What changed in this filing

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Item 1. Financial Statements

2020-10-23 compared with 2020-07-24 · 487 added, 204 removed, 906 unchanged (43% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

2020 December 31,

(In Thousands, Except Share Data)

4 unchanged sentences

Securities held-to-maturity, at amortized cost

28,897 32,700

Loans held for sale

Loans and leases receivable, net of allowance for loan and lease losses of $ 30,817 and $ 19,520 , respectively

2,139,482 1,695,115

Premises and equipment, net 2,130 2,557

5 unchanged sentences

Accrued interest receivable and other assets 99,558 48,506

Total assets $ 2,601,847 $ 2,096,779

Liabilities and Stockholders’ Equity

Deposits $ 1,821,375 $ 1,530,379

Federal Home Loan Bank advances and other borrowings 483,517 319,382

4 unchanged sentences

Stockholders’ equity:

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

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

Preferred stock, $ 0.01 par value, 2,500,000 shares authorized, no ne issued or outstanding

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,227,351 and 9,162,720 shares issued, 8,561,714 and 8,566,044 shares outstanding at September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital 82,620 81,188

1 unchanged sentence

Accumulated other comprehensive loss ( 1,170 ) ( 1,348 )

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

Treasury stock, 665,637 and 596,676 shares at September 30, 2020 and December 31, 2019, respectively, at cost

( 16,517 ) ( 14,881 )

Total stockholders’ equity 200,785 194,156

3 unchanged sentences

Consolidated Statements of Income (Unaudited)

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

(In Thousands, Except Per Share Data)

1 unchanged sentence

Loans and leases $ 21,105 $ 23,922 $ 64,502 $ 72,033

Securities 1,004 1,194 3,262 3,464

Short-term investments 167 322 644 930

1 unchanged sentence

Interest expense

Deposits 1,623 6,006 7,663 18,060

Federal Home Loan Bank advances and other borrowings 1,752 2,376 5,352 6,153

8 unchanged sentences

Service charges on deposits 881 795 2,527 2,314

Loan fees 478 439 1,414 1,316

Increase in cash surrender value of bank-owned life insurance

365 305 1,037 894

Net loss on sale of securities — ( 4 ) ( 4 ) ( 5 )

3 unchanged sentences

Non-interest expense

Compensation 11,857 10,324 33,705 30,991

Occupancy 570 580 1,696 1,730

Professional fees 943 751 2,621 2,745

Data processing 679 654 2,066 1,923

Marketing 356 548 1,169 1,611

Equipment 310 277 905 938

Computer software 1,017 859 2,873 2,485

FDIC insurance 312 1 760 595

Collateral liquidation costs (recovery)

Net loss (gain) on foreclosed properties

Tax credit investment impairment

SBA recourse (benefit) provision

Collateral liquidation costs 45 110 281 108

Net (gain) loss on foreclosed properties ( 121 ) 262 329 241

Tax credit investment impairment (recovery) 113 ( 120 ) 2,066 3,982

SBA recourse provision (benefit) 57 ( 427 ) 53 167

Loss on early extinguishment of debt — — 744 —

2 unchanged sentences

Income before income tax benefit 5,436 6,503 10,967 17,081

Income tax benefit

Income tax expense (benefit) 1,143 1,418 73 ( 475 )

Net income $ 4,293 $ 5,085 $ 10,894 $ 17,556

Earnings per common share

Basic $ 0.50 $ 0.59 $ 1.27 $ 2.01

Diluted 0.50 0.59 1.27 2.01

Dividends declared per share 0.165 0.15 0.495 0.45

2 unchanged sentences

Consolidated Statements of Comprehensive Income (Unaudited)

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

(In Thousands)

Other comprehensive income, before tax

Net income $ 4,293 $ 5,085 $ 10,894 $ 17,556

Other comprehensive income (loss), before tax

Securities available-for-sale:

4 unchanged sentences

Interest rate swaps:

Unrealized losses on interest rate swaps arising during the period

Income tax benefit (expense)

Total other comprehensive (loss) income

Unrealized gain (losses) on interest rate swaps arising during the period 389 ( 846 ) ( 3,654 ) ( 3,310 )

Income tax (expense) benefit ( 6 ) 195 ( 62 ) ( 10 )

Total other comprehensive income (loss) 16 ( 569 ) 178 29

Comprehensive income $ 4,309 $ 4,516 $ 11,072 $ 17,585

2 unchanged sentences

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

Common Shares Outstanding

Common Shares Outstanding Common

Stock Additional

Capital Retained

Earnings Accumulated

Comprehensive

Loss Treasury

(In Thousands, Except Share Data)

1 unchanged sentence

Cumulative effect of adoption of ASC Topic 842

— — — 687 — — 687

Net income — — — 5,899 — — 5,899

Other comprehensive income

— — — — 279 — 279

Share-based compensation - restricted shares, net

49,730 — 318 — — — 318

Cash dividends ($ 0.15 per share)

— — — ( 1,312 ) — — ( 1,312 )

Treasury stock purchased ( 70,074 ) — — — — ( 1,478 ) ( 1,478 )

Balance at March 31, 2019 8,765,136 91 79,941 115,584 ( 1,405 ) ( 9,111 ) 185,100

Net income — — — 6,572 — — 6,572

Other comprehensive income — — — — 319 — 319

1 unchanged sentence

Cash dividends ( $ 0.15 per share)

— — — ( 1,315 ) — — ( 1,315 )

Treasury stock purchased ( 96,831 ) — — — — ( 2,231 ) ( 2,231 )

Balance at June 30, 2019 8,699,456 $ 91 $ 80,351 $ 120,841 $ ( 1,086 ) $ ( 11,342 ) $ 188,855

Common Shares Outstanding

Net income — — — 5,085 — — 5,085

Other comprehensive loss — — — — ( 569 ) — ( 569 )

Share-based compensation - restricted shares, net

6,930 1 389 — — — 390

Cash dividends ($ 0.15 per share)

— — — ( 1,298 ) — — ( 1,298 )

Treasury stock purchased ( 70,301 ) — — — — ( 1,671 ) ( 1,671 )

Balance at September 30, 2019 8,636,085 $ 92 $ 80,740 $ 124,628 $ ( 1,655 ) $ ( 13,013 ) $ 190,792

Common Shares Outstanding Common

Stock Additional

Capital Retained

Earnings Accumulated

Comprehensive

Loss Treasury

(In Thousands, Except Share Data)

Balance at January 1, 2020 8,566,044 $ 92 $ 81,188 $ 129,105 $ ( 1,348 ) $ ( 14,881 ) $ 194,156

Net income — — — 3,278 — — 3,278

Other comprehensive income — — — — 663 — 663

Share-based compensation - restricted shares, net

63,684 — 417 — — — 417

Cash dividends ($ 0.165 per share)

— — — ( 1,410 ) — — ( 1,410 )

Treasury stock purchased ( 58,594 ) — — — — ( 1,447 ) ( 1,447 )

Balance at March 31, 2020 8,571,134 92 81,605 130,973 ( 685 ) ( 16,328 ) 195,657

Net income — — — 3,323 — — 3,323

Other comprehensive loss — — — — ( 501 ) — ( 501 )

Share-based compensation - restricted shares, net

5,357 — 516 — — — 516

Cash dividends ($ 0.165 per share)

— — — ( 1,414 ) — — ( 1,414 )

Treasury stock purchased ( 1,357 ) — — — — ( 19 ) ( 19 )

Balance at June 30, 2020 8,575,134 $ 92 $ 82,121 $ 132,882 $ ( 1,186 ) $ ( 16,347 ) $ 197,562

Net income — — — 4,293 — — 4,293

Other comprehensive income — — — — 16 — 16

Share-based compensation - restricted shares, net

( 4,410 ) — 499 — — — 499

Cash dividends ($ 0.165 per share)

— — — ( 1,415 ) — — ( 1,415 )

Treasury stock purchased ( 9,010 ) — — — — ( 170 ) ( 170 )

Balance at September 30, 2020 8,561,714 $ 92 $ 82,620 $ 135,760 $ ( 1,170 ) $ ( 16,517 ) $ 200,785

See accompanying Notes to Unaudited Consolidated Financial Statements.

1 unchanged sentence

Consolidated Statements of Cash Flows (Unaudited)

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

(In Thousands)

Operating activities

Net income $ 10,894 $ 17,556

Adjustments to reconcile net income to net cash provided by operating activities:

2 unchanged sentences

Provision for loan and lease losses 12,487 613

SBA recourse (benefit) provision

SBA recourse provision 53 167

Depreciation, amortization and accretion, net 2,509 2,252

1 unchanged sentence

Net loss on sale of securities 4 5

Gain on sale of a state tax credit — ( 206 )

Increase in bank-owned life insurance policies ( 1,037 ) ( 894 )

2 unchanged sentences

Gain on sale of SBA loans ( 1,598 ) ( 993 )

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

Net loss on foreclosed properties, including impairment valuation 329 241

Loan servicing right impairment valuation ( 3 ) 25

Excess tax benefit from share-based compensation ( 35 ) ( 74 )

25 unchanged sentences

Loss on early extinguishment of debt 744 —

Repayment of subordinated notes payable — ( 15,000 )

Proceeds from issuance of subordinated notes payable — 15,000

Proceeds from the Federal Reserve Paycheck Protection Program Lending Facility 29,605 —

Net increase in long-term borrowed funds

Net increase (decrease) in long-term borrowed funds 41 ( 36 )

Cash dividends paid ( 4,239 ) ( 3,925 )

9 unchanged sentences

Non-cash investing and financing activities:

Increase in right-of-use exchange for operating lease liability 190 —

Transfer from loans and leases to foreclosed properties 80 596

24 unchanged sentences

Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for loan and lease losses, lease residuals, property under operating leases, goodwill, level of the Small Business Administration (“SBA”) recourse reserve, and income taxes.

The results of operations for the three and six months ended June 30, 2020 , are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2020 .

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

S ubsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements.

The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2020.

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

Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements.

No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.

24 unchanged sentences

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.

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

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

As of September 30, 2020, the Corporation’s aggregate outstanding exposure in these segments was $ 188.5 million, or 10.2 % of the Corporation’s gross loans and leases.

Based on management’s current assessment of the increased inherent risk in the loan portfolio, the allowance for loan and leases losses increased $ 11.3 million, or 57.9 %, compared to December 31, 2019.

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

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

The increase in the allowance for loan and lease losses was in large part due to an increase in specific reserves on impaired loans, in addition to several qualitative factors after careful evaluation by management.

Most notably, an increase in specific reserves of $ 5.5 million was driven by deterioration of two existing legacy SBA impaired relationships and one relationship in the hospitality industry.

Additionally, a $ 4.7 million increase was due to the economic conditions caused by the pandemic, including the increase in the unemployment rate, management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, and the level of loans and leases subject to more frequent review by management.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Corporation’s loan portfolio.

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

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

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

The Corporation provided loan payment deferrals of 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 September 30, 2020, the Corporation had 60 deferral requests outstanding, representing $ 131.5 million in total loans, or 7.1 % of gross loans and leases, excluding gross PPP loans, compared to $ 323.2 million, or 18.6 % of gross loans and leases, excluding gross PPP loans as of June 30, 2020.

For loans subject to the program, each borrower is required to resume making regularly scheduled loan payment at the end of the modification period and the deferred amounts will be moved to the end of the loan term.

8 unchanged sentences

The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020.

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

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

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

As of September 30, 2020, the Corporation had $ 332.3 million in gross PPP loans outstanding and deferred processing fees outstanding of $ 6.9 million.

The processing fees are 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 three and nine months ended September 30, 2020, $ 1.1 million and $ 2.0 million was recognized in loans and leases interest income in the unaudited Consolidated Statements of Income, respectively.

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

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

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

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

Goodwill Impairment Analysis

The Company completed an impairment analysis of goodwill as of August 1, 2020 and determined there was no impairment.

Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value.

A qualitative assessment is performed to determine whether it is more likely than not that the fair value of equity of the reporting unit exceeds the carrying value.

As part of the Corporation’s qualitative assessment of goodwill impairment, management considered the triggering event of the COVID-19 pandemic and determined that the significant change in the general economic environment and financial markets, including the Corporation’s market capitalization, represents an interim impairment indicator requiring continued evaluation.

The Corporation performed Step 1, quantitative goodwill impairment testing, as of August 1, 2020.

The initial basis for the valuation was a forecast prepared by management for the years ended 2020 through 2024.

The income approach as well as the market approach were utilized by an independent third party to determine the fair value of the Corporation’s goodwill .

The fair value of the Corporation’s equity based on the analysis performed was $ 289.0 million, which exceeded its book value by $ 89.4 million, or 44.8 %, as of August 1, 2020.

Based on the analysis performed, management concluded the Corporation’s goodwill is not impaired as of August 1, 2020.

Note 3 — Earnings per Common Share

4 unchanged sentences

Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method.

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

(Dollars in Thousands, Except Share Data)

Basic earnings per common share

Net income $ 4,293 $ 5,085 $ 10,894 $ 17,556

earnings allocated to participating securities 110 111 284 340

1 unchanged sentence

Weighted-average common shares outstanding, excluding participating securities

8,404,084 8,492,445 8,380,676 8,546,192

Basic earnings per common share $ 0.50 $ 0.59 $ 1.27 $ 2.01

2 unchanged sentences

Weighted-average diluted common shares outstanding, excluding participating securities

8,404,084 8,492,445 8,380,676 8,546,192

Diluted earnings per common share $ 0.50 $ 0.59 $ 1.27 $ 2.01

2 unchanged sentences

The Plan is administered by the Compensation Committee of the Board of Directors of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options, restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan.

As of June 30, 2020 , 147,489 shares were available for future grants under the Plan.

As of September 30, 2020, 151,899 shares were available for future grants under the Plan.

Shares covered by awards that expire, terminate, or lapse will again be available for the grant of awards under the Plan.

14 unchanged sentences

The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the TSR metric are never adjusted, and are amortized utilizing the accounting fair value provided using a Monte Carlo pricing model.

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

Restricted Shares/Units

Weighted Average

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

Restricted Shares/Units Weighted Average

Nonvested balance as of January 1, 2019 131,621 $ 21.02

Granted 95,265 23.64

Vested ( 48,207 ) 20.62

Forfeited ( 1,744 ) 23.67

Nonvested balance as of December 31, 2019 176,935 22.51

Nonvested balance as of June 30, 2020

Vested ( 49,978 ) 22.27

Forfeited ( 10,714 ) 22.89

Nonvested balance as of September 30, 2020 191,588 $ 24.30

(1) The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved related to the performance based restricted stock units.

The number of shares actually issued may vary.

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

As of September 30, 2020, the Corporation had $ 3.7 million of unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.30 years.

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

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

(In Thousands)

2 unchanged sentences

The amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

As of June 30, 2020

Amortized Cost

Unrealized Gains

Unrealized Losses

As of September 30, 2020

Amortized Cost Gross

Unrealized Gains Gross

Unrealized Losses Fair Value

(In Thousands)

1 unchanged sentence

government agency securities - government-sponsored enterprises

$ 21,601 $ 10 $ ( 74 ) $ 21,537

Municipal securities 13,520 462 ( 19 ) 13,963

4 unchanged sentences

Other securities

2,205 85 — 2,290

$ 174,596 $ 4,780 $ ( 102 ) $ 179,274

As of December 31, 2019

Amortized Cost

Unrealized Gains

Unrealized Losses

Amortized Cost Gross

Unrealized Gains Gross

Unrealized Losses Fair Value

(In Thousands)

1 unchanged sentence

government agency securities - government-sponsored enterprises

$ 23,616 $ 152 $ ( 10 ) $ 23,758

Municipal securities 160 — — 160

1 unchanged sentence

Residential mortgage-backed securities - government-sponsored enterprises

111,561 847 ( 406 ) 112,002

Commercial mortgage-backed securities - government issued 6,705 45 ( 87 ) 6,663

1 unchanged sentence

Other securities

2,205 30 — 2,235

$ 172,319 $ 1,331 $ ( 517 ) $ 173,133

The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses were as follows:

As of June 30, 2020

Amortized Cost

Unrealized Gains

Unrealized Losses

As of September 30, 2020

Amortized Cost Gross

Unrealized Gains Gross

Unrealized Losses Fair Value

(In Thousands)

3 unchanged sentences

Residential mortgage-backed securities - government-sponsored enterprises

4,173 180 — 4,353

Commercial mortgage-backed securities - government-sponsored enterprises 2,012 307 — 2,319

$ 28,897 $ 1,088 $ ( 21 ) $ 29,964

As of December 31, 2019

Amortized Cost

Unrealized Gains

Unrealized Losses

Amortized Cost Gross

Unrealized Gains Gross

Unrealized Losses Fair Value

(In Thousands)

3 unchanged sentences

Residential mortgage-backed securities - government-sponsored enterprises

5,183 51 ( 23 ) 5,211

Commercial mortgage-backed securities - government-sponsored enterprises

2,014 123 — 2,137

$ 32,700 $ 528 $ ( 40 ) $ 33,188

government agency securities - government-sponsored enterprises represent securities issued by the Federal National Mortgage Association (“FNMA”) and the SBA.

3 unchanged sentences

Other securities represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months.

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

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

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

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

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

The amortized cost and fair value of securities by contractual maturity at June 30, 2020 are shown below.

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

There were 37 and 46 sales of available-for-sale securities that occurred during the three and nine months ended September 30, 2019, respectively.

At September 30, 2020 and December 31, 2019, securities with a fair value of $ 79.8 million and $ 30.3 million, respectively, were pledged to secure various obligations, including interest rate swap contracts, outstanding FHLB advances, additional FHLB availability, the Federal Reserve Discount Window, and municipal deposits.

At September 30, 2020, pledged securities with a fair value of $ 129.3 million were available to secure various obligations.

No pledged securities were available to secure various obligations as of December 31, 2019.

The amortized cost and fair value of securities by contractual maturity at September 30, 2020 are shown below.

Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties.

Available-for-Sale

Held-to-Maturity

Amortized Cost

Available-for-Sale Held-to-Maturity

Amortized Cost Fair Value Amortized Cost Fair Value

(In Thousands)

3 unchanged sentences

Due in over ten years 132,797 135,606 3,136 3,284

The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, 2020 and December 31, 2019 .

At June 30, 2020 , the Corporation held six available-for-sale securities that were in an unrealized loss position.

$ 174,596 $ 179,274 $ 28,897 $ 29,964

At September 30, 2020, the Corporation held 12 available-for-sale securities that were in an unrealized loss position.

Such securities have not experienced credit rating downgrades;

however, they have generally declined in value due to the current interest rate environment.

At June 30, 2020 , the Corporation held zero available-for-sale securities that had been in a continuous unrealized loss position for twelve months or greater.

At September 30, 2020, the Corporation held one available-for-sale security that had been in a continuous unrealized loss position for twelve months or greater.

The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities.

2 unchanged sentences

Based on the Corporation’s evaluation, it is expected that the Corporation will recover the entire amortized cost basis of each security.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019 .

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019.

A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:

As of June 30, 2020

Less than 12 Months

12 Months or Longer

As of September 30, 2020

Less than 12 Months 12 Months or Longer Total

Fair Value Unrealized

Losses Fair Value Unrealized

(In Thousands)

1 unchanged sentence

government agency securities - government-sponsored enterprises

$ 12,933 $ 41 $ 4,086 $ 33 $ 17,019 $ 74

Municipal securities

$ 2,460 $ 19 $ — $ — $ 2,460 $ 19

Residential mortgage-backed securities - government-sponsored enterprises

15,115 9 — — 15,115 9

$ 30,508 $ 69 $ 4,086 $ 33 $ 34,594 $ 102

As of December 31, 2019

Less than 12 Months

12 Months or Longer

Less than 12 Months 12 Months or Longer Total

Fair Value Unrealized

Losses Fair Value Unrealized

(In Thousands)

1 unchanged sentence

government agency securities - government-sponsored enterprises

$ 4,363 $ 10 $ — $ — $ 4,363 $ 10

Residential mortgage-backed securities - government issued

4,619 5 — — 4,619 5

Residential mortgage-backed securities - government-sponsored enterprises

36,972 253 11,304 153 48,276 406

Commercial mortgage-backed securities - government issued

— — 4,727 87 4,727 87

Commercial mortgage-backed securities - government-sponsored enterprises

The tables below show the Corporation’s gross unrealized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, 2020 and December 31, 2019 .

At June 30, 2020 , the Corporation held two held-to-maturity securities that were in an unrealized loss position.

2,245 4 1,047 5 3,292 9

$ 48,199 $ 272 $ 17,078 $ 245 $ 65,277 $ 517

At September 30, 2020, the Corporation held two held-to-maturity securities that were in an unrealized loss position.

Such securities have not experienced credit rating downgrades;

however, they have generally declined in value due to the current interest rate environment.

There were no held-to-maturity securities that had been in a continuous loss position for twelve months or greater as of June 30, 2020 .

There was one held-to-maturity security that had been in a continuous loss position for twelve months or greater as of September 30, 2020.

It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019 .

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019.

A summary of unrealized loss information for securities held-to-maturity, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:

As of June 30, 2020

Less than 12 Months

12 Months or Longer

As of September 30, 2020

Less than 12 Months 12 Months or Longer Total

Fair Value Unrealized

Losses Fair Value Unrealized

(In Thousands)

1 unchanged sentence

Municipal securities

$ 271 $ 18 $ 213 $ 3 $ 484 $ 21

As of December 31, 2019

Less than 12 Months

12 Months or Longer

Less than 12 Months 12 Months or Longer Total

Fair Value Unrealized

Losses Fair Value Unrealized

(In Thousands)

1 unchanged sentence

Municipal securities

$ 499 $ 8 $ — $ — $ 499 $ 8

Residential mortgage-backed securities - government issued

— — 1,887 9 1,887 9

Residential mortgage-backed securities - government-sponsored enterprises

1,364 5 2,144 18 3,508 23

$ 1,863 $ 13 $ 4,031 $ 27 $ 5,894 $ 40

Note 6 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses

Loan and lease receivables consist of the following:

September 30,

2020 December 31,

(In Thousands)

1 unchanged sentence

Commercial real estate — owner occupied

$ 240,706 $ 226,614

Commercial real estate — non-owner occupied

565,781 516,652

Land development

50,864 51,097

142,726 109,057

287,583 217,322

38,857 33,359

Total commercial real estate

1,326,517 1,154,101

Commercial and industrial 790,349 503,402

2 unchanged sentences

Home equity and second mortgages

29,341 22,664

Total consumer and other

36,447 29,670

Total gross loans and leases receivable

2,178,056 1,715,376

Allowance for loan and lease losses 30,817 19,520

1 unchanged sentence

Loans and leases receivable, net

$ 2,139,482 $ 1,695,115

The total amount of the Corporation’s ownership of SBA loans comprised of the following:

September 30,

2020 December 31,

(In Thousands)

4 unchanged sentences

Total SBA loans $ 400,146 $ 62,775

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

As of September 30, 2020 and December 31, 2019, $ 9.6 million and $ 12.1 million of SBA loans were considered impaired, respectively.

Loans transferred to third parties consist of the guaranteed portions of SBA 7(a) loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans.

The total principal amount of the guaranteed portions of SBA 7(a) loans sold during the three months ended June 30, 2020 , and 2019 , was $ 6.5 million and $ 3.3 million , respectively.

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

Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and six months ended June 30, 2020 , and 2019 , have been derecognized in the unaudited Consolidated Financial Statements.

The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements.

The total outstanding balance of sold SBA loans at June 30, 2020 , and December 31, 2019 , was $ 69.9 million and $ 73.8 million , respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended June 30, 2020 , and 2019 , was $ 10.3 million and $ 17.2 million , respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the six months ended June 30, 2020 , and 2019 , was $ 22.2 million and $ 34.4 million , respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

The total principal amount of the guaranteed portions of SBA 7(a) loans sold during the three months ended September 30, 2020, and 2019, was $ 7.9 million and $ 4.9 million, respectively.

The total principal amount of the guaranteed portions of SBA 7(a) loans sold during the nine months ended September 30, 2020, and 2019, was $ 17.2 million and $ 10.5 million, respectively.

Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and nine months ended September 30, 2020, and 2019, have been derecognized in the unaudited Consolidated Financial Statements.

The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as

non-interest income in the unaudited Consolidated Financial Statements.

The total outstanding balance of sold SBA loans at September 30, 2020, and December 31, 2019, was $ 75.1 million and $ 73.8 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended September 30, 2020, and 2019, was $ 7.7 million and $ 7.5 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the nine months ended September 30, 2020, and 2019, was $ 29.9 million and $ 31.5 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation.

The total outstanding balance of these transferred loans at June 30, 2020 , and December 31, 2019 , was $ 149.4 million and $ 142.8 million , respectively.

As of June 30, 2020 , and December 31, 2019 , the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $ 266.1 million and $ 244.6 million , respectively.

No loans in this participation portfolio were considered impaired as of June 30, 2020 , and December 31, 2019 .

The total outstanding balance of these transferred loans at September 30, 2020, and December 31, 2019, was $ 144.1 million and $ 142.8 million, respectively.

As of September 30, 2020, and December 31, 2019, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $ 266.7 million and $ 244.6 million, respectively.

As of September 30, 2020, the non-SBA originated participation portfolio contained an impaired loan totaling $ 5.8 million with a sold portion of $ 4.2 million.

There were no loans impaired as of December 31, 2019.

The Corporation does not share in the participant’s portion of any potential charge-offs.

The total amount of loan participations purchased on the unaudited Consolidated Balance Sheets as of June 30, 2020 , and December 31, 2019 , was $ 452,000 and $ 492,000 , respectively.

The total amount of loan participations purchased on the unaudited Consolidated Balance Sheets as of September 30, 2020, and December 31, 2019, was $ 424,000 and $ 492,000 , respectively.

The following tables illustrate ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators:

June 30, 2020

September 30, 2020

I II III IV Total

(Dollars in Thousands)

3 unchanged sentences

Land development 48,660 1,314 — 890 50,864

Construction 113,476 19,928 9,322 — 142,726

Multi-family 253,849 33,734 — — 287,583

1-4 family 35,446 1,681 1,350 380 38,857

Total commercial real estate 1,084,475 170,478 56,540 15,024 1,326,517

3 unchanged sentences

Home equity and second mortgages 6,389 598 119 — 7,106

Other 29,127 185 — 29 29,341

Total consumer and other 35,516 783 119 29 36,447

2 unchanged sentences

December 31, 2019

I II III IV Total

(Dollars in Thousands)

3 unchanged sentences

Land development 49,132 439 — 1,526 51,097

Construction 108,959 — 98 — 109,057

Multi-family 205,750 11,572 — — 217,322

1-4 family 29,284 1,843 1,759 473 33,359

Total commercial real estate 1,040,674 87,833 19,563 6,031 1,154,101

3 unchanged sentences

Home equity and second mortgages 6,307 610 89 — 7,006

Other 22,517 — — 147 22,664

Total consumer and other 28,824 610 89 147 29,670

3 unchanged sentences

The Corporation primarily uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases.

rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan.

The risk rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan.

Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating.

12 unchanged sentences

Impaired loans and leases, with the exception of performing troubled debt restructurings, have been placed on non-accrual as management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement.

Impaired loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs.

loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs.

When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases.

3 unchanged sentences

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

June 30, 2020

Days Past Due

September 30, 2020

Days Past Due 60-89

Than 90 Days Past Due

Total Past Due

Total Loans and Leases

Days Past Due Greater

Than 90 Days Past Due Total Past Due Current Total Loans and Leases

(Dollars in Thousands)

4 unchanged sentences

Land development — — — — 49,974 49,974

Construction — — — — 142,726 142,726

Multi-family — — — — 287,583 287,583

1-4 family 47 — — 47 38,477 38,524

Commercial and industrial 1,491 530 — 2,021 767,635 769,656

2 unchanged sentences

Home equity and second mortgages — — — — 7,106 7,106

Other — — — — 29,312 29,312

Total 1,538 530 — 2,068 2,139,938 2,142,006

Non-accruing loans and leases

3 unchanged sentences

Land development — — — — 890 890

Construction — — — — — —

Multi-family — — — — — —

1-4 family — — 333 333 — 333

Commercial and industrial 86 545 7,039 7,670 13,023 20,693

2 unchanged sentences

Home equity and second mortgages — — — — — —

Other — — 29 29 — 29

Total 86 817 7,401 8,304 27,746 36,050

Total loans and leases

3 unchanged sentences

Land development — — — — 50,864 50,864

Construction — — — — 142,726 142,726

Multi-family — — — — 287,583 287,583

1-4 family 47 — 333 380 38,477 38,857

Commercial and industrial 1,577 1,075 7,039 9,691 780,658 790,349

2 unchanged sentences

Home equity and second mortgages — — — — 7,106 7,106

Other — — 29 29 29,312 29,341

Total $ 1,624 $ 1,347 $ 7,401 $ 10,372 $ 2,167,684 $ 2,178,056

Percent of portfolio 0.07 % 0.06 % 0.35 % 0.48 % 99.52 % 100.00 %

1 unchanged sentence

Days Past Due 60-89

Days Past Due

Than 90 Days Past Due

Total Past Due

Total Loans and Leases

Days Past Due Greater

Than 90 Days Past Due Total Past Due Current Total Loans and Leases

(Dollars in Thousands)

4 unchanged sentences

Land development — 990 — 990 48,581 49,571

Construction 309 — — 309 108,748 109,057

Multi-family — — — — 217,322 217,322

1-4 family — — — — 33,026 33,026

Commercial and industrial 2,707 52 — 2,759 486,068 488,827

2 unchanged sentences

Home equity and second mortgages — — — — 7,006 7,006

Other — — — — 22,517 22,517

Total 3,016 1,042 — 4,058 1,690,705 1,694,763

Non-accruing loans and leases

3 unchanged sentences

Land development — — — — 1,526 1,526

Construction — — — — — —

Multi-family — — — — — —

1-4 family — 333 — 333 — 333

Commercial and industrial 4,368 2,717 3,123 10,208 4,367 14,575

2 unchanged sentences

Home equity and second mortgages — — — — — —

Other — — 147 147 — 147

Total 4,368 3,050 3,612 11,030 9,583 20,613

Total loans and leases

3 unchanged sentences

Land development — 990 — 990 50,107 51,097

Construction 309 — — 309 108,748 109,057

Multi-family — — — — 217,322 217,322

1-4 family — 333 — 333 33,026 33,359

Commercial and industrial 7,075 2,769 3,123 12,967 490,435 503,402

2 unchanged sentences

Home equity and second mortgages — — — — 7,006 7,006

Other — — 147 147 22,517 22,664

Total $ 7,384 $ 4,092 $ 3,612 $ 15,088 $ 1,700,288 $ 1,715,376

Percent of portfolio 0.43 % 0.24 % 0.21 % 0.88 % 99.12 % 100.00 %

The Corporation’s total impaired assets consisted of the following:

September 30,

2020 December 31,

(In Thousands)

4 unchanged sentences

Land development 890 1,526

Construction — —

Multi-family — —

1-4 family 333 333

Total non-accrual commercial real estate 14,977 5,891

9 unchanged sentences

Total impaired assets $ 36,710 $ 23,672

September 30,

2020 December 31,

Total non-accrual loans and leases to gross loans and leases 1.66 % 1.20 %

3 unchanged sentences

Allowance for loan and lease losses to non-accrual loans and leases 85.48 94.70

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

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

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

As of September 30, 2020, and December 31, 2019, $ 15.4 million and $ 15.6 million of the non-accrual loans and leases were considered troubled debt restructurings, respectively.

The Corporation has allocated $ 4.4 million and $ 2.7 million of specific reserves to troubled debt restructurings as of September 30, 2020 and December 31, 2019, respectively.

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

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

1 unchanged sentence

The following table provides the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Number of Loans

Pre-Modification

Post-Modification

Number of Loans

Pre-Modification

Post-Modification

For the Three Months Ended September 30, For the Nine Months Ended September 30,

Number of Loans Pre-Modification

Investment Post-Modification

Investment Number of Loans Pre-Modification

Investment Post-Modification

(Dollars in Thousands)

1 unchanged sentence

Commercial real estate — owner occupied

— $ — $ — 2 $ 299 $ 272

Commercial and industrial — — — 3 6,007 5,589

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Number of Loans

Pre-Modification

Post-Modification

Number of Loans

Pre-Modification

Post-Modification

Total — $ — $ — 5 $ 6,306 $ 5,861

For the Three Months Ended September 30, For the Nine Months Ended September 30,

Number of Loans Pre-Modification

Investment Post-Modification

Investment Number of Loans Pre-Modification

Investment Post-Modification

(Dollars in Thousands)

Commercial real estate:

Commercial real estate — owner occupied 2 $ 3,774 $ 3,741 2 $ 3,774 $ 3,741

Commercial and industrial 2 2,804 2,804 16 13,412 13,023

Total 4 $ 6,578 $ 6,545 18 $ 17,186 $ 16,764

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, principal reduction, or some combination of these concessions.

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

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

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

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

There were two commercial and industrial loans for a total of $ 703,000 and two owner-occupied commercial real estate loans for a total of $ 272,000 modified in troubled debt restructurings during the previous 12 months which subsequently defaulted during the three and nine months ended September 30, 2020.

There were no loans modified in a troubled debt restructuring during the 12 months previous to September 30, 2019 which subsequently defaulted during the three and nine months ended September 30, 2019.

The following represents additional information regarding the Corporation’s impaired loans and leases, including performing troubled debt restructurings, by class:

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

As of and for the Nine Months Ended September 30, 2020

Investment (1)

Balance Impairment

Reserve Average

Investment (2)

Income Interest

Recognized Net

(In Thousands)

4 unchanged sentences

Land development

890 5,187 — 1,295 19 — 19

— — — — — — —

Multi-family — — — — — — —

1-4 family 380 385 — 416 30 79 ( 49 )

Commercial and industrial 9,787 12,300 — 10,620 813 316 497

2 unchanged sentences

Home equity and second mortgages

— — — — — — —

Other 29 695 — 106 32 — 32

Total 15,557 23,065 — 15,564 1,043 467 576

With impairment reserve recorded:

3 unchanged sentences

Land development

— — — — — — — — — —

Construction — — — — — — — — — —

Multi-family — — — — — — —

1-4 family — — — — — — —

Commercial and industrial 10,906 12,228 2,981 5,724 308 — 308

2 unchanged sentences

Home equity and second mortgages

— — — — — — —

Other — — — — — — —

Total 20,540 23,221 8,898 9,335 1,006 — 1,006

Commercial real estate:

2 unchanged sentences

Land development

890 5,187 — 1,295 19 — 19

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family 380 385 — 416 30 79 ( 49 )

Commercial and industrial 20,693 24,528 2,981 16,344 1,121 316 805

2 unchanged sentences

Home equity and second mortgages — — — — — — —

Other 29 695 — 106 32 — 32

Grand total $ 36,097 $ 46,286 $ 8,898 $ 24,899 $ 2,049 $ 467 $ 1,582

(1) The recorded investment represents the unpaid principal balance net of any partial charge-offs.

2 unchanged sentences

Investment (1)

Balance Impairment

Reserve Average

Investment (2)

Income Interest

Recognized Net

(In Thousands)

4 unchanged sentences

Land development 1,526 5,823 — 1,843 52 6 46

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family 473 478 — 356 19 46 ( 27 )

Commercial and industrial 4,779 6,549 — 14,479 1,073 379 694

2 unchanged sentences

Home equity and second mortgages

— — — — — 7 ( 7 )

Other 147 813 — 191 48 — 48

Total 7,312 14,050 — 20,212 1,257 793 464

With impairment reserve recorded:

3 unchanged sentences

Land development — — — — — — —

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family — — — — — — —

Commercial and industrial 9,796 11,179 2,283 2,367 1,022 — 1,022

2 unchanged sentences

Home equity and second mortgages

— — — — — — —

Other — — — — — — —

Total 13,441 16,183 3,365 3,878 1,436 — 1,436

Commercial real estate:

2 unchanged sentences

Land development 1,526 5,823 — 1,843 52 6 46

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family 473 478 — 356 19 46 ( 27 )

Commercial and industrial 14,575 17,728 2,283 16,846 2,095 379 1,716

2 unchanged sentences

Home equity and second mortgages

— — — — — 7 ( 7 )

Other 147 813 — 191 48 — 48

Grand total $ 20,753 $ 30,233 $ 3,365 $ 24,090 $ 2,693 $ 793 $ 1,900

(1) The recorded investment represents the unpaid principal balance net of any partial charge-offs.

(2) Average recorded investment is calculated primarily using daily average balances.

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 9.7 million and $ 9.5 million as of June 30, 2020 , and December 31, 2019 , respectively, represents partial charge-offs of loans and leases resulting from losses due to the appraised value of the collateral securing the loans and leases being below the carrying values of the loans and leases.

Impaired loans and leases also included $ 49,000 and $ 140,000 of loans as of June 30, 2020 , and December 31, 2019 , respectively, that were performing troubled debt restructurings, and although not on non-accrual, were reported as impaired due to the concession in terms.

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 10.2 million and $ 9.5 million as of September 30, 2020, and December 31, 2019, respectively, represents partial charge-offs of loans and leases resulting from losses due to the appraised value of the collateral securing the loans and leases being below the carrying values of the loans and leases.

Impaired loans and leases also included $ 47,000 and $ 140,000 of loans as of September 30, 2020, and December 31, 2019, respectively, that were performing troubled debt restructurings, and although not on non-accrual, were reported as impaired due to the concession in terms.

When a loan is placed on non-accrual, interest accrual is discontinued and previously accrued but uncollected interest is deducted from interest income.

7 unchanged sentences

A summary of the activity in the allowance for loan and lease losses by portfolio segment is as follows:

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

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

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

Beginning balance $ 16,438 $ 10,179 $ 847 $ 27,464

Charge-offs — ( 505 ) — ( 505 )

Recoveries — 21 2 23

Net charge-offs — ( 484 ) 2 ( 482 )

1 unchanged sentence

Ending balance $ 20,180 $ 9,822 $ 815 $ 30,817

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

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

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

Beginning balance $ 11,269 $ 7,892 $ 658 $ 19,819

Charge-offs — ( 1,097 ) ( 2 ) ( 1,099 )

Recoveries 1 99 1 101

Net recoveries 1 ( 998 ) ( 1 ) ( 998 )

1 unchanged sentence

Ending balance $ 11,138 $ 8,411 $ 621 $ 20,170

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

As of and for the Nine Months Ended September 30, 2020

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

Beginning balance $ 10,852 $ 8,078 $ 590 $ 19,520

Charge-offs ( 27 ) ( 1,414 ) ( 13 ) ( 1,454 )

Recoveries 3 259 2 264

Net charge-offs ( 24 ) ( 1,155 ) ( 11 ) ( 1,190 )

1 unchanged sentence

Ending balance $ 20,180 $ 9,822 $ 815 $ 30,817

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

As of and for the Nine Months Ended September 30, 2019

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

Beginning balance $ 11,662 $ 8,079 $ 684 $ 20,425

Charge-offs — ( 1,158 ) ( 4 ) ( 1,162 )

Recoveries 74 191 29 294

Net recoveries 74 ( 967 ) 25 ( 868 )

2 unchanged sentences

The following tables provide information regarding the allowance for loan and lease losses and balances by type of allowance methodology.

As of June 30, 2020

As of September 30, 2020

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

2 unchanged sentences

Individually evaluated for impairment 5,742 3,156 — 8,898

Total $ 20,180 $ 9,822 $ 815 $ 30,817

Loans and lease receivables:

1 unchanged sentence

Individually evaluated for impairment 15,024 21,044 29 36,097

Total $ 1,326,517 $ 815,092 $ 36,447 $ 2,178,056

As of December 31, 2019

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

2 unchanged sentences

Individually evaluated for impairment 1,082 2,283 — 3,365

Total $ 10,852 $ 8,078 $ 590 $ 19,520

Loans and lease receivables:

1 unchanged sentence

Individually evaluated for impairment 6,031 14,575 147 20,753

Total $ 1,154,101 $ 531,605 $ 29,670 $ 1,715,376

Note 7 — Leases

3 unchanged sentences

Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term.

Lease expense for operating leases and short-term leases

is recognized on a straight-line basis over the lease term.

During 2020, the Corporation extended the term of one of its office spaces by one year, resulting in a $ 190,000 increase in the right-of-use assets in exchange for a lease liability.

The Corporation entered into a sublease for vacated office space which expires in 2023.

The components of total lease expense were as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

(In Thousands)

Operating lease cost

$ 373 $ 391 $ 1,116 $ 1,172

Short-term lease cost

52 56 174 197

Variable lease cost

141 129 394 366

sublease income

( 28 ) — ( 84 ) —

Total lease cost, net

$ 538 $ 576 $ 1,600 $ 1,735

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

June 30, 2020

December 31, 2019

September 30, 2020 December 31, 2019

Weighted-average remaining lease term (in years)

Weighted-average discount rate

3.00 % 3.09 %

The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating leases liabilities:

(In Thousands)

Thereafter 2,307

Total undiscounted cash flows 7,399

3 unchanged sentences

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

June 30, 2020

December 31, 2019

September 30, 2020 December 31, 2019

(In Thousands)

7 unchanged sentences

Prepaid expenses 2,402 2,285

Other assets 7,930 4,184

Total accrued interest receivable and other assets $ 99,558 $ 48,506

2 unchanged sentences

Average balances represent year to date averages.

June 30, 2020

December 31, 2019

September 30, 2020 December 31, 2019

Balance Average

Balance Average Rate Balance Average

Balance Average Rate

(Dollars in Thousands)

Non-interest-bearing transaction accounts

$ 452,268 $ 392,455 — % $ 293,573 $ 275,495 — %

Interest-bearing transaction accounts

484,761 362,326 0.44 273,909 222,244 1.53

Money market accounts 636,872 649,999 0.52 674,409 617,341 1.71

5 unchanged sentences

Average balances represent year to date averages.

June 30, 2020

December 31, 2019

Weighted Average

September 30, 2020 December 31, 2019

Balance Weighted Average

Balance Weighted

Average Rate Balance Weighted Average

Balance Weighted

(Dollars in Thousands)

1 unchanged sentence

Federal Reserve PPPLF

29,605 16,855 0.35 — — —

FHLB advances

429,500 371,738 1.51 295,000 286,464 2.17

Other borrowings 675 675 8.12 675 675 8.11

Subordinated notes payable (1)

23,737 23,720 5.95 23,707 24,502 7.45

Junior subordinated notes 10,058 10,052 11.08 10,047 10,040 11.08

$ 493,575 $ 423,135 1.95 $ 329,429 $ 321,740 2.87

Short-term borrowings $ 231,000 $ 118,500

Long-term borrowings 262,575 210,929

$ 493,575 $ 329,429

(1) Weighted average rate of subordinated notes payable reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of a subordinated note during the third quarter of 2019.

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

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

As of June 30, 2020 and December 31, 2019 , the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit.

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

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

During the second quarter of 2020, the Corporation tested its ability to borrow from the Federal Reserve Paycheck Protection Program Liquidity Facility (“PPPLF”) in the event funding was required to support the Banks PPP lending efforts.

On April 28, 2020, the Corporation borrowed $ 29.6 million from the PPPLF at a rate of 0.35 %.

The borrowing is fully collateralized by a tranche of PPP loans originated by the Bank on April 15, 2020 and matures on April 15, 2022, or when the tranche of PPP loans utilized to collateralize the PPPLF borrowing are forgiven, whichever comes first.

As of September 30, 2020 and December 31, 2019, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit.

Per the promissory note dated February 19, 2020, the Corporation pays a fee on this line of credit.

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

During both the nine months ended September 30, 2020 and 2019, the Corporation incurred interest expense of $ 10,000 due to this fee.

Note 11 — Commitments and Contingencies

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In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults.

Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 1.0 million at June 30, 2020 , which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets.

Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 1.1 million at September 30, 2020, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets.

The summary of the activity in the SBA recourse reserve is as follows:

As of and for the Three Months Ended June 30,

As of and for the Six Months Ended June 30,

As of and for the Three Months Ended September 30, As of and for the Nine Months Ended September 30,

2020 2019 2020 2019

(In Thousands)

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

June 30, 2020

September 30, 2020

Fair Value Measurements Using

Level 1 Level 2 Level 3 Total

(In Thousands)

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Fair Value Measurements Using

Level 1 Level 2 Level 3 Total

(In Thousands)

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Interest rate swaps — 20,885 — 20,885

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three and six months ended June 30, 2020 or the year ended December 31, 2019 related to the above measurements.

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three and nine months ended September 30, 2020 or the year ended December 31, 2019 related to the above measurements.

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

June 30, 2020

September 30, 2020

Fair Value Measurements Using

Level 1 Level 2 Level 3 Total

(In Thousands)

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Fair Value Measurements Using

Level 1 Level 2 Level 3 Total

(In Thousands)

2 unchanged sentences

Loan servicing rights — — 1,195 1,195

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 13.2 million and $ 15.7 million at June 30, 2020 and December 31, 2019 , respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans.

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 22.2 million and $ 15.7 million at September 30, 2020 and December 31, 2019, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans.

Valuation techniques consistent with the market approach, income approach, or cost approach were used to measure fair value.

These techniques included observable inputs for the individual impaired loans being evaluated, such as current appraisals, recent sales of similar assets, or other observable market data, and unobservable inputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable values.

The quantification of unobservable inputs for Level 3 impaired loan values range from 5 % - 93 % as of the measurement date of June 30, 2020 .

The quantification of unobservable inputs for Level 3 impaired loan values range from 5 % - 93 % as of the measurement date of September 30, 2020.

The weighted average of those unobservable inputs was 26 %.

The majority of the impaired loans are considered collateral dependent loans or are supported by a SBA guaranty.

The majority of the impaired loans are considered collateral dependent loans or are supported by an SBA guaranty.

Foreclosed properties, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and lease losses, if deemed necessary, based upon the fair value of the foreclosed property.

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

June 30, 2020

September 30, 2020

Amount Fair Value

Total Level 1 Level 2 Level 3

(In Thousands)

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Federal Home Loan Bank stock

15,153 N/A N/A N/A N/A

Accrued interest receivable 9,938 9,938 9,938 — —

1 unchanged sentence

Financial liabilities:

Deposits 1,821,375 1,823,640 1,658,901 164,739 —

Federal Home Loan Bank advances and other borrowings 483,517 492,911 — 492,911 —

6 unchanged sentences

December 31, 2019

Amount Fair Value

Total Level 1 Level 2 Level 3

(In Thousands)

6 unchanged sentences

Federal Home Loan Bank stock

7,953 N/A N/A N/A N/A

Accrued interest receivable 5,760 5,760 5,760 — —

1 unchanged sentence

Financial liabilities:

Deposits 1,530,379 1,532,517 1,241,891 290,626 —

Federal Home Loan Bank advances and other borrowings

319,382 319,507 — 319,507 —

Junior subordinated notes 10,047 9,970 — — 9,970

41 unchanged sentences

When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds, and guarantees.

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

At September 30, 2020, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was $ 577.9 million.

The Corporation receives fixed rates and pays floating rates based upon LIBOR on the swaps with commercial borrowers.

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

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

Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements.

These commercial borrower swaps were reported on the unaudited Consolidated Balance Sheet as a derivative asset of $ 58.2 million, included in accrued interest receivable and other assets.

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

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

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

At September 30, 2020, the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also $ 577.9 million.

The Corporation pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties.

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

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

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the unaudited Consolidated Balance Sheet as a net derivative liability of $ 58.2 million, included in accrued interest payable and other liabilities.

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of $ 58.2 million and no gross derivative asset.

No right of offset existed with dealer counterparty swaps as of June 30, 2020 .

No right of offset existed with dealer counterparty swaps as of September 30, 2020.

All changes in the fair value of these instruments are recorded in other non-interest income.

Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three and six months ended June 30, 2020 and 2019 had an insignificant impact on the unaudited Consolidated Statements of Income.

Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three and nine months ended September 30, 2020 and 2019 had an insignificant impact on the unaudited Consolidated Statements of Income.

The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans.

These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.

These LIBOR-based derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.

The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances.

The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affects earnings.

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

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

These interest rate swaps mature between December 2021 and December 2027.

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

million was recognized in other comprehensive income for the three and six months ended June 30, 2020 , respectively, and there was no ineffective portion of these hedges.

A pre-tax unrealized gain of $ 389,000

and a pre-tax unrealized loss of $ 3.7 million were recognized in other comprehensive income for the three and nine months ended September 30, 2020, respectively, and there was no ineffective portion of these hedges.

Information about the balance sheet location and fair value of the Corporation’s derivative instruments below:

Interest Rate Swap Contracts

Asset Derivatives

Liability Derivatives

Balance Sheet Location

Asset Derivatives Liability Derivatives

Balance Sheet Location Fair Value Balance Sheet Location Fair Value

(In Thousands)

Derivatives not designated as hedging instruments

June 30, 2020

Accrued interest receivable and other assets

Accrued interest payable and other liabilities

December 31, 2019

Accrued interest receivable and other assets

Accrued interest payable and other liabilities

September 30, 2020 Accrued interest receivable and other assets $ 58,210 Accrued interest payable and other liabilities $ 58,210

December 31, 2019 Accrued interest receivable and other assets $ 18,346 Accrued interest payable and other liabilities $ 18,346

Derivatives designated as hedging instruments

June 30, 2020

Accumulated other comprehensive income (1)

September 30, 2020 Accumulated other comprehensive income (1)

$ 6,193 Accrued interest payable and other liabilities

December 31, 2019

Accumulated other comprehensive income (1)

December 31, 2019 Accumulated other comprehensive income (1)

$ 2,539 Accrued interest payable and other liabilities

11 unchanged sentences

or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios.

Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends.

Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends.

As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would:

1 unchanged sentence

The Bank is also subject to certain legal, regulatory, and other restrictions on its ability to pay dividends to the Corporation.

As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments.

As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the

Corporation could use to pay dividends, if any, in the future and to make other payments.

Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time.

1 unchanged sentence

These risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations.

As of June 30, 2020 , the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework.

As of September 30, 2020, the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework.

The following tables summarize both the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators:

As of June 30, 2020

Minimum Required for Capital Adequacy Purposes

For Capital Adequacy Purposes Plus Capital Conservation Buffer

Minimum Required to Be Well

As of September 30, 2020

Actual Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well

Capitalized Under Prompt Corrective Action Requirements

Amount Ratio Amount Ratio Amount Ratio Amount Ratio

(Dollars in Thousands)

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 252,325 11.42 % $ 176,728 8.00 % $ 231,956 10.50 % N/A N/A

First Business Bank 243,967 11.11 175,634 8.00 230,519 10.50 219,542 10.00 %

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 200,922 9.09 % $ 132,546 6.00 % $ 187,774 8.50 % N/A N/A

First Business Bank 216,469 9.86 131,725 6.00 186,611 8.50 175,634 8.00

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 190,864 8.64 % $ 99,410 4.50 % $ 154,637 7.00 % N/A N/A

First Business Bank 216,469 9.86 98,794 4.50 153,680 7.00 142,702 6.50

1 unchanged sentence

(to adjusted assets)

Consolidated $ 200,922 8.04 % $ 99,940 4.00 % $ 99,940 4.00 % N/A N/A

First Business Bank 216,469 8.72 99,347 4.00 99,347 4.00 124,183 5.00

As of December 31, 2019

Minimum Required for Capital Adequacy Purposes

For Capital Adequacy Purposes Plus Capital Conservation Buffer

Minimum Required to Be Well

Actual Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well

Capitalized Under Prompt Corrective Action Requirements

Amount Ratio Amount Ratio Amount Ratio Amount Ratio

(Dollars in Thousands)

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 239,029 12.01 % $ 159,185 8.00 % $ 208,930 10.50 % N/A N/A

First Business Bank 233,181 11.79 158,177 8.00 207,607 10.50 197,721 10.00 %

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 194,456 9.77 % $ 119,388 6.00 % $ 169,134 8.50 % N/A N/A

First Business Bank 212,315 10.74 118,633 6.00 168,063 8.50 158,177 8.00

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 184,409 9.27 % $ 89,541 4.50 % $ 139,286 7.00 % N/A N/A

First Business Bank 212,315 10.74 88,974 4.50 138,405 7.00 128,519 6.50

1 unchanged sentence

(to adjusted assets)

Consolidated $ 194,456 9.27 % $ 83,950 4.00 % $ 83,950 4.00 % N/A N/A

First Business Bank 212,315 10.18 83,414 4.00 83,414 4.00 104,268 5.00

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

What changed 10-Q

Item 1. Financial Statements