deposits — for the three and six months ended June 30, 2020 decreased to 0.33% and 0.62% , respectively, down from 1.56% and 1.51% , for the three and six months ended June 30, 2019 , respectively.

The average target federal funds rate decreased 234 basis points.

Consistent with the Corporation’s longstanding funding strategy to manage interest rate risk and match fund long-term, fixed-rate loans, wholesale funds are used at various maturity terms to meet the Corporation’s funding needs.

Average FHLB advances for the three months ended March 31, 2020 increased $57.9 million to $325.9 million at an average rate paid of 1.91% , compared to $268.0 million at an average rate paid of 2.16% for the three months ended March 31, 2019 .

As of March 31, 2020 , the weighted average original maturity of our FHLB term advances was 5.93 years.

Average wholesale deposits, consisting of brokered certificates of deposit and deposits gathered from internet listing services, for the three months ended March 31, 2020 decreased $135.3 million to $132.5 million at an average rate paid of 2.57% , compared to $267.8 million at an average rate paid of 2.16% .

Average FHLB advances for the three months ended June 30, 2020 increased $143.1 million to $409.3 million at an average rate paid of 1.25% , compared to $266.1 million at an average rate paid of 2.27% for the three months ended June 30, 2019 .

Average FHLB advances for the six months ended June 30, 2020 increased $100.5 million to $367.6 million at an average rate paid of 1.55% , compared to $267.1 million at an average rate paid of 2.21% for the six months ended June 30, 2019 .

As of June 30, 2020 , the weighted average original maturity of our FHLB term advances was 5.3 years.

Average wholesale deposits, consisting of brokered certificates of deposit and deposits gathered from internet listing services, for the three months ended June 30, 2020 decreased $145.5 million to $105.6 million at an average rate paid of 2.42% , compared to $251.1 million at an average rate paid of 2.22% .

Average wholesale deposits for the six months ended June 30, 2020 decreased $140.3 million to $119.0 million at an average rate paid of 2.50% , compared to $259.4 million at an average rate paid of 2.19% for the six months ended June 30, 2019 .

The existing wholesale deposit portfolio is maturing and being replaced, as needed, by lower cost FHLB advances to match fund long-term, fixed-rate loans.

As of March 31, 2020 , the weighted average original maturity of our wholesale deposits was 4.79 years.

The average rate paid on total bank funding for the three months ended March 31, 2020 decreased to 1.24% compared to 1.68% for the three months ended March 31, 2019 .

Total bank funding is defined as total deposits plus FHLB advances.

Net interest margin decreased 35 basis points to 3.44% for the three months ended March 31, 2020 compared to 3.79% for the three months ended March 31, 2019 .

The decrease was primarily due to the decrease in the average yield on loans and leases receivable and a reduction in fees collected in lieu of interest.

As of June 30, 2020 , the weighted average original maturity of our wholesale deposits was 4.6 years.

The average rate paid on total bank funding for the three and six months ended June 30, 2020 decreased to 0.61% and 0.91% , respectively, compared to 1.76% and 1.72% for the three and six months ended June 30, 2019 .

Total bank funding is defined as total deposits plus FHLB advances and Federal Reserve PPPLF advances.

Net interest margin decreased 18 basis points to 3.34% for the three months ended June 30, 2020 compared to 3.52% for the three months ended June 30, 2019 .

The decrease was primarily due to the decrease in the average yield on loans and leases receivable, partially offset by a decrease in the average rate paid on in-market deposits and wholesale funding and increase in fees collected in lieu of interest.

Excluding fees collected in lieu of interest and PPP loan interest income, net interest margin measured 3.33% for the second quarter of 2020 , compared to 3.31% in the second quarter of 2019 .

Net interest margin decreased 27 basis points to 3.39% for the six months ended June 30, 2020 compared to 3.66% for the six months ended June 30, 2019 .

The decrease was primarily due to the decrease in average yield on loans and leases receivable and a decrease in fees in lieu of interest.

These unfavorable variances were partially offset by a decrease in the average rate paid on in-market deposits and wholesale funding.

Excluding fees collected in lieu of interest, net interest margin measured 3.30% for the first quarter of 2020 , compared to 3.32% in the first quarter of 2019 .

Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in our higher-yielding specialty finance line of business will allow the Corporation to achieve a net interest margin of at least 3.50%, on average, notwithstanding the volatility expected in the second quarter of 2020 due to the PPP loans.

However, the collection of loan fees in lieu of interest is an expected source of volatility to quarterly net interest income and net interest margin, particularly given the nature of the Corporation’s asset-based lending business.

Excluding fees collected in lieu of interest and PPP loan interest income, net interest margin measured 3.33% for the six months ended June 30, 2020 and June 30, 2019 .

The Corporation incurred a $744,000 loss, recognized through non-interest expense, on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020, as the Corporation lowered wholesale funding costs and improved the Corporation’s funding position.

Management believes this strategy will help stabilize net interest margin with the expectation of a low interest rate environment for an extended period of time.

Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in our higher-yielding specialty finance lines of business will allow the Corporation to achieve a net interest margin of at least 3.50%, on average.

Net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows.

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Refer to Allowance for Loan and Lease Losses , below, for further information regarding our allowance for loan and lease loss methodology.

In the first quarter of 2020, the underlying credit quality indicators of the Corporation were strong, however, given the uncertain economic environment created by the COVID-19 pandemic and the impact it could have on credit losses, we believed it was necessary to build credit reserves.

Based on an analysis of this increased inherent risk in the loan portfolio, the allowance for loan and lease losses was increased $3.1 million, or 16.5% , compared to December 31, 2019 .

The provision for loan and lease losses totaled $3.2 million for the three months ended March 31, 2020 , compared to $49,000 for the three months ended March 31, 2019 .

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

Due to COVID-19 and the economic impact it could have on the Corporation’s loan portfolio, additional detail about certain exposure to stressed industries is included in the section titled COVID-19 Update , above.

While it was not a material source of provision for loan and lease losses during the three months ended March 31, 2020 , the legacy on-balance sheet SBA portfolio, defined as SBA 7(a) and Express loans originated in 2016 and prior, has been a source of elevated non-performing assets.

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 provision for loan and lease losses totaled $5.5 million and $8.7 million for the three and six months ended June 30, 2020 , respectively, compared to a provision benefit of $784,000 and $736,000 for the three and six months ended June 30, 2019 , respectively.

For the six months ended June 30, 2020, the increase in the allowance for loan and lease losses was in large part due to an increase in several qualitative factors after careful evaluation by management.

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.

Additionally, an increase in specific reserves of $2.1 million was driven by deterioration of two existing legacy SBA impaired relationships.

The legacy on-balance sheet SBA portfolio, defined as SBA 7(a) and Express loans originated in 2016 and prior, has been a source of elevated non-performing assets.

Additional information on our legacy SBA portfolio is as follows:

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Refer to Asset Quality , below, for further information regarding the overall credit quality of our loan and lease portfolio.

Comparison of Non-Interest Income for the Three Months Ended March 31, 2020 and 2019

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.

Comparison of Non-Interest Income for the Three and Six Months Ended June 30, 2020 and 2019

Non-Interest Income

Non-interest income primarily consists of fees earned for private wealth management services, gains on sale of SBA loans, service charges on deposits, loan fee income, and commercial loan interest rate swap fee income.

For the three months ended March 31, 2020 non-interest income increased by $1.8 million , or 38.3% , to $6.4 million from $4.6 million for the same period in 2019 .

For the three months ended June 30, 2020 non-interest income increased by $514,000 , or 8.9% , to $6.3 million from $5.8 million for the same period in 2019 .

For the six months ended June 30, 2020 non-interest income increased $2.3 million , or 21.9% , to $12.7 million from $10.4 million for the same period in 2019 .

Management continues to focus on revenue growth from multiple non-interest income sources in order to maintain a diversified revenue stream through greater contribution from fee-based revenues.

Total non-interest income accounted for 27.3% of our total revenues for the three months ended March 31, 2020 , compared to 20.7% for the three months ended March 31, 2019 .

Management believes the expected gradual expansion of our SBA lending program, fees from commercial loan interest rate swap activity with our commercial borrowers, and the geographic expansion of our private wealth management division will allow us to achieve our strategic target of 25% over the long-term.

Total non-interest income accounted for 25.1% and 26.2% of our total revenues for the three and six months ended June 30, 2020 , respectively, compared to 25.6% and 23.2% for the three and six months ended June 30, 2019 , respectively.

Management believes the expected gradual expansion of our SBA lending program, fees from commercial loan interest rate swap activity with our commercial borrowers, and the geographic expansion of our private wealth management division will allow us to sustain our strategic target of 25% over the long-term.

The components of non-interest income were as follows:

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(Dollars in Thousands)

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Fee income ratio (1)

Fee income ratio is fee income, per the above table, divided by top line revenue (defined as net interest income plus non-interest income).

Private wealth management service fees increased $185,000 , or 9.6% , for the three months ended March 31, 2020 , compared to the three months ended March 31, 2019 .

This increase was driven by growth in assets under management and administration attributable to new client relationships throughout the time period of comparison.

As of March 31, 2020 , trust assets under management and administration totaled $1.664 billion , decreasing $227.7 million , or 12.0% , compared to $1.892 billion as of December 31, 2019 and $67.5 million , or 3.9% , compared to $1.732 billion as of March 31, 2019 .

The decrease is principally due to the precipitous drop in equity prices in late March 2020.

Management expects to report a modest reduction in fee income in the second quarter of 2020, compared to the current quarter, due to the decline in market values in March 2020 stemming from the COVID-19 pandemic.

Commercial loan interest rate swap fee income was $1.7 million for the three months ended March 31, 2020 , compared to $473,000 for the three months ended March 31, 2019 .

Fee income ratio is total non-interest income, per the above table, divided by top line revenue (defined as net interest income plus non-interest income).

Private wealth management service fees decreased $14,000 , or 0.7% , and increased $170,000 , or 4.2% for the three and six months ended June 30, 2020 , respectively, compared to the three and six months ended June 30, 2019 .

The decrease for the three month comparison period was mainly driven by a decline in equity market values stemming from the COVID-19 pandemic.

The increase in the six month comparison period was driven by growth in assets under management and administration attributable to new client relationships.

As of June 30, 2020 , trust assets under management and administration totaled $1.873 billion , decreasing $18.8 million , or 1.0% , compared to $1.892 billion as of December 31, 2019 and increasing $118.4 million , or 6.7% , compared to $1.755 billion as of June 30, 2019 .

Commercial loan interest rate swap fee income was $1.7 million and $3.3 million for the three and six months ended June 30, 2020 , respectively, compared to $1.1 million and $1.5 million for the three and six months ended June 30, 2019 , respectively.

Interest rate swaps continue to be an attractive product for the Bank’s commercial borrowers, although associated fee income can vary period to period based on client demand and the interest rate environment in any given quarter.

Other non-interest income for the three months ended March 31, 2020 totaled $762,000 , compared to $513,000 for three months ended March 31, 2019 .

Returns on the investment in mezzanine funds were $462,000 for the three months ended March 31, 2020 , compared to $232,000 for three months ended March 31, 2019 .

In addition, fee income from the Company’s newly established bank consulting division, First Business Consulting Services, total $63,000 for the three months ended March 31, 2020 compared to $10,000 for three months ended March 31, 2019 .

Comparison of Non-Interest Expense for the Three Months Ended March 31, 2020 and 2019

Gains on sale of SBA loans increased $277,000 , or 93.3% , and increased $300,000 , or 55.7% , for the three and six months ended June 30, 2020 , respectively, compared to the three and six months ended June 30, 2019 .

The Corporation’s pipeline continues to grow period over period and management believes the gain on sale of traditional SBA loans (i.e., SBA loans unrelated to PPP loans) will increase at a measured pace over time.

Loans held for sale, consisting entirely of SBA loans closed but not fully funded, increased $7.3 million , or 116.0% , to $13.7 million compared to March 31, 2020.

Other non-interest income for the three and six months ended June 30, 2020 totaled $309,000 and $1.1 million , respectively, compared to $816,000 and $1.3 million , respectively, for three and six months ended June 30, 2019 .

Decreases in both periods of comparison were primarily due to gains recognized on end-of-term buyout agreements from the Corporation’s equipment financing business line during the three months ended June 30, 2019.

Comparison of Non-Interest Expense for the Three and Six Months Ended June 30, 2020 and 2019

Non-Interest Expense

The components of non-interest 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,

(Dollars in Thousands)

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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

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Total operating expense represents total non-interest expense, adjusted to exclude the impact of discrete items as previously defined in the non-GAAP efficiency ratio calculation, above.

Non-interest expense for the three months ended March 31, 2020 decreased by $1.6 million , or 9.0% , to $16.1 million compared to $17.7 million for the same period in 2019 .

Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $661,000 , or 4.3% , to $15.9 million for the three months ended March 31, 2020 compared to $15.2 million for the same period in 2019 .

The increase in operating expense was primarily due to an increase in compensation expense and collateral liquidation costs, partially offset by a decrease in professional fees and general business-related expenses due to the Corporation’s adherence to COVID-19 stay-at-home orders.

Compensation expense for the three months ended March 31, 2020 was $11.1 million , an increase of $887,000 compared to the three months ended March 31, 2019 .

The increase in compensation expense reflects an increase in employees, annual merit increases, and an increase in incentive compensation.

Average full-time equivalent employees were 286 for the quarter ended March 31, 2020 compared to 277 for the quarter ended March 31, 2019 .

Collateral liquidation costs increased $212,000 to $121,000 for the three months ended March 31, 2020 compared to a recovery of $91,000 for the three months ended March 31, 2019 .

The first quarter of 2019 included the recovery of various workout expenses following the successful resolution of an impaired asset-based loan relationship.

Professional fee expense decreased $391,000 , or 32.3% , to $819,000 for the three months ended March 31, 2020 compared to $1.2 million for the three months ended March 31, 2019 .

The decrease compared to the prior year quarter was primarily due to a decrease in consulting and recruiting expense.

Tax credit investment impairment expense was $113,000 for the three months ended March 31, 2020 compared to $2.0 million for the same period in the 2019 .

During the first quarter of 2019, the Company recognized $1.9 million in expense due to the impairment of an in-market federal historic tax credit investment, which corresponded with the recognition of a $2.8 million tax credit during the quarter.

Non-interest expense for the three months ended June 30, 2020 increased by $879,000 , or 5.0% , to $18.3 million compared to $17.5 million for the same period in 2019 .

Non-interest expense for the six months ended June 30, 2020 decreased by $718,000 , or 2.0% , to $34.5 million compared to $35.2 million for the same period in 2019 .

Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $158,000 , or 1.0% , to $15.4 million for the three months ended June 30, 2020 compared to $15.3 million for the same period in 2019 .

Operating expense increased $817,000 , or 2.7% , to $31.3 million compared to $30.5 million for the same period in 2019 .

The increase in operating expense for both periods of comparison was primarily due to an increase in compensation expense and collateral liquidation costs, partially offset by a decrease in general business-related expenses due to the Corporation’s adherence to COVID-19 stay-at-home orders.

Compensation expense for the three months ended June 30, 2020 was $10.8 million , an increase of $293,000 , or 2.8% , compared to the three months ended June 30, 2019 .

Compensation expense for six months ended June 30, 2020 was $21.8 million , an increase of $1.2 million , or 5.7% , compared to the six months ended June 30, 2019 .

The increase in compensation expense in both periods of comparison reflects an increase in employees and annual merit increases.

Average full-time equivalent employees were 281 for the quarter ended June 30, 2020 compared to 274 for the quarter ended June 30, 2019 .

Collateral liquidation costs increased $26,000 to $115,000 for the three months June 30, 2020 compared to $89,000 for the three months ended June 30, 2019 , and increased $237,000 to $236,000 for the six months ended June 30, 2020 compared to a recovery of $1,000 for the six months ended June 30, 2019 .

The first half of 2019 included the recovery of various workout expenses following the successful resolution of an impaired asset-based loan relationship.

Tax credit investment impairment expense was $1.8 million and $2.0 million for the three and six months ended June 30, 2020 , respectively, compared to $2.1 million and $4.1 million for the three and six months ended June 30, 2019 , respectively.

During the second quarter of 2020, the Corporation recognized a total of $1.7 million in expense due to the impairment of in-market federal historic tax credit investments, which corresponded with the recognition of a $2.5 million in tax credits during the quarter.

During the six months ended June 30, 2019 , the Corporation recognized $3.9 million in expense due to the impairment of in-market federal historic tax credit investments, which corresponded with the recognition of $5.3 million in tax credits.

Management intends to continue actively pursuing in-market tax credit opportunities throughout 2020 and beyond.

SBA recourse provision was $25,000 for the three months ended March 31, 2020 compared to $481,000 for the three months ended March 31, 2019 .

The decrease for the three months ended March 31, 2020 was primarily due to the declining balance of the outstanding legacy SBA loan sold portfolio and a reduction in the loss rate applied to the portfolio.

SBA recourse benefit was $30,000 and $5,000 for the three and six months ended June 30, 2020 , respectively, compared to recourse provision of $113,000 and $594,000 for the three and six months ended June 30, 2019 , respectively.

The decrease for the three and six months ended June 30, 2020 was primarily due to the declining balance of the outstanding legacy SBA loan sold portfolio and a reduction in the historic loss rate applied to the portfolio.

Changes to SBA recourse reserves may be a source of non-interest expense volatility in future quarters, though the magnitude of this volatility should diminish over time as the outstanding balance of sold legacy SBA loans continues to decline.

The total recourse reserve balance was $1.1 million, or 1.6% of total sold SBA loans outstanding, at March 31, 2020 , compared to $1.3 million, or 1.8%, at December 31, 2019, and $3.3 million, or 4.0%, at March 31, 2019 .

Income tax expense totaled $858,000 for the three months ended March 31, 2020 compared to an income tax benefit of $1.3 million for the three months ended March 31, 2019 .

The income tax benefit for the three months ended March 31, 2019 primarily reflects the recognition of a $2.8 million tax credit, which corresponded with the aforementioned impairment of an in-market federal historic tax credit investment.

The effective tax rate for the three months ended March 31, 2020 was 20.7%.

The total recourse reserve balance was $1.0 million , or 1.4% of total sold SBA loans outstanding, at June 30, 2020 , compared to $1.3 million , or 1.8% , at December 31, 2019, and $2.1 million , or 2.7% , at June 30, 2019 .

Income tax benefit totaled $1.1 million for the six months ended June 30, 2020 compared to an income tax benefit of $1.9 million for the six months ended June 30, 2019 .

The income tax benefit for the six months ended June 30, 2020 primarily reflects the recognition of $2.5 million in tax credits which correspond with the $1.7 million impairment of relationship-based historic tax credit investments during the same period.

The income tax benefit for the six months ended June 30, 2019 primarily reflects the recognition of $5.3 million in federal historic tax credits, which correspond with the $3.9 million impairment of relationship-based historic tax credit investments during the same period.

The effective tax rate for the six months ended June 30, 2020 , excluding the discrete items, was 18.5%.

Generally, the provision for income taxes is determined by applying an estimated annual effective income tax rate to income before taxes and adjusting for discrete items.

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Financial Condition

Total assets increased by $99.6 million , or 4.7% , to $2.196 billion as of March 31, 2020 compared to $2.097 billion at December 31, 2019 .

The increase in total assets was primarily driven by growth in our short-term investments, loan and lease portfolio and commercial loan swap portfolio.

Total assets increased by $372.0 million , or 17.7% , to $2.469 billion as of June 30, 2020 compared to $2.097 billion at December 31, 2019 .

The increase in total assets was primarily driven by PPP loan growth.

Short-Term Investments

Short-term investments increased by $28.6 million , or 56.0% , to $79.6 million at March 31, 2020 from $51.0 million at December 31, 2019 .

Short-term investments decreased by $23.2 million , or 45.4% , to $27.8 million at June 30, 2020 from $51.0 million at December 31, 2019 .

Our short-term investments primarily consist of interest-bearing deposits held at the FRB and commercial paper.

We value the safety and soundness provided by the FRB and therefore incorporate short-term investments in our on-balance sheet liquidity program.

As of March 31, 2020 and December 31, 2019 , our total investment in commercial paper was $5.9 million .

As of June 30, 2020 , we did not hold any commercial paper and as of December 31, 2019 , our total investment in commercial paper was $5.9 million .

Due to current economic conditions, we decided to temporarily exit this short-term investment.

We approach our decisions to purchase commercial paper with similar rigor and underwriting standards as applied to our loan and lease portfolio.

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Please refer to the section titled Liquidity and Capital Resources for further discussion.

Total securities, including available-for-sale and held-to-maturity, increased by $505,000 , or 0.2% , to $206.3 million at March 31, 2020 compared to $205.8 million at December 31, 2019 .

During the three months ended March 31, 2020 , due to declining interest rates, we recognized unrealized gains of $4.5 million before income taxes through other comprehensive income.

As of March 31, 2020 and December 31, 2019 , our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted-average expected maturity of 4.0 years and 4.4 years, respectively.

Total securities, including available-for-sale and held-to-maturity, decreased by $4.3 million , or 2.1% , to $201.5 million at June 30, 2020 compared to $205.8 million at December 31, 2019 .

During the six months ended June 30, 2020 , due to declining interest rates, we recognized unrealized gains of $4.2 million before income taxes through other comprehensive income.

As of June 30, 2020 and December 31, 2019 , our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted-average expected maturity of 3.7 years and 4.4 years, respectively.

Generally, our investment philosophy remains as stated in our most recent Annual Report on Form 10-K.

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On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification, data integrity validation primarily through comparison of current price to an expectation-based analysis of movement in prices based upon the changes in the related yield curves, and other market factors.

No securities within our portfolio were deemed to be other-than-temporarily impaired as of March 31, 2020 .

We sold approximately $839,000 of securities during the three months ended March 31, 2020 to proactively manage our securities portfolio to meet our long-term investment objectives.

No securities within our portfolio were deemed to be other-than-temporarily impaired as of June 30, 2020 .

Loans and Leases Receivable

Loans and leases receivable, net of allowance for loan and lease losses, increased by $25.5 million , or 1.5% , to $1.721 billion at March 31, 2020 from $1.695 billion at December 31, 2019 .

As of March 31, 2020 , commercial and industrial (“C&I”) loans were a significant contributor to loan growth increasing $16.5 million to $519.9 million from $503.4 million at December 31, 2019 .

Total commercial real estate (“CRE”) also contributed to growth, increasing $6.3 million to $1.160 billion from $1.154 billion at December 31, 2019 .

Construction loans were the largest contributors to CRE loan growth as of March 31, 2020 , increasing $22.0 million from December 31, 2019 .

Loans and leases receivable, net of allowance for loan and lease losses, increased by $334.3 million to $2.029 billion at June 30, 2020 from $1.695 billion at December 31, 2019 which was driven by the aforementioned PPP loan growth.

Loans and leases receivable, net of PPP loans and the allowance for loan and lease losses, increased by $6.4 million , or 0.4% , to $1.701 billion at June 30, 2020 from December 31, 2019 .

Total commercial real estate (“CRE”) contributed to growth, increasing $68.1 million to $1.222 billion from $1.154 billion at December 31, 2019 .

Multifamily and construction loans were the largest contributors to CRE loan growth as of June 30, 2020 , increasing $27.2 million and $24.3 million , respectively from December 31, 2019 .

Commercial and industrial (“C&I”) loans increased $277.8 million to $781.2 million from $503.4 million at December 31, 2019 .

Excluding PPP loans, C&I loans decreased $50.1 million to $453.3 million from $503.4 million at December 31, 2019 .

There continues to be a concentration in CRE loans, however, in general our composition of total loans and leases has remained relatively consistent due to balanced growth across our product offerings.

CRE loans represented 66.5% and 67.3% of our total loans as of March 31, 2020 and December 31, 2019 , respectively.

As of March 31, 2020 , 19.3% of the CRE loans were owner-occupied CRE, compared to 19.6% as of December 31, 2019 .

CRE loans represented 70.3% and 67.3% of our total loans, excluding PPP loans, as of June 30, 2020 and December 31, 2019 , respectively.

As of June 30, 2020 , 18.8% of the CRE loans were owner-occupied CRE, compared to 19.6% as of December 31, 2019 .

We consider owner-occupied CRE more characteristic of the Corporation’s C&I portfolio as, in general, the client’s primary source of repayment is the cash flow from the operating entity occupying the commercial real estate property.

As mentioned above, our C&I portfolio increased $16.5 million , or 3.3% , to $519.9 million at March 31, 2020 from $503.4 million at December 31, 2019 reflecting growth in both conventional lending and specialty finance, specifically accounts receivable financing.

Line of credit utilization during these same periods of comparison was relatively unchanged.

As mentioned above, excluding PPP loans, our C&I portfolio decreased $50.1 million , or 10.0% , to $453.3 million at June 30, 2020 from $503.4 million at December 31, 2019 .

Line of credit usage was $212.6 million as of June 30, 2020 , down from $281.4 million at December 31, 2019 , as line of credit usage significantly declined due to PPP loan proceeds.

We will continue to emphasize actively pursuing C&I loans across the Corporation as this segment of our loan and lease portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and private wealth management relationships which generate additional fee revenue.

While we continue to experience significant competition from banks operating in our primary geographic areas, we remain committed to our underwriting standards and will not deviate from those standards for the sole purpose of growing our loan and lease portfolio.

We continue to expect our new loan and lease activity to be adequate to replace normal amortization, allowing us to continue growing in future quarters.

We continue to believe our new loan and lease activity to be adequate to replace normal amortization, allowing us to continue growing in future quarters, although this will temporarily be more challenging due to the current economic conditions.

The types of loans and leases we originate and the various risks associated with these originations remain consistent with information previously outlined in our most recent Annual Report on Form 10-K.

Non-accrual loans increased $7.3 million , or 35.3% , to $27.9 million at March 31, 2020 , compared to $20.6 million at December 31, 2019 .

The increase in non-accrual loans was principally due to the impairment of one $5.0 million commercial relationship and the repurchase of $2.0 million of impaired legacy SBA loans.

The Corporation’s non-accrual loans as a percentage of total gross loans and leases measured 1.60% and 1.20% at March 31, 2020 and December 31, 2019 , respectively.

Non-accrual loans increased $3.5 million , or 16.9% , to $24.1 million at June 30, 2020 , compared to $20.6 million at December 31, 2019 .

The increase in non-accrual loans was principally due to the impairment of one $5.0 million commercial relationship and the repurchase of $3.6 million of impaired legacy SBA loans, partially offset by the $4.0 million payoff of two impaired legacy SBA loan relationships.

The Corporation’s non-accrual loans as a percentage of total gross loans and leases measured 1.17% and 1.20% at June 30, 2020 and December 31, 2019 , respectively.

Non-accrual loans as a percentage of total gross loans and leases, excluding PPP loans, was 1.39% at June 30, 2020 .

Please refer to the sections titled COVID-19 Update and Asset Quality for additional information on credit quality.

As of March 31, 2020 , deposits decreased by $30.3 million , or 2.0% to $1.500 billion from $1.530 billion at December 31, 2019 primarily due to a $64.5 million and $34.6 million decrease in money market accounts and wholesale deposits, respectively, partially offset by a $77.2 million increase in transaction accounts.

As of June 30, 2020 , deposits increased by $180.0 million , or 11.8% to $1.710 billion from $1.530 billion at December 31, 2019 primarily due to a $279.5 million increase in transaction accounts partially offset by decreases of $61.7 million and $17.7 million in wholesale deposits and money market accounts, respectively.

Transaction account balances were inflated as of June 30, 2020 due to PPP loan proceeds.

Management attributes the recent transition from money market accounts to reciprocal transaction accounts with full FDIC insurance to our clients’ preferences for safety and soundness versus interest rate amid the economic uncertainty created by the COVID-19 pandemic.

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We measure the success of in-market deposit gathering efforts based on the number and average balances of our deposit accounts as compared to ending balances due to the volatility of some of our larger relationships.

The Bank’s average in-market deposits, consisting of all transaction accounts, money market accounts, and certificates of deposit, were approximately $1.366 billion , or 74.9% of total bank funding for the three months ended March 31, 2020 , compared to $1.350 billion , or 73.9% of total bank funding for the three months ended December 31, 2019 .

The Bank’s average in-market deposits, consisting of all transaction accounts, money market accounts, and certificates of deposit, were approximately $1.468 billion , or 74.7% of total bank funding for the six months ended June 30, 2020 , compared to $1.271 billion , or 71.3% of total bank funding for the year ended December 31, 2019 .

FHLB Advances and Other Borrowings

As of March 31, 2020 , FHLB advances and other borrowings increased by $93.5 million , or 29.3% , to $412.9 million from $319.4 million at December 31, 2019 .

While total wholesale funding has decreased meaningfully overall due to significant in-market deposit growth, we continue to replace the majority of our maturing brokered certificates of deposit with FHLB advances at lower rates.

In addition, with the swap curve being flat relative to long-term advances, the Corporation borrowed $30.0 million during the first quarter of 2020 at rates below long-term fixed advances by combining pay-fixed swap with a rolling short-term FHLB advance, bringing the total advances using this strategy to $84 million.

As of June 30, 2020 , FHLB advances and other borrowings increased by $145.6 million , or 45.6% , to $465.0 million from $319.4 million at December 31, 2019 .

While total wholesale funding as a percentage of total bank funding has decreased meaningfully overall due to significant in-market deposit growth, we continue to replace the majority of our maturing brokered certificates of deposit with FHLB advances at lower rates.

Total bank funding is defined as total deposits plus FHLB advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances.

Management believes this strategy will help stabilize net interest margin with the expectation of a low interest rate environment for an extended period of time.

During the second quarter of 2020, management tested the availability of the Federal Reserve PPPLF due to the uncertainty of when PPP loans would be required to close and fund.

As of June 30, 2020, the Corporation had one $29.6 million PPPLF advance outstanding.

Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds.

We will utilize FHLB advances to the extent we maintain an adequate level of excess borrowing capacity for liquidity and contingency funding purposes and pricing remains favorable in comparison to the wholesale deposit alternative.

Total bank funding is defined as total deposits plus FHLB advances.

At March 31, 2020 , the ratio of wholesale funds to total bank funding was 26.8% .

At June 30, 2020 , the ratio of wholesale funds to total bank funding was 24.7% .

We will use FHLB advances and/or brokered certificates of deposit in specific maturity periods needed, typically three to five years, to match-fund fixed rate loans and effectively mitigate the interest rate risk measured through our asset/liability management process and to support asset growth initiatives while taking into consideration our operating goals and desired level of usage of wholesale funds.

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Impaired Assets

Total impaired assets consisted of the following at March 31, 2020 and December 31, 2019 , respectively:

Total impaired assets consisted of the following at June 30, 2020 and December 31, 2019 , respectively:

(Dollars in Thousands)

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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 non-accrual loans and leases were considered troubled debt restructurings, respectively.

PPP loans outstanding as of June 30, 2020 , were $327.9 million .

There were no PPP loans outstanding as of December 31, 2019 .

The asset quality ratios, excluding PPP loans as they are fully guaranteed by the SBA, at June 30, 2020 and December 31, 2019 , were as follows:

Total non-accrual loans and leases to gross loans and leases

Total non-performing assets to gross loans and leases plus foreclosed properties, net

Total non-performing assets to total assets

Allowance for loan and lease losses to gross loans and leases

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

This increase is the result of ongoing workout efforts on previously identified impaired loans and does not include any new troubled debt restructurings related to the COVID-19 pandemic.

We use a wide variety of available metrics to assess the overall asset quality of the portfolio and no one metric is used independently to make a final conclusion as to the asset quality of the portfolio.

Non-performing assets increased $6.0 million , or 25.6% , to $29.6 million at March 31, 2020 from $23.5 million at December 31, 2019 .

The increase in non-performing assets was principally due to the impairment of one $5.0 million commercial relationship and the repurchase of $2.0 million of impaired legacy SBA loans, partially offset by a $1.3 million decrease in foreclosed properties, net of impairment, principally due to the sale of one legacy SBA property.

Non-performing assets increased $2.0 million , or 8.3% , to $25.5 million at June 30, 2020 from $23.5 million at December 31, 2019 .

The increase in non-performing assets was principally due to the impairment of one $5.0 million commercial relationship and the repurchase of $3.6 million of impaired legacy SBA loans, partially offset by $4.0 million in payoffs on legacy SBA loans and a $1.5 million decrease in foreclosed properties, net of impairment, principally due to the sale of one legacy SBA property.

We also monitor early stage delinquencies to assist in the identification of potential future problems.

As of March 31, 2020 , 99.81% of the loan and lease portfolio, excluding non-accrual loans and leases, was in a current payment status, compared to 99.76% at December 31, 2019 .

As of June 30, 2020 , 99.64% of the loan and lease portfolio, excluding non-accrual loans and leases, was in a current payment status, compared to 99.76% at December 31, 2019 .

We also monitor asset quality through our established credit quality indicator categories.

As we continue to actively monitor the credit quality of our loan and lease portfolios, we may identify additional loans and leases for which the borrowers or lessees are having difficulties making the required principal and interest payments based upon factors including, but not limited to, the inability to sell the underlying collateral, inadequate cash flow from the

operations of the underlying businesses, liquidation events, or bankruptcy filings.

We work proactively with our impaired loan borrowers to find solutions to difficult situations that are in the best interests of the Bank.

The following represents additional information regarding our impaired loans and leases:

As of and for the Three Months Ended March 31,

As of and for the Six Months Ended June 30,

As of and for the

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A summary of foreclosed properties activity is as follows:

As of and for the Three Months Ended March 31,

As of and for the Six Months Ended June 30,

As of and for the

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Proceeds from sale of foreclosed properties

Net gain on sale of foreclosed properties

Net loss on sale of foreclosed properties

Impairment adjustments

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Allowance for Loan and Lease Losses

The allowance for loan and lease losses increased $3.2 million , or 16.5% , from $19.5 million as of December 31, 2019 to $22.7 million as of March 31, 2020 .

The allowance for loan and lease losses as a percentage of gross loans and leases also increased from 1.14% as of December 31, 2019 to 1.30% as of March 31, 2020 .

The increase in allowance for loan and lease losses as a percent of gross loans and leases was principally driven by COVID-19 and the economic impact it could have on the Company’s loan portfolio.

The allowance for loan and lease losses increased $7.9 million , or 40.7% , from $19.5 million as of December 31, 2019 to $27.5 million as of June 30, 2020 .

The allowance for loan and lease losses as a percentage of gross loans and leases also increased from 1.14% as of December 31, 2019 to 1.33% as of June 30, 2020 .

The allowance for loan and lease losses as a percentage of gross loans and leases, excluding PPP loans, was 1.58% as of June 30, 2020 .

The increase in allowance for loan and lease losses as a percent of gross loans and leases was principally driven by COVID-19 and the economic impact it could have on the Corporation’s loan portfolio.

For the six months ended June 30, 2020 , the increase in the allowance for loan and lease losses was in large part due to an increase in several qualitative factors after careful evaluation by management.

Additionally, an increase in specific reserves of $2.1 million was driven by deterioration of two existing legacy SBA impaired relationships.

There have been no substantive changes to our methodology for estimating the appropriate level of allowance for loan and lease loss reserves from what was previously outlined in our most recent Annual Report on Form 10-K.

Please refer to the section titled COVID-19 Update for additional information.

During the three months ended March 31, 2020 , we recorded net recoveries on impaired loans and leases of $46,000 , comprised of $131,000 of charge-offs and $177,000 of recoveries.

During the three months ended March 31, 2019 , we recorded net charge-offs on impaired loans and leases of approximately $25,000 , comprised of $48,000 of charge-offs and $23,000 of recoveries.

During the six months ended June 30, 2020 , we recorded net charge-offs on impaired loans and leases of $707,000 , comprised of $948,000 of charge-offs and $241,000 of recoveries.

During the six months ended June 30, 2019 , we recorded net recoveries on impaired loans and leases of approximately $130,000 , comprised of $63,000 of charge-offs and $193,000 of recoveries.

We will continue to experience some level of periodic charge-offs in the future as exit strategies are considered and executed, in particular as it relates to our commercial clients impacted by the COVID-19 pandemic.

Loans and leases with previously established specific reserves may ultimately result in a charge-off under a variety of scenarios.

Based upon the application of our methodology for estimating the appropriate level of allowance for loan and lease loss reserves, which includes actively monitoring the asset quality and inherent risks within the loan and lease portfolio, management concluded that an allowance for loan and lease losses of $22.7 million , or 1.30% of total loans and leases, was appropriate as of March 31, 2020 .

Given ongoing complexities with current workout situations, further charge-offs and increased provisions for loan and lease losses may be recorded if additional facts and circumstances lead us to a different conclusion.

As of March 31, 2020 and December 31, 2019 , our allowance for loan and lease losses to total non-accrual loans and leases was 81.54% and 94.70% , respectively.

Based upon the application of our methodology for estimating the appropriate level of allowance for loan and lease loss reserves, which includes actively monitoring the asset quality and inherent risks within the loan and lease portfolio, management concluded that an allowance for loan and lease losses of $27.5 million , or 1.58% of total loans and leases excluding PPP loans, was appropriate as of June 30, 2020 .

Given ongoing complexities with current workout situations, including those related to the COVID-19 pandemic, further charge-offs and increased provisions for loan and lease losses may be recorded if additional facts and circumstances lead us to a different conclusion.

As of June 30, 2020 and December 31, 2019 , our allowance for loan and lease losses to total non-accrual loans and leases was 113.98% and 94.70% , respectively.

Impaired loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease.

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Conversely, if we identify further impaired loans or leases, this ratio could fall if the impaired loans are adequately collateralized and therefore require no specific or general reserve.

Given our business practices and evaluation of our existing loan and lease portfolio, we believe this coverage ratio is appropriate for the probable losses inherent in our loan and lease portfolio as of March 31, 2020 .

A summary of the activity in the allowance for loan and lease losses 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,

(Dollars in Thousands)

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Total recoveries

Net recoveries (charge-offs)

Net (charge-offs) recoveries

Provision for loan and lease losses

Allowance at end of period

Annualized net (recoveries) charge-offs as a percent of average gross loans and leases

Annualized net charge-offs (recoveries) as a percent of average gross loans and leases

Annualized net charge-offs (recoveries) as a percent of average gross loans and leases, excluding average PPP loans

Liquidity and Capital Resources

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While the Bank is subject to certain generally applicable regulatory limitations regarding its ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations.

The Corporation’s principal liquidity requirements at March 31, 2020 were the interest payments due on subordinated and junior subordinated notes.

On April 24, 2020 , the Bank’s Board of Directors declared a dividend in the amount of $2.5 million bringing year-to-date dividend declarations to $8.5 million .

The Corporation’s principal liquidity requirements at June 30, 2020 were the interest payments due on subordinated and junior subordinated notes.

On July 24, 2020 , the Bank’s Board of Directors declared a dividend in the aggregate amount of $2.0 million bringing year-to-date dividend declarations to $10.5 million .

The capital ratios of the Corporation and its subsidiary continue to meet all applicable regulatory capital adequacy requirements.

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The Bank maintains liquidity by obtaining funds from several sources.

The Bank’s primary source of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds and FHLB advances.

The Bank’s primary source of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds, FHLB advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances.

The scheduled payments of loans and mortgage-related securities are generally a predictable source of funds.

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We define our on-balance sheet liquidity as the total of our short-term investments, our unencumbered securities available-for-sale, and our unencumbered pledged loans.

As of March 31, 2020 and December 31, 2019 , our immediate on-balance sheet liquidity was $341.1 million and $438.2 million , respectively.

At March 31, 2020 and December 31, 2019 , the Bank had $73.3 million and $44.4 million on deposit with the FRB recorded in short-term investments, respectively.

As of June 30, 2020 and December 31, 2019 , our immediate on-balance sheet liquidity was $611.6 million and $438.2 million , respectively.

At June 30, 2020 and December 31, 2019 , the Bank had $27.3 million and $44.4 million on deposit with the FRB recorded in short-term investments, respectively.

Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our on-balance sheet liquidity in our interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB.

We plan to utilize excess liquidity to fund loan and lease portfolio growth, pay down maturing debt, allow run off of maturing wholesale certificates of deposit, or invest in securities to maintain adequate liquidity at an improved margin.

We had $505.3 million of outstanding wholesale funds at March 31, 2020 , compared to $446.5 million of wholesale funds as of December 31, 2019 , which represented 26.8% and 24.5% , respectively, of ending balance total bank funding.

Wholesale funds include FHLB advances, brokered certificates of deposit, and deposits gathered from internet listing services.

Total bank funding is defined as total deposits plus FHLB advances.

We had $530.4 million of outstanding wholesale funds at June 30, 2020 , compared to $446.5 million of wholesale funds as of December 31, 2019 , which represented 24.7% and 24.5% , respectively, of ending balance total bank funding.

Wholesale funds include FHLB advances, Federal Reserve PPPLF advances, brokered certificates of deposit, and deposits gathered from internet listing services.

Total bank funding is defined as total deposits plus FHLB advances and Federal Reserve PPPLF advances.

We are committed to raising in-market deposits while utilizing wholesale funds to mitigate interest rate risk.

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The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.

Period-end in-market deposits increased $4.4 million , or 1.3% annualized, to $1.383 billion at March 31, 2020 from $1.379 billion at December 31, 2019 .

Period-end in-market deposits increased $241.7 million to $1.621 billion at June 30, 2020 from $1.379 billion at December 31, 2019 as in-market deposit balances were primarily inflated due to PPP loan proceeds.

Our in-market relationships remain stable;

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The Bank limits the percentage of wholesale funds to total bank funds in accordance with liquidity policies approved by its Board.

The Bank was in compliance with its policy limits as of March 31, 2020 and December 31, 2019 .

The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the three month period ended March 31, 2020 .

In the event that there is a disruption in the availability of wholesale funds at maturity, the Bank has managed the maturity structure, in compliance with our approved liquidity policy, so

at least one year of maturities could be funded through on-balance sheet liquidity.

The Bank was in compliance with its policy limits as of June 30, 2020 and December 31, 2019 .

The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the six month period ended June 30, 2020 .

In the event that there is a disruption in the availability of wholesale funds at maturity, the Bank has managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded through on-balance sheet liquidity.

These potential funding sources include deposits maintained at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.

As of March 31, 2020 , the available liquidity was in excess of the stated policy minimum and was equal to approximately 87 months of maturities.

As of June 30, 2020 , the available liquidity was in excess of the stated policy minimum.

We believe the Bank will also have access to the unused federal funds lines, cash flows from borrower repayments, and cash flows from security maturities.

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We believe that the Bank has sufficient liquidity to match the balance of net withdrawable deposits and short-term borrowings in light of present economic conditions and deposit flows.

During the three months ended March 31, 2020 , operating activities resulted in a net cash inflow of $1.2 million , which included net income of $3.3 million .

Net cash used in investing activities for the three months ended March 31, 2020 was approximately $33.7 million which consisted of cash outflows to fund net loan growth and the purchase of $8.0 million in additional bank-owned life insurance.

Net cash provided by financing activities resulted in a net cash inflow of $60.4 million for the three months ended March 31, 2020 primarily due to a net increase in FHLB advances, partially offset by a net decrease in deposits.

During the six months ended June 30, 2020 , operating activities resulted in a net cash inflow of $2.1 million , which included net income and provision for loan and lease losses of $6.6 million and $8.7 million , respectively, partially offset by a net increase in loans originated for sale.

Net cash used in investing activities for the six months ended June 30, 2020 was approximately $347.4 million which consisted of cash outflows to fund net loan growth and the purchase of $8.0 million in additional bank-owned life insurance, partially offset by a net reduction in securities.

Net cash provided by financing activities resulted in a net cash inflow of $320.6 million for the six months ended June 30, 2020 primarily due to a net increase in FHLB advances, an increase in Federal Reserve PPPLF advances, and a net increase in deposits.

Please refer to the Consolidated Statements of Cash Flows included in PART I., Item 1 for further details regarding significant sources of cash flow for the Corporation.

Contractual Obligations and Off-Balance Sheet Arrangements

As of March 31, 2020 , there were no material changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 .

As of June 30, 2020 , there were no material changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 .

We continue to believe that we have adequate capital and liquidity available from various sources to fund projected contractual obligations and commitments.

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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 2. Management’s Discussion and Analysis