0000802681bmtc:Banking1Memberus-gaap:DepositAccountMember2020-04-012020-06-30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)(Mark One)
of the Securities Exchange Act of 1934 ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended SeptemberJune 30, 20192020
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-35746
Bryn Mawr Bank Corporation
(Exact name of registrant as specified in its charter)
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Pennsylvania | | | 23-2434506 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer
identificationIdentification No.) |
| | | |
801 Lancaster Avenue, | Bryn Mawr, | Pennsylvania | 19010 |
(Address of principal executive offices) | | | (Zip Code) |
(610) 525-1700
(Registrant’s telephone number, including area code (610) 525-1700code)
Not Applicable
(Former name, former address and fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of class | Trading Symbol | Name of exchange on which registered |
Common Stock, $1 par value | BMTC | The NASDAQ Stock Market |
Not Applicable
Former name, former address and fiscal year, if changed since last report.
________________________________________________________________________________________________________________________________________________________________________
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Classes | | Outstanding at November 1, 2019August 4, 2020 |
Common Stock, par value $1 | | 20,124,193 | 19,928,481 |
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BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SeptemberJune 30, 20192020
Index
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PART I - | | |
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ITEM 1. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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PART II - | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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ITEM 5. | | |
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ITEM 6. | | |
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets - Unaudited
| (dollars in thousands) | (dollars in thousands) | | September 30, 2019 | | December 31, 2018 | (dollars in thousands) | | June 30, 2020 | | December 31, 2019 |
Assets | Assets | | | | | Assets | | | | |
Cash and due from banks | Cash and due from banks | | $ | 8,582 | | | $ | 14,099 | | Cash and due from banks | | $ | 16,408 | | | $ | 11,603 | |
Interest bearing deposits with banks | Interest bearing deposits with banks | | 86,158 | | | 34,357 | | Interest bearing deposits with banks | | 448,113 | | | 42,328 | |
Cash and cash equivalents | Cash and cash equivalents | | 94,740 | | | 48,456 | | Cash and cash equivalents | | 464,521 | | | 53,931 | |
Investment securities available for sale, at fair value (amortized cost of $599,199 and $745,328 as of September 30, 2019 and December 31, 2018, respectively) | | 604,181 | | | 737,442 | | |
Investment securities held to maturity, at amortized cost (fair value of $13,015 and $8,438 as of September 30, 2019 and December 31, 2018, respectively) | | 12,947 | | | 8,684 | | |
Investment securities available for sale, at fair value (amortized cost of $517,041 and $1,001,034 as of June 30, 2020 and December 31, 2019, respectively) | | Investment securities available for sale, at fair value (amortized cost of $517,041 and $1,001,034 as of June 30, 2020 and December 31, 2019, respectively) | | 530,581 | | | 1,005,984 | |
Investment securities held to maturity, at amortized cost (fair value of $12,995 and $12,661 as of June 30, 2020 and December 31, 2019, respectively) | | Investment securities held to maturity, at amortized cost (fair value of $12,995 and $12,661 as of June 30, 2020 and December 31, 2019, respectively) | | 12,592 | | | 12,577 | |
Investment securities, trading | Investment securities, trading | | 8,324 | | | 7,502 | | Investment securities, trading | | 7,801 | | | 8,621 | |
Loans held for sale | Loans held for sale | | 5,767 | | | 1,749 | | Loans held for sale | | 4,116 | | | 4,249 | |
Portfolio loans and leases, originated | Portfolio loans and leases, originated | | 3,137,769 | | | 2,885,251 | | Portfolio loans and leases, originated | | 3,422,890 | | | 3,320,816 | |
Portfolio loans and leases, acquired | Portfolio loans and leases, acquired | | 402,978 | | | 541,903 | | Portfolio loans and leases, acquired | | 299,275 | | | 368,497 | |
Total portfolio loans and leases | Total portfolio loans and leases | | 3,540,747 | | | 3,427,154 | | Total portfolio loans and leases | | 3,722,165 | | | 3,689,313 | |
Less: Allowance for originated loan and lease losses | | (20,675) | | | (19,329) | | |
Less: Allowance for acquired loan and lease losses | | (102) | | | (97) | | |
Total allowance for loans and lease losses | | (20,777) | | | (19,426) | | |
Less: Allowance for credit losses on originated loans and leases | | Less: Allowance for credit losses on originated loans and leases | | (51,659) | | | (22,526) | |
Less: Allowance for credit losses on acquired loans and leases | | Less: Allowance for credit losses on acquired loans and leases | | (3,315) | | | (76) | |
Total allowance for credit losses on loans and leases | | Total allowance for credit losses on loans and leases | | (54,974) | | | (22,602) | |
Net portfolio loans and leases | Net portfolio loans and leases | | 3,519,970 | | | 3,407,728 | | Net portfolio loans and leases | | 3,667,191 | | | 3,666,711 | |
Premises and equipment, net | Premises and equipment, net | | 66,439 | | | 65,648 | | Premises and equipment, net | | 61,778 | | | 64,965 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | 42,200 | | | — | | Operating lease right-of-use assets | | 39,348 | | | 40,961 | |
Accrued interest receivable | Accrued interest receivable | | 12,746 | | | 12,585 | | Accrued interest receivable | | 15,577 | | | 12,482 | |
Mortgage servicing rights | Mortgage servicing rights | | 4,580 | | | 5,047 | | Mortgage servicing rights | | 3,440 | | | 4,450 | |
Bank owned life insurance | Bank owned life insurance | | 58,749 | | | 57,844 | | Bank owned life insurance | | 59,728 | | | 59,079 | |
Federal Home Loan Bank stock | Federal Home Loan Bank stock | | 16,148 | | | 14,530 | | Federal Home Loan Bank stock | | 4,506 | | | 23,744 | |
Goodwill | Goodwill | | 184,012 | | | 184,012 | | Goodwill | | 184,012 | | | 184,012 | |
Intangible assets | Intangible assets | | 20,084 | | | 23,455 | | Intangible assets | | 17,303 | | | 19,131 | |
Other investments | Other investments | | 16,683 | | | 16,526 | | Other investments | | 17,055 | | | 16,683 | |
Other assets | Other assets | | 161,071 | | | 61,277 | | Other assets | | 181,762 | | | 85,679 | |
Total assets | Total assets | | $ | 4,828,641 | | | $ | 4,652,485 | | Total assets | | $ | 5,271,311 | | | $ | 5,263,259 | |
Liabilities | Liabilities | | | | | Liabilities | | | | |
Deposits: | Deposits: | | Deposits: | |
Noninterest-bearing | Noninterest-bearing | | $ | 904,409 | | | $ | 901,619 | | Noninterest-bearing | | $ | 1,217,496 | | | $ | 898,173 | |
Interest-bearing | Interest-bearing | | 2,794,079 | | | 2,697,468 | | Interest-bearing | | 3,026,152 | | | 2,944,072 | |
Total deposits | Total deposits | | 3,698,488 | | | 3,599,087 | | Total deposits | | 4,243,648 | | | 3,842,245 | |
| Short-term borrowings | Short-term borrowings | | 203,471 | | | 252,367 | | Short-term borrowings | | 28,891 | | | 493,219 | |
Long-term FHLB advances | Long-term FHLB advances | | 44,735 | | | 55,374 | | Long-term FHLB advances | | 44,837 | | | 52,269 | |
Subordinated notes | Subordinated notes | | 98,660 | | | 98,526 | | Subordinated notes | | 98,794 | | | 98,705 | |
Junior subordinated debentures | Junior subordinated debentures | | 21,709 | | | 21,580 | | Junior subordinated debentures | | 21,843 | | | 21,753 | |
Operating lease liabilities | Operating lease liabilities | | 46,506 | | | — | | Operating lease liabilities | | 43,693 | | | 45,258 | |
Accrued interest payable | Accrued interest payable | | 9,015 | | | 6,652 | | Accrued interest payable | | 7,907 | | | 6,248 | |
Other liabilities | Other liabilities | | 105,122 | | | 54,195 | | Other liabilities | | 178,024 | | | 91,335 | |
Total liabilities | Total liabilities | | 4,227,706 | | | 4,087,781 | | Total liabilities | | 4,667,637 | | | 4,651,032 | |
Shareholders' equity | Shareholders' equity | | | | | Shareholders' equity | | | | |
Common stock, par value $1; authorized 100,000,000 shares; issued 24,645,745 and 24,545,348 shares as of September 30, 2019 and December 31, 2018, respectively and outstanding of 20,124,193 and 20,163,816 as of September 30, 2019 and December 31, 2018, respectively | | 24,646 | | | 24,545 | | |
Common stock, par value $1; authorized 100,000,000 shares; issued 24,662,161 and 24,650,051 shares as of June 30, 2020 and December 31, 2019, respectively and outstanding of 19,927,893 and 20,126,296 as of June 30, 2020 and December 31, 2019, respectively | | Common stock, par value $1; authorized 100,000,000 shares; issued 24,662,161 and 24,650,051 shares as of June 30, 2020 and December 31, 2019, respectively and outstanding of 19,927,893 and 20,126,296 as of June 30, 2020 and December 31, 2019, respectively | | 24,662 | | | 24,650 | |
Paid-in capital in excess of par value | Paid-in capital in excess of par value | | 377,806 | | | 374,010 | | Paid-in capital in excess of par value | | 380,167 | | | 378,606 | |
Less: Common stock in treasury at cost - 4,521,552 and 4,381,532 shares as of September 30, 2019 and December 31, 2018, respectively | | (81,089) | | | (75,883) | | |
Accumulated other comprehensive income (loss), net of tax | | 2,698 | | | (7,513) | | |
Less: Common stock in treasury at cost - 4,734,268 and 4,523,755 shares as of June 30, 2020 and December 31, 2019, respectively | | Less: Common stock in treasury at cost - 4,734,268 and 4,523,755 shares as of June 30, 2020 and December 31, 2019, respectively | | (88,612) | | | (81,174) | |
Accumulated other comprehensive income, net of tax | | Accumulated other comprehensive income, net of tax | | 9,019 | | | 2,187 | |
Retained earnings | Retained earnings | | 277,568 | | | 250,230 | | Retained earnings | | 279,165 | | | 288,653 | |
Total Bryn Mawr Bank Corporation shareholders' equity | Total Bryn Mawr Bank Corporation shareholders' equity | | 601,629 | | | 565,389 | | Total Bryn Mawr Bank Corporation shareholders' equity | | 604,401 | | | 612,922 | |
Noncontrolling interest | Noncontrolling interest | | (694) | | | (685) | | Noncontrolling interest | | (727) | | | (695) | |
Total shareholders' equity | Total shareholders' equity | | 600,935 | | | 564,704 | | Total shareholders' equity | | 603,674 | | | 612,227 | |
Total liabilities and shareholders' equity | Total liabilities and shareholders' equity | | $ | 4,828,641 | | | $ | 4,652,485 | | Total liabilities and shareholders' equity | | $ | 5,271,311 | | | $ | 5,263,259 | |
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income - Unaudited
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(dollars in thousands, except share and per share data) | (dollars in thousands, except share and per share data) | 2019 | | 2018 | | 2019 | | 2018 | (dollars in thousands, except share and per share data) | 2020 | | 2019 | | 2020 | | 2019 |
Interest income: | Interest income: | | | | | | | | Interest income: | | | | | | | |
Interest and fees on loans and leases | Interest and fees on loans and leases | $ | 45,527 | | | $ | 42,103 | | | $ | 135,147 | | | $ | 124,481 | | Interest and fees on loans and leases | $ | 40,690 | | | $ | 44,783 | | | $ | 83,485 | | | $ | 89,620 | |
Interest on cash and cash equivalents | Interest on cash and cash equivalents | 143 | | | 64 | | | 348 | | | 181 | | Interest on cash and cash equivalents | 37 | | | 73 | | | 148 | | | 205 | |
Interest on investment securities: | Interest on investment securities: | | Interest on investment securities: | |
Taxable | Taxable | 3,870 | | | 2,993 | | | 10,814 | | | 8,621 | | Taxable | 2,870 | | | 3,494 | | | 6,046 | | | 6,944 | |
Non-taxable | Non-taxable | 31 | | | 71 | | | 115 | | | 233 | | Non-taxable | 22 | | | 37 | | | 46 | | | 84 | |
Dividends | Dividends | 2 | | | 2 | | | 5 | | | 5 | | Dividends | 2 | | | 1 | | | 3 | | | 3 | |
Total interest income | Total interest income | 49,573 | | | 45,233 | | | 146,429 | | | 133,521 | | Total interest income | 43,621 | | | 48,388 | | | 89,728 | | | 96,856 | |
Interest expense: | Interest expense: | | | | | | | | Interest expense: | | | | | | | |
Interest on deposits | Interest on deposits | 9,510 | | | 5,533 | | | 27,262 | | | 13,504 | | Interest on deposits | 4,476 | | | 9,655 | | | 12,113 | | | 17,752 | |
Interest on short-term borrowings | Interest on short-term borrowings | 937 | | | 1,096 | | | 2,237 | | | 2,711 | | Interest on short-term borrowings | 232 | | | 357 | | | 685 | | | 1,300 | |
Interest on FHLB advances and other borrowings | Interest on FHLB advances and other borrowings | 243 | | | 394 | | | 790 | | | 1,446 | | Interest on FHLB advances and other borrowings | 155 | | | 269 | | | 399 | | | 547 | |
Interest on subordinated notes | Interest on subordinated notes | 1,145 | | | 1,144 | | | 3,434 | | | 3,430 | | Interest on subordinated notes | 1,144 | | | 1,144 | | | 2,289 | | | 2,289 | |
Interest on junior subordinated debentures | Interest on junior subordinated debentures | 340 | | | 337 | | | 1,050 | | | 946 | | Interest on junior subordinated debentures | 229 | | | 352 | | | 524 | | | 710 | |
Total interest expense | Total interest expense | 12,175 | | | 8,504 | | | 34,773 | | | 22,037 | | Total interest expense | 6,236 | | | 11,777 | | | 16,010 | | | 22,598 | |
Net interest income | Net interest income | 37,398 | | | 36,729 | | | 111,656 | | | 111,484 | | Net interest income | 37,385 | | | 36,611 | | | 73,718 | | | 74,258 | |
Provision for loan and lease losses | 919 | | | 664 | | | 6,282 | | | 4,831 | | |
Net interest income after provision for loan and lease losses | 36,479 | | | 36,065 | | | 105,374 | | | 106,653 | | |
Provision for credit losses on loans and leases | | Provision for credit losses on loans and leases | 4,302 | | | 1,627 | | | 36,637 | | | 5,363 | |
Net interest income after provision for credit losses on loans and leases | | Net interest income after provision for credit losses on loans and leases | 33,083 | | | 34,984 | | | 37,081 | | | 68,895 | |
Noninterest income: | Noninterest income: | | Noninterest income: | |
Fees for wealth management services | Fees for wealth management services | 10,826 | | | 10,343 | | | 32,728 | | | 31,309 | | Fees for wealth management services | 9,069 | | | 11,510 | | | 20,237 | | | 21,902 | |
Insurance commissions | Insurance commissions | 1,842 | | | 1,754 | | | 5,211 | | | 5,349 | | Insurance commissions | 1,303 | | | 1,697 | | | 2,836 | | | 3,369 | |
Capital markets revenue | Capital markets revenue | 2,113 | | | 710 | | | 5,821 | | | 3,481 | | Capital markets revenue | 2,975 | | | 1,489 | | | 5,336 | | | 3,708 | |
Service charges on deposits | Service charges on deposits | 856 | | | 726 | | | 2,516 | | | 2,191 | | Service charges on deposits | 603 | | | 852 | | | 1,449 | | | 1,660 | |
Loan servicing and other fees | Loan servicing and other fees | 555 | | | 559 | | | 1,717 | | | 1,720 | | Loan servicing and other fees | 452 | | | 553 | | | 913 | | | 1,162 | |
Net gain on sale of loans | Net gain on sale of loans | 674 | | | 631 | | | 1,745 | | | 1,677 | | Net gain on sale of loans | 3,134 | | | 752 | | | 3,916 | | | 1,071 | |
Net gain on sale of investment securities available for sale | — | | | — | | | — | | | 7 | | |
Net (loss) gain on sale of other real estate owned ("OREO") | (12) | | | 5 | | | (36) | | | 292 | | |
| Net gain (loss) on sale of other real estate owned ("OREO") | | Net gain (loss) on sale of other real estate owned ("OREO") | — | | | — | | | 148 | | | (24) | |
Dividends on FHLB and FRB stock | Dividends on FHLB and FRB stock | 346 | | | 375 | | | 1,073 | | | 1,316 | | Dividends on FHLB and FRB stock | 243 | | | 316 | | | 687 | | | 727 | |
Other operating income | Other operating income | 2,255 | | | 3,171 | | | 8,154 | | | 10,543 | | Other operating income | 2,787 | | | 3,052 | | | 3,344 | | | 5,899 | |
Total noninterest income | Total noninterest income | 19,455 | | | 18,274 | | | 58,929 | | | 57,885 | | Total noninterest income | 20,566 | | | 20,221 | | | 38,866 | | | 39,474 | |
Noninterest expenses: | Noninterest expenses: | | Noninterest expenses: | |
Salaries and wages | Salaries and wages | 17,765 | | | 16,528 | | | 55,704 | | | 48,750 | | Salaries and wages | 16,926 | | | 17,038 | | | 33,915 | | | 37,939 | |
Employee benefits | Employee benefits | 3,288 | | | 3,356 | | | 10,771 | | | 9,941 | | Employee benefits | 3,221 | | | 3,317 | | | 6,721 | | | 7,483 | |
| Occupancy and bank premises | Occupancy and bank premises | 3,008 | | | 2,717 | | | 9,385 | | | 8,464 | | Occupancy and bank premises | 3,033 | | | 3,125 | | | 6,048 | | | 6,377 | |
| Furniture, fixtures, and equipment | Furniture, fixtures, and equipment | 2,335 | | | 2,070 | | | 7,292 | | | 6,037 | | Furniture, fixtures, and equipment | 2,120 | | | 2,568 | | | 4,551 | | | 4,957 | |
Advertising | Advertising | 587 | | | 349 | | | 1,506 | | | 1,179 | | Advertising | 196 | | | 504 | | | 597 | | | 919 | |
Amortization of intangible assets | Amortization of intangible assets | 954 | | | 891 | | | 2,848 | | | 2,659 | | Amortization of intangible assets | 910 | | | 956 | | | 1,828 | | | 1,894 | |
Due diligence, merger-related and merger integration expenses | — | | | 389 | | | — | | | 7,761 | | |
| Professional fees | Professional fees | 1,044 | | | 997 | | | 3,680 | | | 2,677 | | Professional fees | 1,575 | | | 1,316 | | | 2,943 | | | 2,636 | |
Pennsylvania bank shares tax | Pennsylvania bank shares tax | 514 | | | 472 | | | 1,436 | | | 1,418 | | Pennsylvania bank shares tax | 116 | | | 513 | | | 232 | | | 922 | |
Data processing | Data processing | 1,377 | | | 1,155 | | | 4,000 | | | 3,602 | | Data processing | 1,479 | | | 1,303 | | | 2,873 | | | 2,623 | |
Other operating expenses | Other operating expenses | 4,301 | | | 4,668 | | | 13,463 | | | 12,970 | | Other operating expenses | 5,060 | | | 4,548 | | | 11,346 | | | 9,162 | |
Total noninterest expenses | Total noninterest expenses | 35,173 | | | 33,592 | | | 110,085 | | | 105,458 | | Total noninterest expenses | 34,636 | | | 35,188 | | | 71,054 | | | 74,912 | |
Income before income taxes | Income before income taxes | 20,761 | | | 20,747 | | | 54,218 | | | 59,080 | | Income before income taxes | 19,013 | | | 20,017 | | | 4,893 | | | 33,457 | |
Income tax expense | Income tax expense | 4,402 | | | 4,066 | | | 11,405 | | | 12,419 | | Income tax expense | 4,010 | | | 4,239 | | | 1,053 | | | 7,003 | |
Net income | Net income | $ | 16,359 | | | $ | 16,681 | | | $ | 42,813 | | | $ | 46,661 | | Net income | 15,003 | | | 15,778 | | | 3,840 | | | 26,454 | |
Net (loss) income attributable to noncontrolling interest | (1) | | | (1) | | | (9) | | | 5 | | |
Net loss attributable to noncontrolling interest | | Net loss attributable to noncontrolling interest | (32) | | | (7) | | | (32) | | | (8) | |
Net income attributable to Bryn Mawr Bank Corporation | Net income attributable to Bryn Mawr Bank Corporation | $ | 16,360 | | | $ | 16,682 | | | $ | 42,822 | | | $ | 46,656 | | Net income attributable to Bryn Mawr Bank Corporation | $ | 15,035 | | | $ | 15,785 | | | $ | 3,872 | | | $ | 26,462 | |
Basic earnings per common share | Basic earnings per common share | $ | 0.81 | | | $ | 0.82 | | | $ | 2.13 | | | $ | 2.31 | | Basic earnings per common share | $ | 0.75 | | | $ | 0.78 | | | $ | 0.19 | | | $ | 1.31 | |
Diluted earnings per common share | Diluted earnings per common share | $ | 0.81 | | | $ | 0.82 | | | $ | 2.12 | | | $ | 2.28 | | Diluted earnings per common share | 0.75 | | | 0.78 | | | 0.19 | | | 1.31 | |
Dividends paid or accrued per common share | Dividends paid or accrued per common share | $ | 0.26 | | | $ | 0.25 | | | $ | 0.77 | | | $ | 0.69 | | Dividends paid or accrued per common share | 0.26 | | | 0.25 | | | 0.52 | | | 0.50 | |
Weighted-average basic shares outstanding | Weighted-average basic shares outstanding | 20,132,117 | | | 20,270,706 | | | 20,148,289 | | | 20,237,757 | | Weighted-average basic shares outstanding | 19,926,737 | | | 20,144,651 | | | 19,989,948 | | | 20,156,509 | |
Dilutive shares | Dilutive shares | 76,513 | | | 167,670 | | | 88,042 | | | 206,318 | | Dilutive shares | 81,482 | | | 99,758 | | | 87,211 | | | 99,960 | |
Adjusted weighted-average diluted shares | Adjusted weighted-average diluted shares | 20,208,630 | | | 20,438,376 | | | 20,236,331 | | | 20,444,075 | | Adjusted weighted-average diluted shares | 20,008,219 | | | 20,244,409 | | | 20,077,159 | | | 20,256,469 | |
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income - Unaudited
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Net income attributable to Bryn Mawr Bank Corporation | $ | 16,360 | | | $ | 16,682 | | | $ | 42,822 | | | $ | 46,656 | |
| | | | | | | |
Other comprehensive income (loss): | | | | | | | |
Net change in unrealized gains (losses) on investment securities available for sale: | | | | | | | |
Net unrealized gains (losses) arising during the period, net of tax expense (benefit) of $261, $(616), $2,702, and $(2,337), respectively | 983 | | | (2,319) | | | 10,164 | | | (8,792) | |
Reclassification adjustment for net (gain) on sale realized in net income, net of tax expense of $0, $0, $0, and $1 respectively | — | | | — | | | — | | | (6) | |
Reclassification adjustment for net (gain) realized on transfer of investment securities available for sale to trading, net of tax expense of $0, $0, $0, and $88 respectively | — | | | — | | | — | | | (329) | |
Unrealized investment gains (losses), net of tax expense (benefit) of $261, $(616), $2,702, and $(2,426), respectively | 983 | | | (2,319) | | | 10,164 | | | (9,127) | |
Net change in unfunded pension liability: | | | | | | | |
Change in unfunded pension liability related to unrealized loss, prior service cost and transition obligation, net of tax expense of $4, $28, $12, and $37, respectively | 15 | | | 108 | | | 47 | | | 139 | |
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Total other comprehensive income (loss) | 998 | | | (2,211) | | | 10,211 | | | (8,988) | |
| | | | | | | |
Total comprehensive income | $ | 17,358 | | | $ | 14,471 | | | $ | 53,033 | | | $ | 37,668 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Net income attributable to Bryn Mawr Bank Corporation | $ | 15,035 | | | $ | 15,785 | | | $ | 3,872 | | | $ | 26,462 | |
| | | | | | | |
Other comprehensive income: | | | | | | | |
Net change in unrealized gains on investment securities available for sale: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Unrealized investment gains, net of tax expense of $34, $1,319, $1,804 and $2,441, respectively | 127 | | | 4,962 | | | 6,786 | | | 9,181 | |
Net change in unfunded pension liability: | | | | | | | |
Change in unfunded pension liability related to unrealized loss, prior service cost and transition obligation, net of tax expense of $6, $4, $12 and $8, respectively | 23 | | | 16 | | | 46 | | | 32 | |
| | | | | | | |
Total other comprehensive income | 150 | | | 4,978 | | | 6,832 | | | 9,213 | |
| | | | | | | |
Total comprehensive income | $ | 15,185 | | | $ | 20,763 | | | $ | 10,704 | | | $ | 35,675 | |
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Unaudited
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
(dollars in thousands) | 2019 | | 2018 |
Operating activities: | | | |
Net income attributable to Bryn Mawr Bank Corporation | $ | 42,822 | | | $ | 46,656 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Provision for loan and lease losses | 6,282 | | | 4,831 | |
Depreciation of fixed assets | 5,719 | | | 4,584 | |
Amortization of operating lease right-of-use assets | 2,744 | | | — | |
| | | |
Net amortization of investment premiums and discounts | 1,987 | | | 2,373 | |
Net gain on sale of investment securities available for sale | — | | | (7) | |
Net gain on sale of loans | (1,745) | | | (1,677) | |
Stock based compensation | 2,921 | | | 1,944 | |
Amortization and net impairment of mortgage servicing rights | 467 | | | 549 | |
Net accretion of fair value adjustments | (3,843) | | | (7,023) | |
Amortization of intangible assets | 2,848 | | | 2,659 | |
| | | |
Impairment of OREO and other repossessed assets | — | | | 6 | |
Net loss (gain) on sale of OREO | 36 | | | (292) | |
Net increase in cash surrender value of bank owned life insurance ("BOLI") | (905) | | | (876) | |
Other, net | (418) | | | (344) | |
Loans originated for sale | (65,373) | | | (72,545) | |
Proceeds from loans sold | 65,939 | | | 73,650 | |
Provision for deferred income taxes | 446 | | | 4,768 | |
| | | |
| | | |
Change in income taxes payable/receivable, net | 6,147 | | | 6,033 | |
Change in accrued interest receivable | (161) | | | 1,014 | |
Change in accrued interest payable | 2,363 | | | 3,666 | |
Change in operating lease liabilities | (2,613) | | | — | |
Change in other assets | (107,390) | | | (5,704) | |
Change in other liabilities | 54,348 | | | (1,339) | |
Net cash provided by operating activities | 12,621 | | | 62,926 | |
| | | |
Investing activities: | | | |
Purchases of investment securities available for sale | (219,735) | | | (115,381) | |
Purchases of investment securities held to maturity | (4,868) | | | (1,328) | |
Proceeds from maturity and paydowns of investment securities available for sale | 266,526 | | | 259,102 | |
Proceeds from maturity and paydowns of investment securities held to maturity | 548 | | | 312 | |
Proceeds from sale of investment securities available for sale | — | | | 7 | |
Net change in FHLB stock | (1,618) | | | 5,405 | |
Proceeds from calls of investment securities | 97,406 | | | 310 | |
| | | |
Net change in other investments | (157) | | | (4,059) | |
| | | |
Purchase of customer relationships | (18) | | | (215) | |
Purchase of portfolio loans and leases | — | | | (14,974) | |
Net portfolio loan and lease originations | (117,952) | | | (82,695) | |
Purchases of premises and equipment | (6,509) | | | (13,532) | |
| | | |
Acquisitions, net of cash acquired | — | | | (380) | |
Capitalized costs to OREO | — | | | (24) | |
Proceeds from sale of OREO | 380 | | | 430 | |
Net cash provided by investing activities | 14,003 | | | 32,978 | |
| | | |
Financing activities: | | | |
Change in deposits | 99,945 | | | (15,542) | |
Change in short-term borrowings | (48,896) | | | (11,367) | |
Dividends paid | (15,445) | | | (14,208) | |
Change in long-term FHLB advances and other borrowings | (10,740) | | | (66,371) | |
Payment of contingent consideration for business combinations | (875) | | | (660) | |
| | | |
| | | |
Cash payments to taxing authorities on employees' behalf from shares withheld from stock-based compensation | (572) | | | (1,489) | |
Net (purchase of) proceeds from sale of treasury stock for deferred compensation plans | (140) | | | 52 | |
Repurchase of warrants from U.S. Treasury | — | | | (1,755) | |
Net purchase of treasury stock through publicly announced plans | (4,524) | | | (690) | |
| | | |
Proceeds from exercise of stock options | 907 | | | 1,456 | |
Net cash provided by (used in) financing activities | 19,660 | | | (110,574) | |
| | | |
Change in cash and cash equivalents | 46,284 | | | (14,670) | |
Cash and cash equivalents at beginning of period | 48,456 | | | 60,024 | |
Cash and cash equivalents at end of period | $ | 94,740 | | | $ | 45,354 | |
| | | |
| | | | Six Months Ended June 30, | |
(dollars in thousands) | | (dollars in thousands) | 2020 | | 2019 |
Operating activities: | | Operating activities: | | | |
Net income attributable to Bryn Mawr Bank Corporation | | Net income attributable to Bryn Mawr Bank Corporation | $ | 3,872 | | | $ | 26,462 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Provision for credit losses on loans and leases | | Provision for credit losses on loans and leases | 36,637 | | | 5,363 | |
Depreciation of fixed assets | | Depreciation of fixed assets | 4,001 | | | 3,896 | |
Amortization of operating lease right-of-use assets | | Amortization of operating lease right-of-use assets | 1,613 | | | 1,828 | |
| Net amortization of investment premiums and discounts | | Net amortization of investment premiums and discounts | 1,891 | | | 1,316 | |
| Net gain on sale of loans | | Net gain on sale of loans | (3,916) | | | (1,071) | |
Stock based compensation | | Stock based compensation | 1,513 | | | 1,987 | |
Amortization and net impairment of mortgage servicing rights | | Amortization and net impairment of mortgage servicing rights | 1,010 | | | 303 | |
Net accretion of fair value adjustments | | Net accretion of fair value adjustments | (1,989) | | | (2,285) | |
Amortization of intangible assets | | Amortization of intangible assets | 1,828 | | | 1,894 | |
| Net (gain) loss on sale of OREO | | Net (gain) loss on sale of OREO | (148) | | | 24 | |
Net increase in cash surrender value of bank owned life insurance ("BOLI") | | Net increase in cash surrender value of bank owned life insurance ("BOLI") | (649) | | | (593) | |
Other, net | | Other, net | 1,216 | | | (832) | |
Loans originated for sale | | Loans originated for sale | (46,750) | | | (35,781) | |
Proceeds from loans sold | | Proceeds from loans sold | 48,211 | | | 35,187 | |
Provision for deferred income taxes | | Provision for deferred income taxes | 99 | | | 51 | |
| Change in income taxes payable/receivable, net | | Change in income taxes payable/receivable, net | (4,963) | | | 6,906 | |
Change in accrued interest receivable | | Change in accrued interest receivable | (3,095) | | | (727) | |
Change in accrued interest payable | | Change in accrued interest payable | 1,659 | | | 1,592 | |
Change in operating lease liabilities | | Change in operating lease liabilities | (1,565) | | | (1,726) | |
Change in other assets | | Change in other assets | (96,979) | | | (68,444) | |
Change in other liabilities | | Change in other liabilities | 90,831 | | | 30,744 | |
Net cash provided by operating activities | | Net cash provided by operating activities | 34,327 | | | 6,094 | |
| Investing activities: | | Investing activities: | |
Purchases of investment securities available for sale | | Purchases of investment securities available for sale | (120,458) | | | (121,976) | |
Purchases of investment securities held to maturity | | Purchases of investment securities held to maturity | (1,103) | | | (1,827) | |
Proceeds from maturity and paydowns of investment securities available for sale | | Proceeds from maturity and paydowns of investment securities available for sale | 557,125 | | | 238,349 | |
Proceeds from maturity and paydowns of investment securities held to maturity | | Proceeds from maturity and paydowns of investment securities held to maturity | 1,023 | | | 273 | |
| Net change in FHLB stock | | Net change in FHLB stock | 19,238 | | | (147) | |
Proceeds from calls of investment securities | | Proceeds from calls of investment securities | 45,500 | | | 43,285 | |
| Net change in other investments | | Net change in other investments | (372) | | | 9 | |
| Purchase of customer relationships | | Purchase of customer relationships | — | | | (18) | |
| Net portfolio loan and lease originations | | Net portfolio loan and lease originations | (337,951) | | | (112,046) | |
Proceeds from sales of loans originally classified as portfolio loans and leases | | Proceeds from sales of loans originally classified as portfolio loans and leases | 302,169 | | | — | |
Purchases of premises and equipment | | Purchases of premises and equipment | (814) | | | (6,339) | |
| Proceeds from sale of OREO | | Proceeds from sale of OREO | 534 | | | 309 | |
Net cash provided by investing activities | | Net cash provided by investing activities | 464,891 | | | 39,872 | |
| Financing activities: | | Financing activities: | |
Change in deposits | | Change in deposits | 401,624 | | | 33,719 | |
Change in short-term borrowings | | Change in short-term borrowings | (464,328) | | | (44,539) | |
Dividends paid | | Dividends paid | (10,438) | | | (10,086) | |
Change in long-term FHLB advances and other borrowings | | Change in long-term FHLB advances and other borrowings | (7,501) | | | (7,500) | |
Payment of contingent consideration for business combinations | | Payment of contingent consideration for business combinations | (507) | | | (523) | |
| Cash payments to taxing authorities on employees' behalf from shares withheld from stock-based compensation | | Cash payments to taxing authorities on employees' behalf from shares withheld from stock-based compensation | (144) | | | (45) | |
Net purchase of treasury stock for deferred compensation plans | | Net purchase of treasury stock for deferred compensation plans | (90) | | | (82) | |
| Net purchase of treasury stock through publicly announced plans | | Net purchase of treasury stock through publicly announced plans | (7,249) | | | (2,603) | |
| Proceeds from exercise of stock options | | Proceeds from exercise of stock options | 5 | | | 622 | |
Net cash used in financing activities | | Net cash used in financing activities | (88,628) | | | (31,037) | |
| Change in cash and cash equivalents | | Change in cash and cash equivalents | 410,590 | | | 14,929 | |
Cash and cash equivalents at beginning of period | | Cash and cash equivalents at beginning of period | 53,931 | | | 48,456 | |
Cash and cash equivalents at end of period | | Cash and cash equivalents at end of period | $ | 464,521 | | | $ | 63,385 | |
| | Supplemental cash flow information: | Supplemental cash flow information: | | Supplemental cash flow information: | |
Cash paid during the year for: | Cash paid during the year for: | | Cash paid during the year for: | |
Income taxes | Income taxes | $ | 9,344 | | | $ | 1,821 | | Income taxes | $ | 5,922 | | | $ | 4,580 | |
Interest | Interest | $ | 32,410 | | | $ | 18,371 | | Interest | $ | 14,351 | | | $ | 21,006 | |
| Non-cash information: | Non-cash information: | | Non-cash information: | |
| Change in other comprehensive income (loss) | $ | 10,211 | | | $ | (8,988) | | |
Change in other comprehensive income | | Change in other comprehensive income | $ | 6,832 | | | $ | 9,213 | |
Change in deferred tax due to change in comprehensive income | Change in deferred tax due to change in comprehensive income | $ | 2,714 | | | $ | (2,389) | | Change in deferred tax due to change in comprehensive income | $ | 1,816 | | | $ | 2,449 | |
Transfer of loans to OREO and repossessed assets | Transfer of loans to OREO and repossessed assets | $ | 72 | | | $ | 345 | | Transfer of loans to OREO and repossessed assets | $ | 386 | | | $ | 72 | |
Acquisition of noncash assets and liabilities: | | |
Assets acquired | $ | — | | | $ | 1,096 | | |
Liabilities assumed | $ | — | | | $ | 687 | | |
|
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes In Shareholders’ Equity - Unaudited
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, 2020 | | | | | | | | | | | | | | |
(dollars in thousands, except share and per share data) | Shares of Common Stock Issued | | Common Stock | | Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive Income | | Retained Earnings | | Noncontrolling Interest | | Total Shareholders' Equity |
Balance March 31, 2020 | 24,655,362 | | | $ | 24,655 | | | $ | 379,495 | | | $ | (88,540) | | | $ | 8,869 | | | $ | 269,395 | | | $ | (695) | | | $ | 593,179 | |
Net loss attributable to Bryn Mawr Bank Corporation | — | | | — | | | — | | | — | | | — | | | 15,035 | | | — | | | 15,035 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (32) | | | (32) | |
| | | | | | | | | | | | | | | |
Dividends paid or accrued, $0.26 per share | — | | | — | | | — | | | — | | | — | | | (5,265) | | | — | | | (5,265) | |
Other comprehensive income, net of tax expense of $40 | — | | | — | | | — | | | — | | | 150 | | | — | | | — | | | 150 | |
Stock based compensation | — | | | — | | | 624 | | | — | | | — | | | — | | | — | | | 624 | |
Retirement of treasury stock | (3,816) | | | (4) | | | (41) | | | 45 | | | — | | | — | | | — | | | — | |
Net purchase of treasury stock from stock awards for statutory tax withholdings | — | | | — | | | — | | | (63) | | | — | | | — | | | — | | | (63) | |
Net treasury stock activity for deferred compensation trusts | — | | | — | | | — | | | (54) | | | — | | | — | | | — | | | (54) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Common stock issued: | | | | | | | | | | | | | | | |
Common stock issued through share-based awards and options exercises | 10,615 | | | 11 | | | 89 | | | — | | | — | | | — | | | — | | | 100 | |
| | | | | | | | | | | | | | | |
Balance June 30, 2020 | 24,662,161 | | | $ | 24,662 | | | $ | 380,167 | | | $ | (88,612) | | | $ | 9,019 | | | $ | 279,165 | | | $ | (727) | | | $ | 603,674 | |
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes In Shareholders’ Equity - Unaudited
| | | For the Nine Months Ended September 30, 2019 | | | For the Three Months Ended June 30, 2019 | |
(dollars in thousands, except share and per share data) | Shares of Common Stock Issued | | Common Stock | | Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive (Loss) Income | | Retained Earnings | | Noncontrolling Interest | | Total Shareholders' Equity | |
Balance December 31, 2018 | 24,545,348 | | | $ | 24,545 | | | $ | 374,010 | | | $ | (75,883) | | | $ | (7,513) | | | $ | 250,230 | | | $ | (685) | | | $ | 564,704 | | |
| | | Shares of Common Stock Issued | | Common Stock | | Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive (Loss) Income | | Retained Earnings | | Noncontrolling Interest | | Total Shareholders' Equity |
Balance March 31, 2019 | | Balance March 31, 2019 | 24,577,248 | | | $ | 24,577 | | | $ | 375,655 | | | $ | (76,974) | | | $ | (3,278) | | | $ | 255,813 | | | $ | (686) | | | $ | 575,107 | |
Net income attributable to Bryn Mawr Bank Corporation | Net income attributable to Bryn Mawr Bank Corporation | — | | | — | | | — | | | — | | | — | | | 42,822 | | | — | | | 42,822 | | Net income attributable to Bryn Mawr Bank Corporation | — | | | — | | | — | | | — | | | — | | | 15,785 | | | — | | | 15,785 | |
Net loss attributable to noncontrolling interest | Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (9) | | | (9) | | Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (7) | | | (7) | |
Dividends paid or accrued, $0.77 per share | — | | | — | | | — | | | — | | | — | | | (15,484) | | | — | | | (15,484) | | |
Other comprehensive income, net of tax expense of $2,714 | — | | | — | | | — | | | — | | | 10,211 | | | — | | | — | | | 10,211 | | |
Dividends paid or accrued, $0.25 per share | | Dividends paid or accrued, $0.25 per share | — | | | — | | | — | | | — | | | — | | | (5,102) | | | — | | | (5,102) | |
Other comprehensive income, net of tax expense of $1,323 | | Other comprehensive income, net of tax expense of $1,323 | — | | | — | | | — | | | — | | | 4,978 | | | — | | | — | | | 4,978 | |
Stock based compensation | Stock based compensation | — | | | — | | | 2,921 | | | — | | | — | | | — | | | — | | | 2,921 | | Stock based compensation | — | | | — | | | 850 | | | — | | | — | | | — | | | — | | | 850 | |
Retirement of treasury stock | Retirement of treasury stock | (2,704) | | | (3) | | | (27) | | | 30 | | | — | | | — | | | — | | | — | | Retirement of treasury stock | (2,704) | | | (3) | | | (27) | | | 30 | | | — | | | — | | | — | | | — | |
Net purchase of treasury stock from stock awards for statutory tax withholdings | Net purchase of treasury stock from stock awards for statutory tax withholdings | — | | | — | | | — | | | (572) | | | — | | | — | | | — | | | (572) | | Net purchase of treasury stock from stock awards for statutory tax withholdings | — | | | — | | | — | | | (11) | | | — | | | — | | | — | | | (11) | |
Net treasury stock activity for deferred compensation trusts | Net treasury stock activity for deferred compensation trusts | — | | | — | | | — | | | (140) | | | — | | | — | | | — | | | (140) | | Net treasury stock activity for deferred compensation trusts | — | | | — | | | — | | | (82) | | | — | | | — | | | — | | | (82) | |
Purchase of treasury stock through publicly announced plans | Purchase of treasury stock through publicly announced plans | — | | | — | | | — | | | (4,524) | | | — | | | — | | | — | | | (4,524) | | Purchase of treasury stock through publicly announced plans | — | | | — | | | — | | | (1,546) | | | — | | | — | | | — | | | (1,546) | |
| Common stock issued: | Common stock issued: | | | | Common stock issued: | |
Common stock issued through share-based awards and options exercises | Common stock issued through share-based awards and options exercises | 103,101 | | | 104 | | | 902 | | | — | | | — | | | — | | | — | | | 1,006 | | Common stock issued through share-based awards and options exercises | 8,013 | | | 9 | | | 174 | | | — | | | — | | | — | | | — | | | 183 | |
| Balance September 30, 2019 | 24,645,745 | | | $ | 24,646 | | | $ | 377,806 | | | $ | (81,089) | | | $ | 2,698 | | | $ | 277,568 | | | $ | (694) | | | $ | 600,935 | | |
Balance June 30, 2019 | | Balance June 30, 2019 | 24,582,557 | | | $ | 24,583 | | | $ | 376,652 | | | $ | (78,583) | | | $ | 1,700 | | | $ | 266,496 | | | $ | (693) | | | $ | 590,155 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2019 | | | | | | | | | | | | | | |
(dollars in thousands, except share and per share data) | Shares of Common Stock Issued | | Common Stock | | Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive Income | | Retained Earnings | | Noncontrolling Interest | | Total Shareholders' Equity |
Balance June 30, 2019 | 24,582,557 | | | $ | 24,583 | | | $ | 376,652 | | | $ | (78,583) | | | $ | 1,700 | | | $ | 266,496 | | | $ | (693) | | | $ | 590,155 | |
Net income attributable to Bryn Mawr Bank Corporation | — | | | — | | | — | | | — | | | — | | | 16,360 | | | — | | | 16,360 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Dividends paid or accrued, $0.26 per share | — | | | — | | | — | | | — | | | — | | | (5,288) | | | — | | | (5,288) | |
Other comprehensive income, net of tax expense of $265 | — | | | — | | | — | | | — | | | 998 | | | — | | | — | | | 998 | |
Stock based compensation | — | | | — | | | 934 | | | — | | | — | | | — | | | — | | | 934 | |
| | | | | | | | | | | | | | | |
Net purchase of treasury stock from stock awards for statutory tax withholdings | — | | | — | | | — | | | (527) | | | — | | | — | | | — | | | (527) | |
Net treasury stock activity for deferred compensation trusts | — | | | — | | | — | | | (58) | | | — | | | — | | | — | | | (58) | |
Purchase of treasury stock through publicly announced plans | — | | | — | | | — | | | (1,921) | | | — | | | — | | | — | | | (1,921) | |
| | | | | | | | | | | | | | | |
Common stock issued: | | | | | | | | | | | | | | | |
Common stock issued through share-based awards and options exercises | 63,188 | | | 63 | | | 220 | | | — | | | — | | | — | | | — | | | 283 | |
| | | | | | | | | | | | | | | |
Balance September 30, 2019 | 24,645,745 | | | $ | 24,646 | | | $ | 377,806 | | | $ | (81,089) | | | $ | 2,698 | | | $ | 277,568 | | | $ | (694) | | | $ | 600,935 | |
BRYN MAWR BANK CORPORATION AND SUBSIDIARIESConsolidated Statements of Changes In Shareholders’ Equity - Unaudited
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, 2020 | | | | | | | | | | | | | | |
(dollars in thousands, except share and per share data) | Shares of Common Stock Issued | | Common Stock | | Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive Income | | Retained Earnings | | Noncontrolling Interest | | Total Shareholders' Equity |
Balance December 31, 2019 | 24,650,051 | | | $ | 24,650 | | | $ | 378,606 | | | $ | (81,174) | | | $ | 2,187 | | | $ | 288,653 | | | $ | (695) | | | $ | 612,227 | |
Net income attributable to Bryn Mawr Bank Corporation | — | | | — | | | — | | | — | | | — | | | 3,872 | | | — | | | 3,872 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (32) | | | (32) | |
Cumulative-effect adjustment due to the adoption of ASU No. 2016-13 | — | | | — | | | — | | | — | | | — | | | (2,801) | | | — | | | (2,801) | |
Dividends paid or accrued, $0.52 per share | — | | | — | | | — | | | — | | | — | | | (10,559) | | | — | | | (10,559) | |
Other comprehensive income, net of tax expense of $1,816 | — | | | — | | | — | | | — | | | 6,832 | | | — | | | — | | | 6,832 | |
Stock based compensation | — | | | — | | | 1,513 | | | — | | | — | | | — | | | — | | | 1,513 | |
Retirement of treasury stock | (3,816) | | | (4) | | | (41) | | | 45 | | | — | | | — | | | — | | | — | |
Net purchase of treasury stock from stock awards for statutory tax withholdings | — | | | — | | | — | | | (144) | | | — | | | — | | | — | | | (144) | |
Net treasury stock activity for deferred compensation trusts | — | | | — | | | — | | | (90) | | | — | | | — | | | — | | | (90) | |
Purchase of treasury stock through publicly announced plans | — | | | — | | | — | | | (7,249) | | | — | | | — | | | — | | | (7,249) | |
| | | | | | | | | | | | | | | |
Common stock issued: | | | | | | | | | | | | | | | |
Common stock issued through share-based awards and options exercises | 15,926 | | | 16 | | | 89 | | | — | | | — | | | — | | | — | | | 105 | |
| | | | | | | | | | | | | | | |
Balance June 30, 2020 | 24,662,161 | | | $ | 24,662 | | | $ | 380,167 | | | $ | (88,612) | | | $ | 9,019 | | | $ | 279,165 | | | $ | (727) | | | $ | 603,674 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2018 | | | | | | | | | | | | | | |
| Shares of Common Stock Issued | | Common Stock | | Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Noncontrolling Interest | | Total Shareholders' Equity |
Balance December 31, 2017 | 24,360,049 | | | $ | 24,360 | | | $ | 371,486 | | | $ | (68,179) | | | $ | (4,414) | | | $ | 205,549 | | | $ | (683) | | | $ | 528,119 | |
Net income attributable to Bryn Mawr Bank Corporation | — | | | — | | | — | | | — | | | — | | | 46,656 | | | — | | | 46,656 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | 5 | | | 5 | |
Dividends paid or accrued, $0.69 per share | — | | | — | | | — | | | — | | | — | | | (14,099) | | | — | | | (14,099) | |
Other comprehensive loss, net of tax benefit of $2,389 | — | | | — | | | — | | | — | | | (8,988) | | | — | | | — | | | (8,988) | |
Stock based compensation | — | | | — | | | 1,944 | | | — | | | — | | | — | | | — | | | 1,944 | |
Retirement of treasury stock | (2,253) | | | (2) | | | (20) | | | 22 | | | — | | | — | | | — | | | — | |
Net purchase of treasury stock from stock awards for statutory tax withholdings | — | | | — | | | — | | | (1,489) | | | — | | | — | | | — | | | (1,489) | |
Net treasury stock activity for deferred compensation trusts | — | | | — | | | 153 | | | (101) | | | — | | | — | | | — | | | 52 | |
Purchase of treasury stock through publicly announced plans | — | | | — | | | — | | | (690) | | | — | | | — | | | — | | | (690) | |
Repurchase of warrants from U.S. Treasury | — | | | — | | | (1,853) | | | — | | | — | | | 98 | | | — | | | (1,755) | |
Common stock issued: | | | | | | | | | | | | | | | |
Common stock issued through share-based awards and options exercises | 172,387 | | | 172 | | | 1,385 | | | — | | | — | | | — | | | — | | | 1,557 | |
Shares issued in acquisitions(1) | 2,562 | | | 3 | | | 110 | | | — | | | — | | | — | | | — | | | 113 | |
Balance September 30, 2018 | 24,532,745 | | | $ | 24,533 | | | $ | 373,205 | | | $ | (70,437) | | | $ | (13,402) | | | $ | 238,204 | | | $ | (678) | | | $ | 551,425 | |
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES(1) Restricted shares relating to the RBPI Merger (defined in Note 3 – Business Combinations below) recorded during the three months ended June 30, 2018.Consolidated Statements of Changes In Shareholders’ Equity - Unaudited
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, 2019 | | | | | | | | | | | | | | |
| Shares of Common Stock Issued | | Common Stock | | Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive (Loss) Income | | Retained Earnings | | Noncontrolling Interest | | Total Shareholders' Equity |
Balance December 31, 2018 | 24,545,348 | | | $ | 24,545 | | | $ | 374,010 | | | $ | (75,883) | | | $ | (7,513) | | | $ | 250,230 | | | $ | (685) | | | $ | 564,704 | |
Net income attributable to Bryn Mawr Bank Corporation | — | | | — | | | — | | | — | | | — | | | 26,462 | | | — | | | 26,462 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (8) | | | (8) | |
Dividends paid or accrued, $0.50 per share | — | | | — | | | — | | | — | | | — | | | (10,196) | | | — | | | (10,196) | |
Other comprehensive income, net of tax expense of $2,449 | — | | | — | | | — | | | — | | | 9,213 | | | — | | | — | | | 9,213 | |
Stock based compensation | — | | | — | | | 1,987 | | | — | | | — | | | — | | | — | | | 1,987 | |
Retirement of treasury stock | (2,704) | | | (3) | | | (27) | | | 30 | | | — | | | — | | | — | | | — | |
Net purchase of treasury stock from stock awards for statutory tax withholdings | — | | | — | | | — | | | (45) | | | — | | | — | | | — | | | (45) | |
Net treasury stock activity for deferred compensation trusts | — | | | — | | | — | | | (82) | | | — | | | — | | | — | | | (82) | |
Purchase of treasury stock through publicly announced plans | — | | | — | | | — | | | (2,603) | | | — | | | — | | | — | | | (2,603) | |
| | | | | | | | | | | | | | | |
Common stock issued: | | | | | | | | | | | | | | | |
Common stock issued through share-based awards and options exercises | 39,913 | | | 41 | | | 682 | | | — | | | — | | | — | | | — | | | 723 | |
| | | | | | | | | | | | | | | |
Balance June 30, 2019 | 24,582,557 | | | $ | 24,583 | | | $ | 376,652 | | | $ | (78,583) | | | $ | 1,700 | | | $ | 266,496 | | | $ | (693) | | | $ | 590,155 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2018 | | | | | | | | | | | | | | |
| Shares of Common Stock Issued | | Common Stock | | Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Noncontrolling Interest | | Total Shareholders' Equity |
Balance June 30, 2018 | 24,453,417 | | | $ | 24,453 | | | $ | 372,227 | | | $ | (68,943) | | | $ | (11,191) | | | $ | 226,634 | | | $ | (677) | | | $ | 542,503 | |
Net income attributable to Bryn Mawr Bank Corporation | — | | | — | | | — | | | — | | | — | | | 16,682 | | | — | | | 16,682 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Dividends paid or accrued, $0.25 per share | — | | | — | | | — | | | — | | | — | | | (5,112) | | | — | | | (5,112) | |
Other comprehensive loss, net of tax benefit of $588 | — | | | — | | | — | | | — | | | (2,211) | | | — | | | — | | | (2,211) | |
Stock based compensation | — | | | — | | | 709 | | | — | | | — | | | — | | | — | | | 709 | |
| | | | | | | | | | | | | | | |
Net purchase of treasury stock from stock awards for statutory tax withholdings | — | | | — | | | — | | | (757) | | | — | | | — | | | — | | | (757) | |
Net treasury stock activity for deferred compensation trusts | — | | | — | | | — | | | (47) | | | — | | | — | | | — | | | (47) | |
Purchase of treasury stock through publicly announced plans | — | | | — | | | — | | | (690) | | | — | | | — | | | — | | | (690) | |
| | | | | | | | | | | | | | | |
Common stock issued: | | | | | | | | | | | | | | | |
Common stock issued through share-based awards and options exercises | 79,328 | | | 80 | | | 269 | | | — | | | — | | | — | | | — | | | 349 | |
| | | | | | | | | | | | | | | |
Balance September 30, 2018 | 24,532,745 | | | $ | 24,533 | | | $ | 373,205 | | | $ | (70,437) | | | $ | (13,402) | | | $ | 238,204 | | | $ | (678) | | | $ | 551,425 | |
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Presentation, Principles of Consolidation, and Significant Accounting Policies
The Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In the opinion of Bryn Mawr Bank Corporation’s (“BMBC,” and together with its direct and indirect subsidiaries, the “Corporation”) management, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included. These Unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto in BMBC’s Annual Report on Form 10-K for the twelve months ended December 31, 2018 (the “2018 Annual Report”).
The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for any other interim period or for the full year.
Principles of Consolidation
The Unaudited Consolidated Financial Statements include the accounts of Bryn Mawr Bank Corporation (“BMBC,” and together with its subsidiaries, the “Corporation”) and its consolidated subsidiaries; BMBC's primary subsidiary is The Bryn Mawr Trust Company (the “Bank”). In connection with the RBPI Merger (defined in Note 3 – Business Combinations below)merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into BMBC, and the merger of Royal Bank America with and into the Bank (collectively, the "RBPI Merger"), the Corporation acquired 2 Delaware trusts, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust II. These two entities are not consolidated per requirements under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (“ASC Topic 810”). All significant intercompany balances and transactions have beenare eliminated in consolidation. Certain prior periodconsolidation and certain prior-period amounts have been reclassified when necessary in order to conform to the current-yearcurrent period presentation.
In the opinion of management, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for any other interim period or for the full year.
In preparing the Unaudited Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
These Unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto in BMBC’s Annual Report on Form 10-K for the twelve months ended December 31, 2019 (the “2019 Annual Report”). Except as described below, the accounting policies applied in these Unaudited Consolidated Financial Statements are the same as those applied in the 2019 Annual Report.
Updates to Significant Accounting Policies:
A.Allowance for Credit Losses (“ACL”) on Loans and Leases:
The ACL on loans and leases represents management’s estimate of all expected credit losses over the expected contractual life of our existing portfolio loans and leases. Determining the appropriateness of the ACL on loans and leases is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACL on loans and leases in those future periods.
The expense for credit loss recorded through earnings is the amount necessary to maintain the ACL on loans and leases at the amount of expected credit losses inherent within the loans and leases portfolio. The amount of expense and the corresponding level of ACL on loans and leases are based on management’s evaluation of the collectability of the loan and lease portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. The ACL on loans and leases, as reported in our Consolidated Statements of Financial Condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan and lease amounts, net of recoveries. For further information on the ACL on loans and leases, see Note 4 - Loans and Leases in the accompanying Notes to Unaudited Consolidated Financial Statements.
Management employs a disciplined process and methodology to establish the ACL on loans and leases that has two basic components: first, an asset-specific component involving individual loans and leases that do not share risk characteristics with other loans and leases and the measurement of expected credit losses for such individual loans; and second, a collective (pooled) component for estimated expected credit losses for pools of loans and leases that share similar risk characteristics.
Based upon this methodology, management establishes an asset-specific ACL on loans and leases that do not share risk characteristics with other loans and leases based on the amount of expected credit losses calculated on those loans and leases and charges off amounts determined to be uncollectible. Factors we consider in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.
When a loan or lease does not share risk characteristics with other loans or leases, management measures expected credit loss as the difference between the amortized cost basis in the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate except that, for collateral dependent loans, credit loss is measured as the difference between the amortized cost basis in the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. If the calculated expected credit loss is determined to be permanent, fixed or nonrecoverable, the credit loss portion of the loan will be charged off against the ACL on loans and leases. Loans and leases designated as having significantly increased credit risk are generally placed on nonaccrual and remain in that status until all principal and interest payments are current and the prospects for future payments in accordance with the loan agreement are reasonably assured, at which point the loan is returned to accrual status.
In estimating the component of the ACL on loans and leases that share common risk characteristics, loans and leases are segregated into portfolio segments based on federal call report codes which classify loans and leases based on the primary collateral supporting the loan and lease. Methods utilized by management to estimate expected credit losses include a discounted cash flow (“DCF”) methodology that discounts instrument-level contractual cash flows, adjusted for prepayments and curtailments, incorporating loss expectations, and a weighted average remaining maturity (“WARM”) methodology which contemplates expected losses at a pool-level, utilizing historic loss information.
Under both methodologies, management estimates the ACL on loans and leases using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. After the end of the reasonable and supportable forecast period, the loss rates revert to the long-term mean loss rate, or in the case of an input-driven predictive method, the long-term mean of the input, using a reversion period where applicable. Historical credit loss experience, including examination of loss experience at representative peer institutions when the Corporation’s first-party loss history does not result in estimations that are meaningful to users of the Corporation’s Consolidated Financial Statements, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are considered for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.
The DCF methodology uses inputs of current and forecasted macroeconomic indicators to predict future loss rates. The current macroeconomic indicator utilized by the bank is the Pennsylvania unemployment rate. In building the current expected credit loss (“CECL”) model utilized in the DCF methodology, a correlation between this indicator and historic loss levels was developed, enabling a prediction of future loss rates related to future Pennsylvania unemployment rates. The portfolio segments utilizing the DCF methodology as of June 30, 2020 included: CRE - owner-occupied and nonowner-occupied loans, home equity lines of credit, residential mortgages (first and junior liens), construction loans and consumer loans.
The WARM methodology uses combined historic loss rates for the Bank and peer institutions, if necessary, gathered from Call Report filings. The selected period for which historic loss rates are used is dependent on management's evaluation of current conditions and expectations of future loss conditions. The portfolio segments utilizing the WARM methodology as of June 30, 2020 included commercial and industrial loans and leases.
For those loans and leases where the ACL is measured on a collective (pool) basis, management has identified the following portfolio segments based on federal call report codes which classify loans and leases based on the primary collateral supporting the loan or lease:
Commercial Real Estate (“CRE”) Loans (owner-occupied and non-owner occupied): The Bank originates mortgage loans for multifamily properties (i.e. buildings which have five or more residential units) and other commercial real estate that is either owner-occupied or managed as an investment property (non-owner occupied) primarily within Pennsylvania, Delaware and Southern and Central New Jersey. Commercial real estate properties primarily include retail buildings/shopping centers, hotels, office/medical buildings and industrial/warehouse space. Multifamily loans are expected to be repaid from the cash flows of the underlying property so the collective amount of rents must be sufficient to cover all operating expenses, property management and maintenance, taxes and debt service. Increases in vacancy rates, interest rates or other changes in general economic conditions can have an impact on the borrower and its ability to repay the loan. Commercial real estate loans are generally considered to have a higher degree of credit risk than multifamily loans as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to economic conditions.
Home equity lines of credit: The Bank originates the majority of its home equity lines of credit through its retail channel. The primary risk characteristics associated with home equity lines of credit typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as major medical expenses,
catastrophic events, divorce and death. Home equity lines of credit are typically originated with variable or floating interest rates, which could expose the borrower to higher payments in a rising interest rate environment. Real estate values could decrease and cause the value of the underlying property to fall below the loan amount, creating additional potential loss exposure for the Bank.
Residential Mortgages secured by first liens: The Bank originates one-to-four family residential mortgage loans primarily within Pennsylvania, Delaware and Southern and Central New Jersey. These loans are secured by first liens on a primary residence or investment property. The primary risk characteristics associated with residential mortgage loans typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as major medical expenses, catastrophic events, divorce or death. Residential mortgage loans that have adjustable rates could expose the borrower to higher payments in a rising interest rate environment. Real estate values could decrease and cause the value of the underlying property to fall below the loan amount, creating additional potential loss exposure for the Bank.
Residential Mortgages secured by junior liens: The Bank originates loans secured by junior liens against one to four family properties primarily within Pennsylvania, Delaware and Southern and Central New Jersey. Loans secured by junior liens are primarily in the form of an amortizing home equity loan. These loans are subordinate to a first mortgage which may be from another lending institution. The primary risk characteristics associated with loans secured by junior liens typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death. Real estate values could decrease and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank.
Construction: The Bank originates construction loans to finance land development preparatory to erecting new structures or the on-site construction of industrial, commercial, or residential buildings. Construction loans include not only construction of new structures, but also additions or alterations to existing structures and the demolition of existing structures to make way for new structures. Construction loans are generally secured by real estate. The primary risk characteristics are specific to the uncertainty on whether the construction will be completed according to the specifications and schedules. Factors that may influence the completion of construction may be customer specific, such as the quality and depth of property management, or related to changes in general economic conditions.
Commercial & Industrial: The Bank originates lines of credit and term loans to operating companies for business purposes. The loans are generally secured by business assets such as accounts receivable, inventory, business vehicles and equipment as well as the stock of a company, if privately held. Commercial & Industrial loans are typically repaid first by the cash flows generated by the borrower’s business operations. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and positive cash flow. Factors that may influence a borrower's ability to repay their loan include demand for the business’ products or services, the quality and depth of management, the degree of competition, regulatory changes, and general economic conditions. The ability of the Bank to foreclose and realize sufficient value from business assets securing these loans is often uncertain. To mitigate the risk characteristics of commercial and industrial loans, commercial real estate may be included as a secondary source of collateral. The Bank will often require more frequent reporting requirements from the borrower in order to better monitor its business performance.
Consumer: The Bank originates or lines of credit to individuals for household, family, and other personal expenditures as well as overdrawn customer deposit balances which are reported as loans. This also represents all other loans that cannot be categorized in any of the previous mentioned loan segments. Consumer loans generally have higher interest rates and shorter terms than residential loans but tend to have higher credit risk due to the type of collateral securing the loan or in some cases the absence of collateral.
Leases: The Bank’s wholly-owned subsidiary Bryn Mawr Equipment Financing, Inc. specializes in equipment leases for small- and mid-sized businesses nationally and across a broad range of industries. The Bank’s credit risk generally results from the potential default of borrowers or lessees, which may be driven by customer specific or broader industry related conditions.
Accrued interest receivable on loans and leases, which is reported in Accrued interest receivable on the Consolidated Balance Sheet, totaled $12.5 million as of June 30, 2020 and is excluded from the estimate of credit losses.
B.ACL on Off-Balance Sheet (“OBS”) Credit Exposures
Management estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. The ACL on OBS credit exposure, included within Other Liabilities on the Consolidated Balance Sheet, is adjusted as a provision for credit loss expense included within other operating expense on the Consolidated Statement of Income. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be
funded over its estimated life. Management estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by the bank and applying the loss factors used in the ACL on loans and leases methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan type. No credit loss estimate is reported for OBS credit exposures that are unconditionally cancellable by the Bank.
The ACL on OBS credit exposure as of June 30, 2020 was $3.3 million. For the three months ended June 30, 2020 the Corporation recorded a $867 thousand release of reserves for credit losses on OBS credit exposures. For the six months ended June 30, 2020, the Corporation recorded a $2.1 million provision for credit losses on OBS credit exposures.
C.Troubled Debt Restructurings (“TDRs”)
The Corporation has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. In accordance with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), loans to borrowers experiencing financial difficulty related to the COVID-19 pandemic which were granted short-term modifications after March 1, 2020 and which were not more than 30 days past due as of December 31, 2019 are exempt from TDR classification. In addition, for loans modified in response to the COVID-19 pandemic that do not meet the above delinquency criteria (e.g., not more than 30 days past due as of December 31, 2019), the Corporation applies the guidance included in an interagency statement issued by the bank regulatory agencies. This guidance states that loan modifications performed in light of the COVID-19 pandemic, including loan payment deferrals that are up to six months in duration, that were granted to borrowers who were less than 30 days past due as of the implementation date of a loan modification program or modifications granted under government mandated modification programs, are also exempt from TDR classification. For loan modifications that include a payment deferral and are not TDRs, the borrower’s past due and nonaccrual status will not be impacted during the deferral period. Interest income will continue to be recognized over the contractual life of the loan. For more information on the Corporation's TDR accounting, see Note 1 – Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Corporation’s 2019 Annual Report.
D.Purchased Credit Deteriorated (“PCD”) Loans and Leases
The Corporation has purchased loans and leases, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An ACL is determined using the same methodology as other portfolio loans and leases. The initial ACL determined on a collective basis is allocated to individual loans. The loan’s purchase price is grossed-up by adding the allocated ACL to arrive at its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan or lease is a noncredit discount or premium, which is amortized into interest income over the life of the loan or lease. Subsequent changes to the ACL associated with PCD loans or leases are recorded through provision expense.
E.ACL on Held to Maturity Securities
Management measures expected credit losses on held to maturity debt securities on a collective basis by major security type. The Corporation’s held to maturity debt securities consist of mortgage-backed securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, management considers the history of credit losses, current conditions and reasonable and supportable forecasts, which may indicate that the expectation that nonpayment of the amortized cost basis is or continues to be zero, even if the U.S. government were to default. Therefore, for those securities, the Corporation does not record expected credit losses. Accrued interest receivable on held to maturity debt securities, which is reported in Accrued interest receivable on the Consolidated Balance Sheet, totaled $36 thousand as of June 30, 2020 and is excluded from the estimate of credit losses.
F.ACL on Available for Sale Securities
For available for sale debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available for sale debt securities that do not meet the aforementioned criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any explicit or implicit guarantees by the U.S. government, any changes to the rating of the security by the rating agency, and adverse conditions specifically related to the security, among other factors.
If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.
Changes in the ACL on available for sale debt securities are recorded as provision for (or release of) credit loss expense. Losses are charged against the ACL on available for sale debt securities when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available for sale debt securities, which is reported in Accrued interest receivable on the Consolidated Balance Sheet, totaled $1.9 million at June 30, 2020 and is excluded from the estimate of credit losses.
Note 2 – Recent Accounting Pronouncements
The following FASB Accounting Standards Updates (“ASUs”) are divided into pronouncements which have been adopted by the Corporation since January 1, 2019,2020, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of SeptemberJune 30, 2019.2020.
Adopted Pronouncements:
FASB ASU 2016-02 (Topic 842), “Leases”
In February 2016, the FASB established Topic 842, Leases, by issuing ASU 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard became effective for us on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. Management has elected to use the effective date as its date of initial application. Consequently, financial information was not be updated, and the disclosures required under the new standard are not be provided for dates and periods before January 1, 2019.
The new standard provided a number of optional practical expedients in transition. We have elected the ‘package of practical expedients’, which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.
This standard had a material effect on our Consolidated Balance Sheet and related disclosures but did not have a material impact on our Consolidated Statement of Income. The additional assets recorded as a result of adoption had a negative impact on BMBC and Bank capital ratios under current regulatory guidance. On adoption, we had:
•recognized operating lease liabilities of approximately $49.1 million, with corresponding ROU assets of the same amount, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases, and
•derecognized $541 thousand of favorable lease assets, $2.2 million in unfavorable lease liabilities, and $2.5 million in deferred rent, with a corresponding adjustment to the ROU asset for the same amounts.
The new standard also provides practical expedients for an entity’s ongoing accounting. We have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we did not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also have elected the practical expedient to not separate lease and non-lease components for all of our leases.
FASB ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”
Issued in June 2018, ASU 2018-07: Compensation - Stock Compensation (Topic 718), “Improvements to Nonemployee Share-Based Payment Accounting” expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.
The amendments in this update became effective for us January 1, 2019. The adoption did not have an impact on our Consolidated Financial Statements and related disclosures as the Corporation has not historically granted share based payment awards to nonemployees other than to the Corporation’s Board of Directors, who are treated as employees for share-based payment accounting.
FASB ASU 2018-15 (Topic 350), “Intangibles - Goodwill and Other - Internal-Use Software”
Issued in August 2018, ASU 2018-15 provides clarity on capitalizing and expensing implementation costs for cloud computing arrangements in a service contract. If an implementation cost is capitalized, the cost should be recognized over the noncancellable term and periodically assessed for impairment. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. Adoption should be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Corporation early adopted ASU 2018-15 in the third quarter of 2019 and the adoption did not have a material impact on our Consolidated Financial Statements and related disclosures.
Pronouncements Not Yet Effective:
FASB ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”
Issued in June 2016, On January 1, 2020, the Corporation adopted ASU 2016-13 (Topic 326 -326), “Measurement of Credit Losses), commonly referencedLosses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology that is referred to as the Current Expected Credit Loss (“CECL”), current expected credit loss (or CECL) methodology. This standardeliminates the Provision for Loan and Lease Losses (“PLLL”) and Allowance for Loan and Lease Losses (“ALLL”) line items and establishes the Provision for Credit Losses (“PCL”) and Allowance for Credit Losses (“ACL”) line items.
Under the legacy “Incurred Loss” notion, management presents an ALLL intended to represent “probable and estimable” incurred but not yet realizedThe measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to OBS credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on assets in scope. Whenleases. In addition, ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management deems collection of contractual cash flows for an instrument unlikely, a specific reserve is calculated under ASC 310-10. Management further calculates a general reserve for performing assets under ASC 450-20, using historical loss experience and adjustments for several qualitative factors, including current economic conditions. The “Incurred Loss” standard does not allow for projections beyond theintend to sell or believes that it is more likely ‘emergence period’ of losses, or for forward-looking economic conditions; for example, loss contingencies in 2022 arethan not currently presented, nor is the presentation adjusted for the likelihood of future economic condition change.they will be required to sell.
The Corporation adopted ASC 326 using the modified retrospective approach method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. In contrast,conjunction with the future accountingadoption of CECL, the Corporation has revised its segmentation to align with the methodology applied in determining the ACL for loans and leases under CECL, which is based on federal call report codes which classify loans based on the primary collateral supporting the loan. Segmentation prior to the adoption of CECL was based on product type or purpose. As such, certain reclassifications were made to conform prior-period amounts to current period presentation.
Upon adoption, the Corporation's total ACL increased by $4.0 million, or 17.5%, which included an increase in ACL on loans and leases of $3.2 million and an increase in the reserve for OBS exposures, which is included within Other Liabilities on the Consolidated Balance Sheet, of $821 thousand. The increase in the total ACL resulted in a $2.8 million decrease to retained earnings, net of deferred taxes. The overall change in total ACL upon adoption was primarily due to the move to a life of loan reserve estimate as well as methodology changes required under CECL.
The Corporation adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, requires projectionmanagement did not reassess whether PCI assets met the criteria of credit loss over the contract lifetimePCD assets as of the asset,date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $481 thousand of the allowance for prepayment tendencies. Further, management’s specific expectations forcredit losses. The remaining noncredit discount (based on the future economic environment must be incorporated in the projection, with loss expectations to revert to the long-run historical mean after such time as management can make or obtain a reasonable and supportable forecast. This valuation reserveadjusted amortized cost basis) will be established inaccreted into interest income at the ACL and maintained througheffective interest rate as of January 1, 2020.
expense (provision) inThe following table illustrates the PCL. In the event that additional allocation is required to fund the ACL at adoption, investors will see a cumulative-effect (one time) adjustment to retained earnings upon adoption of the new standard. The new CECL standard will become effective for the Corporation for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years.on January 1, 2020:
The Corporation has engaged with a leading vendor to assist in building a model for computing the ACL. Management has completed the data gathering and model selection efforts, including segmentation of the loan and lease portfolio and identification of comparable peer institutions whose loss experience will augment the Bank's own, if deemed necessary. Methodologies expected to be employed include a discounted cash flow method, in which instrument-level cash flows are adjusted for timing (i.e. prepayment) and credit (default and loss) expectations, and for portfolio segments for which insufficient loss experience exists and for which peer-bank data is not representative of the Bank's credit quality, a method utilizing a loss rate applied to the weighted average remaining maturity of the segment, at the pool level. Efforts will continue through the remainder of 2019 to operationalize the practice for establishing the ACL and preparing its presentation.
The Corporation will comply with the new disclosure and presentation requirements enumerated in ASU 2016-13 (and as amended in ASU 2019-04), including presentation of the vintage disclosure organizing certain credit performance data by year of origination/renewal.
Financial statement users should be aware that the ACL is, by design, inherently sensitive to changes in economic outlook, loan and lease portfolio composition, portfolio duration, and other factors. The following factors could lead to a material impact to retained earnings - in either direction - as of the adoption date:
•Increases or decreases to the time period management is able to forecast on a reasonable and supportable basis
•Inclusion or exclusion of forecast factors
•Adverse changes to reasonable and supportable forecasts
•Detectable increases or decreases in the Corporation’s or comparable industry's credit loss parameters
•Deterioration or improvement in the risk profile of the Corporation’s loan and lease portfolio
•Changes in prepayment behavior or other factors impacting loan and lease portfolio duration
•Changes in credit risk through the ordinary course of operations, (e.g. the launch or expansion of higher risk-bearing products)
•Interest rate fluctuations impacting effective yield on certain instruments.
Management cautions that this list is not exhaustive. Further, management may adjust quantitatively-established allocations based on factors that defy numerical modeling, leading to a material adjustment not due to factors specified above. Moreover, interpretations and clarifications of the guidance through the FASB’s ongoing Transition Resource Group efforts may change management’s estimates of the impact. Finally, the impact of accounting treatment changes for establishing the ACL for purchased assets under future acquisitions may effect a cumulative-effect adjustment to retained earnings that proves material.
Ongoing financial statement behavior will be impacted by the standard, regardless of any cumulative-effect adjustment at adoption. Under our currently-contemplated cash flow projection model, assets will originate with a specific allocation for the contract life of that instrument, adjusted for prepayment behavior and probabilistic credit performance expectations to arrive at an expected cash flow projection. All else being equal, as that continues toward its contract maturity, estimates of lifetime credit loss at the instrument level will decrease. Under steady-state conditions, portfolio-segment-level aggregation of management’s expected loss estimates should be stable or track with portfolio-segment growth (contraction and runoff). When management’s expectations of the likely future economic environment change based on reasonable and supportable forecasts, portfolio allocation may increase (decrease) rapidly between periods. The establishment of the ACL will be more responsive to deteriorating (improving) economic conditions than prior establishment of the ALLL, which is based on historical experience and agnostic to future conditions. In dynamic economic environments, users of financial statements should expect expense (income) in the PCL to be concentrated in fewer quarters than was typical for the PLLL. Users of financial statements should be aware that this accounting treatment does not determine the ultimate, realized loss or recovery for assets in scope; ASU 2016-13 impacts timing and possibly the magnitude of the impact on our financial condition and results of operations in dynamic economic environments.
Criteria for establishment of specific reserves are expected to be similar to criteria currently considered when identifying a loan or lease that should be individually evaluated for impairment. Specific reserve impact to instruments meeting the legacy “impairment” criteria are not anticipated to change materially, though the volume of such credits may change before the adoption date due to deterioration (improvement) of portfolio credit quality. Management is evaluating additional criteria to identify instruments for specific evaluation under the future standard’s broader allowable criteria.
Management does not currently plan to implement an accounting election to recognize changes in the ACL valuation account due to timing (prepayment) behavior as interest income (expense). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 1, 2020 | | | | | | | | |
| Pre-CECL Adoption | | Reclassification to CECL Portfolio Segmentation | | Pre-CECL Adoption Portfolio Segmentation | | Post-CECL Adoption Portfolio Segmentation | | Impact of CECL Adoption |
Assets: | | | | | | | | | |
Loans and leases: | | | | | | | | | |
Commercial mortgage | $ | 1,913,430 | | | $ | (1,913,430) | | | $ | — | | | $ | — | | | $ | — | |
CRE - nonowner-occupied | — | | | 1,337,167 | | | 1,337,167 | | | 1,337,464 | | | 297 | |
CRE - owner-occupied | — | | | 527,607 | | | 527,607 | | | 527,607 | | | — | |
Home equity lines of credit | 194,639 | | | 29,623 | | | 224,262 | | | 224,262 | | | — | |
Residential mortgage | 489,903 | | | (489,903) | | | — | | | — | | | — | |
Residential mortgage - first liens | — | | | 706,690 | | | 706,690 | | | 706,843 | | | 153 | |
Residential mortgage - junior liens | — | | | 36,843 | | | 36,843 | | | 36,843 | | | — | |
Construction | 159,867 | | | 42,331 | | | 202,198 | | | 202,198 | | | — | |
Commercial & Industrial | 709,257 | | | (277,030) | | | 432,227 | | | 432,248 | | | 21 | |
Consumer | 57,139 | | | 102 | | | 57,241 | | | 57,241 | | | — | |
Leases | 165,078 | | | — | | | 165,078 | | | 165,088 | | | 10 | |
Total loans and leases | $ | 3,689,313 | | | $ | — | | | $ | 3,689,313 | | | $ | 3,689,794 | | | $ | 481 | |
| | | | | | | | | |
ACL on loans and leases | | | | | | | | | |
Commercial mortgage | $ | 10,434 | | | $ | (10,434) | | | $ | — | | | $ | — | | | $ | — | |
CRE - nonowner-occupied | — | | | 7,960 | | | 7,960 | | | 7,493 | | | (467) | |
CRE - owner-occupied | — | | | 2,825 | | | 2,825 | | | 2,841 | | | 16 | |
Home equity lines of credit | 890 | | | 224 | | | 1,114 | | | 1,068 | | | (46) | |
Residential mortgage | 1,538 | | | (1,538) | | | — | | | — | | | — | |
Residential mortgage - first liens | — | | | 2,501 | | | 2,501 | | | 4,909 | | | 2,408 | |
Residential mortgage - junior liens | — | | | 338 | | | 338 | | | 417 | | | 79 | |
Construction | 997 | | | 233 | | | 1,230 | | | 871 | | | (359) | |
Commercial & Industrial | 6,029 | | | (2,194) | | | 3,835 | | | 3,676 | | | (159) | |
Consumer | 353 | | | 85 | | | 438 | | | 578 | | | 140 | |
Leases | 2,361 | | | — | | | 2,361 | | | 3,955 | | | 1,594 | |
Total ACL on loans and leases | $ | 22,602 | | | $ | — | | | $ | 22,602 | | | $ | 25,808 | | | $ | 3,206 | |
| | | | | | | | | |
Liabilities: | | | | | | | | | |
ACL on OBS credit exposures | $ | 360 | | | $ | — | | | $ | 360 | | | $ | 1,181 | | | $ | 821 | |
| | | | | | | | | |
Total ACL | $ | 22,962 | | | $ | — | | | $ | 22,962 | | | $ | 26,989 | | | $ | 4,027 | |
| | | | | | | | | |
Retained earnings: | | | | | | | | | |
Total increase in ACL | | | | | | | | | $ | 4,027 | |
Balance sheet reclassification | | | | | | | | | (481) | |
Total pre-tax impact | | | | | | | | | 3,546 | |
Tax effect | | | | | | | | | (745) | |
Decrease to retained earnings | | | | | | | | | $ | 2,801 | |
FASB ASU 2017-04 (Topic 350), “Intangibles – Goodwill and Others”
Issued in January 2017, ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 isbecame effective for the Corporation on January 1, 2020, and will follow such guidance in connection with our next annual periods beginning after December 15, 2019 including interim periods within those periods.impairment testing, or prior to that if any such change constitutes a triggering event outside of the quarter from when the annual goodwill impairment test is performed. Management does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.
FASB ASU 2018-12 (Topic 944), “Targeted Improvements to the Accounting for Long-Duration Contracts”
Issued in August 2018, ASU 2018-12 makes targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. Specifically, the ASU is intended to (1) improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows, (2) simplify and improve the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts, (3) simplify the amortization of deferred acquisition costs, and (4) improve the effectiveness of the required disclosures. ASU 2018-12 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application of the amendments is permitted. As an independent insurance agent, the Corporation does not issue insurance contracts. As a result, management does not expect the adoption of this ASU to have an impact on our Consolidated Financial Statements and related disclosures.
FASB ASU 2018-13, “Fair Value Measurement Disclosure Framework”
Issued in August 2018, ASU 2018-13 modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements for fair value measurements. The guidance isbecame effective in annualfor the Corporation on January 1, 2020 and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. Adoption is required on both a prospective and retrospective basis depending on the amendment. Management does not expect the adoption of this ASU todid not have a material impact on our Consolidated Financial Statements and related disclosures.
Pronouncements Not Yet Effective:
FASB ASU 2018-14 (Topic 715), “Compensation-Retirement Benefits - Defined Benefit Plans-General”
Issued in August 2018, ASU 2018-14, modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements to financial statement users. The guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. Use of the retrospective method is required. Management does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.
FASB ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”
Issued in AprilDecember 2019, ASU 2019-04 clarifies certain aspects of2019-12 adds new guidance to simplify accounting for credit losses, hedging activities,income taxes, changes the accounting for certain income tax transactions and makes minor improvements to the codification. The guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. Management does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.
FASB ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
Issued in March 2020, ASU No. 2020-04 provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial instruments (addressed by ASUs 2016-13, 2017-12, and 2016-01, respectively). Thereporting. Specifically, the guidance permits an entity, when certain criteria are met, to consider amendments to estimating expected credit losses (ASU 2016-13), in particular, howcontracts made to comply with reference rate reform to meet the definition of a company considers recoveries and extension options when estimating expected credit losses, are the most relevant to the Corporation. The ASU clarifies that (1) the estimate of expected credit losses should include expected recoveries of financial assets, including recoveries of amounts expectedmodification under GAAP. It further allows hedge accounting to be written offmaintained and those previously written off,a one-time transfer or sale of qualifying held-to-maturity securities. The expedients and (2) that contractual extension or renewal options that are not unconditionally cancellableexceptions provided by the lenderamendments are considered when determining the contractual term over which expected credit losses are measured.permitted to be adopted any time through December 31, 2022 and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for certain optional expedients elected for certain hedging relationships existing as of December 31, 2022. Management is currently evaluating the potential impact of ASU 2019-042020-04 on our Consolidated Financial Statements and related disclosures.
Note 3 – Business Combinations
Domenick & Associates (“Domenick”)
The Bank’s subsidiary, BMT Insurance Advisors, Inc., completed the acquisition of Domenick, a full-service insurance agency established in 1993 and headquartered in Philadelphia, on May 1, 2018. The consideration for the transaction was an aggregate amount in cash not to exceed $1.5 million, of which $750 thousand was paid at closing, $225 thousand was paid during the third quarter of 2019, and 2 remaining contingent cash payments, not to exceed $250 thousand each, are payable in 2020 and 2021, respectively, subject to the attainment of certain targets during the related periods.
The following table details the consideration paid, the initial estimated fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition and the resulting goodwill recorded:
| | | | | |
(dollars in thousands) | |
Consideration paid: | |
Cash paid at closing | $ | 750 | |
Contingent payment liability (present value) | 706 | |
Value of consideration | 1,456 | |
| | |
Assets acquired: | | |
Cash and due from banks | 370 | |
Intangible assets - customer relationships | 779 | |
Premises and equipment | 1 | |
Other assets | 316 | |
Total assets | 1,466 | |
| |
Liabilities assumed: | |
Accounts payable | 657 | |
Other liabilities | 30 | |
Total liabilities | 687 | |
| | |
Net assets acquired | 779 | |
| | |
Goodwill resulting from acquisition of Domenick | $ | 677 | |
As of June 30, 2018, the estimates of the fair value of identifiable assets acquired and liabilities assumed in the Domenick acquisition were final.
Royal Bancshares of Pennsylvania, Inc.
On December 15, 2017, the previously announced merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into BMBC (the “Effective Date”), and the merger of Royal Bank America with and into the Bank (collectively, the “RBPI Merger”), pursuant to the Agreement and Plan of Merger, by and between RBPI and BMBC, dated as of January 30, 2017 (the “Agreement”) was completed. In accordance with the Agreement, the aggregate share consideration paid to RBPI shareholders consisted of 3,101,316 shares of BMBC’s common stock. Shareholders of RBPI received 0.1025 shares of BMBC common stock for each share of RBPI Class A common stock and 0.1179 shares of BMBC common stock for each share of RBPI Class B common stock owned as of the Effective Date of the RBPI Merger, with cash-in-lieu of fractional shares totaling $7 thousand. Holders of in-the-money options to purchase RBPI Class A common stock received cash totaling $112 thousand. In addition, 1,368,040 warrants to purchase Class A common stock of RBPI, valued at $1.9 million were converted to 140,224 warrants to purchase BMBC common stock. In accordance with the acquisition method of accounting, assets acquired and liabilities assumed were preliminarily adjusted to their fair values as of the Effective Date. The excess of consideration paid above the fair value of net assets acquired was recorded as goodwill. This goodwill is not amortizable 0r is it deductible for income tax purposes.
In connection with the RBPI Merger, the consideration paid and the estimated fair value of identifiable assets acquired and liabilities assumed as of the Effective Date, which include the effects of any measurement period adjustments in accordance with ASC 805-10, are summarized in the following table:
| | | | | |
(dollars in thousands) | |
Consideration paid: | |
Common shares issued (3,101,316) | $ | 136,768 | |
Cash in lieu of fractional shares | 7 | |
Cash-out of certain options | 112 | |
Fair value of warrants assumed | 1,853 | |
Value of consideration | 138,740 | |
| | |
Assets acquired: | | |
Cash and due from banks | 17,092 | |
Investment securities available for sale | 121,587 | |
Loans | 566,228 | |
Premises and equipment | 8,264 | |
Deferred income taxes | 34,823 | |
Bank-owned life insurance | 16,550 | |
Core deposit intangible | 4,670 | |
Favorable lease asset | 566 | |
Other assets | 13,611 | |
Total assets | 783,391 | |
| | |
Liabilities assumed: | | |
Deposits | 593,172 | |
FHLB and other long-term borrowings | 59,568 | |
Short-term borrowings | 15,000 | |
Junior subordinated debentures | 21,416 | |
Unfavorable lease liability | 322 | |
Other liabilities | 31,381 | |
Total liabilities | 720,859 | |
| | |
Net assets acquired | 62,532 | |
| | |
Goodwill resulting from acquisition of RBPI | $ | 76,208 | |
As of December 31, 2018, the estimates of the fair value of identifiable assets acquired and liabilities assumed in the RBPI merger were final.
Due Diligence, Merger-Related and Merger Integration Expenses
Due diligence, merger-related and merger integration expenses include consultant costs, investment banker fees, contract breakage fees, retention bonuses for severed employees, salary and wages for redundant staffing involved in the integration of the institutions and bonus accruals for members of the merger integration team. The following table details the costs identified and classified as due diligence, merger-related and merger integration costs for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Advertising | $ | — | | | $ | — | | | $ | — | | | $ | 61 | |
Employee benefits | — | | | — | | | — | | | 271 | |
Occupancy and bank premises | — | | | — | | | — | | | 2,145 | |
Furniture, fixtures, and equipment | — | | | — | | | — | | | 365 | |
Data processing | — | | | 167 | | | — | | | 421 | |
Professional fees | — | | | 193 | | | — | | | 1,450 | |
Salaries and wages | — | | | 29 | | | — | | | 852 | |
Other | — | | | — | | | — | | | 2,196 | |
Total due diligence, merger-related and merger integration expenses | $ | — | | | $ | 389 | | | $ | — | | | $ | 7,761 | |
Note 4 – Investment Securities
The amortized cost and fair value of investment securities available for sale as of SeptemberJune 30, 20192020 and December 31, 20182019 are as follows:
As of SeptemberJune 30, 20192020
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
U.S. Treasury securities | $ | 100 | | | $ | 1 | | | $ | — | | | $ | 101 | |
Obligations of the U.S. government and agencies | 172,565 | | | 449 | | | (261) | | | 172,753 | |
Obligations of state and political subdivisions | 6,319 | | | 9 | | | (1) | | | 6,327 | |
Mortgage-backed securities | 384,286 | | | 4,913 | | | (308) | | | 388,891 | |
Collateralized mortgage obligations | 35,279 | | | 278 | | | (98) | | | 35,459 | |
Other investment securities | 650 | | | — | | | — | | | 650 | |
Total | $ | 599,199 | | | $ | 5,650 | | | $ | (668) | | | $ | 604,181 | |
As of December 31, 2018
| (dollars in thousands) | (dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | (dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
U.S. Treasury securities | U.S. Treasury securities | $ | 200,026 | | | $ | — | | | $ | (13) | | | $ | 200,013 | | U.S. Treasury securities | $ | 100 | | | $ | — | | | $ | — | | | $ | 100 | |
Obligations of the U.S. government and agencies | Obligations of the U.S. government and agencies | 198,604 | | | 107 | | | (2,856) | | | 195,855 | | Obligations of the U.S. government and agencies | 113,046 | | | 1,120 | | | (17) | | | 114,149 | |
Obligations of state and political subdivisions | Obligations of state and political subdivisions | 11,372 | | | 3 | | | (43) | | | 11,332 | | Obligations of state and political subdivisions | 4,553 | | | 30 | | | — | | | 4,583 | |
Mortgage-backed securities | Mortgage-backed securities | 294,076 | | | 554 | | | (4,740) | | | 289,890 | | Mortgage-backed securities | 365,521 | | | 12,056 | | | (373) | | | 377,204 | |
Collateralized mortgage obligations | Collateralized mortgage obligations | 40,150 | | | 141 | | | (1,039) | | | 39,252 | | Collateralized mortgage obligations | 25,171 | | | 702 | | | — | | | 25,873 | |
Corporate bonds | | Corporate bonds | 8,000 | | | 22 | | | — | | | 8,022 | |
Other investment securities | Other investment securities | 1,100 | | | — | | | — | | | 1,100 | | Other investment securities | 650 | | | — | | | — | | | 650 | |
Total | Total | $ | 745,328 | | | $ | 805 | | | $ | (8,691) | | | $ | 737,442 | | Total | $ | 517,041 | | | $ | 13,930 | | | $ | (390) | | | $ | 530,581 | |
As of December 31, 2019
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
U.S. Treasury securities | $ | 500,066 | | | $ | 35 | | | $ | — | | | $ | 500,101 | |
Obligations of the U.S. government and agencies | 102,179 | | | 193 | | | (352) | | | 102,020 | |
Obligations of state and political subdivisions | 5,366 | | | 13 | | | — | | | 5,379 | |
Mortgage-backed securities | 360,977 | | | 5,182 | | | (157) | | | 366,002 | |
Collateralized mortgage obligations | 31,796 | | | 195 | | | (159) | | | 31,832 | |
| | | | | | | |
Other investment securities | 650 | | | — | | | — | | | 650 | |
Total | $ | 1,001,034 | | | $ | 5,618 | | | $ | (668) | | | $ | 1,005,984 | |
The following tables present the aggregate amount of gross unrealized losses as of SeptemberJune 30, 20192020 and December 31, 20182019 on available for sale investment securities classified according to the amount of time those securities have been in a continuous unrealized loss position:
As of SeptemberJune 30, 20192020
| | | Less than 12 Months | | | 12 Months or Longer | | | Total | | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
(dollars in thousands) | (dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | (dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Obligations of the U.S. government and agencies | Obligations of the U.S. government and agencies | $ | 42,541 | | | $ | (222) | | | $ | 9,521 | | | $ | (39) | | | $ | 52,062 | | | $ | (261) | | Obligations of the U.S. government and agencies | $ | 6,005 | | | $ | (17) | | | $ | — | | | $ | — | | | $ | 6,005 | | | $ | (17) | |
Obligations of state and political subdivisions | 963 | | | (1) | | | — | | | — | | | 963 | | | (1) | | |
| Mortgage-backed securities | Mortgage-backed securities | 56,351 | | | (260) | | | 7,048 | | | (48) | | | 63,399 | | | (308) | | Mortgage-backed securities | 32,503 | | | (373) | | | — | | | — | | | 32,503 | | | (373) | |
Collateralized mortgage obligations | 4,625 | | | (14) | | | 11,659 | | | (84) | | | 16,284 | | | (98) | | |
| | Total | Total | $ | 104,480 | | | $ | (497) | | | $ | 28,228 | | | $ | (171) | | | $ | 132,708 | | | $ | (668) | | Total | $ | 38,508 | | | $ | (390) | | | $ | — | | | $ | — | | | $ | 38,508 | | | $ | (390) | |
As of December 31, 20182019
| | | Less than 12 Months | | | 12 Months or Longer | | | Total | | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
(dollars in thousands) | (dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | (dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities | $ | 199,912 | | | $ | (13) | | | $ | — | | | $ | — | | | $ | 199,912 | | | $ | (13) | | |
| Obligations of the U.S. government and agencies | Obligations of the U.S. government and agencies | 12,916 | | | (62) | | | 140,506 | | | (2,794) | | | 153,422 | | | (2,856) | | Obligations of the U.S. government and agencies | $ | 48,497 | | | $ | (315) | | | $ | 7,966 | | | $ | (37) | | | $ | 56,463 | | | $ | (352) | |
Obligations of state and political subdivisions | — | | | — | | | 3,989 | | | (43) | | | 3,989 | | | (43) | | |
| Mortgage-backed securities | Mortgage-backed securities | 43,276 | | | (352) | | | 195,697 | | | (4,388) | | | 238,973 | | | (4,740) | | Mortgage-backed securities | 33,783 | | | (119) | | | 5,977 | | | (38) | | | 39,760 | | | (157) | |
Collateralized mortgage obligations | Collateralized mortgage obligations | 540 | | | (1) | | | 27,077 | | | (1,038) | | | 27,617 | | | (1,039) | | Collateralized mortgage obligations | 6,978 | | | (67) | | | 10,861 | | | (92) | | | 17,839 | | | (159) | |
| Total | Total | $ | 256,644 | | | $ | (428) | | | $ | 367,269 | | | $ | (8,263) | | | $ | 623,913 | | | $ | (8,691) | | Total | $ | 89,258 | | | $ | (501) | | | $ | 24,804 | | | $ | (167) | | | $ | 114,062 | | | $ | (668) | |
Management evaluatesAs of June 30, 2020, the Corporation’s available for sale investment securities consisted of 392 securities, 14 of which were in an unrealized loss position.
As of June 30, 2020, management had not made a decision to sell any of the Corporation’s available for sale investment securities in an unrealized loss position, nor did management consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. Management has evaluated available for sale debt securities that are in an unrealized loss position in order to determine ifand has determined that the decline in fair value is other than temporary. The investment portfolio includes debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, stateunrelated to credit loss and local municipalities and other issuers. All fixed income investment securitiesis related to the change in the Corporation’s investment portfolio are rated as investment-grade or higher.market interest rates since purchase. Factors considered in thethis evaluation include the current economic climate, the length of time andincluded the extent to which the fair value has been belowis less than amortized cost, interest rates andany explicit or implicit guarantees by the bondU.S. government, any changes to the rating of each security. The unrealized losses presented in the tables above are temporary in naturesecurity by the rating agency, and are primarilyadverse conditions specifically related to market interest rates rather than the underlying credit qualitysecurity, among other factors. As of June 30, 2020, approximately 97.0% of the issuersCorporation’s available for sale investment securities were U.S. Treasuries or collateral. Management does not believe that these unrealized losses are other-than-temporary. Management does not intend to sell thesemortgage-backed securities prior to their maturity or collateral mortgage obligations which were issued or guaranteed by U.S. government-sponsored entities and agencies. In addition, none of the recovery of their cost bases and believes that it is more likely than not thatavailable for sale debt securities held by the Corporation will not have to sell these securities prior to their maturity or the recoveryare past due as of their cost bases.June 30, 2020.
As of SeptemberJune 30, 20192020 and December 31, 2018,2019, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.
As of June 30, 2020 and December 31, 2019, securities having a fair value of $123.5$268.2 million and $123.5$156.4 million, respectively, were specifically pledged as collateral for public funds, trust deposits, the Federal Reserve Bank of Philadelphia (the “FRB”) discount window program, Federal Home Loan Bank (“FHLB”) borrowings, collateral requirements in derivative contracts, and other purposes. Advances by the FHLB are collateralized by a blanket lien on non-pledged, mortgage-related loans as part of the Corporation’s borrowing agreement with the FHLB as well as certain securities individually pledged by the Corporation.
The amortized cost and fair value of available for sale investment and mortgage-related securities available for sale as of SeptemberJune 30, 20192020 and December 31, 2018,2019, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | September 30, 2019 | | | December 31, 2018 | | | June 30, 2020 | | | December 31, 2019 | |
(dollars in thousands) | (dollars in thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | (dollars in thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Investment securities: | Investment securities: | | | | | | | | Investment securities: | | | | | | | |
Due in one year or less | Due in one year or less | $ | 4,841 | | | $ | 4,845 | | | $ | 209,129 | | | $ | 209,099 | | Due in one year or less | $ | 2,511 | | | $ | 2,514 | | | $ | 504,851 | | | $ | 504,890 | |
Due after one year through five years | Due after one year through five years | 106,622 | | | 106,547 | | | 180,657 | | | 177,972 | | Due after one year through five years | 11,808 | | | 11,905 | | | 38,710 | | | 38,623 | |
Due after five years through ten years | Due after five years through ten years | 56,598 | | | 56,660 | | | 7,258 | | | 7,268 | | Due after five years through ten years | 102,829 | | | 103,479 | | | 53,598 | | | 53,457 | |
Due after ten years | Due after ten years | 11,573 | | | 11,779 | | | 14,058 | | | 13,961 | | Due after ten years | 9,201 | | | 9,606 | | | 11,102 | | | 11,180 | |
Subtotal | Subtotal | 179,634 | | | 179,831 | | | 411,102 | | | 408,300 | | Subtotal | 126,349 | | | 127,504 | | | 608,261 | | | 608,150 | |
Mortgage-related securities(1) | Mortgage-related securities(1) | 419,565 | | | 424,350 | | | 334,226 | | | 329,142 | | Mortgage-related securities(1) | 390,692 | | | 403,077 | | | 392,773 | | | 397,834 | |
| Total | Total | $ | 599,199 | | | $ | 604,181 | | | $ | 745,328 | | | $ | 737,442 | | Total | $ | 517,041 | | | $ | 530,581 | | | $ | 1,001,034 | | | $ | 1,005,984 | |
(1) Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The amortized cost and fair value of investment securities held to maturity as of SeptemberJune 30, 20192020 and December 31, 20182019 are as follows:
As of SeptemberJune 30, 20192020
| (dollars in thousands) | (dollars in thousands) | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | (dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Mortgage-backed securities | Mortgage-backed securities | $ | 12,947 | | | $ | 82 | | | $ | (14) | | | $ | 13,015 | | Mortgage-backed securities | $ | 12,592 | | | $ | 403 | | | $ | — | | | $ | 12,995 | |
As of December 31, 20182019
| (dollars in thousands) | (dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | (dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Mortgage-backed securities | Mortgage-backed securities | $ | 8,684 | | | $ | — | | | $ | (246) | | | $ | 8,438 | | Mortgage-backed securities | $ | 12,577 | | | $ | 104 | | | $ | (20) | | | $ | 12,661 | |
The Corporation had no held to maturity securities with gross unrealized losses as of June 30, 2020. The following tables presenttable presents the aggregate amount of gross unrealized losses as of September 30, 2019 and December 31, 20182019 on held to maturity securities classified according to the amount of time those securities have been in a continuous unrealized loss position:
As of September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | | | 12 Months or Longer | | | | Total | | |
(dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Mortgage-backed securities | $ | 5,562 | | | $ | (14) | | | $ | — | | | $ | — | | | $ | 5,562 | | | $ | (14) | |
As of December 31, 20182019
| | | Less than 12 Months | | | 12 Months or Longer | | | Total | | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
(dollars in thousands) | (dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | (dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Mortgage-backed securities | Mortgage-backed securities | $ | 1,315 | | | $ | (4) | | | $ | 7,123 | | | $ | (242) | | | $ | 8,438 | | | $ | (246) | | Mortgage-backed securities | $ | 3,159 | | | $ | (20) | | | $ | — | | | $ | — | | | $ | 3,159 | | | $ | (20) | |
As of June 30, 2020, none of the Corporation’s
held to maturity
investment securities were in an unrealized loss position. The Corporation’s held to maturity debt securities consist of mortgage-backed securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, the bank considers the history of credit
losses, current conditions and reasonable and supportable forecasts, which may indicate that the expectation that nonpayment of the amortized cost basis is or continues to be zero, even if the U.S. government were to default. The bank does not record expected credit losses for these securities. Accrued interest receivable on held to maturity debt securities totaled $36 thousand at June 30, 2020 and is excluded from the estimate of credit losses.
The amortized cost and fair value of held to maturity investment securities as of SeptemberJune 30, 20192020 and December 31, 2018,2019, by contractual maturity, are shown below:
| | | September 30, 2019 | | | December 31, 2018 | | | June 30, 2020 | | | December 31, 2019 | |
(dollars in thousands) | (dollars in thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | (dollars in thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Mortgage-backed securities(1) | Mortgage-backed securities(1) | $ | 12,947 | | | $ | 13,015 | | | $ | 8,684 | | | $ | 8,438 | | Mortgage-backed securities(1) | $ | 12,592 | | | $ | 12,995 | | | $ | 12,577 | | | $ | 12,661 | |
(1) Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the Corporation’s investment securities held in trading accounts totaled $8.3$7.8 million and $7.5$8.6 million, respectively, and primarily consist of deferred compensation trust accounts which are invested in listed mutual funds whose diversification is at the discretion of the deferred compensation plan participants and a rabbi trust accountaccounts established to fund certain unqualified pension obligations. Investment securities held in trading accounts are reported at fair value, with adjustments in fair value reported through income. Changes in the fair value of investments held in the deferred compensation trust accounts create corresponding changes in the liability to the deferred compensation plan participants.
Note 54 – Loans and Leases
The loan and lease portfolio consists of loans and leases originated by the Corporation, as well as loans acquired in prior acquisitions. Certain tables in this footnote are presented with a breakdown between originated and acquired loans and leases.
A. The following table details the amortized cost of loans and leases as of the dates indicated:
| Loans and Leases | Loans and Leases | | Loans and Leases | |
| | September 30, 2019 | | | December 31, 2018 | | | June 30, 2020 | | | December 31, 2019 | |
(dollars in thousands) | (dollars in thousands) | Originated | | Acquired | | Total Loans and Leases | | Originated | | Acquired | | Total Loans and Leases | (dollars in thousands) | Originated | | Acquired | | Total Loans and Leases | | Originated | | Acquired | | Total Loans and Leases |
Loans held for sale | Loans held for sale | $ | 5,767 | | | $ | — | | | $ | 5,767 | | | $ | 1,749 | | | $ | — | | | $ | 1,749 | | Loans held for sale | $ | 4,116 | | | $ | — | | | $ | 4,116 | | | $ | 4,249 | | | $ | — | | | $ | 4,249 | |
Real Estate Loans: | | |
Commercial mortgage | 1,499,307 | | | 263,075 | | | 1,762,382 | | | 1,327,822 | | | 329,614 | | | 1,657,436 | | |
Home equity lines and loans | 177,402 | | | 20,628 | | | 198,030 | | | 181,506 | | | 25,845 | | | 207,351 | | |
Residential mortgage | 437,670 | | | 67,634 | | | 505,304 | | | 411,022 | | | 83,333 | | | 494,355 | | |
Real estate loans: | | Real estate loans: | |
Commercial real estate (CRE) - nonowner-occupied | | Commercial real estate (CRE) - nonowner-occupied | 1,252,173 | | | 123,731 | | | 1,375,904 | | | 1,161,815 | | | 175,352 | | | 1,337,167 | |
Commercial real estate (CRE) - owner-occupied | | Commercial real estate (CRE) - owner-occupied | 499,650 | | | 43,038 | | | 542,688 | | | 479,466 | | | 48,141 | | | 527,607 | |
Home equity lines of credit | | Home equity lines of credit | 182,035 | | | 12,732 | | | 194,767 | | | 209,239 | | | 15,023 | | | 224,262 | |
Residential mortgage - 1st liens | | Residential mortgage - 1st liens | 596,597 | | | 98,673 | | | 695,270 | | | 604,884 | | | 101,806 | | | 706,690 | |
Residential mortgage - junior liens | | Residential mortgage - junior liens | 32,083 | | | 1,561 | | | 33,644 | | | 34,903 | | | 1,940 | | | 36,843 | |
Construction | Construction | 151,593 | | | — | | | 151,593 | | | 174,592 | | | 6,486 | | | 181,078 | | Construction | 203,833 | | | 8,541 | | | 212,374 | | | 193,307 | | | 8,891 | | | 202,198 | |
Total real estate loans | Total real estate loans | 2,265,972 | | | 351,337 | | | 2,617,309 | | | 2,094,942 | | | 445,278 | | | 2,540,220 | | Total real estate loans | 2,766,371 | | | 288,276 | | | 3,054,647 | | | 2,683,614 | | | 351,153 | | | 3,034,767 | |
Commercial and industrial | 671,462 | | | 38,346 | | | 709,808 | | | 624,643 | | | 70,941 | | | 695,584 | | |
Commercial & Industrial | | Commercial & Industrial | 451,228 | | | 6,301 | | | 457,529 | | | 425,322 | | | 6,905 | | | 432,227 | |
Consumer | Consumer | 48,030 | | | 2,451 | | | 50,481 | | | 44,099 | | | 2,715 | | | 46,814 | | Consumer | 43,672 | | | 90 | | | 43,762 | | | 54,913 | | | 2,328 | | | 57,241 | |
Leases | Leases | 152,305 | | | 10,844 | | | 163,149 | | | 121,567 | | | 22,969 | | | 144,536 | | Leases | 161,619 | | | 4,608 | | | 166,227 | | | 156,967 | | | 8,111 | | | 165,078 | |
Total portfolio loans and leases | Total portfolio loans and leases | 3,137,769 | | | 402,978 | | | 3,540,747 | | | 2,885,251 | | | 541,903 | | | 3,427,154 | | Total portfolio loans and leases | 3,422,890 | | | 299,275 | | | 3,722,165 | | | 3,320,816 | | | 368,497 | | | 3,689,313 | |
Total loans and leases | Total loans and leases | $ | 3,143,536 | | | $ | 402,978 | | | $ | 3,546,514 | | | $ | 2,887,000 | | | $ | 541,903 | | | $ | 3,428,903 | | Total loans and leases | $ | 3,427,006 | | | $ | 299,275 | | | $ | 3,726,281 | | | $ | 3,325,065 | | | $ | 368,497 | | | $ | 3,693,562 | |
Loans with fixed rates | Loans with fixed rates | $ | 1,275,733 | | | $ | 231,837 | | | $ | 1,507,570 | | | $ | 1,204,070 | | | $ | 323,604 | | | $ | 1,527,674 | | Loans with fixed rates | $ | 1,298,849 | | | $ | 165,053 | | | $ | 1,463,902 | | | $ | 1,251,762 | | | $ | 216,269 | | | $ | 1,468,031 | |
Loans with adjustable or floating rates | Loans with adjustable or floating rates | 1,867,803 | | | 171,141 | | | 2,038,944 | | | 1,682,930 | | | 218,299 | | | 1,901,229 | | Loans with adjustable or floating rates | 2,128,157 | | | 134,222 | | | 2,262,379 | | | 2,073,303 | | | 152,228 | | | 2,225,531 | |
Total loans and leases | Total loans and leases | $ | 3,143,536 | | | $ | 402,978 | | | $ | 3,546,514 | | | $ | 2,887,000 | | | $ | 541,903 | | | $ | 3,428,903 | | Total loans and leases | $ | 3,427,006 | | | $ | 299,275 | | | $ | 3,726,281 | | | $ | 3,325,065 | | | $ | 368,497 | | | $ | 3,693,562 | |
Net deferred loan origination (costs) fees included in the above loan table | $ | (227) | | | $ | — | | | $ | (227) | | | $ | 2,226 | | | $ | — | | | $ | 2,226 | | |
Net deferred loan origination fees (costs) included in the above loan table | | Net deferred loan origination fees (costs) included in the above loan table | $ | 210 | | | $ | — | | | $ | 210 | | | $ | (193) | | | $ | — | | | $ | (193) | |
B. The following table details the components of net investment in leases:
| Components of Net Investment in Leases | Components of Net Investment in Leases | | Components of Net Investment in Leases | |
| | September 30, 2019 | | | December 31, 2018 | | | June 30, 2020 | | | December 31, 2019 | |
(dollars in thousands) | (dollars in thousands) | Originated | | Acquired | | Total Leases | | Originated | | Acquired | | Total Leases | (dollars in thousands) | Originated | | Acquired | | Total Leases | | Originated | | Acquired | | Total Leases |
Minimum lease payments receivable | Minimum lease payments receivable | $ | 169,547 | | | $ | 11,765 | | | $ | 181,312 | | | $ | 135,313 | | | $ | 25,372 | | | $ | 160,685 | | Minimum lease payments receivable | $ | 178,407 | | | $ | 4,874 | | | $ | 183,281 | | | $ | 174,385 | | | $ | 8,753 | | | $ | 183,138 | |
Unearned lease income | Unearned lease income | (23,259) | | | (1,158) | | | (24,417) | | | (19,388) | | | (3,005) | | | (22,393) | | Unearned lease income | (23,182) | | | (346) | | | (23,528) | | | (23,641) | | | (813) | | | (24,454) | |
Initial direct costs and deferred fees | Initial direct costs and deferred fees | 6,017 | | | 237 | | | 6,254 | | | 5,642 | | | 602 | | | 6,244 | | Initial direct costs and deferred fees | 6,394 | | | 80 | | | 6,474 | | | 6,223 | | | 171 | | | 6,394 | |
Total Leases | Total Leases | $ | 152,305 | | | $ | 10,844 | | | $ | 163,149 | | | $ | 121,567 | | | $ | 22,969 | | | $ | 144,536 | | Total Leases | $ | 161,619 | | | $ | 4,608 | | | $ | 166,227 | | | $ | 156,967 | | | $ | 8,111 | | | $ | 165,078 | |
C. The following table details the amortized cost of nonperforming loans and leases as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nonperforming Loans and Leases | | | | | | | | | | | |
| September 30, 2019 | | | | | | December 31, 2018 | | | | |
(dollars in thousands) | Originated | | Acquired | | Total Loans and Leases | | Originated | | Acquired | | Total Loans and Leases |
Commercial mortgage | $ | 3,232 | | | $ | 4,587 | | | $ | 7,819 | | | $ | 435 | | | $ | 2,133 | | | $ | 2,568 | |
Home equity lines and loans | 790 | | | — | | | 790 | | | 3,590 | | | 26 | | | 3,616 | |
Residential mortgage | 192 | | | 109 | | | 301 | | | 2,813 | | | 639 | | | 3,452 | |
| | | | | | | | | | | |
Commercial and industrial | 3,268 | | | 873 | | | 4,141 | | | 1,786 | | | 315 | | | 2,101 | |
Consumer | 32 | | | 43 | | | 75 | | | 45 | | | 63 | | | 108 | |
Leases | 710 | | | 283 | | | 993 | | | 392 | | | 583 | | | 975 | |
Total non-performing loans and leases | $ | 8,224 | | | $ | 5,895 | | | $ | 14,119 | | | $ | 9,061 | | | $ | 3,759 | | | $ | 12,820 | |
D. Purchased Credit-Impaired Loans and Leases
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nonperforming Loans and Leases | | | | | | | | | | | |
| June 30, 2020 | | | | | | December 31, 2019 | | | | |
(dollars in thousands) | Originated | | Acquired | | Total Loans and Leases | | Originated | | Acquired | | Total Loans and Leases |
CRE - nonowner-occupied | $ | 245 | | | $ | — | | | $ | 245 | | | $ | 199 | | | $ | — | | | $ | 199 | |
CRE - owner-occupied | 2,937 | | | 1,109 | | | 4,046 | | | 1,523 | | | 2,636 | | | 4,159 | |
Home equity lines of credit | 741 | | | 174 | | | 915 | | | 636 | | | — | | | 636 | |
Residential mortgage - 1st liens | 899 | | | 13 | | | 912 | | | 630 | | | 1,817 | | | 2,447 | |
Residential mortgage - junior liens | 72 | | | — | | | 72 | | | 83 | | | — | | | 83 | |
| | | | | | | | | | | |
Commercial & Industrial | 1,642 | | | 331 | | | 1,973 | | | 1,799 | | | 381 | | | 2,180 | |
Consumer | 36 | | | — | | | 36 | | | 19 | | | 42 | | | 61 | |
Leases | 190 | | | 29 | | | 219 | | | 747 | | | 136 | | | 883 | |
Total non-performing loans and leases | $ | 6,762 | | | $ | 1,656 | | | $ | 8,418 | | | $ | 5,636 | | | $ | 5,012 | | | $ | 10,648 | |
The outstanding principal balance and related carrying amount of purchased credit-impaired loans, for which the Corporation applies ASC 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality, to account for the interest earned, as of the dates indicated, are as follows:
| | | | | | | | | | | |
Purchased Credit-Impaired Loans and Leases | | | |
(dollars in thousands) | September 30, 2019 | | December 31, 2018 |
Outstanding principal balance | $ | 9,931 | | | $ | 17,904 | |
Carrying amount | 7,578 | | | 12,304 | |
The following table presents changes in the accretable discount on purchased credit-impaired loans, for which the Corporation applies ASC 310-30, for the nine months ended September 30, 2019:
| | | | | |
Roll-Forward of Accretable Discount on Purchased Credit-Impaired Loans and Leases | |
(dollars in thousands) | Accretable Discount |
Balance, December 31, 2018 | $ | 2,697 | |
Accretion | (1,138) | |
Reclassifications from nonaccretable difference | 1,465 | |
Additions/adjustments | — | |
Disposals | (526) | |
Balance, September 30, 2019 | $ | 2,498 | |
E.D. Age Analysis of Past Due Loans and Leases
The following tables present an aging of all portfolio loans and leases as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of All Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of September 30, 2019 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
Commercial mortgage | $ | 445 | | | $ | 867 | | | $ | — | | | $ | 1,312 | | | $ | 1,753,251 | | | $ | 1,754,563 | | | $ | 7,819 | | | $ | 1,762,382 | |
Home equity lines and loans | 452 | | | — | | | — | | | 452 | | | 196,788 | | | 197,240 | | | 790 | | | 198,030 | |
Residential mortgage | 1,504 | | | 336 | | | — | | | 1,840 | | | 503,163 | | | 505,003 | | | 301 | | | 505,304 | |
Construction | — | | | — | | | — | | | — | | | 151,593 | | | 151,593 | | | — | | | 151,593 | |
Commercial and industrial | — | | | 346 | | | — | | | 346 | | | 705,321 | | | 705,667 | | | 4,141 | | | 709,808 | |
Consumer | 97 | | | 86 | | | — | | | 183 | | | 50,223 | | | 50,406 | | | 75 | | | 50,481 | |
Leases | 486 | | | 653 | | | — | | | 1,139 | | | 161,017 | | | 162,156 | | | 993 | | | 163,149 | |
Total portfolio loans and leases | $ | 2,984 | | | $ | 2,288 | | | $ | — | | | $ | 5,272 | | | $ | 3,521,356 | | | $ | 3,526,628 | | | $ | 14,119 | | | $ | 3,540,747 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of All Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of June 30, 2020 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
CRE - nonowner-occupied | $ | 538 | | | $ | 920 | | | $ | — | | | $ | 1,458 | | | $ | 1,374,201 | | | $ | 1,375,659 | | | $ | 245 | | | $ | 1,375,904 | |
CRE - owner-occupied | 995 | | | 501 | | | — | | | 1,496 | | | 537,146 | | | 538,642 | | | 4,046 | | | 542,688 | |
Home equity lines of credit | 214 | | | 22 | | | — | | | 236 | | | 193,616 | | | 193,852 | | | 915 | | | 194,767 | |
Residential mortgage - 1st liens | 4,826 | | | 153 | | | — | | | 4,979 | | | 689,379 | | | 694,358 | | | 912 | | | 695,270 | |
Residential mortgage - junior liens | — | | | — | | | — | | | — | | | 33,572 | | | 33,572 | | | 72 | | | 33,644 | |
Construction | — | | | — | | | — | | | — | | | 212,374 | | | 212,374 | | | — | | | 212,374 | |
Commercial & Industrial | 12 | | | 271 | | | — | | | 283 | | | 455,273 | | | 455,556 | | | 1,973 | | | 457,529 | |
Consumer | 9 | | | 76 | | | — | | | 85 | | | 43,641 | | | 43,726 | | | 36 | | | 43,762 | |
Leases | 1,337 | | | 148 | | | — | | | 1,485 | | | 164,523 | | | 166,008 | | | 219 | | | 166,227 | |
Total portfolio loans and leases | $ | 7,931 | | | $ | 2,091 | | | $ | — | | | $ | 10,022 | | | $ | 3,703,725 | | | $ | 3,713,747 | | | $ | 8,418 | | | $ | 3,722,165 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of All Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of December 31, 2018 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current(1) | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
Commercial mortgage | $ | 821 | | | $ | 251 | | | $ | — | | | $ | 1,072 | | | $ | 1,653,796 | | | $ | 1,654,868 | | | $ | 2,568 | | | $ | 1,657,436 | |
Home equity lines and loans | 92 | | | — | | | — | | | 92 | | | 203,643 | | | 203,735 | | | 3,616 | | | 207,351 | |
Residential mortgage | 2,330 | | | 218 | | | — | | | 2,548 | | | 488,355 | | | 490,903 | | | 3,452 | | | 494,355 | |
Construction | — | | | — | | | — | | | — | | | 181,078 | | | 181,078 | | | — | | | 181,078 | |
Commercial and industrial | 280 | | | 332 | | | — | | | 612 | | | 692,871 | | | 693,483 | | | 2,101 | | | 695,584 | |
Consumer | 35 | | | 5 | | | — | | | 40 | | | 46,666 | | | 46,706 | | | 108 | | | 46,814 | |
Leases | 641 | | | 460 | | | — | | | 1,101 | | | 142,460 | | | 143,561 | | | 975 | | | 144,536 | |
Total portfolio loans and leases | $ | 4,199 | | | $ | 1,266 | | | $ | — | | | $ | 5,465 | | | $ | 3,408,869 | | | $ | 3,414,334 | | | $ | 12,820 | | | $ | 3,427,154 | |
(1) Included as “current” are $3.2 million
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of All Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of December 31, 2019 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
CRE - nonowner-occupied | $ | 184 | | | $ | — | | | $ | — | | | $ | 184 | | | $ | 1,336,784 | | | $ | 1,336,968 | | | $ | 199 | | | $ | 1,337,167 | |
CRE - owner-occupied | 2,462 | | | — | | | — | | | 2,462 | | | 520,986 | | | 523,448 | | | 4,159 | | | 527,607 | |
Home equity lines of credit | 354 | | | 365 | | | — | | | 719 | | | 222,907 | | | 223,626 | | | 636 | | | 224,262 | |
Residential mortgage - 1st liens | 1,639 | | | 388 | | | — | | | 2,027 | | | 702,216 | | | 704,243 | | | 2,447 | | | 706,690 | |
Residential mortgage - junior liens | 116 | | | — | | | — | | | 116 | | | 36,644 | | | 36,760 | | | 83 | | | 36,843 | |
Construction | — | | | — | | | — | | | — | | | 202,198 | | | 202,198 | | | — | | | 202,198 | |
Commercial & Industrial | — | | | — | | | — | | | — | | | 430,047 | | | 430,047 | | | 2,180 | | | 432,227 | |
Consumer | 98 | | | 140 | | | — | | | 238 | | | 56,942 | | | 57,180 | | | 61 | | | 57,241 | |
Leases | 857 | | | 594 | | | — | | | 1,451 | | | 162,744 | | | 164,195 | | | 883 | | | 165,078 | |
Total portfolio loans and leases | $ | 5,710 | | | $ | 1,487 | | | $ | — | | | $ | 7,197 | | | $ | 3,671,468 | | | $ | 3,678,665 | | | $ | 10,648 | | | $ | 3,689,313 | |
The following tables present an aging of originated portfolio loans and leases as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of Originated Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of September 30, 2019 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
Commercial mortgage | $ | 445 | | | $ | 867 | | | $ | — | | | $ | 1,312 | | | $ | 1,494,763 | | | $ | 1,496,075 | | | $ | 3,232 | | | $ | 1,499,307 | |
Home equity lines and loans | 275 | | | — | | | — | | | 275 | | | 176,337 | | | 176,612 | | | 790 | | | 177,402 | |
Residential mortgage | 1,000 | | | 159 | | | — | | | 1,159 | | | 436,319 | | | 437,478 | | | 192 | | | 437,670 | |
Construction | — | | | — | | | — | | | — | | | 151,593 | | | 151,593 | | | — | | | 151,593 | |
Commercial and industrial | — | | | 346 | | | — | | | 346 | | | 667,848 | | | 668,194 | | | 3,268 | | | 671,462 | |
Consumer | 97 | | | 55 | | | — | | | 152 | | | 47,846 | | | 47,998 | | | 32 | | | 48,030 | |
Leases | 447 | | | 470 | | | — | | | 917 | | | 150,678 | | | 151,595 | | | 710 | | | 152,305 | |
Total originated portfolio loans and leases | $ | 2,264 | | | $ | 1,897 | | | $ | — | | | $ | 4,161 | | | $ | 3,125,384 | | | $ | 3,129,545 | | | $ | 8,224 | | | $ | 3,137,769 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of Originated Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of June 30, 2020 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
CRE - nonowner-occupied | $ | 395 | | | $ | — | | | $ | — | | | $ | 395 | | | $ | 1,251,533 | | | $ | 1,251,928 | | | $ | 245 | | | $ | 1,252,173 | |
CRE - owner-occupied | 995 | | | 383 | | | — | | | 1,378 | | | 495,335 | | | 496,713 | | | 2,937 | | | 499,650 | |
Home equity lines of credit | 112 | | | 22 | | | — | | | 134 | | | 181,160 | | | 181,294 | | | 741 | | | 182,035 | |
Residential mortgage - 1st liens | 1,007 | | | 121 | | | — | | | 1,128 | | | 594,570 | | | 595,698 | | | 899 | | | 596,597 | |
Residential mortgage - junior liens | — | | | — | | | — | | | — | | | 32,011 | | | 32,011 | | | 72 | | | 32,083 | |
Construction | — | | | — | | | — | | | — | | | 203,833 | | | 203,833 | | | — | | | 203,833 | |
Commercial & Industrial | 12 | | | 271 | | | — | | | 283 | | | 449,303 | | | 449,586 | | | 1,642 | | | 451,228 | |
Consumer | 9 | | | 76 | | | — | | | 85 | | | 43,551 | | | 43,636 | | | 36 | | | 43,672 | |
Leases | 1,256 | | | 147 | | | — | | | 1,403 | | | 160,026 | | | 161,429 | | | 190 | | | 161,619 | |
Total portfolio loans and leases | $ | 3,786 | | | $ | 1,020 | | | $ | — | | | $ | 4,806 | | | $ | 3,411,322 | | | $ | 3,416,128 | | | $ | 6,762 | | | $ | 3,422,890 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of Originated Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of December 31, 2019 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
CRE - nonowner-occupied | $ | 184 | | | $ | — | | | $ | — | | | $ | 184 | | | $ | 1,161,432 | | | $ | 1,161,616 | | | $ | 199 | | | $ | 1,161,815 | |
CRE - owner-occupied | 2,462 | | | — | | | — | | | 2,462 | | | 475,481 | | | 477,943 | | | 1,523 | | | 479,466 | |
Home equity lines of credit | 254 | | | 365 | | | — | | | 619 | | | 207,984 | | | 208,603 | | | 636 | | | 209,239 | |
Residential mortgage - 1st liens | 890 | | | 102 | | | — | | | 992 | | | 603,262 | | | 604,254 | | | 630 | | | 604,884 | |
Residential mortgage - junior liens | 116 | | | — | | | — | | | 116 | | | 34,704 | | | 34,820 | | | 83 | | | 34,903 | |
Construction | — | | | — | | | — | | | — | | | 193,307 | | | 193,307 | | | — | | | 193,307 | |
Commercial & Industrial | — | | | — | | | — | | | — | | | 423,523 | | | 423,523 | | | 1,799 | | | 425,322 | |
Consumer | 18 | | | 88 | | | — | | | 106 | | | 54,788 | | | 54,894 | | | 19 | | | 54,913 | |
Leases | 781 | | | 566 | | | — | | | 1,347 | | | 154,873 | | | 156,220 | | | 747 | | | 156,967 | |
Total portfolio loans and leases | $ | 4,705 | | | $ | 1,121 | | | $ | — | | | $ | 5,826 | | | $ | 3,309,354 | | | $ | 3,315,180 | | | $ | 5,636 | | | $ | 3,320,816 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of Originated Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of December 31, 2018 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current(1) | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
Commercial mortgage | $ | 816 | | | $ | 251 | | | $ | — | | | $ | 1,067 | | | $ | 1,326,320 | | | $ | 1,327,387 | | | $ | 435 | | | $ | 1,327,822 | |
Home equity lines and loans | 25 | | | — | | | — | | | 25 | | | 177,891 | | | 177,916 | | | 3,590 | | | 181,506 | |
Residential mortgage | 1,545 | | | — | | | — | | | 1,545 | | | 406,664 | | | 408,209 | | | 2,813 | | | 411,022 | |
Construction | — | | | — | | | — | | | — | | | 174,592 | | | 174,592 | | | — | | | 174,592 | |
Commercial and industrial | 280 | | | 332 | | | — | | | 612 | | | 622,245 | | | 622,857 | | | 1,786 | | | 624,643 | |
Consumer | 35 | | | 5 | | | — | | | 40 | | | 44,014 | | | 44,054 | | | 45 | | | 44,099 | |
Leases | 350 | | | 233 | | | — | | | 583 | | | 120,592 | | | 121,175 | | | 392 | | | 121,567 | |
Total originated portfolio loans and leases | $ | 3,051 | | | $ | 821 | | | $ | — | | | $ | 3,872 | | | $ | 2,872,318 | | | $ | 2,876,190 | | | $ | 9,061 | | | $ | 2,885,251 | |
(1) Included as “current” are $2.0 million of loans and leases as of December 31, 2018 which were classified as administratively delinquent. An administratively delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. Management does not consider these loans to be delinquent.
The following tables present an aging of acquired portfolio loans and leases as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of Acquired Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of September 30, 2019 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
Commercial mortgage | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 258,488 | | | $ | 258,488 | | | $ | 4,587 | | | $ | 263,075 | |
Home equity lines and loans | 177 | | | — | | | — | | | 177 | | | 20,451 | | | 20,628 | | | — | | | 20,628 | |
Residential mortgage | 504 | | | 177 | | | — | | | 681 | | | 66,844 | | | 67,525 | | | 109 | | | 67,634 | |
| | | | | | | | | | | | | | | |
Commercial and industrial | — | | | — | | | — | | | — | | | 37,473 | | | 37,473 | | | 873 | | | 38,346 | |
Consumer | — | | | 31 | | | — | | | 31 | | | 2,377 | | | 2,408 | | | 43 | | | 2,451 | |
Leases | 39 | | | 183 | | | — | | | 222 | | | 10,339 | | | 10,561 | | | 283 | | | 10,844 | |
Total acquired portfolio loans and leases | $ | 720 | | | $ | 391 | | | $ | — | | | $ | 1,111 | | | $ | 395,972 | | | $ | 397,083 | | | $ | 5,895 | | | $ | 402,978 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of Acquired Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of June 30, 2020 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
CRE - nonowner-occupied | $ | 143 | | | $ | 920 | | | $ | — | | | $ | 1,063 | | | $ | 122,668 | | | $ | 123,731 | | | $ | — | | | $ | 123,731 | |
CRE - owner-occupied | — | | | 118 | | | — | | | 118 | | | 41,811 | | | 41,929 | | | 1,109 | | | 43,038 | |
Home equity lines of credit | 102 | | | — | | | — | | | 102 | | | 12,456 | | | 12,558 | | | 174 | | | 12,732 | |
Residential mortgage - 1st liens | 3,819 | | | 32 | | | — | | | 3,851 | | | 94,809 | | | 98,660 | | | 13 | | | 98,673 | |
Residential mortgage - junior liens | — | | | — | | | — | | | — | | | 1,561 | | | 1,561 | | | — | | | 1,561 | |
Construction | — | | | — | | | — | | | — | | | 8,541 | | | 8,541 | | | — | | | 8,541 | |
Commercial & Industrial | — | | | — | | | — | | | — | | | 5,970 | | | 5,970 | | | 331 | | | 6,301 | |
Consumer | — | | | — | | | — | | | — | | | 90 | | | 90 | | | — | | | 90 | |
Leases | 81 | | | 1 | | | — | | | 82 | | | 4,497 | | | 4,579 | | | 29 | | | 4,608 | |
Total portfolio loans and leases | $ | 4,145 | | | $ | 1,071 | | | $ | — | | | $ | 5,216 | | | $ | 292,403 | | | $ | 297,619 | | | $ | 1,656 | | | $ | 299,275 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of Acquired Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of December 31, 2018 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current(1) | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
Commercial mortgage | $ | 5 | | | $ | — | | | $ | — | | | $ | 5 | | | $ | 327,476 | | | $ | 327,481 | | | $ | 2,133 | | | $ | 329,614 | |
Home equity lines and loans | 67 | | | — | | | — | | | 67 | | | 25,752 | | | 25,819 | | | 26 | | | 25,845 | |
Residential mortgage | 785 | | | 218 | | | — | | | 1,003 | | | 81,691 | | | 82,694 | | | 639 | | | 83,333 | |
Construction | — | | | — | | | — | | | — | | | 6,486 | | | 6,486 | | | — | | | 6,486 | |
Commercial and industrial | — | | | — | | | — | | | — | | | 70,626 | | | 70,626 | | | 315 | | | 70,941 | |
Consumer | — | | | — | | | — | | | — | | | 2,652 | | | 2,652 | | | 63 | | | 2,715 | |
Leases | 291 | | | 227 | | | — | | | 518 | | | 21,868 | | | 22,386 | | | 583 | | | 22,969 | |
Total acquired portfolio loans and leases | $ | 1,148 | | | $ | 445 | | | $ | — | | | $ | 1,593 | | | $ | 536,551 | | | $ | 538,144 | | | $ | 3,759 | | | $ | 541,903 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status of Acquired Portfolio Loans and Leases | | | | | | | | | | | | | | | |
| Accruing Loans and Leases | | | | | | | | | | | | | | |
As of December 31, 2019 | 30 – 59 Days Past Due | | 60 – 89 Days Past Due | | Over 89 Days Past Due | | Total Past Due | | Current | | Total Accruing Loans and Leases | | Nonaccrual Loans and Leases | | Total Loans and Leases |
(dollars in thousands) | | | | | | | | | | | | | | | |
CRE - nonowner-occupied | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 175,352 | | | $ | 175,352 | | | $ | — | | | $ | 175,352 | |
CRE - owner-occupied | — | | | — | | | — | | | — | | | 45,505 | | | 45,505 | | | 2,636 | | | 48,141 | |
Home equity lines of credit | 100 | | | — | | | — | | | 100 | | | 14,923 | | | 15,023 | | | — | | | 15,023 | |
Residential mortgage - 1st liens | 749 | | | 286 | | | — | | | 1,035 | | | 98,954 | | | 99,989 | | | 1,817 | | | 101,806 | |
Residential mortgage - junior liens | — | | | — | | | — | | | — | | | 1,940 | | | 1,940 | | | — | | | 1,940 | |
Construction | — | | | — | | | — | | | — | | | 8,891 | | | 8,891 | | | — | | | 8,891 | |
Commercial & Industrial | — | | | — | | | — | | | — | | | 6,524 | | | 6,524 | | | 381 | | | 6,905 | |
Consumer | 80 | | | 52 | | | — | | | 132 | | | 2,154 | | | 2,286 | | | 42 | | | 2,328 | |
Leases | 76 | | | 28 | | | — | | | 104 | | | 7,871 | | | 7,975 | | | 136 | | | 8,111 | |
Total portfolio loans and leases | $ | 1,005 | | | $ | 366 | | | $ | — | | | $ | 1,371 | | | $ | 362,114 | | | $ | 363,485 | | | $ | 5,012 | | | $ | 368,497 | |
E. Allowance for Credit Losses (“ACL”) on Loan and Leases
The ACL on loans and leases represents management’s estimate of all expected credit losses over the expected contractual life of our existing portfolio loans and leases. Determining the appropriateness of the ACL on loans and leases is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACL on loans and leases in those future periods.
The expense for credit loss recorded through earnings is the amount necessary to maintain the ACL on loans and leases at the amount of expected credit losses inherent within the loans and leases portfolio. The amount of expense and the corresponding level of ACL on loans and leases are based on management’s evaluation of the collectability of the loan and lease portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. The ACL on loans and leases, as reported in our Consolidated Statements of Financial Condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan and lease amounts, net of recoveries.
Management employs a disciplined process and methodology to establish the ACL on loans and leases that has two basic components: first, an asset-specific component involving individual loans and leases that do not share risk characteristics with other loans and leases
(1) Included as “current” are $1.2 millionand the measurement of expected credit losses for such individual loans; and second, a collective (pooled) component for estimated expected credit losses for pools of loans and leases as of December 31, 2018 which were classified as administratively delinquent. An administratively delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. Management does not consider these loans to be delinquent.
F. Allowance for Loan and Lease Losses (the “Allowance”)
The following tables detail the roll-forward of the Allowance for the three and nine months ended September 30, 2019 and 2018:that share similar risk characteristics.
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Roll-Forward of Allowance for Loan and Lease Losses | | | | | | | | | | | | | | | |
(dollars in thousands) | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
Balance, December 31, 2018 | $ | 7,567 | | | $ | 1,003 | | | $ | 1,813 | | | $ | 1,485 | | | $ | 5,461 | | | $ | 229 | | | $ | 1,868 | | | $ | 19,426 | |
Charge-offs | (2,047) | | | (315) | | | (675) | | | — | | | (457) | | | (427) | | | (1,848) | | | (5,769) | |
Recoveries | 21 | | | 110 | | | 14 | | | 3 | | | 77 | | | 33 | | | 580 | | | 838 | |
Provision for loan and lease losses | 3,024 | | | 171 | | | 694 | | | (481) | | | 757 | | | 421 | | | 1,696 | | | 6,282 | |
Balance, September 30, 2019 | $ | 8,565 | | | $ | 969 | | | $ | 1,846 | | | $ | 1,007 | | | $ | 5,838 | | | $ | 256 | | | $ | 2,296 | | | $ | 20,777 | |
Based upon this methodology, management establishes an asset-specific ACL on loans and leases that do not share risk characteristics with other loans and leases based on the amount of expected credit losses calculated on those loans and leases and charges off amounts determined to be uncollectible. Factors we consider in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.
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Roll-Forward of Allowance for Loan and Lease Losses | | | | | | | | | | | | | | | |
(dollars in thousands) | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
Balance, June 30, 2019 | $ | 8,958 | | | $ | 1,043 | | | $ | 1,893 | | | $ | 1,086 | | | $ | 5,700 | | | $ | 253 | | | $ | 2,249 | | | $ | 21,182 | |
Charge-offs | (660) | | | — | | | (4) | | | — | | | (31) | | | (196) | | | (657) | | | (1,548) | |
Recoveries | 4 | | | 22 | | | 11 | | | 1 | | | 23 | | | 15 | | | 148 | | | 224 | |
Provision for loan and lease losses | 263 | | | (96) | | | (54) | | | (80) | | | 146 | | | 184 | | | 556 | | | 919 | |
Balance, September 30, 2019 | $ | 8,565 | | | $ | 969 | | | $ | 1,846 | | | $ | 1,007 | | | $ | 5,838 | | | $ | 256 | | | $ | 2,296 | | | $ | 20,777 | |
When a loan or lease does not share risk characteristics with other loans or leases, management measures expected credit loss as the difference between the amortized cost basis in the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate except that, for collateral dependent loans, credit loss is measured as the difference between the amortized cost basis in the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. If the calculated expected credit loss is determined to be permanent, fixed or nonrecoverable, the credit loss portion of the loan will be charged off against the ACL on loans and leases. Loans and leases designated as having significantly increased credit risk are generally placed on nonaccrual and remain in that status until all principal and interest payments are current and the prospects for future payments in accordance with the loan agreement are reasonably assured, at which point the loan is returned to accrual status.
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Roll-Forward of Allowance for Loan and Lease Losses | | | | | | | | | | | | | | | |
(dollars in thousands) | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
Balance, December 31, 2017 | $ | 7,550 | | | $ | 1,086 | | | $ | 1,926 | | | $ | 937 | | | $ | 5,038 | | | $ | 246 | | | $ | 742 | | | $ | 17,525 | |
Charge-offs | (74) | | | (225) | | | (42) | | | — | | | (1,069) | | | (165) | | | (2,416) | | | (3,991) | |
Recoveries | 8 | | | 1 | | | 55 | | | 1 | | | 17 | | | 5 | | | 232 | | | 319 | |
Provision for loan and lease losses | 60 | | | 30 | | | (121) | | | 303 | | | 1,319 | | | 232 | | | 3,008 | | | 4,831 | |
Balance, September 30, 2018 | $ | 7,544 | | | $ | 892 | | | $ | 1,818 | | | $ | 1,241 | | | $ | 5,305 | | | $ | 318 | | | $ | 1,566 | | | $ | 18,684 | |
In estimating the component of the ACL on loans and leases that share common risk characteristics, loans and leases are segregated into portfolio segments based on federal call report codes which classify loans and leases based on the primary collateral supporting the loan and lease. Methods utilized by management to estimate expected credit losses include a DCF methodology that discounts instrument-level contractual cash flows, adjusted for prepayments and curtailments, incorporating loss expectations, and a WARM methodology which contemplates expected losses at a pool-level, utilizing historic loss information.
Under both methodologies, management estimates the ACL on loans and leases using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. After the end of the reasonable and supportable forecast period, the loss rates revert to the long-term mean loss rate, or in the case of an input-driven predictive method, the long-term mean of the input, using a reversion period where applicable. Historical credit loss experience, including examination of loss experience at representative peer institutions when the Corporation’s first-party loss history does not result in estimations that are meaningful to users of the Corporation’s Consolidated Financial Statements, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are considered for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.
The DCF methodology uses inputs of current and forecasted macroeconomic indicators to predict future loss rates. The current macroeconomic indicator utilized by the bank is the Pennsylvania unemployment rate. In building the CECL model utilized in the DCF methodology, a correlation between this indicator and historic loss levels was developed, enabling a prediction of future loss rates related to future Pennsylvania unemployment rates. The portfolio segments utilizing the DCF methodology as of June 30, 2020 included: CRE - owner-occupied and nonowner-occupied loans, home equity lines of credit, residential mortgages (first and junior liens), construction loans and consumer loans.
The WARM methodology uses combined historic loss rates for the Bank and peer institutions, if necessary, gathered from Call Report filings. The selected period for which historic loss rates are used is dependent on management's evaluation of current conditions and expectations of future loss conditions. The portfolio segments utilizing the WARM methodology as of June 30, 2020 included commercial and industrial loans and leases.
For the three months ended June 30, 2020, there was a significant change in the economic outlook impacting the ACL on loans and leases. Our CECL model included a sharp deterioration in the Pennsylvania unemployment rate, to levels observed during the last recessionary period, projected to be sustained in the third and fourth quarters of 2020, with a reversion to a long-term 15-year average.
In addition to these assumptions, management applied additional qualitative factors related to the loss mitigation expected to be provided by the various governmental aid programs, such as increased unemployment benefits, stimulus payments, and the SBA's Paycheck Protection Program, as well as the Bank's loan payment deferral programs being offered to borrowers which provide a three- or six-month payment deferral to borrowers affected by the COVID-19 pandemic. These qualitative factors were applied to all segments of the portfolio except the construction segment and the retail and hospitality sectors of the nonowner-occupied CRE segment, due to the significant expected impact on these specific segments and sectors from the economic shutdown, such as government mandated stay at home orders and closure of non-essential businesses.
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Roll-Forward of Allowance for Loan and Lease Losses | | | | | | | | | | | | | | | |
(dollars in thousands) | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
Balance, June 30, 2018 | $ | 8,033 | | | $ | 933 | | | $ | 1,933 | | | $ | 1,158 | | | $ | 5,672 | | | $ | 289 | | | $ | 1,380 | | | $ | 19,398 | |
Charge-offs | (58) | | | — | | | (42) | | | — | | | (319) | | | (73) | | | (1,068) | | | (1,560) | |
Recoveries | 2 | | | — | | | 54 | | | — | | | 16 | | | 2 | | | 108 | | | 182 | |
Provision for loan and lease losses | (433) | | | (41) | | | (127) | | | 83 | | | (64) | | | 100 | | | 1,146 | | | 664 | |
Balance, September 30, 2018 | $ | 7,544 | | | $ | 892 | | | $ | 1,818 | | | $ | 1,241 | | | $ | 5,305 | | | $ | 318 | | | $ | 1,566 | | | $ | 18,684 | |
The following tables detailpresent the allocation ofactivity in the Allowance for all portfolioACL on loans and leases, by portfolio segment, basedfor the three and six months ended June 30, 2020 and 2019:
Roll-Forward of ACL on the methodology used to evaluate the loansLoans and leases for impairment as of September 30, 2019 and December 31, 2018:Leases
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(dollars in thousands) | CRE - nonowner-occupied | | CRE - owner-occupied | | Home equity lines of credit | | Residential mortgage - 1st liens | | Residential mortgage - junior liens | | Construction | | Commercial & Industrial | | Consumer | | Leases | | Total |
Balance, March 31, 2020 | $ | 13,329 | | | $ | 4,192 | | | $ | 2,748 | | | $ | 8,316 | | | $ | 517 | | | $ | 6,984 | | | $ | 8,734 | | | $ | 341 | | | $ | 8,909 | | | $ | 54,070 | |
Loans and leases charged-off | — | | | (1,234) | | | — | | | (556) | | | — | | | — | | | (522) | | | (296) | | | (1,443) | | | (4,051) | |
Recoveries collected | 4 | | | — | | | 4 | | | 136 | | | — | | | 1 | | | 22 | | | 57 | | | 428 | | | 652 | |
PCL on loans and leases | 1,998 | | | 2,125 | | | (1,125) | | | 302 | | | 4 | | | (924) | | | (246) | | | 338 | | | 1,831 | | | 4,303 | |
Balance, June 30, 2020 | $ | 15,331 | | | $ | 5,083 | | | $ | 1,627 | | | $ | 8,198 | | | $ | 521 | | | $ | 6,061 | | | $ | 7,988 | | | $ | 440 | | | $ | 9,725 | | | $ | 54,974 | |
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Allocation of Allowance by Impairment Evaluation Method - All Loans and Leases | | | | | | | | | | | | | | | |
As of September 30, 2019 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Allowance on loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — | | | $ | 167 | | | $ | 259 | | | $ | — | | | $ | — | | | $ | 35 | | | $ | 41 | | | $ | 502 | |
Collectively evaluated for impairment | 8,565 | | | 802 | | | 1,587 | | | 1,007 | | | 5,838 | | | 221 | | | 2,255 | | | 20,275 | |
Purchased credit-impaired(1) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 8,565 | | | $ | 969 | | | $ | 1,846 | | | $ | 1,007 | | | $ | 5,838 | | | $ | 256 | | | $ | 2,296 | | | $ | 20,777 | |
Roll-Forward of ACL on Loans and Leases(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | CRE - nonowner-occupied | | CRE - owner-occupied | | Home equity lines of credit | | Residential mortgage - 1st liens | | Residential mortgage - junior liens | | Construction | | Commercial & Industrial | | Consumer | | Leases | | Total |
Balance, December 31, 2019 Prior to Adoption of ASC 326 | $ | 7,960 | | | $ | 2,825 | | | $ | 1,114 | | | $ | 2,501 | | | $ | 338 | | | $ | 1,230 | | | $ | 3,835 | | | $ | 438 | | | $ | 2,361 | | | $ | 22,602 | |
Impact of Adopting ASC 326 | (467) | | | 16 | | | (46) | | | 2,408 | | | 79 | | | (359) | | | (159) | | | 140 | | | 1,594 | | | 3,206 | |
Loans and leases charged-off | — | | | (1,233) | | | (114) | | | (1,284) | | | — | | | — | | | (1,149) | | | (590) | | | (4,069) | | | (8,439) | |
Recoveries collected | 6 | | | — | | | 4 | | | 137 | | | — | | | 2 | | | 37 | | | 90 | | | 692 | | | 968 | |
PCL on loans and leases | 7,832 | | | 3,475 | | | 669 | | | 4,436 | | | 104 | | | 5,188 | | | 5,424 | | | 362 | | | 9,147 | | | 36,637 | |
Balance, June 30, 2020 | $ | 15,331 | | | $ | 5,083 | | | $ | 1,627 | | | $ | 8,198 | | | $ | 521 | | | $ | 6,061 | | | $ | 7,988 | | | $ | 440 | | | $ | 9,725 | | | $ | 54,974 | |
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Allocation of Allowance by Impairment Evaluation Method - All Loans and Leases | | | | | | | | | | | | | | | |
As of December 31, 2018 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Allowance on loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — | | | $ | 162 | | | $ | 272 | | | $ | — | | | $ | — | | | $ | 28 | | | $ | — | | | $ | 462 | |
Collectively evaluated for impairment | 7,567 | | | 841 | | | 1,541 | | | 1,485 | | | 5,461 | | | 201 | | | 1,868 | | | 18,964 | |
Purchased credit-impaired(1) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 7,567 | | | $ | 1,003 | | | $ | 1,813 | | | $ | 1,485 | | | $ | 5,461 | | | $ | 229 | | | $ | 1,868 | | | $ | 19,426 | |
Roll-Forward of ACL on Loans and Leases
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(dollars in thousands) | CRE - nonowner-occupied | | CRE - owner-occupied | | Home equity lines of credit | | Residential mortgage - 1st liens | | Residential mortgage - junior liens | | Construction | | Commercial & Industrial | | Consumer | | Leases | | Total |
Balance, March 31, 2019 | $ | 6,308 | | | $ | 2,740 | | | $ | 1,222 | | | $ | 2,634 | | | $ | 350 | | | $ | 1,372 | | | $ | 3,507 | | | $ | 439 | | | $ | 2,044 | | | $ | 20,616 | |
Loans and leases charged-off | — | | | — | | | (211) | | | (341) | | | (56) | | | — | | | (20) | | | (127) | | | (624) | | | (1,379) | |
Recoveries collected | 5 | | | — | | | 83 | | | 2 | | | 4 | | | 1 | | | 37 | | | 7 | | | 179 | | | 318 | |
PCL on loans and leases | 520 | | | (80) | | | 158 | | | 349 | | | 45 | | | (93) | | | 58 | | | 20 | | | 650 | | | 1,627 | |
Balance, June 30, 2019 | $ | 6,833 | | | $ | 2,660 | | | $ | 1,252 | | | $ | 2,644 | | | $ | 343 | | | $ | 1,280 | | | $ | 3,582 | | | $ | 339 | | | $ | 2,249 | | | $ | 21,182 | |
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Roll-Forward of ACL on Loans and Leases | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | CRE - nonowner-occupied | | CRE - owner-occupied | | Home equity lines of credit | | Residential mortgage - 1st liens | | Residential mortgage - junior liens | | Construction | | Commercial & Industrial | | Consumer | | Leases | | Total |
Balance, December 31, 2018 | $ | 5,856 | | | $ | 2,454 | | | $ | 1,140 | | | $ | 2,561 | | | $ | 364 | | | $ | 1,715 | | | $ | 3,166 | | | $ | 303 | | | $ | 1,867 | | | $ | 19,426 | |
Loans and leases charged-off | (1,515) | | | — | | | (313) | | | (682) | | | (56) | | | — | | | (217) | | | (247) | | | (1,192) | | | (4,222) | |
Recoveries collected | 7 | | | — | | | 84 | | | 15 | | | 4 | | | 2 | | | 45 | | | 25 | | | 433 | | | 615 | |
PCL on loans and leases | 2,485 | | | 206 | | | 341 | | | 750 | | | 31 | | | (437) | | | 588 | | | 258 | | | 1,141 | | | 5,363 | |
Balance, June 30, 2019 | $ | 6,833 | | | $ | 2,660 | | | $ | 1,252 | | | $ | 2,644 | | | $ | 343 | | | $ | 1,280 | | | $ | 3,582 | | | $ | 339 | | | $ | 2,249 | | | $ | 21,182 | |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
The following tables detail the carrying value for all portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of September 30, 2019 and December 31, 2018:
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Carrying Value of All Portfolio Loans and Leases by Impairment Evaluation Method | | | | | | | | | | | | | | | |
As of September 30, 2019 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Carrying value of loans and leases: | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 7,819 | | | $ | 2,353 | | | $ | 3,119 | | | $ | — | | | $ | 4,529 | | | $ | 100 | | | $ | 1,268 | | | $ | 19,188 | |
Collectively evaluated for impairment | 1,747,505 | | | 195,159 | | | 502,183 | | | 151,593 | | | 705,279 | | | 50,381 | | | 161,881 | | | 3,513,981 | |
Purchased credit-impaired(1) | 7,058 | | | 518 | | | 2 | | | — | | | — | | | — | | | — | | | 7,578 | |
Total | $ | 1,762,382 | | | $ | 198,030 | | | $ | 505,304 | | | $ | 151,593 | | | $ | 709,808 | | | $ | 50,481 | | | $ | 163,149 | | | $ | 3,540,747 | |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
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Carrying Value of All Portfolio Loans and Leases by Impairment Evaluation Method | | | | | | | | | | | | | | | |
As of December 31, 2018 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Carrying value of loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 7,008 | | | $ | 4,998 | | | $ | 6,608 | | | $ | — | | | $ | 2,629 | | | $ | 134 | | | $ | — | | | $ | 21,377 | |
Collectively evaluated for impairment | 1,642,117 | | | 201,841 | | | 487,747 | | | 178,673 | | | 691,879 | | | 46,680 | | | 144,536 | | | 3,393,473 | |
Purchased credit-impaired(1) | 8,311 | | | 512 | | | — | | | 2,405 | | | 1,076 | | | — | | | — | | | 12,304 | |
Total | $ | 1,657,436 | | | $ | 207,351 | | | $ | 494,355 | | | $ | 181,078 | | | $ | 695,584 | | | $ | 46,814 | | | $ | 144,536 | | | $ | 3,427,154 | |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
The following tables detail the allocation of the Allowance for originated portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of September 30, 2019 and December 31, 2018:
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Allocation of Allowance by Impairment Evaluation Method - Originated Loans and Leases | | | | | | | | | | | | | | | |
As of September 30, 2019 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Allowance on loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — | | | $ | 167 | | | $ | 164 | | | $ | — | | | $ | — | | | $ | 35 | | | $ | 34 | | | $ | 400 | |
Collectively evaluated for impairment | 8,565 | | | 802 | | | 1,587 | | | 1,007 | | | 5,838 | | | 221 | | | 2,255 | | | 20,275 | |
Total | $ | 8,565 | | | $ | 969 | | | $ | 1,751 | | | $ | 1,007 | | | $ | 5,838 | | | $ | 256 | | | $ | 2,289 | | | $ | 20,675 | |
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Allocation of Allowance by Impairment Evaluation Method - Originated Loans and Leases | | | | | | | | | | | | | | | |
As of December 31, 2018 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Allowance on loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — | | | $ | 162 | | | $ | 175 | | | $ | — | | | $ | — | | | $ | 28 | | | $ | — | | | $ | 365 | |
Collectively evaluated for impairment | 7,567 | | | 841 | | | 1,541 | | | 1,485 | | | 5,461 | | | 201 | | | 1,868 | | | 18,964 | |
Total | $ | 7,567 | | | $ | 1,003 | | | $ | 1,716 | | | $ | 1,485 | | | $ | 5,461 | | | $ | 229 | | | $ | 1,868 | | | $ | 19,329 | |
The following tables detail the carrying value for originated portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of September 30, 2019 and December 31, 2018:
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Carrying Value of Originated Portfolio Loans and Leases by Impairment Evaluation Method | | | | | | | | | | | | | | | |
As of September 30, 2019 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Carrying value of loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 3,232 | | | $ | 2,353 | | | $ | 2,366 | | | $ | — | | | $ | 3,656 | | | $ | 57 | | | $ | 863 | | | $ | 12,527 | |
Collectively evaluated for impairment | 1,496,075 | | | 175,049 | | | 435,304 | | | 151,593 | | | 667,806 | | | 47,973 | | | 151,442 | | | 3,125,242 | |
Total | $ | 1,499,307 | | | $ | 177,402 | | | $ | 437,670 | | | $ | 151,593 | | | $ | 671,462 | | | $ | 48,030 | | | $ | 152,305 | | | $ | 3,137,769 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Carrying Value of Originated Portfolio Loans and Leases by Impairment Evaluation Method | | | | | | | | | | | | | | | |
As of December 31, 2018 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Carrying value of loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 4,874 | | | $ | 4,972 | | | $ | 5,106 | | | $ | — | | | $ | 2,314 | | | $ | 71 | | | $ | — | | | $ | 17,337 | |
Collectively evaluated for impairment | 1,322,948 | | | 176,534 | | | 405,916 | | | 174,592 | | | 622,329 | | | 44,028 | | | 121,567 | | | 2,867,914 | |
Total | $ | 1,327,822 | | | $ | 181,506 | | | $ | 411,022 | | | $ | 174,592 | | | $ | 624,643 | | | $ | 44,099 | | | $ | 121,567 | | | $ | 2,885,251 | |
The following tables detail the allocation of the Allowance for acquired portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of September 30, 2019 and December 31, 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allocation of Allowance by Impairment Evaluation Method - Acquired Loans and Leases | | | | | | | | | | | | | | | |
As of September 30, 2019 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Allowance on loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — | | | $ | — | | | $ | 95 | | | $ | — | | | $ | — | | | $ | — | | | $ | 7 | | | $ | 102 | |
Collectively evaluated for impairment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Purchased credit-impaired(1) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | — | | | $ | — | | | $ | 95 | | | $ | — | | | $ | — | | | $ | — | | | $ | 7 | | | $ | 102 | |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allocation of Allowance by Impairment Evaluation Method - Acquired Loans and Leases | | | | | | | | | | | | | | | |
As of December 31, 2018 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Allowance on loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — | | | $ | — | | | $ | 97 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 97 | |
Collectively evaluated for impairment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Purchased credit-impaired(1) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | — | | | $ | — | | | $ | 97 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 97 | |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
The following tables detail the carrying value for acquired portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of September 30, 2019 and December 31, 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Carrying Value of Acquired Portfolio Loans and Leases by Impairment Evaluation Method | | | | | | | | | | | | | | | |
As of September 30, 2019 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Carrying value of loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 4,587 | | | $ | — | | | $ | 753 | | | $ | — | | | $ | 873 | | | $ | 43 | | | $ | 405 | | | $ | 6,661 | |
Collectively evaluated for impairment | 251,430 | | | 20,110 | | | 66,879 | | | — | | | 37,473 | | | 2,408 | | | 10,439 | | | 388,739 | |
Purchased credit-impaired(1) | 7,058 | | | 518 | | | 2 | | | — | | | — | | | — | | | — | | | 7,578 | |
Total | $ | 263,075 | | | $ | 20,628 | | | $ | 67,634 | | | $ | — | | | $ | 38,346 | | | $ | 2,451 | | | $ | 10,844 | | | $ | 402,978 | |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Carrying Value of Acquired Portfolio Loans and Leases by Impairment Evaluation Method | | | | | | | | | | | | | | | |
As of December 31, 2018 | Commercial Mortgage | | Home Equity Lines and Loans | | Residential Mortgage | | Construction | | Commercial and Industrial | | Consumer | | Leases | | Total |
(dollars in thousands) | | | | | | | | | | | | | | | |
Carrying value of loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 2,134 | | | $ | 26 | | | $ | 1,502 | | | $ | — | | | $ | 315 | | | $ | 63 | | | $ | — | | | $ | 4,040 | |
Collectively evaluated for impairment | 319,169 | | | 25,307 | | | 81,831 | | | 4,081 | | | 69,550 | | | 2,652 | | | 22,969 | | | 525,559 | |
Purchased credit-impaired(1) | 8,311 | | | 512 | | | — | | | 2,405 | | | 1,076 | | | — | | | — | | | 12,304 | |
Total | $ | 329,614 | | | $ | 25,845 | | | $ | 83,333 | | | $ | 6,486 | | | $ | 70,941 | | | $ | 2,715 | | | $ | 22,969 | | | $ | 541,903 | |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
As part of the process of determining the AllowanceACL for the different segments of the loan and lease portfolio, management considers certain credit quality indicators. Periodic reviews of the individual loans are conducted by both in-house staff as well as external loan reviewers. The result of these reviews is reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:
•Pass – Loans considered satisfactory with no indications of deterioration.
•Pass-Watch – Loans that are performing, but which may have a potential deficiency which the borrower appears to be managing or a possible deficiency in the future.
•Special mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
•Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
•Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The following tables detail the carrying value of all portfolio loans and leases by portfolio segment based on the credit quality indicators used, in part, in the determination of the Allowance as of September 30, 2019 and December 31, 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit Risk Profile by Internally Assigned Grade - All Portfolio Loans and Leases | | | | | | | | | | |
As of September 30, 2019 | | | | | | | | | | |
(dollars in thousands) | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
Commercial mortgage | | $ | 1,706,659 | | | $ | 37,386 | | | $ | 18,337 | | | $ | — | | | $ | 1,762,382 | |
Home equity loans and lines | | 197,240 | | | — | | | 790 | | | — | | | 198,030 | |
Residential mortgage | | 504,775 | | | — | | | 529 | | | — | | | 505,304 | |
Construction | | 144,870 | | | — | | | 6,723 | | | — | | | 151,593 | |
Commercial and industrial | | 698,058 | | | 3,107 | | | 8,643 | | | — | | | 709,808 | |
Consumer | | 50,304 | | | — | | | 177 | | | — | | | 50,481 | |
Leases | | 162,156 | | | — | | | 993 | | | — | | | 163,149 | |
Total | | $ | 3,464,062 | | | $ | 40,493 | | | $ | 36,192 | | | $ | — | | | $ | 3,540,747 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit Risk Profile by Internally Assigned Grade - All Portfolio Loans and Leases | | | | | | | | | | |
As of December 31, 2018 | | | | | | | | | | |
(dollars in thousands) | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
Commercial mortgage | | $ | 1,635,068 | | | $ | 631 | | | $ | 20,639 | | | $ | 1,098 | | | $ | 1,657,436 | |
Home equity loans and lines | | 203,037 | | | — | | | 4,314 | | | — | | | 207,351 | |
Residential mortgage | | 490,789 | | | — | | | 3,566 | | | — | | | 494,355 | |
Construction | | 171,353 | | | 938 | | | 8,787 | | | — | | | 181,078 | |
Commercial and industrial | | 684,444 | | | 2,737 | | | 8,402 | | | 1 | | | 695,584 | |
Consumer | | 46,588 | | | — | | | 226 | | | — | | | 46,814 | |
Leases | | 143,561 | | | — | | | 975 | | | — | | | 144,536 | |
Total | | $ | 3,374,840 | | | $ | 4,306 | | | $ | 46,909 | | | $ | 1,099 | | | $ | 3,427,154 | |
The following tables detailtable details the carrying valueamortized cost oforiginated portfolio loans and leases, by year of origination (for term loans) and by risk grade within each portfolio segment based on the credit quality indicators used, in part, in the determination of the Allowance as of SeptemberJune 30, 2019 and December 31, 2018:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit Risk Profile by Internally Assigned Grade - Originated Portfolio Loans and Leases | | | | | | | | | | |
As of September 30, 2019 | | | | | | | | | | |
(dollars in thousands) | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
Commercial mortgage | | $ | 1,465,118 | | | $ | 29,618 | | | $ | 4,571 | | | $ | — | | | $ | 1,499,307 | |
Home equity loans and lines | | 176,612 | | | — | | | 790 | | | — | | | 177,402 | |
Residential mortgage | | 437,250 | | | — | | | 420 | | | — | | | 437,670 | |
Construction | | 144,870 | | | — | | | 6,723 | | | — | | | 151,593 | |
Commercial and industrial | | 661,496 | | | 2,374 | | | 7,592 | | | — | | | 671,462 | |
Consumer | | 47,896 | | | — | | | 134 | | | — | | | 48,030 | |
Leases | | 151,595 | | | — | | | 710 | | | — | | | 152,305 | |
Total | | $ | 3,084,837 | | | $ | 31,992 | | | $ | 20,940 | | | $ | — | | | $ | 3,137,769 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Term Loans | | | | | | | | | | | | Revolving Loans | | | | |
| | | Amortized Cost Basis by Origination Year(1) | | | | | | | | | | | | Amortized Cost Basis | | | | |
(dollars in thousands) | Risk Rating | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 and Prior | | Revolving Lines of Credit | | Revolving Lines of Credit Converted to Term Loans | | Total |
CRE - nonowner-occupied | Pass | | $ | 171,485 | | | $ | 454,690 | | | $ | 192,252 | | | $ | 124,010 | | | $ | 120,715 | | | $ | 140,138 | | | $ | 32,668 | | | $ | — | | | $ | 1,235,958 | |
| Pass-Watch | | 332 | | | 676 | | | 2,963 | | | — | | | 1,686 | | | 2,455 | | | — | | | — | | | 8,112 | |
| Special Mention | | 17,817 | | | — | | | 10,931 | | | — | | | — | | | — | | | — | | | — | | | 28,748 | |
| Substandard | | 2,443 | | | 33,386 | | | 11,868 | | | 4,780 | | | 43,235 | | | 7,374 | | | — | | | — | | | 103,086 | |
| Total | | $ | 192,077 | | | $ | 488,752 | | | $ | 218,014 | | | $ | 128,790 | | | $ | 165,636 | | | $ | 149,967 | | | $ | 32,668 | | | $ | — | | | $ | 1,375,904 | |
CRE - owner-occupied | Pass | | $ | 73,670 | | | $ | 111,679 | | | $ | 109,629 | | | $ | 87,028 | | | $ | 51,683 | | | $ | 50,568 | | | $ | 13,430 | | | $ | — | | | $ | 497,687 | |
| Pass-Watch | | 4,914 | | | 1,786 | | | — | | | — | | | 2,401 | | | 1,747 | | | 441 | | | — | | | 11,289 | |
| Special Mention | | 3,367 | | | 434 | | | 3,698 | | | — | | | — | | | 879 | | | 50 | | | — | | | 8,428 | |
| Substandard | | 3,153 | | | 6,746 | | | 7,597 | | | 860 | | | 5,907 | | | 858 | | | 163 | | | — | | | 25,284 | |
| Total | | $ | 85,104 | | | $ | 120,645 | | | $ | 120,924 | | | $ | 87,888 | | | $ | 59,991 | | | $ | 54,052 | | | $ | 14,084 | | | $ | — | | | $ | 542,688 | |
Home equity lines of credit | Pass | | $ | 98 | | | $ | 887 | | | $ | 332 | | | $ | 123 | | | $ | 276 | | | $ | 2,777 | | | $ | 184,201 | | | $ | 4,327 | | | $ | 193,021 | |
| Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | | 831 | | | 251 | | | 195 | | | 58 | | | — | | | 352 | | | 59 | | | — | | | 1,746 | |
| Total | | $ | 929 | | | $ | 1,138 | | | $ | 527 | | | $ | 181 | | | $ | 276 | | | $ | 3,129 | | | $ | 184,260 | | | $ | 4,327 | | | $ | 194,767 | |
Residential mortgage - 1st liens | Pass | | $ | 62,318 | | | $ | 135,324 | | | $ | 91,917 | | | $ | 87,672 | | | $ | 77,890 | | | $ | 228,862 | | | $ | 1,135 | | | $ | — | | | $ | 685,118 | |
| Pass-Watch | | 505 | | | — | | | — | | | — | | | — | | | 265 | | | — | | | — | | | 770 | |
| Special Mention | | — | | | — | | | — | | | — | | | — | | | 7,505 | | | — | | | — | | | 7,505 | |
| Substandard | | — | | | 86 | | | 689 | | | 26 | | | 977 | | | 99 | | | — | | | — | | | 1,877 | |
| Total | | $ | 62,823 | | | $ | 135,410 | | | $ | 92,606 | | | $ | 87,698 | | | $ | 78,867 | | | $ | 236,731 | | | $ | 1,135 | | | $ | — | | | $ | 695,270 | |
Residential mortgage - junior liens | Pass | | $ | 1,825 | | | $ | 5,056 | | | $ | 9,251 | | | $ | 4,371 | | | $ | 3,412 | | | $ | 9,425 | | | $ | 177 | | | $ | — | | | $ | 33,517 | |
| Substandard | | 55 | | | — | | | — | | | — | | | 36 | | | 36 | | | — | | | — | | | 127 | |
| Total | | $ | 1,880 | | | $ | 5,056 | | | $ | 9,251 | | | $ | 4,371 | | | $ | 3,448 | | | $ | 9,461 | | | $ | 177 | | | $ | — | | | $ | 33,644 | |
Construction | Pass | | $ | 85,546 | | | $ | 66,421 | | | $ | 25,739 | | | $ | 10,134 | | | $ | — | | | $ | 5,079 | | | $ | 13,033 | | | $ | — | | | $ | 205,952 | |
| Pass-Watch | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | | 6,422 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 6,422 | |
| Total | | $ | 91,968 | | | $ | 66,421 | | | $ | 25,739 | | | $ | 10,134 | | | $ | — | | | $ | 5,079 | | | $ | 13,033 | | | $ | — | | | $ | 212,374 | |
Commercial & Industrial | Pass | | $ | 87,861 | | | $ | 70,042 | | | $ | 70,867 | | | $ | 15,637 | | | $ | 30,559 | | | $ | 23,068 | | | $ | 104,645 | | | $ | — | | | $ | 402,679 | |
| Pass-Watch | | 10,564 | | | 7,656 | | | 205 | | | 3,492 | | | 305 | | | 916 | | | 6,486 | | | — | | | 29,624 | |
| Special Mention | | 532 | | | — | | | 4,685 | | | 212 | | | — | | | 1,127 | | | 3,934 | | | — | | | 10,490 | |
| Substandard | | 1,774 | | | 1,962 | | | 3,298 | | | 1,531 | | | 1,307 | | | 3,119 | | | 1,745 | | | — | | | 14,736 | |
| Total | | $ | 100,731 | | | $ | 79,660 | | | $ | 79,055 | | | $ | 20,872 | | | $ | 32,171 | | | $ | 28,230 | | | $ | 116,810 | | | $ | — | | | $ | 457,529 | |
Consumer | Pass | | $ | 1,154 | | | $ | 4,817 | | | $ | 2,554 | | | $ | 379 | | | $ | 32 | | | $ | 235 | | | $ | 33,401 | | | $ | — | | | $ | 42,572 | |
| Substandard | | 1,154 | | | 18 | | | 6 | | | 12 | | | — | | | — | | | — | | | — | | | 1,190 | |
| Total | | $ | 2,308 | | | $ | 4,835 | | | $ | 2,560 | | | $ | 391 | | | $ | 32 | | | $ | 235 | | | $ | 33,401 | | | $ | — | | | $ | 43,762 | |
Leases | Pass | | $ | 34,974 | | | $ | 69,578 | | | $ | 45,476 | | | $ | 12,391 | | | $ | 3,163 | | | $ | 426 | | | $ | — | | | $ | — | | | $ | 166,008 | |
| Substandard | | — | | | 69 | | | 66 | | | 68 | | | 16 | | | — | | | — | | | — | | | 219 | |
| Total | | $ | 34,974 | | | $ | 69,647 | | | $ | 45,542 | | | $ | 12,459 | | | $ | 3,179 | | | $ | 426 | | | $ | — | | | $ | — | | | $ | 166,227 | |
Total portfolio loans and leases | | | $ | 572,794 | | | $ | 971,564 | | | $ | 594,218 | | | $ | 352,784 | | | $ | 343,600 | | | $ | 487,310 | | | $ | 395,568 | | | $ | 4,327 | | | $ | 3,722,165 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit Risk Profile by Internally Assigned Grade - Originated Portfolio Loans and Leases | | | | | | | | | | |
As of December 31, 2018 | | | | | | | | | | |
(dollars in thousands) | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
Commercial mortgage | | $ | 1,321,973 | | | $ | 631 | | | $ | 5,218 | | | $ | — | | | $ | 1,327,822 | |
Home equity loans and lines | | 177,916 | | | — | | | 3,590 | | | — | | | 181,506 | |
Residential mortgage | | 408,095 | | | — | | | 2,927 | | | — | | | 411,022 | |
Construction | | 167,272 | | | 938 | | | 6,382 | | | — | | | 174,592 | |
Commercial and industrial | | 615,817 | | | 2,511 | | | 6,314 | | | 1 | | | 624,643 | |
Consumer | | 43,936 | | | — | | | 163 | | | — | | | 44,099 | |
Leases | | 121,175 | | | — | | | 392 | | | — | | | 121,567 | |
Total | | $ | 2,856,184 | | | $ | 4,080 | | | $ | 24,986 | | | $ | 1 | | | $ | 2,885,251 | |
The following tables detail the carrying value of acquired portfolio loans and leases by portfolio segment based on the credit quality indicators used, in part, in the determination of the Allowance as of September 30, 2019 and December 31, 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit Risk Profile by Internally Assigned Grade - Acquired Portfolio Loans and Leases | | | | | | | | | | |
As of September 30, 2019 | | | | | | | | | | |
(dollars in thousands) | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
Commercial mortgage | | $ | 241,541 | | | $ | 7,768 | | | $ | 13,766 | | | $ | — | | | $ | 263,075 | |
Home equity loans and lines | | 20,628 | | | — | | | — | | | — | | | 20,628 | |
Residential mortgage | | 67,525 | | | — | | | 109 | | | — | | | 67,634 | |
| | | | | | | | | | |
Commercial and industrial | | 36,562 | | | 733 | | | 1,051 | | | — | | | 38,346 | |
Consumer | | 2,408 | | | — | | | 43 | | | — | | | 2,451 | |
Leases | | 10,561 | | | — | | | 283 | | | — | | | 10,844 | |
Total | | $ | 379,225 | | | $ | 8,501 | | | $ | 15,252 | | | $ | — | | | $ | 402,978 | |
(1) Year originated or renewed, whichever is more recent.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit Risk Profile by Internally Assigned Grade - Acquired Portfolio Loans and Leases | | | | | | | | | | |
As of December 31, 2018 | | | | | | | | | | |
(dollars in thousands) | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
Commercial mortgage | | $ | 313,095 | | | $ | — | | | $ | 15,421 | | | $ | 1,098 | | | $ | 329,614 | |
Home equity loans and lines | | 25,121 | | | — | | | 724 | | | — | | | 25,845 | |
Residential mortgage | | 82,694 | | | — | | | 639 | | | — | | | 83,333 | |
Construction | | 4,081 | | | — | | | 2,405 | | | — | | | 6,486 | |
Commercial and industrial | | 68,627 | | | 226 | | | 2,088 | | | — | | | 70,941 | |
Consumer | | 2,652 | | | — | | | 63 | | | — | | | 2,715 | |
Leases | | 22,386 | | | — | | | 583 | | | — | | | 22,969 | |
Total | | $ | 518,656 | | | $ | 226 | | | $ | 21,923 | | | $ | 1,098 | | | $ | 541,903 | |
The following tables present the amortized cost basis of loans and leases on nonaccrual status and loans and leases past due over 89 days still accruing as of the dates indicated:
G.
| | | | | | | | | | | | | | | | | | |
As of June 30, 2020 | | | | | | |
(dollars in thousands) | Nonaccrual with No ACL | | Nonaccrual with ACL | | Loans Past Due Over 89 Days Still Accruing | |
CRE - nonowner-occupied | $ | 245 | | | $ | — | | | $ | — | | |
CRE - owner-occupied | 4,046 | | | — | | | — | | |
Home equity lines of credit | 915 | | | — | | | — | | |
Residential mortgage - 1st liens | 912 | | | — | | | — | | |
Residential mortgage - junior liens | 72 | | | — | | | — | | |
Construction | — | | | — | | | — | | |
Commercial & Industrial | 1,973 | | | — | | | — | | |
Consumer | — | | | 36 | | | — | | |
Leases | — | | | 219 | | | — | | |
Total non-performing loans and leases | $ | 8,163 | | | $ | 255 | | | $ | — | | |
| | | | | | | | | | | | | | | | | | |
As of December 31, 2019 | | | | | | |
(dollars in thousands) | Nonaccrual with No ACL | | Nonaccrual with ACL | | Loans Past Due Over 89 Days Still Accruing | |
CRE - nonowner-occupied | $ | 199 | | | $ | — | | | $ | — | | |
CRE - owner-occupied | 4,159 | | | — | | | — | | |
Home equity lines of credit | 636 | | | — | | | — | | |
Residential mortgage - 1st liens | 2,447 | | | — | | | — | | |
Residential mortgage - junior liens | 83 | | | — | | | — | | |
Construction | — | | | — | | | — | | |
Commercial & Industrial | 2,180 | | | — | | | — | | |
Consumer | 42 | | | 19 | | | — | | |
Leases | — | | | 883 | | | — | | |
Total non-performing loans and leases | $ | 9,746 | | | $ | 902 | | | $ | — | | |
For the three months ended June 30, 2020, $78 thousand of interest income was recognized on nonaccrual loans and leases.
Collateral-dependent loans and leases for which the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale of the collateral are, in general, individually evaluated for credit losses. Identified shortfalls between the amortized cost of the individually evaluated loan or lease and the value, less selling costs, of the underlying collateral are charged against the ACL. In certain cases, when the loan or lease is serviced by a third-party, and management is unable to process a timely charge-down of the loan or lease, it will assess a specific ACL to the individual loan or lease. This ACL represents the shortfall between the amortized cost and realizable value of the collateral.
The following tables present the amortized cost basis of collateral-dependent loans and leases, indicating the type of collateral and the ACL determined through individual evaluation for credit loss, as of the dates indicated:
| | | | | | | | | | | | | | | | | |
As of June 30, 2020 | | | | | |
(dollars in thousands) | Real Estate Collateral | | Non-Real Estate Collateral | | Individually Evaluated ACL |
CRE - nonowner-occupied | $ | 245 | | | $ | — | | | $ | — | |
CRE - owner-occupied | 4,046 | | | — | | | — | |
Home equity lines of credit | 915 | | | — | | | — | |
Residential mortgage - 1st liens | 912 | | | — | | | — | |
Residential mortgage - junior liens | 72 | | | — | | | — | |
Construction | — | | | — | | | — | |
Commercial & Industrial | — | | | 1,973 | | | — | |
Consumer | — | | | 36 | | | 36 | |
Leases | — | | | 219 | | | 165 | |
Total collateral-dependent loans and leases | $ | 6,190 | | | $ | 2,228 | | | $ | 201 | |
| | | | | | | | | | | | | | | | | |
As of December 31, 2019 | | | | | |
(dollars in thousands) | Real Estate Collateral | | Non-Real Estate Collateral | | Individually Evaluated ACL |
CRE - nonowner-occupied | $ | 199 | | | $ | — | | | $ | — | |
CRE - owner-occupied | 4,159 | | | — | | | — | |
Home equity lines of credit | 636 | | | — | | | — | |
Residential mortgage - 1st liens | 2,447 | | | — | | | — | |
Residential mortgage - junior liens | 83 | | | — | | | — | |
Construction | — | | | — | | | — | |
Commercial & Industrial | — | | | 2,180 | | | — | |
Consumer | — | | | 61 | | | 19 | |
Leases | — | | | 883 | | | 60 | |
Total collateral-dependent loans and leases | $ | 7,524 | | | $ | 3,124 | | | $ | 79 | |
F. Troubled Debt Restructurings (“TDRs”)
The restructuring of a loan is considered a “troubled debt restructuring” if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.
The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower, were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.
The following table presents the balance of TDRs as of the indicated dates:
| Troubled Debt Restructurings(1) | Troubled Debt Restructurings(1) | | Troubled Debt Restructurings(1) | |
(dollars in thousands) | (dollars in thousands) | September 30, 2019 | | December 31, 2018 | (dollars in thousands) | June 30, 2020 | | December 31, 2019 |
TDRs included in nonperforming loans and leases | TDRs included in nonperforming loans and leases | $ | 5,755 | | | $ | 1,217 | | TDRs included in nonperforming loans and leases | $ | 1,792 | | | $ | 3,018 | |
TDRs in compliance with modified terms | TDRs in compliance with modified terms | 5,069 | | | 9,745 | | TDRs in compliance with modified terms | 10,013 | | | 5,071 | |
Total TDRs | Total TDRs | $ | 10,824 | | | $ | 10,962 | | Total TDRs | $ | 11,805 | | | $ | 8,089 | |
(1) The Corporation began entering into loan modifications with borrowers in response to the COVID-19 pandemic, which have not been classified as TDRs, and therefore are not included in the above table. For more information on the criteria for classifying loans as TDRs, see Note 1 – Basis of Presentation, Principles of Consolidation, and Significant Accounting Policies to the Unaudited Consolidated Financial Statements.
The following tables present information regarding loan and lease modifications categorized as TDRs for the three and ninesix months ended SeptemberJune 30, 2019:2020:
| Troubled Debt Restructurings(1) | Troubled Debt Restructurings(1) | | Troubled Debt Restructurings(1) | |
| | For the Three Months Ended September 30, 2019 | | | For the Three Months Ended June 30, 2020 | |
(dollars in thousands) | (dollars in thousands) | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | (dollars in thousands) | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Home equity loans and lines | 2 | | | $ | 169 | | | $ | 169 | | |
| Commercial and industrial | 2 | | | 1,714 | | | | 1,714 | | |
CRE - nonowner-occupied | | CRE - nonowner-occupied | 2 | | $ | 1,818 | | | $ | 1,818 | |
Residential mortgage - 1st liens | | Residential mortgage - 1st liens | 1 | | 200 | | | 200 | |
Construction | | Construction | 4 | | 3,419 | | | 3,419 | |
Leases | Leases | 4 | | | 133 | | | 133 | | Leases | 6 | | 141 | | | 141 | |
Total | Total | 8 | | | $ | 2,016 | | | $ | 2,016 | | Total | 13 | | $ | 5,578 | | | $ | 5,578 | |
| | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings(1) | | | | | |
| For the Six Months Ended June 30, 2020 | | | | |
(dollars in thousands) | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
CRE - nonowner-occupied | 2 | | $ | 1,818 | | | $ | 1,818 | |
Residential mortgage - 1st liens | 1 | | 200 | | | 200 | |
Construction | 4 | | 3,419 | | | 3,419 | |
Leases | 6 | | 141 | | | 141 | |
Total | 13 | | $ | 5,578 | | | $ | 5,578 | |
Page 33
| | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings | | | | | |
| For the Nine Months Ended September 30, 2019 | | | | |
(dollars in thousands) | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Home equity loans and lines | 3 | | | $ | 233 | | | $ | 233 | |
Residential mortgage | 1 | | | 40 | | | 40 | |
Commercial and industrial | 4 | | | 2,633 | | | 2,633 | |
Leases | 6 | | | 264 | | | 264 | |
Total | 14 | | | $ | 3,170 | | | $ | 3,170 | |
The following tables presents information regardingPresentation, Principles of Consolidation, and Significant Accounting Policies to the types of loan and lease modifications made for the three and nine months ended September 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings | | | | | | | | | |
| Number of Contracts for the Three Months Ended September 30, 2019 | | | | | | | | |
| Loan Term Extension | | Interest Rate Change and Term Extension | | Interest Rate Change and/or Interest-Only Period | | Contractual Payment Reduction (Leases only) | | Temporary Payment Deferral |
Home equity loans and lines | 1 | | | 1 | | | — | | | — | | | — | |
| | | | | | | | | |
Commercial and industrial | 2 | | | — | | | — | | | — | | | — | |
Leases | — | | | — | | | — | | | 4 | | | — | |
Total | 3 | | | 1 | | | — | | | 4 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings | | | | | | | | | |
| Number of Contracts for the Nine Months Ended September 30, 2019 | | | | | | | | |
| Loan Term Extension | | Interest Rate Change and Term Extension | | Interest Rate Change and/or Interest-Only Period | | Contractual Payment Reduction (Leases only) | | Temporary Payment Deferral |
Home equity loans and lines | 1 | | | 2 | | | — | | | — | | | — | |
Residential mortgage | 1 | | | — | | | — | | | — | | | — | |
Commercial and industrial | 2 | | | — | | | 2 | | | — | | | — | |
Leases | — | | | — | | | — | | | 6 | | | — | |
Total | 4 | | | 2 | | | 2 | | | 6 | | | — | |
Unaudited Consolidated Financial Statements.
H. Impaired Loans
The following tables detailtable presents information regarding the recorded investmenttypes of loan and principal balance of impaired loans by portfolio segment, their related Allowance and interest income recognizedlease modifications made for the three and ninesix months ended SeptemberJune 30, 20192020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings(1) | | | | | | | | | |
| Number of Contracts for the Three Months Ended June 30, 2020 | | | | | | | | |
| Loan Term Extension | | Interest Rate Change and Term Extension | | Interest Rate Change and/or Interest-Only Period | | Contractual Payment Reduction (Leases only) | | Temporary Payment Deferral |
CRE - nonowner-occupied | — | | — | | — | | — | | 2 |
Residential mortgage - 1st liens | 1 | | — | | — | | — | | — |
Construction | — | | — | | — | | — | | 4 |
Leases | — | | — | | — | | 6 | | — |
Total | 1 | | — | | — | | 6 | | 6 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings(1) | | | | | | | | | |
| Number of Contracts for the Six Months Ended June 30, 2020 | | | | | | | | |
| Loan Term Extension | | Interest Rate Change and Term Extension | | Interest Rate Change and/or Interest-Only Period | | Contractual Payment Reduction (Leases only) | | Temporary Payment Deferral |
CRE - nonowner-occupied | — | | — | | — | | — | | 2 |
Residential mortgage - 1st liens | 1 | | — | | — | | — | | — |
Construction | — | | — | | — | | — | | 4 |
Leases | — | | — | | — | | 6 | | — |
Total | 1 | | — | | — | | 6 | | 6 |
(1) The Corporation began entering into loan modifications with borrowers in response to the COVID-19 pandemic, which have not been classified as TDRs, and balances as of December 31, 2018 (purchased credit-impaired loanstherefore are not included in the tables):above table. For more information on the criteria for classifying loans as TDRs, see Note 1 – Basis of Presentation, Principles of Consolidation, and Significant Accounting Policies to the Unaudited Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired Loans | | | | | | | | | | | |
As of and for the Three Months Ended September 30, 2019 | Recorded Investment(2) | | Contractual Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized | | Cash-Basis Interest Income Recognized |
(dollars in thousands) | | | | | | | | | | | |
Impaired loans with related allowance: | | | | | | | | | | | |
Home equity lines and loans | $ | 1,318 | | | $ | 1,318 | | | $ | 167 | | | $ | 1,265 | | | $ | 12 | | | $ | — | |
Residential mortgage | 1,936 | | | 1,936 | | | 259 | | | 1,940 | | | 19 | | | — | |
| | | | | | | | | | | |
Consumer | 56 | | | 56 | | | 35 | | | 57 | | | — | | | — | |
Total | 3,310 | | | 3,310 | | | 461 | | | 3,262 | | | 31 | | | — | |
| | | | | | | | | | | |
Impaired loans without related allowance(1): | | | | | | | | | | | |
Commercial mortgage | 7,819 | | | 10,111 | | | — | | | 8,633 | | | 28 | | | — | |
Home equity lines and loans | 1,034 | | | 1,035 | | | — | | | 1,016 | | | 9 | | | — | |
Residential mortgage | 1,184 | | | 1,184 | | | — | | | 1,190 | | | 13 | | | — | |
Commercial and industrial | 4,529 | | | 4,804 | | | — | | | 4,590 | | | 50 | | | — | |
Consumer | 43 | | | 46 | | | — | | | 44 | | | — | | | — | |
Total | 14,609 | | | 17,180 | | | — | | | 15,473 | | | 100 | | | — | |
Grand total | $ | 17,919 | | | $ | 20,490 | | | $ | 461 | | | $ | 18,735 | | | $ | 131 | | | $ | — | |
For the six months ended June 30, 2020, two residential mortgage loans, in the aggregate amount of $228 thousand, and one commercial and industrial loan in the amount of $477 thousand that were modified as a TDR during the past 12 months defaulted and were charged off.
(1) The table above does not include the recorded investment of $1.3 million of impaired leases without a related Allowance.
(2) Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired Loans | | | | | | | | | | | |
As of and for the Nine Months Ended September 30, 2019 | Recorded Investment(2) | | Contractual Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized | | Cash-Basis Interest Income Recognized |
(dollars in thousands) | | | | | | | | | | | |
Impaired loans with related allowance: | | | | | | | | | | | |
Home equity lines and loans | $ | 1,318 | | | $ | 1,318 | | | $ | 167 | | | $ | 1,310 | | | $ | 35 | | | $ | — | |
Residential mortgage | 1,936 | | | 1,936 | | | 259 | | | 1,950 | | | 58 | | | — | |
| | | | | | | | | | | |
Consumer | 56 | | | 56 | | | 35 | | | 36 | | | 1 | | | — | |
Total | $ | 3,310 | | | $ | 3,310 | | | $ | 461 | | | $ | 3,296 | | | $ | 94 | | | $ | — | |
| | | | | | | | | | | |
Impaired loans without related allowance(1): | | | | | | | | | | | |
Commercial mortgage | $ | 7,819 | | | $ | 10,111 | | | $ | — | | | $ | 9,351 | | | $ | 115 | | | $ | — | |
Home equity lines and loans | 1,034 | | | 1,035 | | | — | | | 1,035 | | | 34 | | | — | |
Residential mortgage | 1,184 | | | 1,184 | | | — | | | 1,164 | | | 43 | | | — | |
| | | | | | | | | | | |
Commercial and industrial | 4,529 | | | 4,804 | | | — | | | 4,653 | | | 198 | | | — | |
Consumer | 43 | | | 46 | | | | | 46 | | | — | | | — | |
Total | $ | 14,609 | | | $ | 17,180 | | | $ | — | | | $ | 16,249 | | | $ | 390 | | | $ | — | |
Grand total | $ | 17,919 | | | $ | 20,490 | | | $ | 461 | | | $ | 19,545 | | | $ | 484 | | | $ | — | |
(1) The table above does not include the recorded investment of $1.3 million of impaired leases without a related Allowance.
(2) Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired Loans | | | | | | | | | | | |
As of and for the Three Months Ended September 30, 2018 | Recorded Investment(2) | | Contractual Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized | | Cash-Basis Interest Income Recognized |
(dollars in thousands) | | | | | | | | | | | |
Impaired loans with related allowance: | | | | | | | | | | | | | | | | | |
Home equity lines and loans | $ | 567 | | | $ | 567 | | | $ | 19 | | | $ | 569 | | | $ | 6 | | | $ | — | |
Residential mortgage | 1,699 | | | 1,699 | | | 228 | | | 1,702 | | | 20 | | | — | |
Commercial and industrial | 25 | | | 25 | | | 12 | | | 25 | | | — | | | — | |
Consumer | 58 | | | 58 | | | 19 | | | 58 | | | — | | | — | |
Total | $ | 2,349 | | | $ | 2,349 | | | $ | 278 | | | $ | 2,354 | | | $ | 26 | | | $ | — | |
| | | | | | | | | | | |
Impaired loans without related allowance(1): | | | | | | | | | | | |
Commercial mortgage | $ | 735 | | | $ | 793 | | | $ | — | | | $ | 930 | | | $ | — | | | $ | — | |
Home equity lines and loans | 2,035 | | | 2,096 | | | — | | | 2,064 | | | 2 | | | — | |
Residential mortgage | 4,242 | | | 4,328 | | | — | | | 4,299 | | | 24 | | | — | |
Construction | 291 | | | | 291 | | | | — | | | | 294 | | | | — | | | | | |
Commercial and industrial | 1,733 | | | 2,665 | | | — | | | 2,138 | | | 5 | | | — | |
Consumer | $ | 86 | | | | $ | 86 | | | | $ | — | | | | $ | 87 | | | | $ | — | | | | | |
Total | $ | 9,122 | | | $ | 10,259 | | | $ | — | | | $ | 9,812 | | | $ | 31 | | | $ | — | |
Grand total | $ | 11,471 | | | $ | 12,608 | | | $ | 278 | | | $ | 12,166 | | | $ | 57 | | | $ | — | |
(1) The table above does not include the recorded investment of $1.4 million of impaired leases without a related Allowance.
(2) Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired Loans | | | | | | | | | | | |
As of and for the Nine Months Ended September 30, 2018 | Recorded Investment(2) | | Contractual Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized | | Cash-Basis Interest Income Recognized |
(dollars in thousands) | | | | | | | | | | | |
Impaired loans with related allowance: | | | | | | | | | | | | | | | | | |
Home equity lines and loans | $ | 567 | | | $ | 567 | | | $ | 19 | | | $ | 572 | | | $ | 17 | | | $ | — | |
Residential mortgage | 1,699 | | | 1,699 | | | 228 | | | 1,709 | | | 60 | | | — | |
Commercial and industrial | 25 | | | 25 | | | 12 | | | 29 | | | 1 | | | — | |
Consumer | 58 | | | 58 | | | 19 | | | 58 | | | 1 | | | — | |
Total | $ | 2,349 | | | $ | 2,349 | | | $ | 278 | | | $ | 2,368 | | | $ | 79 | | | $ | — | |
| | | | | | | | | | | |
Impaired loans without related allowance(1): | | | | | | | | | | | |
Commercial mortgage | $ | 735 | | | $ | 793 | | | $ | — | | | $ | 825 | | | $ | 6 | | | $ | — | |
Home equity lines and loans | 2,035 | | | 2,096 | | | — | | | 2,086 | | | 10 | | | — | |
Residential mortgage | 4,242 | | | 4,328 | | | — | | | 4,228 | | | 91 | | | — | |
Construction | 291 | | | | 291 | | | | — | | | | 239 | | | | 5 | | | | — | |
Commercial and industrial | 1,733 | | | 2,665 | | | — | | | 2,236 | | | 56 | | | — | |
Consumer | 86 | | | | 86 | | | | — | | | | 88 | | | | 3 | | | | — | |
Total | $ | 9,122 | | | $ | 10,259 | | | $ | — | | | $ | 9,702 | | | $ | 171 | | | $ | — | |
Grand total | $ | 11,471 | | | $ | 12,608 | | | $ | 278 | | | $ | 12,070 | | | $ | 250 | | | $ | — | |
(1) The table above does not include the recorded investment of $1.4 million of impaired leases without a related Allowance.
(2) Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
| | | | | | | | | | | | | | | | | |
Impaired Loans | | | | | |
As of December 31, 2018 | Recorded Investment (2) | | Contractual Principal Balance | | Related Allowance |
(dollars in thousands) | | | | | |
Impaired loans with related allowance: | | | | | | | | |
Home equity lines and loans | $ | 1,280 | | | $ | 1,280 | | | $ | 162 | |
Residential mortgage | 1,966 | | | 1,966 | | | 272 | |
Consumer | 50 | | | 50 | | | 28 | |
Total | $ | 3,296 | | | $ | 3,296 | | | $ | 462 | |
Impaired loans without related allowance(1): | | | | | |
Commercial mortgage | $ | 7,007 | | | $ | 7,264 | | | $ | — | |
Home equity lines and loans | 3,718 | | | 3,724 | | | — | |
Residential mortgage | 4,641 | | | 4,728 | | | — | |
Commercial and industrial | 2,629 | | | 3,803 | | | — | |
Consumer | 83 | | | 86 | | | |
Total | $ | 18,078 | | | $ | 19,605 | | | $ | — | |
Grand total | $ | 21,374 | | | $ | 22,901 | | | $ | 462 | |
(1) The table above does not include the recorded investment of$1.2 millionof impaired leases without a related Allowance.
(2) Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
I. Loan Mark
Loans acquired in mergers and acquisitions are recorded at fair value as of the date of the transaction. This adjustment to the acquired principal amount is referred to as the “Loan Mark.” With the exception of purchased credit impaired loans, for which the Loan Mark is accounted under ASC 310-30, the Loan Mark is amortized or accreted as an adjustment to yield over the lives of the loans.
The following tables detail, for acquired loans, the outstanding principal, remaining Loan Mark, and recorded investment, by portfolio segment, as of the dates indicated:
| | | | | | | | | | | | | | | | | |
Loan Mark on Acquired Loans and Leases | | | | | |
| September 30, 2019 | | | | |
(dollars in thousands) | Outstanding Principal | | Remaining Loan Mark | | Recorded Investment |
Commercial mortgage | $ | 269,465 | | | $ | (6,390) | | | $ | 263,075 | |
Home equity lines and loans | 22,614 | | | (1,986) | | | 20,628 | |
Residential mortgage | 69,908 | | | (2,274) | | | 67,634 | |
| | | | | |
Commercial and industrial | 39,303 | | | (957) | | | 38,346 | |
Consumer | 2,539 | | | (88) | | | 2,451 | |
Leases | 11,097 | | | (253) | | | 10,844 | |
Total | $ | 414,926 | | | $ | (11,948) | | | $ | 402,978 | |
| | | | | | | | | | | | | | | | | |
Loan Mark on Acquired Loans and Leases | | | | | |
| December 31, 2018 | | | | |
(dollars in thousands) | Outstanding Principal | | Remaining Loan Mark | | Recorded Investment |
Commercial mortgage | $ | 339,241 | | | $ | (9,627) | | | $ | 329,614 | |
Home equity lines and loans | 28,212 | | | (2,367) | | | 25,845 | |
Residential mortgage | 86,111 | | | (2,778) | | | 83,333 | |
Construction | 6,780 | | | (294) | | | 6,486 | |
Commercial and industrial | 72,948 | | | (2,007) | | | 70,941 | |
Consumer | 2,828 | | | (113) | | | 2,715 | |
Leases | 23,695 | | | (726) | | | 22,969 | |
Total | $ | 559,815 | | | $ | (17,912) | | | $ | 541,903 | |
Note 65 – Mortgage Servicing Rights
The following table summarizes the Corporation’s activity related to mortgage servicing rights (“MSRs”) for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
| | | Three Months Ended September 30, | | | Three Months Ended June 30, | |
(dollars in thousands) | (dollars in thousands) | 2019 | | 2018 | (dollars in thousands) | 2020 | | 2019 |
Balance, beginning of period | Balance, beginning of period | $ | 4,744 | | | $ | 5,511 | | Balance, beginning of period | $ | 4,115 | | | $ | 4,910 | |
Additions | Additions | — | | | — | | Additions | — | | | — | |
Amortization | Amortization | (183) | | | (206) | | Amortization | (453) | | | (156) | |
Recovery | 19 | | | 23 | | |
Impairment | | Impairment | (222) | | | (10) | |
Balance, end of period | Balance, end of period | $ | 4,580 | | | $ | 5,328 | | Balance, end of period | $ | 3,440 | | | $ | 4,744 | |
| Fair value | Fair value | $ | 4,925 | | | $ | 6,586 | | Fair value | $ | 3,440 | | | $ | 5,175 | |
Residential mortgage loans serviced for others | Residential mortgage loans serviced for others | $ | 527,869 | | | $ | 596,162 | | Residential mortgage loans serviced for others | $ | 445,233 | | | $ | 545,743 | |
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
(dollars in thousands) | (dollars in thousands) | 2019 | | 2018 | (dollars in thousands) | 2020 | | 2019 |
Balance, beginning of period | Balance, beginning of period | $ | 5,047 | | | $ | 5,861 | | Balance, beginning of period | $ | 4,450 | | | $ | 5,047 | |
Additions | Additions | — | | | 16 | | Additions | — | | | — | |
Amortization | Amortization | (459) | | | (623) | | Amortization | (557) | | | (276) | |
(Impairment) / Recovery | (8) | | | 74 | | |
Impairment | | Impairment | (453) | | | (27) | |
Balance, end of period | Balance, end of period | $ | 4,580 | | | $ | 5,328 | | Balance, end of period | $ | 3,440 | | | $ | 4,744 | |
|
As of SeptemberJune 30, 2019,2020, and December 31, 2018,2019, key economic assumptions and the sensitivity of the current fair value of MSRs to immediate 10% and 20% adverse changes in those assumptions are as follows:
| (dollars in thousands) | (dollars in thousands) | September 30, 2019 | | December 31, 2018 | (dollars in thousands) | June 30, 2020 | | December 31, 2019 |
Fair value amount of MSRs | Fair value amount of MSRs | $ | 4,925 | | | $ | 6,277 | | Fair value amount of MSRs | $ | 3,440 | | | $ | 4,838 | |
Weighted average life (in years) | Weighted average life (in years) | 5.9 | | 6.7 | Weighted average life (in years) | 4.7 | | 6.0 |
Prepayment speeds (constant prepayment rate)(1) | Prepayment speeds (constant prepayment rate)(1) | 10.6 | % | | 9.1 | % | Prepayment speeds (constant prepayment rate)(1) | 14.4 | % | | 10.5 | % |
Impact on fair value: | Impact on fair value: | | Impact on fair value: | |
10% adverse change | 10% adverse change | $ | (159) | | | $ | (124) | | 10% adverse change | $ | (151) | | | $ | (149) | |
20% adverse change | 20% adverse change | (317) | | | (257) | | 20% adverse change | (292) | | | (297) | |
Discount rate | Discount rate | 9.55 | % | | 9.55 | % | Discount rate | 9.56 | % | | 9.55 | % |
Impact on fair value: | Impact on fair value: | | Impact on fair value: | |
10% adverse change | 10% adverse change | $ | (165) | | | $ | (234) | | 10% adverse change | $ | (88) | | | $ | (166) | |
20% adverse change | 20% adverse change | (320) | | | (451) | | 20% adverse change | (172) | | | (321) | |
(1) Represents the weighted average prepayment rate for the life of the MSR asset.
At SeptemberJune 30, 20192020 and December 31, 20182019, the fair value of the MSRs was $4.9$3.4 million and $6.3$4.8 million, respectively. The fair value of the MSRs for these dates was determined using values obtained from a third party which utilizes a valuation model which calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates. Mortgage loan prepayment speed is the annual rate at which borrowers are forecasted to repay their mortgage loan principal and is based on historical experience. The discount rate is used to determine the present value of future net servicing income. Another key assumption in the model is the required rate of return the market would expect for an asset with similar risk. These assumptions can, and generally will, change quarterly valuations as market conditions and interest rates change. Management reviews, annually, the process utilized by its independent third-party valuation experts.
These assumptions and sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which could magnify or counteract the sensitivities.
Note 76 – Goodwill and Intangible Assets
The following table presents activity in the Corporation's goodwill by its reporting units and finite-lived and indefinite-lived intangible assets, other than MSRs, for the ninesix months ended SeptemberJune 30, 2019:2020:
| (dollars in thousands) | (dollars in thousands) | Balance December 31, 2018 | | Additions | | Adjustments | | Amortization | | Balance September 30, 2019 | | Amortization Period | (dollars in thousands) | Balance December 31, 2019 | | Additions | | | Amortization | | Balance June 30, 2020 | | Amortization Period |
Goodwill – Wealth | Goodwill – Wealth | $ | 20,412 | | | $ | — | | | $ | — | | | $ | — | | | $ | 20,412 | | | Indefinite | Goodwill – Wealth | $ | 20,412 | | | $ | — | | | | $ | — | | | $ | 20,412 | | | Indefinite |
Goodwill – Banking | Goodwill – Banking | 156,991 | | | — | | | — | | | — | | | 156,991 | | | Indefinite | Goodwill – Banking | 156,991 | | | — | | | | — | | | 156,991 | | | Indefinite |
Goodwill – Insurance | Goodwill – Insurance | 6,609 | | | — | | | — | | | — | | | 6,609 | | | Indefinite | Goodwill – Insurance | 6,609 | | | — | | | | — | | | 6,609 | | | Indefinite |
Total Goodwill | Total Goodwill | 184,012 | | | — | | | — | | | — | | | 184,012 | | | Total Goodwill | 184,012 | | | — | | | | — | | | 184,012 | | |
Core deposit intangible | Core deposit intangible | 5,906 | | | — | | | — | | | (982) | | | 4,924 | | | 10 years | Core deposit intangible | 4,598 | | | — | | | | (584) | | | 4,014 | | | 10 years |
Customer relationships | Customer relationships | 13,607 | | | 18 | | | — | | | (1,350) | | | 12,275 | | | 5 to 20 years | Customer relationships | 11,820 | | | — | | | | (906) | | | 10,914 | | | 5 to 20 years |
Non-compete agreements | Non-compete agreements | 1,101 | | | — | | | — | | | (142) | | | 959 | | | 5 to 10 years | Non-compete agreements | 911 | | | — | | | | (94) | | | 817 | | | 5 to 10 years |
Trade name | Trade name | 2,149 | | | — | | | — | | | (374) | | | 1,775 | | | 3 to 5 years | Trade name | 1,651 | | | — | | | | (244) | | | 1,407 | | | 3 to 5 years |
Domain name | Domain name | 151 | | | — | | | — | | | — | | | 151 | | | Indefinite | Domain name | 151 | | | — | | | | — | | | 151 | | | Indefinite |
Favorable lease assets | 541 | | | — | | | (541) | | | — | | | — | | | |
Total Intangible Assets | Total Intangible Assets | 23,455 | | | 18 | | | (541) | | | (2,848) | | | 20,084 | | | Total Intangible Assets | 19,131 | | | — | | | | (1,828) | | | 17,303 | | |
Total Goodwill and Intangible Assets | Total Goodwill and Intangible Assets | $ | 207,467 | | | $ | 18 | | | $ | (541) | | | $ | (2,848) | | | $ | 204,096 | | | Total Goodwill and Intangible Assets | $ | 203,143 | | | $ | — | | | | $ | (1,828) | | | $ | 201,315 | | |
Management conducted its annual impairment tests for goodwill and indefinite-lived intangible assets as of October 31, 20182019 using generally accepted valuation methods. Management determined that 0 impairment of goodwill or indefinite-lived intangible assets was identified as a result of the annual impairment analyses. Future impairment testing will be conducted each October 31, unless a triggering event occurs in the interim that would suggest possible impairment, in which case it would be tested as of the date of the triggering event. For the elevenfive months ended SeptemberJune 30, 2019,2020, management determined there were 0 events that would necessitate impairment testing of goodwill or indefinite-lived intangible assets. Management continues to monitor the economic environment as impacted by the COVID-19 pandemic in the markets we serve and resulting effect on the Corporation's long-term forecast.
Note 87 – Deposits
The following table details the components of deposits:
| | | September 30, 2019 | | December 31, 2018 | | | | | | | | | | |
(dollars in thousands) | (dollars in thousands) | | | | (dollars in thousands) | June 30, 2020 | | December 31, 2019 |
| Interest-bearing demand | Interest-bearing demand | $ | 778,809 | | | $ | 664,749 | | Interest-bearing demand | $ | 910,441 | | | $ | 944,915 | |
Money market | Money market | 983,170 | | | 862,644 | | Money market | 1,239,523 | | | 1,106,478 | |
Savings | Savings | 248,539 | | | 247,081 | | Savings | 249,636 | | | 220,450 | |
Retail time deposits | Retail time deposits | 467,346 | | | 542,702 | | Retail time deposits | 400,186 | | | 405,123 | |
Wholesale non-maturity deposits | Wholesale non-maturity deposits | 274,121 | | | 55,031 | | Wholesale non-maturity deposits | 146,463 | | | 177,865 | |
Wholesale time deposits | Wholesale time deposits | 42,094 | | | 325,261 | | Wholesale time deposits | 79,903 | | | 89,241 | |
Total interest-bearing deposits | Total interest-bearing deposits | 2,794,079 | | | 2,697,468 | | Total interest-bearing deposits | 3,026,152 | | | 2,944,072 | |
Noninterest-bearing deposits | Noninterest-bearing deposits | 904,409 | | | 901,619 | | Noninterest-bearing deposits | 1,217,496 | | | 898,173 | |
Total deposits | Total deposits | $ | 3,698,488 | | | $ | 3,599,087 | | Total deposits | $ | 4,243,648 | | | $ | 3,842,245 | |
Note 98 – Short-Term Borrowings and Long-Term FHLB Advances
A. Short-term borrowings
The Corporation’s short-term borrowings (original maturity of one year or less), which consist of funds obtained from overnight repurchase agreements with commercial customers, FHLB advances with original maturities of one year or less and overnight fed funds, are detailed below.
A summary of short-term borrowings is as follows:
| (dollars in thousands) | (dollars in thousands) | September 30, 2019 | | December 31, 2018 | (dollars in thousands) | June 30, 2020 | | December 31, 2019 |
Repurchase agreements(1) – commercial customers | Repurchase agreements(1) – commercial customers | $ | 19,511 | | | $ | 22,717 | | Repurchase agreements(1) – commercial customers | $ | 28,891 | | | $ | 10,819 | |
Short-term FHLB advances | Short-term FHLB advances | 183,960 | | | 229,650 | | Short-term FHLB advances | — | | | 482,400 | |
| Total short-term borrowings | Total short-term borrowings | $ | 203,471 | | | $ | 252,367 | | Total short-term borrowings | $ | 28,891 | | | $ | 493,219 | |
(1) Overnight repurchase agreements with no expiration date
The following table sets forth information concerning short-term borrowings:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(dollars in thousands) | (dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 | (dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Balance at period-end | Balance at period-end | $ | 203,471 | | | $ | 226,498 | | | $ | 203,471 | | | $ | 226,498 | | Balance at period-end | $ | 28,891 | | | $ | 207,828 | | | $ | 28,891 | | | $ | 207,828 | |
Maximum amount outstanding at any month end | Maximum amount outstanding at any month end | 262,699 | | | 302,932 | | | 262,699 | | | 302,932 | | Maximum amount outstanding at any month end | 174,431 | | | 207,828 | | | 174,431 | | | 207,828 | |
Average balance outstanding during the period | Average balance outstanding during the period | 169,985 | | | 218,551 | | | 132,100 | | | 205,046 | | Average balance outstanding during the period | 136,816 | | | 68,529 | | | 138,700 | | | 112,844 | |
| Weighted-average interest rate: | Weighted-average interest rate: | | Weighted-average interest rate: | |
As of the period-end | As of the period-end | 1.98 | % | | 2.18 | % | | 1.98 | % | | 2.18 | % | As of the period-end | 0.10 | % | | 2.33 | % | | 0.10 | % | | 2.33 | % |
Paid during the period | Paid during the period | 2.19 | % | | 2.09 | % | | 2.26 | % | | 1.85 | % | Paid during the period | 0.68 | % | | 2.09 | % | | 0.99 | % | | 2.32 | % |
Average balances outstanding during the year represent daily average balances and average interest rates represent interest expense divided by the related average balance.
B. Long-term FHLB Advances
As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the Corporation had $44.7$44.8 million and $55.4$52.3 million, respectively, of long-term FHLB advances (original maturities exceeding one year).
The following table presents the remaining periods until maturity of long-term FHLB advances:
| (dollars in thousands) | (dollars in thousands) | September 30, 2019 | | December 31, 2018 | (dollars in thousands) | June 30, 2020 | | December 31, 2019 |
Within one year | Within one year | $ | 24,863 | | | $ | 28,105 | | Within one year | $ | 4,861 | | | $ | 12,363 | |
Over one year through five years | Over one year through five years | 19,872 | | | 27,269 | | Over one year through five years | 39,976 | | | 39,906 | |
Total | Total | $ | 44,735 | | | $ | 55,374 | | Total | $ | 44,837 | | | $ | 52,269 | |
The following table presents rate and maturity information on FHLB advances and other borrowings:
| | | Maturity Range(1) | | | Weighted Average Rate(1) | | Coupon Rate(1) | | | Balance at | | | Maturity Range(1) | | | Weighted Average Rate(1) | | Coupon Rate(1) | | | Balance at | |
Description | Description | From | | To | | | | From | | To | | September 30, 2019 | | December 31, 2018 | Description | From | | To | | | | Weighted Average Rate(1) | From | | To | | | December 31, 2019 |
Bullet maturity – fixed rate | Bullet maturity – fixed rate | 11/20/2019 | | 8/24/2021 | | 1.78 | % | | 1.40 | % | | 2.13 | % | | $ | 44,735 | | | $ | 55,374 | | Bullet maturity – fixed rate | 12/9/2020 | | 11/12/2021 | | 1.73 | % | | 1.40 | % | 2.13 | % | | $ | 44,837 | | | $ | 52,269 | |
|
(1) Maturity range, weighted average rate and coupon rate range refers to SeptemberJune 30, 20192020 balances.
C. Other Borrowings Information
In connection with its FHLB borrowings, the Corporation is required to hold the capital stock of the FHLB. The amount of capital stock held was $16.1$4.5 million at SeptemberJune 30, 2019,2020, and $14.5$23.7 million at December 31, 2018.2019. The carrying amount of the FHLB stock approximates its redemption value.
The level of required investment in FHLB stock is based on the balance of outstanding borrowings the Corporation has from the FHLB. Although FHLB stock is a financial instrument that represents an equity interest in the FHLB, it does not have a readily determinable fair value. FHLB stock is generally viewed as a long-term investment. Accordingly, when evaluating FHLB stock
for impairment, its value should be determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
The Corporation had a maximum borrowing capacity with the FHLB of $1.62$1.83 billion as of SeptemberJune 30, 20192020 of which the unused capacity was $1.39$1.78 billion. In addition, there were $79.0$74.0 million in the overnight federal funds line available and $164.7$166.8 million of FRB discount window capacity.
Note 109 – Subordinated Notes
On December 13, 2017, BMBC completed the issuance of $70.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2027 (the “2027 Notes”) in an underwritten public offering. On August 6, 2015, BMBC completed the issuance of $30.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2025 (the “2025 Notes”) in a private placement transaction to institutional accredited investors. The net proceeds of both offerings increased Tier II regulatory capital at BMBC.
The following tables detail the subordinated notes, including debt issuance costs, as of SeptemberJune 30, 2019,2020, and December 31, 2018:2019:
| | | September 30, 2019 | | | December 31, 2018 | | | June 30, 2020 | | | December 31, 2019 | |
(dollars in thousands) | (dollars in thousands) | Balance | | Rate(1)(2) | | Balance | | Rate(1)(2) | (dollars in thousands) | Balance | | Rate(1)(2) | | Balance | | Rate(1)(2) |
Subordinated notes – due 2027 | Subordinated notes – due 2027 | $ | 68,978 | | | 4.25 | % | | $ | 68,885 | | | 4.25 | % | Subordinated notes – due 2027 | $ | 69,071 | | | 4.25 | % | | $ | 69,009 | | | 4.25 | % |
Subordinated notes – due 2025 | Subordinated notes – due 2025 | 29,682 | | | 4.75 | | | 29,641 | | | 4.75 | | Subordinated notes – due 2025 | 29,723 | | | 4.75 | | | 29,696 | | | 4.75 | |
Total subordinated notes | Total subordinated notes | $ | 98,660 | | | $ | 98,526 | | | Total subordinated notes | $ | 98,794 | | | $ | 98,705 | | |
(1) The 2027 Notes bear interest at an annual fixed rate of 4.25% from the date of issuance until and including December 14, 2022, and will thereafter bear interest at a variable rate that will reset quarterly to a level equal to the then-current three-month LIBOR rate plus 2.050% until December 15, 2027, or any early redemption date.
(2) The 2025 Notes bear interest at an annual fixed rate of 4.75% from the date of issuance until and including August 14, 2020, and will thereafter bear interest at a variable rate that will reset quarterly to a level equal to the then-current three-month LIBOR rate plus 3.068% until August 15, 2025, or any early redemption date.
Note 1110 – Junior Subordinated Debentures
In connection with the RBPI Merger, BMBC acquired Royal Bancshares Capital Trust I (“Trust I”) and Royal Bancshares Capital Trust II (“Trust II”) (collectively, the “Trusts”), which were utilized for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. Although BMBC owns an aggregate of $774 thousand of the common securities of Trust I and Trust II, the Trusts are not consolidated into the Corporation’s Consolidated Financial Statements as the Corporation is not deemed to be the primary beneficiary of these entities. In connection with the issuance and sale of the capital securities, RBPI issued, and the Corporation assumed as a result of the RBPI Merger, junior subordinated debentures to the Trusts of $10.7 million each, totaling $21.4 million representing the Corporation’s maximum exposure to loss. The junior subordinated debentures incur interest at a coupon rate of 4.27%2.46% as of SeptemberJune 30, 2019.2020. The rate resets quarterly based on 3-month LIBOR plus 2.15%.
Each of Trust I and Trust II issued an aggregate principal amount of $12.5 million of capital securities initially bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to an unaffiliated investment vehicle and an aggregate principal amount of $387 thousand of common securities bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to the Corporation. As a result of the RBPI Merger, the Corporation has
fully and unconditionally guaranteed all of the obligations of the Trusts, including any distributions and payments on liquidation or redemption of the capital securities.
The rights of holders of common securities of the Trusts are subordinate to the rights of the holders of capital securities only in the event of a default; otherwise, the common securities’ economic and voting rights are pari passu with the capital securities. The capital and common securities of the Trusts are subject to mandatory redemption upon the maturity or call of the junior subordinated debentures held by each. Unless earlier dissolved, the Trusts will dissolve on December 15, 2034. The junior subordinated debentures are the sole assets of Trusts, mature on December 15, 2034, currently and may be called at par by the
Corporation. The Corporation records its investments in the Trusts’ common securities of $387 thousand each as investments in unconsolidated entities and records dividend income upon declaration by Trust I and Trust II.
Note 1211 – Operating Leases
On January 1, 2019, the Corporation adopted ASU 2016-02 (Topic 842), “Leases”, as further explained in Note 2, Recent Accounting Pronouncements.
The Corporation’s operating leases consist of various retail branch locations and corporate offices. As of SeptemberJune 30, 2019,2020, the Corporation’s leases have remaining lease terms ranging from three months to 2322 years including extension options that the Corporation is reasonably certain will be exercised.
The Corporation’s leases include fixed rental payments, and certain of our leases also include variable rental payments where lease payments may increase at pre-determined dates based on the change in the consumer price index. The Corporation’s lease agreements include gross leases as well as leases in which we make separate payments to the lessor for items such as the property taxes assessed on the property or a portion of the common area maintenance associated with the property. We have elected the practical expedient not to separate lease and non-lease components for all of our building leases. The Corporation also elected to not recognize right-of-use assets (“ROU assetsassets”) and lease liabilities for short-term leases, which consist of certain leases of the Corporation’s limited-hour retirement community offices.
As of SeptemberJune 30, 20192020 the Corporation’s ROU assets and related lease liabilities were $42.2$39.3 million and $46.5$43.7 million, respectively.
The components of lease expense were as follows:
| | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
(dollars in thousands) | | | |
Operating lease expense | $ | 1,331 | | | $ | 3,994 | |
Short term lease expense | 15 | | | 44 | |
Variable lease expense | 297 | | | 1,107 | |
Sublease income | (7) | | | (23) | |
Total lease expense | $ | 1,636 | | | $ | 5,122 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
(dollars in thousands) | | | | | | | |
Operating lease expense | $ | 1,198 | | | $ | 1,333 | | | $ | 2,396 | | | $ | 2,663 | |
Short term lease expense | 14 | | | 14 | | | 29 | | | 29 | |
Variable lease expense | 308 | | | 392 | | | 665 | | | 810 | |
Sublease income | (8) | | | (7) | | | (17) | | | (16) | |
Total lease expense | $ | 1,512 | | | $ | 1,732 | | | $ | 3,073 | | | $ | 3,486 | |
Supplemental cash flow information related to leases was as follows:
| | | | | |
| Nine Months Ended September 30, 2019 |
(dollars in thousands) | |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 3,865 | |
ROU assets obtained in exchange for lease liabilities | 44,944 | |
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
(dollars in thousands) | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 2,348 | | | $ | 2,561 | |
ROU assets obtained in exchange for lease liabilities | — | | | 44,944 | |
Maturities of operating lease liabilities under FASB ASC 842 “Leases” as of SeptemberJune 30, 20192020 are as follows:
| | | | | |
| September 30, 2019 |
(dollars in thousands) | |
2019 | $ | 1,309 | |
2020 | 4,707 | |
2021 | 4,484 | |
2022 | 4,209 | |
2023 | 4,061 | |
2024 and thereafter | 41,862 | |
Total lease payments | 60,632 | |
Less: imputed interest | 14,126 | |
Present value of operating lease liabilities | $ | 46,506 | |
| | | | | |
| June 30, 2020 |
(dollars in thousands) | |
2020 | $ | 2,357 | |
2021 | 4,479 | |
2022 | 4,200 | |
2023 | 4,047 | |
2024 | 4,076 | |
2025 and thereafter | 37,308 | |
Total lease payments | 56,467 | |
Less: imputed interest | 12,774 | |
Present value of operating lease liabilities | $ | 43,693 | |
As of SeptemberJune 30, 2019,2020, the weighted-average remaining lease term, including extension options that the Corporation is reasonably certain will be exercised, for all operating leases is 14.3913.94 years.
Because we generally do not have access to the rate implicit in the lease, we utilize our incremental borrowing rate as the discount rate. The weighted average discount rate associated with operating leases as of SeptemberJune 30, 20192020 is 3.56%3.58%.
As of SeptemberJune 30, 2019,2020, the Corporation had not entered into any material leases that have not yet commenced.
Future minimum cash rent commitments from various operating leases under FASB ASC 840 “Leases” as of December 31, 2018 are as follows:
| | | | | |
(dollars in thousands) | December 31, 2018 |
2019 | $ | 5,211 | |
2020 | 4,700 | |
2021 | 4,478 | |
2022 | 4,203 | |
2023 | 4,051 | |
2024 and thereafter | 41,845 | |
Total | $ | 64,488 | |
Note 1312 – Derivative Instruments and Hedging Activities
Derivative financial instruments involve, to varying degrees, interest rate, market and credit risk. Management manages these risks as part of its asset and liability management process and through credit policies and procedures. Management seeks to minimize counterparty credit risk by establishing credit limits and collateral agreements and utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The derivative transactions entered into by the Corporation are an economic hedge of a derivative offerings to Bank customers. The Corporation does not use derivative financial instruments for trading purposes.
Customer Derivatives – Interest Rate Swaps. The Corporation enters into interest rate swaps with commercial loan customers and correspondent banks wishing to manage interest rate risk. The Corporation then enters into corresponding swap agreements with swap dealer counterparties to economically hedge the exposure arising from these contracts. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. As of SeptemberJune 30, 2019,2020, there were no fair value adjustments related to credit quality.
Foreign Exchange Forward Contracts. The Corporation enters into foreign exchange forward contracts (“FX forwards”) with customers to exchange one currency for another on an agreed date in the future at an agreed exchange rate. The Corporation
then enters into corresponding FX forwards with swap dealer counterparties to economically hedge its exposure on the exchange rate component of the customer agreements. The FX forwards with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. Exposure to gains and losses on these contracts increase or decrease over their respective lives as currency exchange and interest rates fluctuate. As the FX forwards are structured to offset each other, changes to the underlying term structure of currency exchange rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. As of SeptemberJune 30, 2019,2020, there were no fair value adjustments related to credit quality.
Risk Participation Agreements. The Corporation may enter into a risk participation agreement (“RPA”) with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed. This type of derivative is referred to as an “RPA sold.” In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the
Corporation has provided a loan structured with a derivative, the Corporation may purchase an RPA from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA purchased.”
The following tables detail the derivative instruments as of SeptemberJune 30, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | | | Liability Derivatives | | |
(dollars in thousands) | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
Derivatives not designated as hedging instruments | | | | | | | | | | | |
As of September 30, 2019: | | | | | | | |
Customer derivatives – interest rate swaps | $ | 598,381 | | | $ | 62,571 | | | $ | 598,381 | | | $ | 62,140 | |
FX forwards | 39 | | | — | | | 39 | | | — | |
RPAs sold | — | | | — | | | 5,088 | | | 30 | |
RPAs purchased | 28,648 | | | 151 | | | — | | | — | |
Total derivatives | $ | 627,068 | | | $ | 62,722 | | | $ | 603,508 | | | $ | 62,170 | |
As of December 31, 2018: | | | | | | | |
Customer derivatives – interest rate swaps | $ | 369,623 | | | $ | 12,550 | | | $ | 369,623 | | | $ | 12,549 | |
RPAs sold | — | | | — | | | 854 | | | 2 | |
RPAs purchased | 35,305 | | | 71 | | | — | | | — | |
Total derivatives | $ | 404,928 | | | $ | 12,621 | | | $ | 370,477 | | | $ | 12,551 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | | | Liability Derivatives | | |
(dollars in thousands) | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
Derivatives not designated as hedging instruments | | | | | | | |
As of June 30, 2020: | | | | | | | |
Customer derivatives – interest rate swaps | $ | 970,146 | | | $ | 143,339 | | | $ | 970,146 | | | $ | 143,339 | |
FX forwards | 3,528 | | | 36 | | | 4,116 | | | 107 | |
RPAs sold | — | | | — | | | 14,164 | | | 39 | |
RPAs purchased | 39,995 | | | 358 | | | — | | | — | |
Total derivatives | $ | 1,013,669 | | | $ | 143,733 | | | $ | 988,426 | | | $ | 143,485 | |
As of December 31, 2019: | | | | | | | |
Customer derivatives – interest rate swaps | $ | 790,209 | | | $ | 47,627 | | | $ | 790,209 | | | $ | 47,627 | |
RPAs sold | — | | | — | | | 4,232 | | | 16 | |
RPAs purchased | 20,249 | | | 90 | | | — | | | — | |
Total derivatives | $ | 810,458 | | | $ | 47,717 | | | $ | 794,441 | | | $ | 47,643 | |
The Corporation has International Swaps and Derivatives Association agreements with third parties that requires a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties at SeptemberJune 30, 20192020 and December 31, 20182019 was $62.2$157.5 million and $8.8$63.8 million, respectively.respectively, and is comprised of a combination of cash and investment securities. The amount of collateral posted with third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $61.7$143.3 million and $11.5$46.7 million as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.
Note 1413 – Accounting for Uncertainty in Income Taxes
The Corporation recognizes the financial statement benefit of a tax position only after determining that the Corporation would be more likely than not to sustain the position following an examination. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon settlement with the relevant tax authority.
The Corporation is subject to income taxes in the United States federal jurisdiction and multiple state jurisdictions. The Corporation is no longer subject to U.S. federal income tax examination by taxing authorities for years before 2016.
The Corporation’s policy is to record interest and penalties on uncertain tax positions as income tax expense. NaN interest or penalties were accrued for the ninesix months ended SeptemberJune 30, 20192020 or 2018.2019.
Note 1514 – Shareholders’ Equity
Dividend
On October 17, 2019,July 20, 2020, BMBC’s Board of Directors declared a regular quarterly dividend of $0.26$0.27 per share payable DecemberSeptember 1, 20192020 to shareholders of record as of November 1, 2019.August 3, 2020. During the thirdsecond quarter of 2019,2020, the Corporation paid or accrued, as applicable, a regular quarterly dividend of $0.26 per share. This dividend totaled $5.4$5.3 million, based on outstanding shares and restricted stock units as of August 1, 2019April 30, 2020 of 20,447,94720,251,459 shares.
S-3 Shelf Registration Statement and Offerings Thereunder
In May 2018, BMBC filed a shelf registration statement on Form S-3, SEC File No. 333-224849 (the “Shelf Registration Statement”). The Shelf Registration Statement allows BMBC to raise additional capital from time to time through offers and sales of registered securities consisting of common stock, debt securities, warrants, purchase contracts, rights and units or units consisting of any combination of the foregoing securities. BMBC may sell these securities using the prospectus in the Shelf Registration Statement, together with applicable prospectus supplements, from time to time, in one or more offerings.
In addition, BMBC has in place a Dividend Reinvestment and Stock Purchase Plan (the “Plan”), which allows it to issue up to 1,500,000 shares of registered common stock. The Plan allows for the grant of a request for waiver (“RFW”) above the Plan’s maximum investment of $120 thousand per account per year. A RFW is granted based on a variety of factors, including BMBC’s current and projected capital needs, prevailing market prices of BMBC’s common stock and general economic and market conditions.
For the three and ninesix months ended SeptemberJune 30, 2019,2020, BMBC did not issue any shares under the Plan. The Plan administrator conducted dividend reinvestments for Plan participants through open market purchases. No RFWs were approved during the three and ninesix months ended SeptemberJune 30, 2019.2020. No other sales of equity securities were executed under the Shelf Registration Statement during the three and ninesix months ended SeptemberJune 30, 2019.2020.
Option Exercises and Vesting of Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”)
In addition to shares that may be issued through the Plan, the Corporation also issues shares through the exercise of stock options and the vesting of RSUs and PSUs. During the three and ninesix months ended SeptemberJune 30, 2019, 15,6252020, 338 shares and 49,700 shares, respectively, were issued pursuant to the exercise of stock options, increasing shareholders’ equity by $285 thousand and $907 thousand, respectively.$5 thousand. NaN shares were issued pursuant to the exercise of stock options during the three months ended June 30, 2020. The increase in shareholders’ equity related to the vesting of RSUs and PSUs, which is recognized over the vesting period through stock based compensation expense, was $933$624 thousand and $3.0$1.5 million for the three and ninesix months ended SeptemberJune 30, 2019, respectively.2020.
Stock Repurchases
On August 6, 2015, BMBC announced a stock repurchase program (the “2015 Program”) pursuant to which the Corporation may repurchase up to 1,200,000 shares of BMBC’s common stock, at an aggregate purchase price not to exceed $40 million. The 2015 Program was completed during the second quarter of 2019. During the six months ended June 30, 2019, 40,016 shares were repurchased under the 2015 Program at an average price of $38.12. As of June 30, 2019, there were 0 shares remaining authorized for repurchase under the 2015 Program.
On April 18, 2019, BMBC announced a new stock repurchase program (the “2019 Program”) pursuant to which the Corporation may repurchase up to 1,000,000 shares of BMBC's common stock. Under the 2019 Program, the Corporation may repurchase BMBC's common stock at any price, but the aggregate purchase price is not to exceed $45 million. The 2019 Program became effective in the second quarter of 2019 upon the completion of BMBC’s existing 2015 Program.2019. During the three and nine months ended September 30, 2019, 54,291 and 82,767March 31, 2020, 207,201 shares respectively, were repurchased under the 2019 Program at an average price of $35.38 and $36.22, respectively.$34.99. No shares were repurchased during the three months ended June 30, 2020. All share repurchases were accomplished in open market transactions. As of SeptemberJune 30, 2019,2020, the maximum number of shares remaining authorized for repurchase under the 2019 Program was 917,233,710,032, at an aggregate purchase price not to exceed $43.9$34.8 million.
In addition to the 2015 Program and 2019 Program, it is BMBC’s practice to retire shares to its treasury account upon the vesting of stock awards to certain officers in order to cover the statutory income tax withholdings related to such vestings.
Note 1615 – Accumulated Other Comprehensive Income (Loss)
The following table details the components of accumulated other comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | Net Change in Unrealized Gains on Available-for- Sale Investment Securities | | Net Change in Unfunded Pension Liability | | Accumulated Other Comprehensive Income (Loss) |
Balance, June 30, 2019 | $ | 2,952 | | | $ | (1,252) | | | $ | 1,700 | |
Other comprehensive income | 983 | | | 15 | | | 998 | |
Balance, September 30, 2019 | $ | 3,935 | | | $ | (1,237) | | | $ | 2,698 | |
| | | | | |
Balance, June 30, 2018 | $ | (9,669) | | | $ | (1,522) | | | $ | (11,191) | |
Other comprehensive (loss) income | (2,319) | | | 108 | | | (2,211) | |
Balance, September 30, 2018 | $ | (11,988) | | | $ | (1,414) | | | $ | (13,402) | |
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | Net Change in Unrealized Gains on Available-for- Sale Investment Securities | | Net Change in Unfunded Pension Liability | | Accumulated Other Comprehensive Income (Loss) |
Balance, March 31, 2020 | $ | 10,569 | | | $ | (1,700) | | | $ | 8,869 | |
Other comprehensive income | 127 | | | 23 | | | 150 | |
Balance, June 30, 2020 | $ | 10,696 | | | $ | (1,677) | | | $ | 9,019 | |
| | | | | |
Balance, March 31, 2019 | $ | (2,010) | | | $ | (1,268) | | | $ | (3,278) | |
Other comprehensive income | 4,962 | | | 16 | | | 4,978 | |
Balance, June 30, 2019 | $ | 2,952 | | | $ | (1,252) | | | $ | 1,700 | |
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | Net Change in Unrealized Gains on Available-for- Sale Investment Securities | | Net Change in Unfunded Pension Liability | | Accumulated Other Comprehensive (Loss) Income |
Balance, December 31, 2018 | $ | (6,229) | | | $ | (1,284) | | | $ | (7,513) | |
Other comprehensive income | 10,164 | | | 47 | | | 10,211 | |
Balance, September 30, 2019 | $ | 3,935 | | | $ | (1,237) | | | $ | 2,698 | |
| | | | | |
Balance, December 31, 2017 | $ | (2,861) | | | $ | (1,553) | | | $ | (4,414) | |
Other comprehensive (loss) income | (9,127) | | | 139 | | | (8,988) | |
Balance, September 30, 2018 | $ | (11,988) | | | $ | (1,414) | | | $ | (13,402) | |
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | Net Change in Unrealized Gains on Available-for- Sale Investment Securities | | Net Change in Unfunded Pension Liability | | Accumulated Other Comprehensive Income (Loss) |
Balance, December 31, 2019 | $ | 3,910 | | | $ | (1,723) | | | $ | 2,187 | |
Other comprehensive income | 6,786 | | | 46 | | | 6,832 | |
Balance, June 30, 2020 | $ | 10,696 | | | $ | (1,677) | | | $ | 9,019 | |
| | | | | |
Balance, December 31, 2018 | $ | (6,229) | | | $ | (1,284) | | | $ | (7,513) | |
Other comprehensive income | 9,181 | | | 32 | | | 9,213 | |
Balance, June 30, 2019 | $ | 2,952 | | | $ | (1,252) | | | $ | 1,700 | |
The following table details the amounts reclassified from each component of accumulated other comprehensive income (loss) to each component’s applicable income statement line, for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
| | | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | | | | | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | | | |
Description of Accumulated Other Comprehensive Income (Loss) Component | Description of Accumulated Other Comprehensive Income (Loss) Component | | Three Months Ended September 30, | | | Affected Income Statement Category | Description of Accumulated Other Comprehensive Income (Loss) Component | | Three Months Ended June 30, | | | Affected Income Statement Category |
| | | 2019 | | 2018 | | | | | 2020 | | 2019 | | |
| Unfunded pension liability: | Unfunded pension liability: | | Unfunded pension liability: | |
Amortization of net loss included in net periodic pension costs(1) | Amortization of net loss included in net periodic pension costs(1) | | $ | 10 | | | $ | 25 | | | Other operating expenses | Amortization of net loss included in net periodic pension costs(1) | | $ | 17 | | | $ | 13 | | | Other operating expenses |
Income tax effect | Income tax effect | | (2) | | | (5) | | | Income tax expense | Income tax effect | | (3) | | | (3) | | | Income tax expense |
Net of income tax | Net of income tax | | $ | 8 | | | $ | 20 | | | Net income | Net of income tax | | $ | 14 | | | $ | 10 | | | Net income |
| | | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | | | | | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | | | |
Description of Accumulated Other Comprehensive Income (Loss) Component | Description of Accumulated Other Comprehensive Income (Loss) Component | | Nine Months Ended September 30, | | | Affected Income Statement Category | Description of Accumulated Other Comprehensive Income (Loss) Component | | Six Months Ended June 30, | | | Affected Income Statement Category |
| | | 2019 | | 2018 | | | | | 2020 | | 2019 | | |
Net unrealized gain on investment securities available for sale: | | |
Realization of gain on sale of investment securities available for sale | | $ | — | | | $ | (7) | | | Net gain on sale of available for sale investment securities | |
Realization of gain on transfer of investment securities available for sale to trading | | — | | | (417) | | | Other operating income | |
Total | | — | | | (424) | | | |
Income tax effect | | — | | | 89 | | | Income tax expense | |
Net of income tax | | $ | — | | | $ | (335) | | | Net income | |
| | Unfunded pension liability: | Unfunded pension liability: | | Unfunded pension liability: | |
Amortization of net loss included in net periodic pension costs(1) | Amortization of net loss included in net periodic pension costs(1) | | $ | 34 | | | $ | 75 | | | Other operating expenses | Amortization of net loss included in net periodic pension costs(1) | | $ | 35 | | | $ | 24 | | | Other operating expenses |
Income tax effect | Income tax effect | | (7) | | | (15) | | | Income tax expense | Income tax effect | | (7) | | | (5) | | | Income tax expense |
Net of income tax | Net of income tax | | $ | 27 | | | $ | 60 | | | Net income | Net of income tax | | $ | 28 | | | $ | 19 | | | Net income |
(1) Accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost.
Note 1716 – Earnings per Common Share
Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution that would occur if in-the-money stock options were exercised and converted into common shares and RSUs and PSUs were vested. Proceeds assumed to have been received on option exercises are assumed to be used to purchase shares of BMBC’s common stock at the average market price during the period, as required by the treasury stock method of accounting. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive.
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(dollars in thousands except share and per share data) | (dollars in thousands except share and per share data) | 2019 | | 2018 | | 2019 | | 2018 | (dollars in thousands except share and per share data) | 2020 | | 2019 | | 2020 | | 2019 |
Numerator: | Numerator: | | | | | | | | Numerator: | | | | | | | |
Net income available to common shareholders | Net income available to common shareholders | $ | 16,360 | | | $ | 16,682 | | | $ | 42,822 | | | $ | 46,656 | | Net income available to common shareholders | $ | 15,035 | | | $ | 15,785 | | | $ | 3,872 | | | $ | 26,462 | |
Denominator for basic earnings per share – weighted average shares outstanding | Denominator for basic earnings per share – weighted average shares outstanding | 20,132,117 | | | 20,270,706 | | | 20,148,289 | | | 20,237,757 | | Denominator for basic earnings per share – weighted average shares outstanding | 19,926,737 | | | 20,144,651 | | | 19,989,948 | | | 20,156,509 | |
Effect of dilutive common shares | Effect of dilutive common shares | 76,513 | | | 167,670 | | | 88,042 | | | 206,318 | | Effect of dilutive common shares | 81,482 | | | 99,758 | | | 87,211 | | | 99,960 | |
Denominator for diluted earnings per share – adjusted weighted average shares outstanding | Denominator for diluted earnings per share – adjusted weighted average shares outstanding | 20,208,630 | | | 20,438,376 | | | 20,236,331 | | | 20,444,075 | | Denominator for diluted earnings per share – adjusted weighted average shares outstanding | 20,008,219 | | | 20,244,409 | | | 20,077,159 | | | 20,256,469 | |
Basic earnings per share | Basic earnings per share | $ | 0.81 | | | $ | 0.82 | | | $ | 2.13 | | | $ | 2.31 | | Basic earnings per share | $ | 0.75 | | | $ | 0.78 | | | $ | 0.19 | | | $ | 1.31 | |
Diluted earnings per share | Diluted earnings per share | 0.81 | | | 0.82 | | | 2.12 | | | 2.28 | | Diluted earnings per share | 0.75 | | | 0.78 | | | 0.19 | | | 1.31 | |
Antidilutive shares excluded from computation of average dilutive earnings per share | Antidilutive shares excluded from computation of average dilutive earnings per share | 769 | | | 22,232 | | | 1,840 | | | 48,807 | | Antidilutive shares excluded from computation of average dilutive earnings per share | 76,038 | | | 14,441 | | | 71,260 | | | 30,506 | |
Note 1817 – Revenue from Contracts with Customers
All of the Corporation’s revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income. The following table presents the Corporation’s noninterest income by revenue stream and reportable segment for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. Items outside the scope of ASC 606 are noted as such.
| | | Three Months Ended September 30, 2019 | | | Three Months Ended September 30, 2018 | | | Three Months Ended June 30, 2020 | | | Three Months Ended June 30, 2019 | |
(dollars in thousands) | (dollars in thousands) | Banking | | Wealth Management | | Consolidated | | Banking | | Wealth Management | | Consolidated | (dollars in thousands) | Banking | | Wealth Management | | Consolidated | | Banking | | Wealth Management | | Consolidated |
Fees for wealth management services | Fees for wealth management services | $ | — | | | $ | 10,826 | | | $ | 10,826 | | | $ | — | | | $ | 10,343 | | | $ | 10,343 | | Fees for wealth management services | $ | — | | | $ | 9,069 | | | $ | 9,069 | | | $ | — | | | $ | 11,510 | | | $ | 11,510 | |
Insurance commissions | Insurance commissions | — | | | 1,842 | | | 1,842 | | | — | | | 1,754 | | | 1,754 | | Insurance commissions | — | | | 1,303 | | | 1,303 | | | — | | | 1,697 | | | 1,697 | |
Capital markets revenue(1) | Capital markets revenue(1) | 2,113 | | | — | | | 2,113 | | | 710 | | | — | | | 710 | | Capital markets revenue(1) | 2,975 | | | — | | | 2,975 | | | 1,489 | | | — | | | 1,489 | |
Service charges on deposit accounts | Service charges on deposit accounts | 856 | | | — | | | 856 | | | 726 | | | — | | | 726 | | Service charges on deposit accounts | 603 | | | — | | | 603 | | | 852 | | | — | | | 852 | |
Loan servicing and other fees(1) | Loan servicing and other fees(1) | 555 | | | — | | | 555 | | | 559 | | | — | | | 559 | | Loan servicing and other fees(1) | 452 | | | — | | | 452 | | | 553 | | | — | | | 553 | |
Net gain on sale of loans(1) | Net gain on sale of loans(1) | 674 | | | — | | | 674 | | | 631 | | | — | | | 631 | | Net gain on sale of loans(1) | 3,134 | | | — | | | 3,134 | | | 752 | | | — | | | 752 | |
| Net (loss) gain on sale of OREO | (12) | | | — | | | (12) | | | 5 | | | — | | | 5 | | |
| Dividends on FHLB and FRB stock(1) | Dividends on FHLB and FRB stock(1) | 346 | | | — | | | 346 | | | 375 | | | — | | | 375 | | Dividends on FHLB and FRB stock(1) | 243 | | | — | | | 243 | | | 316 | | | — | | | 316 | |
Other operating income(2) | Other operating income(2) | 2,219 | | | 36 | | | 2,255 | | | 3,123 | | | 48 | | | 3,171 | | Other operating income(2) | 2,699 | | | 88 | | | 2,787 | | | 3,026 | | | 26 | | | 3,052 | |
Total noninterest income | Total noninterest income | $ | 6,751 | | | $ | 12,704 | | | $ | 19,455 | | | $ | 6,129 | | | $ | 12,145 | | | $ | 18,274 | | Total noninterest income | $ | 10,106 | | | $ | 10,460 | | | $ | 20,566 | | | $ | 6,988 | | | $ | 13,233 | | | $ | 20,221 | |
(1) Not within the scope of ASC 606.
(2) Other operating income includes Visa debit card income, safe deposit box rentals, and rent income totaling $588$733 thousand and $595$525 thousand for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively, which are within the scope of ASC 606.
| | | Nine Months Ended September 30, 2019 | | | Nine Months Ended September 30, 2018 | | | Six Months Ended June 30, 2020 | | | Six Months Ended June 30, 2019 | |
(dollars in thousands) | (dollars in thousands) | Banking | | Wealth Management | | Consolidated | | Banking | | Wealth Management | | Consolidated | (dollars in thousands) | Banking | | Wealth Management | | Consolidated | | Banking | | Wealth Management | | Consolidated |
Fees for wealth management services | Fees for wealth management services | $ | — | | | $ | 32,728 | | | $ | 32,728 | | | $ | — | | | $ | 31,309 | | | $ | 31,309 | | Fees for wealth management services | $ | — | | | $ | 20,237 | | | $ | 20,237 | | | $ | — | | | $ | 21,902 | | | $ | 21,902 | |
Insurance commissions | Insurance commissions | — | | | 5,211 | | | 5,211 | | | — | | | 5,349 | | | 5,349 | | Insurance commissions | — | | | 2,836 | | | 2,836 | | | — | | | 3,369 | | | 3,369 | |
Capital markets revenue(1) | Capital markets revenue(1) | 5,821 | | | — | | | 5,821 | | | 3,481 | | | — | | | 3,481 | | Capital markets revenue(1) | 5,336 | | | — | | | 5,336 | | | 3,708 | | | — | | | 3,708 | |
Service charges on deposit accounts | Service charges on deposit accounts | 2,516 | | | — | | | 2,516 | | | 2,191 | | | — | | | 2,191 | | Service charges on deposit accounts | 1,449 | | | — | | | 1,449 | | | 1,660 | | | — | | | 1,660 | |
Loan servicing and other fees(1) | Loan servicing and other fees(1) | 1,717 | | | — | | | 1,717 | | | 1,720 | | | — | | | 1,720 | | Loan servicing and other fees(1) | 913 | | | — | | | 913 | | | 1,162 | | | — | | | 1,162 | |
Net gain on sale of loans(1) | Net gain on sale of loans(1) | 1,745 | | | — | | | 1,745 | | | 1,677 | | | — | | | 1,677 | | Net gain on sale of loans(1) | 3,916 | | | — | | | 3,916 | | | 1,071 | | | — | | | 1,071 | |
Net gain on sale of investment securities available for sale(1) | — | | | — | | | — | | | 7 | | | — | | | 7 | | |
Net (loss) gain on sale of OREO | (36) | | | — | | | (36) | | | 292 | | | — | | | 292 | | |
| Net gain (loss) on sale of OREO | | Net gain (loss) on sale of OREO | 148 | | | — | | | 148 | | | (24) | | | — | | | (24) | |
Dividends on FHLB and FRB stock(1) | Dividends on FHLB and FRB stock(1) | 1,073 | | | — | | | 1,073 | | | 1,316 | | | — | | | 1,316 | | Dividends on FHLB and FRB stock(1) | 687 | | | — | | | 687 | | | 727 | | | — | | | 727 | |
Other operating income(2) | Other operating income(2) | 8,071 | | | 83 | | | 8,154 | | | 10,393 | | | 150 | | | 10,543 | | Other operating income(2) | 3,243 | | | 101 | | | 3,344 | | | 5,852 | | | 47 | | | 5,899 | |
Total noninterest income | Total noninterest income | $ | 20,907 | | | $ | 38,022 | | | $ | 58,929 | | | $ | 21,077 | | | $ | 36,808 | | | $ | 57,885 | | Total noninterest income | $ | 15,692 | | | $ | 23,174 | | | $ | 38,866 | | | $ | 14,156 | | | $ | 25,318 | | | $ | 39,474 | |
(1) Not within the scope of ASC 606.
(2) Other operating income includes Visa debit card income, safe deposit box rentals, and rent income totaling $1.6$1.4 million and $1.7$1.0 million for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively, which are within the scope of ASC 606.
A description of the Corporation’s primary revenue streams accounted for under ASC 606 follows:
Service Charges on Deposit Accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation.
Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.
Wealth Management Fees: The Corporation earns wealth management fee revenue from a variety of sources including fees from trust administration and other related fiduciary services, custody, investment management and advisory services, employee benefit account and IRA administration, estate settlement, tax service fees, shareholder service fees and brokerage.
Fees that are determined based on the market value of the assets held in their accounts are generally billed monthly or quarterly, in arrears, based on the market value of assets at the end of the previous billing period. Other related services that are based on a fixed fee schedule are recognized when the services are rendered. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e. the trade date.
Included in other assets on the balance sheet is a receivable for wealth management fees that have been earned but not yet collected.
Insurance Commissions: The Corporation earns commissions from the sale of insurance policies, which are generally calculated as a percentage of the policy premium, and contingent income, which is calculated based on the volume and performance of the policies held by each carrier. Obligations for the sale of insurance policies are generally satisfied at the point in time which the policy is executed and are recognized at the point in time in which the amounts are known and collection is reasonably assured. Performance metrics for contingent income are generally satisfied over time, not exceeding one year, and are recognized at the point in time in which the amounts are known and collection is reasonably assured.
Visa Debit Card Income: The Corporation earns income fees from debit cardholder transactions conducted through the Visa payment network. Fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
Gains/Losses on Sales of OREO: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.
Note 1918 – Stock-Based Compensation
A. General Information
BMBC permits the issuance of stock options, dividend equivalents, performance stock awards, stock appreciation rights and restricted stock units or awards to employees and directors of the Corporation under several plans. The performance awards and restricted awards may be in the form of stock awards or stock units. Stock awards and stock units differ in that for a stock award, shares of restricted stock are issued in the name of the grantee, whereas a stock unit constitutes a promise to issue shares of stock upon vesting. The accounting for awards and units is identical. The terms and conditions of awards under the plans are determined by the Corporation’s Management Development and Compensation Committee.
Prior to April 25, 2007, all shares authorized for grant as stock-based compensation were limited to grants of stock options. On April 25, 2007, the shareholders approved BMBC’s “2007 Long-Term Incentive Plan” (the “2007 LTIP”) under which a total of 428,996 shares of BMBC’s common stock were made available for award grants. On April 28, 2010, the shareholders approved BMBC’s “2010 Long Term Incentive Plan” under which a total of 445,002 shares of BMBC’s common stock were made available for award grants, and on April 30, 2015, the shareholders approved an amendment and restatement of such plan (as amended and restated, the “2010 LTIP”) to, among other things, increase the number of shares available for award grants by 500,000 to 945,002.
In addition to the shareholder-approved plans mentioned in the preceding paragraph, BMBC periodically authorizes grants of stock-based compensation as inducement awards to new employees. This type of award does not require shareholder approval in accordance with Rule 5635(c)(4) of the NASDAQ listing rules.
The equity awards are authorized to be in the form of, among others, options to purchase BMBC’s common stock, RSUs and PSUs.
RSUs have a restriction based on the passage of time. The grant date fair value of the RSUs is based on the closing price on the date of the grant.
PSUs have restrictions based on performance criteria and the passage of time. The performance criteria may be a market-based criteria measured by BMBC’s total shareholder return (“TSR”) relative to the performance of the community bank index for the respective period. The fair value of the PSUs based on BMBC’s TSR relative to the performance of a designated peer group or the NASDAQ Community Bank Index is calculated using the Monte Carlo Simulation method. The performance criteria may
also be based on a non-market-based criteria such as return on average equity relative to that designated peer group. The grant date fair value of these PSUs is based on the closing price of BMBC’s stock on the date of the grant. PSU grants may have a vesting percent ranging from 0% to 150%.
B. Other Stock Option Information
The following table provides information about options outstanding for the three and ninesix months ended SeptemberJune 30, 2019:2020:
| | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price | | Weighted Average Grant Date Fair Value |
Options outstanding, June 30, 2019 | 16,526 | | | $ | 18.33 | | | $ | 5.09 | |
Forfeited | — | | | — | | | — | |
Expired | — | | | — | | | — | |
Exercised | (15,625) | | | 18.27 | | | 4.42 | |
Options outstanding, September 30, 2019 | 901 | | | 19.33 | | | 16.78 | |
| | | Shares | | Weighted Average Exercise Price | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Exercise Price | | Weighted Average Grant Date Fair Value |
Options outstanding, December 31, 2018 | 50,601 | | | $ | 18.28 | | | $ | 4.68 | | |
Options outstanding, March 31, 2020 | | Options outstanding, March 31, 2020 | 563 | | | $ | 21.32 | | | $ | 19.09 | |
Forfeited | Forfeited | — | | | — | | | — | | Forfeited | — | | | — | | | — | |
Expired | Expired | — | | | — | | | — | | Expired | — | | | — | | | — | |
Exercised | Exercised | (49,700) | | | 18.26 | | | 4.46 | | Exercised | — | | | — | | | — | |
Options outstanding, September 30, 2019 | 901 | | | 19.33 | | | 16.78 | | |
Options outstanding, June 30, 2020 | | Options outstanding, June 30, 2020 | 563 | | | 21.32 | | | 19.09 | |
| | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price | | Weighted Average Grant Date Fair Value |
Options outstanding, December 31, 2019 | 901 | | | $ | 19.33 | | | $ | 16.78 | |
Forfeited | — | | | — | | | — | |
Expired | — | | | — | | | — | |
Exercised | (338) | | | 16.02 | | | 12.93 | |
Options outstanding, June 30, 2020 | 563 | | | 21.32 | | | 19.09 | |
As of SeptemberJune 30, 20192020 there were 0 unvested options.
Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows for the periods presented:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(dollars in thousands) | (dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 | (dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Proceeds from exercise of stock options | Proceeds from exercise of stock options | $ | 285 | | | $ | 349 | | | $ | 907 | | | $ | 1,456 | | Proceeds from exercise of stock options | $ | — | | | $ | 82 | | | $ | 5 | | | $ | 622 | |
Related tax benefit recognized | Related tax benefit recognized | 57 | | | 81 | | | 212 | | | 312 | | Related tax benefit recognized | — | | | 18 | | | 2 | | | 155 | |
Net proceeds of options exercised | Net proceeds of options exercised | $ | 342 | | | $ | 430 | | | $ | 1,119 | | | $ | 1,768 | | Net proceeds of options exercised | $ | — | | | $ | 100 | | | $ | 7 | | | $ | 777 | |
| Intrinsic value of options exercised | Intrinsic value of options exercised | $ | 272 | | | $ | 386 | | | $ | 1,010 | | | $ | 1,484 | | Intrinsic value of options exercised | $ | — | | | $ | 86 | | | $ | 8 | | | $ | 738 | |
The following table provides information about options outstanding and exercisable at SeptemberJune 30, 2019:
| | | | | | | | | | | |
(dollars in thousands, except share data and exercise price) | Outstanding | | Exercisable |
Number of shares | 901 | | | 901 | |
Weighted average exercise price | $ | 19.33 | | | $ | 19.33 | |
Aggregate intrinsic value | $ | 314 | | | $ | 314 | |
Weighted average remaining contractual term in years | 2.8 | | 2.8 |
2020:
| | | | | | | | | | | |
(dollars in thousands, except share data and exercise price) | Outstanding | | Exercisable |
Number of shares | 563 | | | 563 | |
Weighted average exercise price | $ | 21.32 | | | $ | 21.32 | |
Aggregate intrinsic value | $ | 4 | | | $ | 4 | |
Weighted average remaining contractual term in years | 3.6 | | 3.6 |
C. Restricted Stock Units and Performance Stock Units
The Corporation has granted RSUs and PSUs under the 2007 LTIP and 2010 LTIP and in accordance with Rule 5635(c)(4) of the NASDAQ listing standards.
RSUs
The compensation expense for the RSUs is measured based on the market price of the stock on the day prior to the grant date and is recognized on a straight-line basis over the vesting period.
For the three and ninesix months ended SeptemberJune 30, 2019,2020, the Corporation recognized $466$471 thousand and $1.4$0.9 million, respectively, of expense related to the Corporation’s RSUs. As of SeptemberJune 30, 2019,2020, there was $3.4$2.8 million of unrecognized compensation cost related to RSUs. This cost will be recognized over a weighted average period of 2.32 years.
During the first quarter of 2019, the Corporation adopted a voluntary Years of Service Incentive Program (the “Incentive Program”) which offers certain benefits to eligible employees who meet the Incentive Program requirements and voluntarily exit from service with the Corporation, the Bank or one of their subsidiaries. As part of the Incentive Program, the Corporation elected to remove the service requirement as an RSU vesting condition for employees who held RSUs and chose to participate in the Incentive Program. As a result, 3,494 RSUs have been modified through September 30, 2019, which resulted in $112 thousand of incremental expense to date, all of which was recognized during the three months ended March 31, 2019.
The following table details the RSUs for the three and ninesix months ended SeptemberJune 30, 2019:2020:
| | | Three Months Ended September 30, 2019 | | | Nine Months Ended September 30, 2019 | | | Three Months Ended June 30, 2020 | | | Six Months Ended June 30, 2020 | |
| | Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
Beginning balance | Beginning balance | 135,491 | | | $ | 38.27 | | | 76,746 | | | $ | 39.71 | | Beginning balance | 136,725 | | | $ | 38.02 | | | 115,466 | | | $ | 38.57 | |
Granted | Granted | 3,098 | | | 35.42 | | | 70,406 | | | 36.30 | | Granted | — | | | — | | | 26,818 | | | 35.90 | |
Vested | Vested | (16,095) | | | 34.06 | | | (19,229) | | | 33.41 | | Vested | (6,799) | | | 39.82 | | | (11,772) | | | 39.73 | |
Forfeited | Forfeited | (298) | | | 36.19 | | | (5,727) | | | 39.38 | | Forfeited | — | | | — | | | (586) | | | 35.74 | |
Ending balance | Ending balance | 122,196 | | | 38.75 | | | 122,196 | | | 38.75 | | Ending balance | 129,926 | | | 37.92 | | | 129,926 | | | 37.92 | |
PSUs
For the three and ninesix months ended SeptemberJune 30, 2019,2020, the Corporation recognized $467$153 thousand and $1.6$0.6 million, respectively, of expense related to the PSUs. As of SeptemberJune 30, 2019,2020, there was $3.3$2.3 million of unrecognized compensation cost related to PSUs. This cost will be recognized over a weighted average period of 2.11.8 years.
As part of the Incentive Program, the Corporation elected to remove the service requirement as a PSU vesting condition for employees who held PSUs and chose to participate in the Incentive Program. As a result, 8,208 PSUs have been modified through September 30, 2019, which resulted in $250 thousand of incremental expense to date, all of which was recognized during the three months ended March 31, 2019.
The following table details the PSUs for the three and ninesix months ended SeptemberJune 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | | | Nine Months Ended September 30, 2019 | | |
| Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
Beginning balance | 179,893 | | | $ | 35.72 | | | 121,656 | | | $ | 36.82 | |
Granted | 444 | | | 31.96 | | | 69,553 | | | 34.27 | |
Added by performance | 3,688 | | | 30.45 | | | 3,688 | | | 30.45 | |
Vested(1) | (31,507) | | | 29.38 | | | (31,507) | | | 29.38 | |
Forfeited | (14,072) | | | 27.13 | | | (24,944) | | | 32.31 | |
Ending balance | 138,446 | | | 37.88 | | | 138,446 | | | 37.88 | |
(1) Includes an aggregate of 41 shares paid in cash in lieu of fractional shares.2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | Six Months Ended June 30, 2020 | | |
| Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
Beginning balance | 189,808 | | | $ | 37.31 | | | 136,271 | | | $ | 37.87 | |
Granted | — | | | — | | | 53,685 | | | 35.90 | |
| | | | | | | |
Vested | — | | | — | | | — | | | — | |
Forfeited | — | | | — | | | (148) | | | 40.35 | |
Ending balance | 189,808 | | | 37.31 | | | 189,808 | | | 37.31 | |
Note 2019 – Fair Value Measurement
FASB ASC 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under FASB ASC Topic 820 are:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active and model derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A. Assets and liabilities measured on a recurring basis
A description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Investment Securities
The value of the Corporation’s available for sale investment securities, which include obligations of the U.S. government and its agencies, mortgage-backed securities issued by U.S. government- and U.S. government sponsored agencies, obligations of state and political subdivisions, corporate bonds and other debt securities are determined by the Corporation, taking into account the input of an independent third party valuation service provider. The third party’s evaluations are based on market data, utilizing pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their pricing models apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain securities, additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions. Management reviews, annually, the process utilized by its independent third-party valuation service provider. On a quarterly basis, management tests the validity of the prices provided by the third party by selecting a representative sample of the portfolio and obtaining actual trade results, or if actual trade results are not available, competitive broker pricing. On an annual basis, management evaluates, for appropriateness, the methodology utilized by the independent third-party valuation service provider.
U.S. Governmentgovernment agencies are evaluated and priced using multi-dimensional relational models and option adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage-backed securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks. Other available-for-sale investments are evaluated using a broker-quote based application, including quotes from issuers.
Interest Rate Swaps, FX Forwards, and Risk Participation Agreements
The Corporation’s interest rate swaps, FX forwards, and RPAs are reported at fair value utilizing Level 2 inputs. Prices of these instruments are obtained through an independent pricing source utilizing pricing information which may include market observed quotations for swaps, LIBOR rates, forward rates and rate volatility. When entering into a derivative contract, the Corporation is exposed to fair value changes due to interest rate movements, and the potential non-performance of our contract counterparty. The Corporation has developed a methodology to value the non-performance risk based on internal credit risk metrics and the unique characteristics of derivative instruments, which include notional exposure rather than principle at risk
and interest payment netting. The results of this methodology are used to adjust the base fair value of the instrument for the potential counterparty credit risk.
The following tables present the Corporation’s assets measured at fair value on a recurring basis as of SeptemberJune 30, 20192020 and December 31, 2018:2019:
| As of September 30, 2019 | | | | | | | | |
As of June 30, 2020 | | As of June 30, 2020 | | | | | | | |
(dollars in thousands) | (dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 | (dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Investment securities available for sale: | Investment securities available for sale: | | | | | | | | Investment securities available for sale: | | | | | | | |
U.S. Treasury securities | U.S. Treasury securities | $ | 101 | | | $ | 101 | | | $ | — | | | $ | — | | U.S. Treasury securities | $ | 100 | | | $ | 100 | | | $ | — | | | $ | — | |
Obligations of U.S. government & agencies | Obligations of U.S. government & agencies | 172,753 | | | — | | | 172,753 | | | — | | Obligations of U.S. government & agencies | 114,149 | | | — | | | 114,149 | | | — | |
Obligations of state & political subdivisions | Obligations of state & political subdivisions | 6,327 | | | — | | | 6,327 | | | — | | Obligations of state & political subdivisions | 4,583 | | | — | | | 4,583 | | | — | |
Mortgage-backed securities | Mortgage-backed securities | 388,891 | | | — | | | 388,891 | | | — | | Mortgage-backed securities | 377,204 | | | — | | | 377,204 | | | — | |
Collateralized mortgage obligations | Collateralized mortgage obligations | 35,459 | | | — | | | 35,459 | | | — | | Collateralized mortgage obligations | 25,873 | | | — | | | 25,873 | | | — | |
Corporate bonds | | Corporate bonds | 8,022 | | | — | | | 8,022 | | | — | |
Other investment securities | Other investment securities | 650 | | | — | | | 650 | | | — | | Other investment securities | 650 | | | — | | | 650 | | | — | |
Total investment securities available for sale | Total investment securities available for sale | 604,181 | | | 101 | | | 604,080 | | | — | | Total investment securities available for sale | 530,581 | | | 100 | | | 530,481 | | | — | |
| Investment securities trading: | Investment securities trading: | | Investment securities trading: | |
Mutual funds | Mutual funds | 8,324 | | | 8,324 | | | — | | | — | | Mutual funds | 7,801 | | | 7,801 | | | — | | | — | |
| Derivatives: | Derivatives: | | Derivatives: | |
Interest rate swaps | Interest rate swaps | 62,571 | | | — | | | 62,571 | | | — | | Interest rate swaps | 143,339 | | | — | | | 143,339 | | | — | |
RPAs purchased | RPAs purchased | 151 | | | — | | | 151 | | | — | | RPAs purchased | 358 | | | — | | | 358 | | | — | |
FX forwards | FX forwards | — | | | — | | | — | | | — | | FX forwards | 36 | | | — | | | 36 | | | — | |
Total derivatives | Total derivatives | 62,722 | | | — | | | 62,722 | | | — | | Total derivatives | 143,733 | | | — | | | 143,733 | | | — | |
| Total recurring fair value measurements | Total recurring fair value measurements | $ | 675,227 | | | $ | 8,425 | | | $ | 666,802 | | | $ | — | | Total recurring fair value measurements | $ | 682,115 | | | $ | 7,901 | | | $ | 674,214 | | | $ | — | |
| As of December 31, 2018 | | | | | | | | |
As of December 31, 2019 | | As of December 31, 2019 | | | | | | | |
(dollars in thousands) | (dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 | (dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Investment securities available for sale: | Investment securities available for sale: | | | | | | | | Investment securities available for sale: | | | | | | | |
U.S. Treasury securities | U.S. Treasury securities | $ | 200,013 | | | $ | 200,013 | | | $ | — | | | $ | — | | U.S. Treasury securities | $ | 500,101 | | | $ | 500,101 | | | $ | — | | | $ | — | |
Obligations of U.S. government & agencies | Obligations of U.S. government & agencies | 195,855 | | | — | | | 195,855 | | | — | | Obligations of U.S. government & agencies | 102,020 | | | — | | | 102,020 | | | — | |
Obligations of state & political subdivisions | Obligations of state & political subdivisions | 11,332 | | | — | | | 11,332 | | | — | | Obligations of state & political subdivisions | 5,379 | | | — | | | 5,379 | | | — | |
Mortgage-backed securities | Mortgage-backed securities | 289,890 | | | — | | | 289,890 | | | — | | Mortgage-backed securities | 366,002 | | | — | | | 366,002 | | | — | |
Collateralized mortgage obligations | Collateralized mortgage obligations | 39,252 | | | — | | | 39,252 | | | — | | Collateralized mortgage obligations | 31,832 | | | — | | | 31,832 | | | — | |
Other investment securities | Other investment securities | 1,100 | | | — | | | 1,100 | | | — | | Other investment securities | 650 | | | — | | | 650 | | | — | |
Total investment securities available for sale | Total investment securities available for sale | 737,442 | | | 200,013 | | | 537,429 | | | — | | Total investment securities available for sale | 1,005,984 | | | 500,101 | | | 505,883 | | | — | |
| Investment securities trading: | Investment securities trading: | | Investment securities trading: | |
Mutual funds | Mutual funds | 7,502 | | | 7,502 | | | — | | | — | | Mutual funds | 8,621 | | | 8,621 | | | — | | | — | |
| Derivatives: | Derivatives: | | Derivatives: | |
Interest rate swaps | Interest rate swaps | 12,550 | | | — | | | 12,550 | | | — | | Interest rate swaps | 47,627 | | | — | | | 47,627 | | | — | |
RPAs purchased | RPAs purchased | 71 | | | — | | | 71 | | | — | | RPAs purchased | 90 | | | — | | | 90 | | | — | |
| Total derivatives | Total derivatives | 12,621 | | | — | | | 12,621 | | | — | | Total derivatives | 47,717 | | | — | | | 47,717 | | | — | |
| Total recurring fair value measurements | Total recurring fair value measurements | $ | 757,565 | | | $ | 207,515 | | | $ | 550,050 | | | $ | — | | Total recurring fair value measurements | $ | 1,062,322 | | | $ | 508,722 | | | $ | 553,600 | | | $ | — | |
There have been no transfers between levels during the three and ninesix months ended SeptemberJune 30, 2019.2020.
B. Assets and liabilities measured on a non-recurring basis
Fair value is used on a nonrecurring basis to evaluate certain financial assets and financial liabilities in specific circumstances. Similarly, fair value is used on a nonrecurring basis for nonfinancial assets and nonfinancial liabilities such as foreclosed assets, OREO, intangible assets, nonfinancial assets and liabilities evaluated in a goodwill impairment analysis and other nonfinancial assets measured at fair value for purposes of assessing impairment. A description of the valuation methodologies used for financial and nonfinancial assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy, is set forth below.
ImpairedCollateral-dependent Loans and Leases
Collateral-dependent loans and leases for which the repayment is expected to be provided substantially through the sale of the collateral and the borrower is experiencing financial difficulty are, in general, individually evaluated for credit losses. Management evaluates and values impairedcollateral-dependent loans and leases when management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the timereporting date and repayment is expected to be provided substantially through the loan is identified as impaired,operation or sale of the collateral, and the fair values of such loans and leases are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan.loan or lease. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which range from 10% - 50%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by the Corporation. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.
The Corporation has an appraisal policy in which an appraisal is obtained for a commercial loan at the point at which the loan either becomes nonperforming or is downgraded to a substandard or worse classification. For consumer loans, management obtains updated appraisals when a loan becomes 90 days past due or when it receives other information that may indicate possible impairment. Based on the appraisals obtained by the Corporation, a partial or full charge-off may be necessary.
Other Real Estate Owned (“OREO”)
OREO consists of properties acquired as a result of foreclosures and deeds in-lieu-of foreclosure. Properties classified as OREO are reported at the lower of cost or fair value less cost to sell, and are classified as Level 3 in the fair value hierarchy. The Corporation did not have any OREO at June 30, 2020 or December 31, 2019.
Mortgage Servicing Rights
The model to value MSRs estimates the present value of projected net servicing cash flows of the remaining servicing portfolio based on various assumptions, including changes in anticipated loan prepayment rates, the discount rate, reflective of a market participant's required return on an investment for similar assets, and other market-based economic factors. All of these assumptions are considered to be unobservable inputs. Accordingly, MSRs are classified within Level 3 of the fair value hierarchy.
The following tables present the Corporation’s assets measured at fair value on a non-recurring basis as of SeptemberJune 30, 20192020 and December 31, 2018:2019:
| As of September 30, 2019 | | |
As of June 30, 2020 | | As of June 30, 2020 | |
(dollars in thousands) | (dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 | (dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
MSRs | MSRs | $ | 4,925 | | | $ | — | | | $ | — | | | $ | 4,925 | | MSRs | $ | 3,440 | | | $ | — | | | $ | — | | | $ | 3,440 | |
Impaired loans and leases | 18,726 | | | — | | | — | | | 18,726 | | |
OREO | 72 | | | — | | | — | | | 72 | | |
Collateral-dependent loans and leases | | Collateral-dependent loans and leases | 8,217 | | | — | | | — | | | 8,217 | |
| Total non-recurring fair value measurements | Total non-recurring fair value measurements | $ | 23,723 | | | $ | — | | | $ | — | | | $ | 23,723 | | Total non-recurring fair value measurements | $ | 11,657 | | | $ | — | | | $ | — | | | $ | 11,657 | |
| | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2018 | | | | | | | |
(dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
MSRs | $ | 6,277 | | | $ | — | | | $ | — | | | $ | 6,277 | |
Impaired loans and leases | 22,112 | | | — | | | — | | | 22,112 | |
OREO | 417 | | | — | | | — | | | 417 | |
Total non-recurring fair value measurements | $ | 28,806 | | | $ | — | | | $ | — | | | $ | 28,806 | |
| | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2019 | | | | | | | |
(dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
MSRs | $ | 4,838 | | | $ | — | | | $ | — | | | $ | 4,838 | |
Impaired loans and leases | 15,311 | | | — | | | — | | | 15,311 | |
| | | | | | | |
Total non-recurring fair value measurements | $ | 20,149 | | | $ | — | | | $ | — | | | $ | 20,149 | |
During the three and ninesix months ended SeptemberJune 30, 2019,2020, a net decrease and a net increase and a net decrease of $1$110 thousand and $1$122 thousand respectively, were recorded in the AllowanceACL on loans and leases as a result of adjusting the carrying value and estimated fair value of the impairedcollateral-dependent loans in the above tables.
Note 2120 – Fair Value of Financial Instruments
FASB ASC 825, “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. The methodologies for estimating the fair value of financial assets and financial liabilities measured at fair value on a recurring and non-recurring basis are discussed above. The estimated fair value amounts have been determined by management using available market information and appropriate valuation methodologies, are based on the exit price notion. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The aggregate fair value amounts presented below do not represent the underlying value of the Corporation.
The carrying amount and fair value of the Corporation’s financial instruments are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2019 | | | | December 31, 2018 | | |
(dollars in thousands) | Fair Value Hierarchy Level(1) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | Level 1 | | $ | 94,740 | | | $ | 94,740 | | | $ | 48,456 | | | $ | 48,456 | |
Investment securities - available for sale | See Note 20 | | 604,181 | | | 604,181 | | | 737,442 | | | 737,442 | |
Investment securities - trading | See Note 20 | | 8,324 | | | 8,324 | | | 7,502 | | | 7,502 | |
Investment securities – held to maturity | Level 2 | | 12,947 | | | 13,015 | | | 8,684 | | | 8,438 | |
Loans held for sale | Level 2 | | 5,767 | | | 5,767 | | | 1,749 | | | 1,749 | |
Net portfolio loans and leases | Level 3 | | 3,519,970 | | | 3,491,456 | | | 3,407,728 | | | 3,414,921 | |
MSRs | Level 3 | | 4,580 | | | 4,925 | | | 5,047 | | | 6,277 | |
Interest rate swaps | Level 2 | | 62,571 | | | 62,571 | | | 12,550 | | | 12,550 | |
FX forwards | Level 2 | | — | | | — | | | — | | | — | |
RPAs purchased | Level 2 | | 151 | | | 151 | | | 71 | | | 71 | |
Other assets | Level 3 | | 45,576 | | | 45,576 | | | 43,641 | | | 43,641 | |
Total financial assets | | | $ | 4,358,807 | | | $ | 4,330,706 | | | $ | 4,272,870 | | | $ | 4,281,047 | |
Financial liabilities: | | | | | | | | | |
Deposits | Level 2 | | $ | 3,698,488 | | | $ | 3,698,300 | | | $ | 3,599,087 | | | $ | 3,594,123 | |
Short-term borrowings | Level 2 | | 203,471 | | | 203,471 | | | 252,367 | | | 252,367 | |
Long-term FHLB advances | Level 2 | | 44,735 | | | 44,831 | | | 55,374 | | | 54,803 | |
Subordinated notes | Level 2 | | 98,660 | | | 97,387 | | | 98,526 | | | 100,120 | |
Junior subordinated debentures | Level 2 | | 21,709 | | | 25,681 | | | 21,580 | | | 31,176 | |
Interest rate swaps | Level 2 | | 62,140 | | | 62,140 | | | 12,549 | | | 12,549 | |
FX forwards | Level 2 | | — | | | — | | | — | | | — | |
RPAs sold | Level 2 | | 30 | | | 30 | | | 2 | | | 2 | |
Other liabilities | Level 3 | | 51,965 | | | 51,965 | | | 60,847 | | | 60,847 | |
Total financial liabilities | | | $ | 4,181,198 | | | $ | 4,183,805 | | | $ | 4,100,332 | | | $ | 4,105,987 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2020 | | | | December 31, 2019 | | |
(dollars in thousands) | Fair Value Hierarchy Level(1) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | Level 1 | | $ | 464,521 | | | $ | 464,521 | | | $ | 53,931 | | | $ | 53,931 | |
Investment securities - available for sale | See Note 19 | | 530,581 | | | 530,581 | | | 1,005,984 | | | 1,005,984 | |
Investment securities - trading | See Note 19 | | 7,801 | | | 7,801 | | | 8,621 | | | 8,621 | |
Investment securities – held to maturity | Level 2 | | 12,592 | | | 12,995 | | | 12,577 | | | 12,661 | |
Loans held for sale | Level 2 | | 4,116 | | | 4,116 | | | 4,249 | | | 4,249 | |
Net portfolio loans and leases | Level 3 | | 3,667,191 | | | 3,564,380 | | | 3,666,711 | | | 3,596,268 | |
MSRs | Level 3 | | 3,440 | | | 3,440 | | | 4,450 | | | 4,838 | |
Interest rate swaps | Level 2 | | 143,339 | | | 143,339 | | | 47,627 | | | 47,627 | |
FX forwards | Level 2 | | 36 | | | 36 | | | — | | | — | |
RPAs purchased | Level 2 | | 358 | | | 358 | | | 90 | | | 90 | |
Other assets | Level 3 | | 37,137 | | | 37,137 | | | 52,908 | | | 52,908 | |
Total financial assets | | | $ | 4,871,112 | | | $ | 4,768,704 | | | $ | 4,857,148 | | | $ | 4,787,177 | |
Financial liabilities: | | | | | | | | | |
Deposits | Level 2 | | $ | 4,243,648 | | | $ | 4,248,488 | | | $ | 3,842,245 | | | $ | 3,842,014 | |
Short-term borrowings | Level 2 | | 28,891 | | | 28,891 | | | 493,219 | | | 493,219 | |
Long-term FHLB advances | Level 2 | | 44,837 | | | 45,664 | | | 52,269 | | | 52,380 | |
Subordinated notes | Level 2 | | 98,794 | | | 91,748 | | | 98,705 | | | 97,199 | |
Junior subordinated debentures | Level 2 | | 21,843 | | | 26,097 | | | 21,753 | | | 25,652 | |
Interest rate swaps | Level 2 | | 143,339 | | | 143,339 | | | 47,627 | | | 47,627 | |
FX forwards | Level 2 | | 107 | | | 107 | | | — | | | — | |
RPAs sold | Level 2 | | 39 | | | 39 | | | 16 | | | 16 | |
Other liabilities | Level 3 | | 42,447 | | | 42,447 | | | 50,251 | | | 50,251 | |
Total financial liabilities | | | $ | 4,623,945 | | | $ | 4,626,820 | | | $ | 4,606,085 | | | $ | 4,608,358 | |
(1) See Note 2019 in the Notes to Unaudited Consolidated Financial Statements above for a description of hierarchy levels.
Note 2221 – Financial Instruments with Off-Balance Sheet Risk, Contingencies and Concentration of Credit Risk
Off-Balance Sheet Arrangements
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.
The Corporation’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument of commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments.
Commitments to extend credit, which include unused lines of credit and unfunded commitments to originate loans, are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Some of the commitments are expected to expire without being drawn upon, and the total commitment amounts do not necessarily represent future cash requirements. Total commitments to extend credit at SeptemberJune 30, 20192020 and December 31, 20182019 were $776.2$826.3 million and $867.2$828.9 million, respectively. Management evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on a credit evaluation of the counterparty. Collateral varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, residential real estate, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in extending loan facilities to customers. The collateral varies, but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and residential real estate for those commitments for which collateral is deemed necessary. The Corporation’s obligations under standby letters of credit as of SeptemberJune 30, 20192020 and December 31, 20182019 were $34.3$13.2 million and $21.2$20.7 million, respectively.
Contingencies
Legal Matters
In the ordinary course of its operations, BMBC and its subsidiaries are parties to various claims, litigation, investigations, and legal and administrative cases and proceedings. Such pending or threatened claims, litigation, investigations, legal and administrative cases and proceedings typically entail matters that are considered ordinary routine litigation incidental to our business. Claims for significant monetary damages may be asserted in many of these types of legal actions. Based on the information currently available, management believes it has meritorious defenses to the claims asserted against it in its currently outstanding legal proceedings and with respect to such legal proceedings, intends to continue to defend itself vigorously, litigating or settling cases according to management’s judgment as to what is in the best interests of the Corporation and its shareholders.
On a regular basis, liabilities and contingencies in connection with outstanding legal proceedings are assessed utilizing the latest information available. For those matters where it is probable that the Corporation will incur a loss and the amount of the loss can be reasonably estimated, a liability may be recorded in the Consolidated Financial Statements. These legal reserves may be increased or decreased to reflect any relevant developments on at least a quarterly basis. For other matters, where a loss is not probable or the amount or range of the loss is not estimable, legal reserves are not accrued. While the outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel and available insurance coverage, management believes that the established legal reserves are adequate and the liabilities arising from legal proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of the Corporation.
Crusader Servicing Corporation (“Crusader”), which was an 80% owned subsidiary of Royal Bank America that was acquired by the Bank in the RBPI merger, along with the Bank as successor-in-interest to Royal Bank America, are defendants in the case captioned Snyder v. Crusader Servicing Corporation et al., Case No. 2007-01027, in the Court of Common Pleas of Montgomery County, Pennsylvania. The case involves claims brought by a former Crusader shareholder in 2007 against Crusader, its former directors and remaining shareholders related, among other things, to a purported failure to pay amounts allegedly due to Snyder for his shares of Crusader stock. Subsequent to the end of the first quarter of 2019, on May 1, 2019, the Court rendered a decision against Crusader. Both sides have filed for appeal withThe matter was appealed, and on March 18, 2020, the Superior Court of the Commonwealth of Pennsylvania returned an opinion reversing in part and Crusader is considering other strategic optionsaffirming in part the trial court's judgment. The effect of this was to vacate the initial judgment awarded by the trial court, and instead to require an appraisal process in accordance with respectCrusader's Shareholders' Agreement to this matter duringdetermine the pendencyvalue of the appeal.Mr. Snyder's shares. We do not believe that this ruling and theany monetary award if any, ultimately payable by Crusader will be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of the Corporation.
Indemnifications
In general, the Corporation does not sell loans with recourse, except to the extent that it arises from standard loan-sale contract provisions. These provisions cover violations of representations and warranties and, under certain circumstances, first payment default by borrowers. These indemnifications may include the repurchase of loans by the Corporation, and are considered customary provisions in the secondary market for conforming mortgage loan sales. Repurchases and losses have been rare and no provision is made for losses at the time of sale. There were no such repurchases for the three or nineand six months ended SeptemberJune 30, 2019.2020.
Concentrations of Credit Risk
The Corporation has a material portion of its loans in real estate-related loans. A predominant percentage of the Corporation’s real estate exposure, both commercial and residential, is in the Corporation’s primary trade area which includes portions of Delaware, Chester, Montgomery and Philadelphia counties in Southeastern Pennsylvania. Management is aware of this concentration and attempts to mitigate this risk to the extent possible in many ways, including the underwriting and assessment of borrower’s capacity to repay. See Note 54 – “Loans and Leases” for additional information.
Note 2322 – Segment Information
FASB Codification 280 – “Segment Reporting” identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s chief operating decision maker, our Chief Executive Officer, in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in this codification to the results of its operations.
The Corporation’s Banking segment consists of commercial and retail banking. The Banking segment is evaluated as a single strategic unit which generates revenues from a variety of products and services. The Banking segment generates interest income from its lending (including leases) and investing activities and is dependent on the gathering of lower cost deposits from its branch network or borrowed funds from other sources for funding its loans, resulting in the generation of net interest income. The Banking segment also derives revenues from other sources including gains on the sale in available for sale investment securities, gains on the sale of residential mortgage loans, service charges on deposit accounts, cash sweep fees, overdraft fees, bank owned life insurance (“BOLI”) income and revenue associated with its Visa Check Card offering. Also included in the Banking segment are two subsidiaries of the Bank, KCMI Capital, Inc. and Bryn Mawr Equipment Financing, Inc., both of which provide specialized lending solutions to our customers.
The Wealth Management segment has responsibility for a number of activities within the Corporation, including trust administration, other related fiduciary services, custody, investment management and advisory services, employee benefits and IRA administration, estate settlement, tax services and brokerage. Bryn Mawr Trust of Delaware and Lau Associates areis included in the Wealth Management segment of the Corporation since they haveit has similar economic characteristics, products and services to those of the Wealth Management Division of the Bank. Effective January 1, 2020, the business of Lau Associates LLC was transitioned into the Wealth Management Division of the Bank. BMT Investment Advisers, formed in May 2017, which serves as investment adviser to BMT Investment Funds, a Delaware statutory trust, is also reported under the Wealth Management segment. In addition, the Wealth Management Division oversees all insurance services of the Corporation, which are conducted through the Bank’s insurance subsidiary, BMT Insurance Advisors, Inc., and are reported in the Wealth Management segment.
The accounting policies of the Corporation are applied by segment in the following tables. The segments are presented on a pre-tax basis.
The following tables detail the Corporation’s segments for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | | | | | Three Months Ended September 30, 2018 | | | | |
(dollars in thousands) | Banking | | Wealth Management | | Consolidated | | Banking | | Wealth Management | | Consolidated |
Net interest income | $ | 37,397 | | | $ | 1 | | | $ | 37,398 | | | $ | 36,726 | | | $ | 3 | | | $ | 36,729 | |
Provision for loan and lease losses | 919 | | | — | | | 919 | | | 664 | | | — | | | 664 | |
Net interest income after loan loss provision | 36,478 | | | 1 | | | 36,479 | | | 36,062 | | | 3 | | | 36,065 | |
Noninterest income: | | | | | | | | | | | |
Fees for wealth management services | — | | | 10,826 | | | 10,826 | | | — | | | 10,343 | | | 10,343 | |
Insurance commissions | — | | | 1,842 | | | 1,842 | | | — | | | 1,754 | | | 1,754 | |
Capital markets revenue | 2,113 | | | — | | | 2,113 | | | 710 | | | — | | | 710 | |
Service charges on deposit accounts | 856 | | | — | | | 856 | | | 726 | | | — | | | 726 | |
Loan servicing and other fees | 555 | | | — | | | 555 | | | 559 | | | — | | | 559 | |
Net gain on sale of loans | 674 | | | — | | | 674 | | | 631 | | | — | | | 631 | |
| | | | | | | | | | | |
Net (loss) gain on sale of OREO | (12) | | | — | | | (12) | | | 5 | | | — | | | 5 | |
Other operating income | 2,565 | | | 36 | | | 2,601 | | | 3,498 | | | 48 | | | 3,546 | |
Total noninterest income | 6,751 | | | 12,704 | | | 19,455 | | | 6,129 | | | 12,145 | | | 18,274 | |
| | | | | | | | | | | |
Noninterest expenses: | | | | | | | | | | | |
Salaries & wages | 12,674 | | | 5,091 | | | 17,765 | | | 11,737 | | | 4,791 | | | 16,528 | |
Employee benefits | 2,343 | | | 945 | | | 3,288 | | | 2,394 | | | 962 | | | 3,356 | |
Occupancy and bank premises | 2,502 | | | 506 | | | 3,008 | | | 2,224 | | | 493 | | | 2,717 | |
Amortization of intangible assets | 327 | | | 627 | | | 954 | | | 386 | | | 505 | | | 891 | |
Professional fees | 902 | | | 142 | | | 1,044 | | | 889 | | | 108 | | | 997 | |
Other operating expenses | 7,643 | | | 1,471 | | | 9,114 | | | 7,770 | | | 1,333 | | | 9,103 | |
Total noninterest expenses | 26,391 | | | 8,782 | | | 35,173 | | | 25,400 | | | 8,192 | | | 33,592 | |
Segment profit | 16,838 | | | 3,923 | | | 20,761 | | | 16,791 | | | 3,956 | | | 20,747 | |
Intersegment (revenues) expenses(1) | (124) | | | 124 | | | — | | | (186) | | | 186 | | | — | |
Pre-tax segment profit after eliminations | $ | 16,714 | | | $ | 4,047 | | | $ | 20,761 | | | $ | 16,605 | | | $ | 4,142 | | | $ | 20,747 | |
% of segment pre-tax profit after eliminations | 80.5 | % | | 19.5 | % | | 100.0 | % | | 80.0 | % | | 20.0 | % | | 100.0 | % |
Segment assets (dollars in millions) | $ | 4,771.9 | | | $ | 56.7 | | | $ | 4,828.6 | | | $ | 4,335.8 | | | $ | 52.6 | | | $ | 4,388.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | | | Three Months Ended June 30, 2019 | | | | |
(dollars in thousands) | Banking | | Wealth Management | | Consolidated | | Banking | | Wealth Management | | Consolidated |
Net interest income | $ | 37,384 | | | $ | 1 | | | $ | 37,385 | | | $ | 36,610 | | | $ | 1 | | | $ | 36,611 | |
PCL on loans and leases | 4,302 | | | — | | | 4,302 | | | 1,627 | | | — | | | 1,627 | |
Net interest income after PCL on loans and leases | 33,082 | | | 1 | | | 33,083 | | | 34,983 | | | 1 | | | 34,984 | |
Noninterest income: | | | | | | | | | | | |
Fees for wealth management services | — | | | 9,069 | | | 9,069 | | | — | | | 11,510 | | | 11,510 | |
Insurance commissions | — | | | 1,303 | | | 1,303 | | | — | | | 1,697 | | | 1,697 | |
Capital markets revenue | 2,975 | | | — | | | 2,975 | | | 1,489 | | | — | | | 1,489 | |
Service charges on deposit accounts | 603 | | | — | | | 603 | | | 852 | | | — | | | 852 | |
Loan servicing and other fees | 452 | | | — | | | 452 | | | 553 | | | — | | | 553 | |
Net gain on sale of loans | 3,134 | | | — | | | 3,134 | | | 752 | | | — | | | 752 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other operating income | 2,942 | | | 88 | | | 3,030 | | | 3,342 | | | 26 | | | 3,368 | |
Total noninterest income | 10,106 | | | 10,460 | | | 20,566 | | | 6,988 | | | 13,233 | | | 20,221 | |
| | | | | | | | | | | |
Noninterest expenses: | | | | | | | | | | | |
Salaries & wages | 11,699 | | | 5,227 | | | 16,926 | | | 12,295 | | | 4,743 | | | 17,038 | |
Employee benefits | 2,301 | | | 920 | | | 3,221 | | | 2,338 | | | 979 | | | 3,317 | |
Occupancy and bank premises | 2,535 | | | 498 | | | 3,033 | | | 2,608 | | | 517 | | | 3,125 | |
Amortization of intangible assets | 291 | | | 619 | | | 910 | | | 328 | | | 628 | | | 956 | |
Professional fees | 1,357 | | | 218 | | | 1,575 | | | 1,221 | | | 95 | | | 1,316 | |
Other operating expenses | 7,496 | | | 1,475 | | | 8,971 | | | 7,983 | | | 1,453 | | | 9,436 | |
Total noninterest expenses | 25,679 | | | 8,957 | | | 34,636 | | | 26,773 | | | 8,415 | | | 35,188 | |
Segment profit | 17,509 | | | 1,504 | | | 19,013 | | | 15,198 | | | 4,819 | | | 20,017 | |
Intersegment (revenues) expenses(1) | (177) | | | 177 | | | — | | | (125) | | | 125 | | | — | |
Pre-tax segment profit after eliminations | $ | 17,332 | | | $ | 1,681 | | | $ | 19,013 | | | $ | 15,073 | | | $ | 4,944 | | | $ | 20,017 | |
% of segment pre-tax profit after eliminations | 91.2 | % | | 8.8 | % | | 100.0 | % | | 75.3 | % | | 24.7 | % | | 100.0 | % |
Segment assets (dollars in millions) | $ | 5,221.7 | | | $ | 49.6 | | | $ | 5,271.3 | | | $ | 4,682.0 | | | $ | 54.6 | | | $ | 4,736.6 | |
| | | Nine Months Ended September 30, 2019 | | | Nine Months Ended September 30, 2018 | | | Six Months Ended June 30, 2020 | | | Six Months Ended June 30, 2019 | |
(dollars in thousands) | (dollars in thousands) | Banking | | Wealth Management | | Consolidated | | Banking | | Wealth Management | | Consolidated | (dollars in thousands) | Banking | | Wealth Management | | Consolidated | | Banking | | Wealth Management | | Consolidated |
Net interest income | Net interest income | $ | 111,652 | | | $ | 4 | | | $ | 111,656 | | | $ | 111,479 | | | $ | 5 | | | $ | 111,484 | | Net interest income | $ | 73,716 | | | $ | 2 | | | $ | 73,718 | | | $ | 74,255 | | | $ | 3 | | | $ | 74,258 | |
Provision for loan and lease losses | 6,282 | | | — | | | 6,282 | | | 4,831 | | | — | | | 4,831 | | |
Net interest income after loan loss provision | 105,370 | | | 4 | | | 105,374 | | | 106,648 | | | 5 | | | 106,653 | | |
PCL on loans and leases | | PCL on loans and leases | 36,637 | | | — | | | 36,637 | | | 5,363 | | | — | | | 5,363 | |
Net interest income after PCL on loans and leases | | Net interest income after PCL on loans and leases | 37,079 | | | 2 | | | 37,081 | | | 68,892 | | | 3 | | | 68,895 | |
Noninterest income: | Noninterest income: | | | | | | | | | | | | Noninterest income: | | | | | | | | | | | |
Fees for wealth management services | Fees for wealth management services | — | | | 32,728 | | | 32,728 | | | — | | | 31,309 | | | 31,309 | | Fees for wealth management services | — | | | 20,237 | | | 20,237 | | | — | | | 21,902 | | | 21,902 | |
Insurance commissions | Insurance commissions | — | | | 5,211 | | | 5,211 | | | — | | | 5,349 | | | 5,349 | | Insurance commissions | — | | | 2,836 | | | 2,836 | | | — | | | 3,369 | | | 3,369 | |
Capital markets revenue | Capital markets revenue | 5,821 | | | — | | | 5,821 | | | 3,481 | | | — | | | 3,481 | | Capital markets revenue | 5,336 | | | — | | | 5,336 | | | 3,708 | | | — | | | 3,708 | |
Service charges on deposit accounts | Service charges on deposit accounts | 2,516 | | | — | | | 2,516 | | | 2,191 | | | — | | | 2,191 | | Service charges on deposit accounts | 1,449 | | | — | | | 1,449 | | | 1,660 | | | — | | | 1,660 | |
Loan servicing and other fees | Loan servicing and other fees | 1,717 | | | — | | | 1,717 | | | 1,720 | | | — | | | 1,720 | | Loan servicing and other fees | 913 | | | — | | | 913 | | | 1,162 | | | — | | | 1,162 | |
Net gain on sale of loans | Net gain on sale of loans | 1,745 | | | — | | | 1,745 | | | 1,677 | | | — | | | 1,677 | | Net gain on sale of loans | 3,916 | | | — | | | 3,916 | | | 1,071 | | | — | | | 1,071 | |
Net gain on sale of investment securities available for sale | — | | | — | | | — | | | 7 | | | — | | | 7 | | |
Net (loss) gain on sale of OREO | (36) | | | — | | | (36) | | | 292 | | | — | | | 292 | | |
| Net gain (loss) on sale of OREO | | Net gain (loss) on sale of OREO | 148 | | | — | | | 148 | | | (24) | | | — | | | (24) | |
Other operating income | Other operating income | 9,144 | | | 83 | | | 9,227 | | | 11,709 | | | 150 | | | 11,859 | | Other operating income | 3,930 | | | 101 | | | 4,031 | | | 6,579 | | | 47 | | | 6,626 | |
Total noninterest income | Total noninterest income | 20,907 | | | 38,022 | | | 58,929 | | | 21,077 | | | 36,808 | | | 57,885 | | Total noninterest income | 15,692 | | | 23,174 | | | 38,866 | | | 14,156 | | | 25,318 | | | 39,474 | |
| Noninterest expenses: | Noninterest expenses: | | Noninterest expenses: | |
Salaries & wages | Salaries & wages | 40,744 | | | 14,960 | | | 55,704 | | | 34,077 | | | 14,673 | | | 48,750 | | Salaries & wages | 23,558 | | | 10,357 | | | 33,915 | | | 28,070 | | | 9,869 | | | 37,939 | |
Employee benefits | Employee benefits | 7,853 | | | 2,918 | | | 10,771 | | | 6,992 | | | 2,949 | | | 9,941 | | Employee benefits | 4,898 | | | 1,823 | | | 6,721 | | | 5,510 | | | 1,973 | | | 7,483 | |
Occupancy and bank premises | Occupancy and bank premises | 7,842 | | | 1,543 | | | 9,385 | | | 7,035 | | | 1,429 | | | 8,464 | | Occupancy and bank premises | 5,051 | | | 997 | | | 6,048 | | | 5,340 | | | 1,037 | | | 6,377 | |
Amortization of intangible assets | Amortization of intangible assets | 982 | | | 1,866 | | | 2,848 | | | 1,169 | | | 1,490 | | | 2,659 | | Amortization of intangible assets | 583 | | | 1,245 | | | 1,828 | | | 655 | | | 1,239 | | | 1,894 | |
Professional fees | Professional fees | 3,286 | | | 394 | | | 3,680 | | | 2,497 | | | 180 | | | 2,677 | | Professional fees | 2,454 | | | 489 | | | 2,943 | | | 2,384 | | | 252 | | | 2,636 | |
Other operating expenses | Other operating expenses | 22,895 | | | 4,802 | | | 27,697 | | | 29,076 | | | 3,891 | | | 32,967 | | Other operating expenses | 16,732 | | | 2,867 | | | 19,599 | | | 15,252 | | | 3,331 | | | 18,583 | |
Total noninterest expenses | Total noninterest expenses | 83,602 | | | 26,483 | | | 110,085 | | | 80,846 | | | 24,612 | | | 105,458 | | Total noninterest expenses | 53,276 | | | 17,778 | | | 71,054 | | | 57,211 | | | 17,701 | | | 74,912 | |
Segment profit | 42,675 | | | 11,543 | | | 54,218 | | | 46,879 | | | 12,201 | | | 59,080 | | |
Intersegment (revenues) expenses* | (372) | | | 372 | | | — | | | (485) | | | 485 | | | — | | |
Segment (loss) profit | | Segment (loss) profit | (505) | | | 5,398 | | | 4,893 | | | 25,837 | | | 7,620 | | | 33,457 | |
Intersegment (revenues) expenses(1) | | Intersegment (revenues) expenses(1) | (355) | | | 355 | | | — | | | (248) | | | 248 | | | — | |
Pre-tax segment profit after eliminations | Pre-tax segment profit after eliminations | $ | 42,303 | | | $ | 11,915 | | | $ | 54,218 | | | $ | 46,394 | | | $ | 12,686 | | | $ | 59,080 | | Pre-tax segment profit after eliminations | $ | (860) | | | $ | 5,753 | | | $ | 4,893 | | | $ | 25,589 | | | $ | 7,868 | | | $ | 33,457 | |
% of segment pre-tax profit after eliminations | % of segment pre-tax profit after eliminations | 78.0 | % | | 22.0 | % | | 100.0 | % | | 78.5 | % | | 21.5 | % | | 100.0 | % | % of segment pre-tax profit after eliminations | (17.6) | % | | 117.6 | % | | 100.0 | % | | 76.5 | % | | 23.5 | % | | 100.0 | % |
Segment assets (dollars in millions) | Segment assets (dollars in millions) | $ | 4,771.9 | | | $ | 56.7 | | | $ | 4,828.6 | | | $ | 4,335.8 | | | $ | 52.6 | | | $ | 4,388.4 | | Segment assets (dollars in millions) | $ | 5,221.7 | | | $ | 49.6 | | | $ | 5,271.3 | | | $ | 4,682.0 | | | $ | 54.6 | | | $ | 4,736.6 | |
(1) Inter-segment revenues consist of rental payments, interest on deposits and management fees.
Wealth Management Segment Information
| (dollars in millions) | (dollars in millions) | September 30, 2019 | | December 31, 2018 | (dollars in millions) | June 30, 2020 | | December 31, 2019 |
Assets under management, administration, supervision and brokerage | Assets under management, administration, supervision and brokerage | $ | 15,609.8 | | | $ | 13,429.5 | | Assets under management, administration, supervision and brokerage | $ | 17,012.9 | | | $ | 16,548.1 | |
ITEM 2. Management’s Discussion and Analysis of Results of Operation and Financial Condition
The following discussion describes the significant changes to the financial condition of the Corporation that have occurred during the first ninesix months of 20192020 compared to the financial condition as of December 31, 2018.2019. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Corporation for the three and ninesix months ended SeptemberJune 30, 2019,2020, compared to the same periods in 2018.2019. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 20182019 (the “2018“2019 Annual Report”). Certain financial condition comparisons to the prior year and results of operations comparisons for the linked quarter are included for additional trend analysis.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements contained in this reportQuarterly Report on Form 10-Q and the documents incorporated by reference herein may constitute forward-looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). As such, they are only predictionsandSuch forward-looking statements may involve known and unknown risks, uncertaintiesinclude financial and other factors which may cause actual results, performance or achievements of the Bryn Mawr Bank Corporation (the “Corporation”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-lookingprojections as well as statements include statements with respect toregarding the Corporation’s financial goals, future business plans, business prospects, credit quality, credit risk, reserve adequacy, liquidity, origination and sale of residential mortgage loans, mortgage servicing rights, the effect of changes in accounting standards, and market and pricing trends loss. The words “may,”“might, “might,” “would,”“could, “should,”“will, “could,”“likely, “will,”“expect, “likely,” “possibly,” “expect,” “anticipate,” “intend,”“estimate, “indicate,”“plan, “estimate,”“forecast, “target,”“project, “potentially,” “promising,” “probably,” “outlook,” “predict,”“believe” “contemplate,” “continue,” “plan,” “strategy,” “forecast,” “project,” “annualized,” “are optimistic,” “are looking,” “are looking forward,” and “believe” or other similar expressions are intended tomay identify statements that constitute forward-looking statements. Persons reading this Quarterly Report on Form 10-Q are cautioned that such statements are only predictions and may involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Corporation to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
The COVID-19 pandemic is adversely affecting us, our clients, counterparties, employees, and third party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility, which could result in impairment to our goodwill in future periods.Changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to the COVID-19 pandemic, could affect us in substantial and unpredictable ways, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance. In addition, the Corporation’s actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation:
•local, regional, national and international economic conditions, their impact on us and our customers, and our ability to assess those impacts;
•our need for capital;
•reduced demand for our products and services, and lower revenues and earnings due to an economic recession;
•lower earnings due to other-than-temporary impairment charges related to our investment securities portfolios or other assets;
•changes in monetary or fiscal policy, or existing statutes, regulatory guidance, legislation or judicial decisions, including those concerning banking, securities. insurance or taxes, that adversely affect our business, the financial services industry as a whole, the Corporation, or our subsidiaries individually or collectively;
•changes in the level of non-performing assets and charge-offs;
•effectiveness of capital management strategies and activities;
•uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021;
•the effect of changes in estimates of future reserve requirements based uponaccounting policies and practices or accounting standards, as may be adopted from time-to-time by bank regulatory agencies, the periodic review thereof under relevant regulatory andSEC, the Public Company Accounting Oversight Board, the FASB or other accounting requirements,standards setters, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as the Current Expected Credit Loss (“CECL”) model, which will changehas changed how we estimate credit losses and may increaseresult in further increases in the required level of our allowance for credit losses after adoption on January 1, 2020;losses;
•the accuracy of assumptions underlying the establishment of provisions for loan and lease losses, estimates in the value of collateral, and various financial assets and liabilities;
•inflation, securities market and monetary fluctuations, including changes in the market values of financial assets and the stability of particular securities markets;
•changes in interest rates, spreads on interest-earning assets and interest-bearing liabilities, and interest rate sensitivity;
•uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021;
•prepayment speeds, loan originations and credit losses;
•changes in the value of our mortgage servicing rights;
•sources of liquidity and financial resources in the amounts, at the times, and on the terms required to support our future business;
•possible credit-related impairments of securities held by us;
•results of examinations by the Board of Governors of the Federal Reserve BoardSystem (the “Federal Reserve”) of the Corporation, or its subsidiaries, including the possibility that such regulator may, among other things, require us to increase our allowance for loan losses or to write down assets, or restrict our ability to: engage in new products or services; engage in future mergers or acquisitions; open new branches; pay future dividends; or otherwise take action, or refrain from taking action, in order to correct activities or practices that the Federal Reserve believes may violate applicable law or constitute an unsafe or unsound banking practice;
•variances in common stock outstanding and/or volatility in common stock price;
•fair value of and number of stock-based compensation awards to be issued in future periods;
•risks related to our past or future, if any, mergers and acquisitions, including, but not limited to: reputational risks; client and customer retention risks; diversion of management’s time for integration-related issues; integration may take longer than anticipated or cost more than expected; anticipated benefits of the merger or acquisition, including any anticipated cost savings or strategic gains, may take longer or be significantly harder to achieve, or may not be realized;
•deposit attrition, operating costs, customer loss and business disruption following a merger or acquisition, including, without limitation, difficulties in maintaining relationships with employees, customers, and/or suppliers may be greater than expected;
•the credit risks of lending activities and overall quality of the composition of acquired loan, lease and securities portfolio;
•our success in continuing to generate new business in our existing markets, as well as identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time;
•our ability to continue to generate investment results for customers or introduce competitive new products and services on a timely, cost-effective basis, including investment and banking products that meet customers’ needs;
•changes in consumer and business spending, borrowing and savings habits and demand for financial services in the relevant market areas;
•extent to which products or services previously offered (including but not limited to mortgages and asset back securities) require us to incur liabilities or absorb losses not contemplated at their initiation or origination;
•rapid technological developments and changes;
•technological systems failures, interruptions and security breaches, internally or through a third-party provider, could negatively impact our operations, customers and/or reputation;
•competitive pressure and practices of other commercial banks, thrifts, mortgage companies, finance companies, credit unions, securities brokerage firms, insurance companies, money-market and mutual funds and other institutions operating in our market areas and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;
•protection and validity of intellectual property rights;
•reliance on large customers;
•technological, implementation and cost/financial risks in contracts;
•the outcome of pending and future litigation and governmental proceedings;
•any extraordinary events (such as natural disasters, global health risks or pandemics, acts of terrorism, wars or political conflicts);, including the COVID-19 pandemic, and the effects of the economic and business environments in which we operate, including our credit quality and business operations, as well as the impact on general economic and financial market conditions;
•ability to retain key employees and members of senior management;
•changes in relationships with employees, customers, and/or suppliers;
•the ability of key third-party providers to perform their obligations to us and our subsidiaries;
•our need for capital, or our ability to control operating costs and expenses or manage loan and lease delinquency rates;
•other material adverse changes in operations or earnings; and
•our success in managing the risks involved in the foregoing.
All written or oral forward-looking statements attributed to the Corporation are expressly qualified in their entirety by the factors, risks, and uncertainties set forth in the foregoing cautionary statements, along with those set forth under the caption titled “Risk Factors” beginning on page 1214 of the 2018Corporation's 2019 Annual Report. All forward-looking statements included in this Quarterly Report and the documents incorporated by reference herein are based upon the Corporation’s beliefs and assumptions as of the date of this Quarterly Report. The Corporation assumes no obligation to update any forward-looking statement, whether the result of new information, future events, uncertainties or otherwise, as of any future date. In light of these risks, uncertainties and assumptions, you should not put undue reliance on any forward-looking statements discussed in this Quarterly Report or incorporated documents. For a complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review our filings with the SEC, including our 2019 Annual Report, as updated by our quarterly or other reports subsequently filed with the SEC.
Brief History of the Corporation
The Bryn Mawr Trust Company (the “Bank”) received its Pennsylvania banking charter in 1889 and is a member of the Federal Reserve System. In 1986, Bryn Mawr Bank Corporation (“BMBC”, together with its direct and indirect subsidiaries, the “Corporation”) was formed and the Bank became a wholly-owned subsidiary of BMBC. The Bank and BMBC are headquartered in Bryn Mawr, Pennsylvania, a western suburb of Philadelphia. The Corporation offers a full range of personal and business banking services, consumer and commercial loans, equipment leasing, mortgages, insurance and wealth management services, including investment management, trust and estate administration, retirement planning, custody services, and tax planning and preparation from 43 banking locations, five wealth management offices and two insurance and risk management locations in the following counties: Montgomery, Chester, Delaware, Philadelphia, and Dauphin Counties in Pennsylvania; New Castle County in Delaware; and Mercer and Camden Counties in New Jersey. The common stock of BMBC trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol BMTC.
The Corporation operates in a highly competitive market area that includes local, national and regional banks as competitors along with savings banks, credit unions, insurance companies, trust companies, registered investment advisors and mutual fund families. BMBC and its subsidiaries are regulated by many agencies including the Securities and Exchange Commission (“SEC”), NASDAQ, Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve Bank of Philadelphia (the “FRB”) and the Pennsylvania Department of Banking and Securities. The goal of the Corporation is to become the preeminent community bank and wealth management organization in the Philadelphia area.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Corporation conform withto U.S. generally accepted accounting principles (“GAAP”). All inter-companysignificant intercompany balances and transactions are eliminated in consolidation and certain reclassifications are madeprior-period amounts have been reclassified when necessary in order to conform to current period presentation. In preparing the previous year’s financial statementsConsolidated Financial Statements, management is required to make estimates and assumptions that affect the current year’s presentation.reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ from these estimates. In preparing the Consolidated Financial Statements, the Corporation is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. However, there are uncertainties inherent in making these estimates and actual results could differ from these estimates. The Corporation has identified certain areas that require estimates and assumptions, which include the allowance for loancredit losses (“ACL”) on loans and lease losses (the “Allowance”leases, the ACL on Off-Balance Sheet (“OBS”), Credit Exposures, the valuation of goodwill and intangible assets, the fair value of investment securities, the fair value of derivative financial instruments, and the valuation of mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation. The Corporation’s derivative financial instruments are not exchange-traded and therefore are valued utilizing models that use as their basis readily observable market parameters, specifically the London Interbank Offered Rate (“LIBOR”) swap curve, and are classified within Level 2
compensation. In addition, certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).circumstances.
These criticalOn January 1, 2020, ASU 2016-13 (Topic 326 - Credit Losses), commonly referenced as the Current Expected Credit Loss (“CECL”) became effective for the Corporation. CECL has changed the way we estimate credit losses for loans and leases, including off-balance sheet (“OBS”) credit exposures for reporting periods beginning after January 1, 2020. For more information regarding the CECL standard, see Note 2, “Recent Accounting Pronouncements” in the accompanying Unaudited Notes to the Consolidated Financial Statements.
As a result, management has identified the accounting policies along with other significantand estimates related to the ACL on loans and leases that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial statements. We believe that the judgments, estimates and assumptions used in the preparation of the Company’s financial statements are appropriate. For a further description of our accounting policies, are presented in Footnotesee Note 1, – Summary“Summary of Significant Accounting Policies,” in the Notes to the audited Consolidated Financial Statements in the 20182019 Annual Report.
Recent AcquisitionsReport, as well as Note 1, “Basis of Presentation, Principles of Consolidation, and Expansions
On May 1, 2018, BMT Insurance Advisors, Inc. acquired Domenick & Associates, a full-service insurance agency establishedSignificant Accounting Policies,” in 1993 and headquartered in Philadelphia. Domenick & Associates has a specialty niche with nonprofit and social service organizations which aligns well with our banking and wealth management solutions in these specialty service areas. This acquisition furthers our objective of pursuing strategic growth opportunitiesthe accompanying Notes to enhance, broaden, and diversify our revenue streams.Unaudited Consolidated Financial Statements.
Allowance for Credit Losses on Loans and Leases
The ACL on loans and leases represents management’s estimate of all expected credit losses over the expected contractual life of our existing portfolio loans and leases. Determining the appropriateness of the ACL on loans and leases is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACL on loans and leases in those future periods.
The expense for credit loss recorded through earnings is the amount necessary to maintain the ACL on loans and leases at the amount of expected credit losses inherent within the loans and leases portfolio. The amount of expense and the corresponding level of ACL on loans and leases are based on management’s evaluation of the collectability of the loan and lease portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. The ACL on loans and leases, as reported in our Consolidated Statements of Financial Condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan and lease amounts, net of recoveries. For further information on the ACL on loans and leases, see Note 4 - Loans and Leases in the accompanying Notes to Unaudited Consolidated Financial Statements.
Management employs a disciplined process and methodology to establish the ACL on loans and leases that has two basic components: first, an asset-specific component involving individual loans and leases that do not share risk characteristics with other loans and leases and the measurement of expected credit losses for such individual loans; and second, a collective (pooled) component for estimated expected credit losses for pools of loans and leases that share similar risk characteristics.
Based upon this methodology, management establishes an asset-specific ACL on loans and leases that do not share risk characteristics with other loans and leases based on the amount of expected credit losses calculated on those loans and leases and charges off amounts determined to be uncollectible. Factors we consider in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.
When a loan or lease does not share risk characteristics with other loans or leases, management measures expected credit loss as the difference between the amortized cost basis in the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate except that, for collateral dependent loans, credit loss is measured as the difference between the amortized cost basis in the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. If the calculated expected credit loss is determined to be permanent, fixed or nonrecoverable, the credit loss portion of the loan will be charged off against the ACL on loans and leases. Loans and leases designated as having significantly increased credit risk are generally placed on nonaccrual and remain in that status until all principal and interest payments are current and the prospects for future payments in accordance with the loan agreement are reasonably assured, at which point the loan is returned to accrual status.
In estimating the component of the ACL on loans and leases that share common risk characteristics, loans and leases are segregated into portfolio segments based on federal call report codes which classify loans and leases based on the primary collateral supporting the loan and lease. Methods utilized by management to estimate expected credit losses include a discounted cash flow (“DCF”) methodology that discounts instrument-level contractual cash flows, adjusted for prepayments
On December 15, 2017 (the “Effective Date”and curtailments, incorporating loss expectations, and a weighted average remaining maturity (“WARM”), methodology which contemplates expected losses at a pool-level, utilizing historic loss information.
Under both methodologies, management estimates the mergerACL on loans and leases using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. After the end of Royal Bancsharesthe reasonable and supportable forecast period, the loss rates revert to the long-term mean loss rate, or in the case of Pennsylvania, Inc. (“RBPI”) with and into BMBC (collectively,an input-driven predictive method, the “RBPI Merger”), andlong-term mean of the mergerinput, using a reversion period where applicable. Historical credit loss experience, including examination of Royal Bank America with and intoloss experience at representative peer institutions when the Bank, were completed. Consideration totaled $138.7 million, comprisedCorporation’s first-party loss history does not result in estimations that are meaningful to users of 3,101,316 shares of BMBC’s common stock, the assumption of 140,224 warrants to purchase BMBC common stock, valued at $1.9 million, $112 thousandCorporation’s Consolidated Financial Statements, provides the basis for the cash-outestimation of certain options and $7 thousand cashexpected credit losses. Adjustments to historical loss information are considered for differences in lieu of fractional shares. Including the effects of any measurement period adjustmentscurrent loan-specific risk characteristics such as differences in accordance with ASC 805-10, the RBPI Merger initially added $566.2 million of loans, $121.6 million of investments, $593.2 million of deposits, twelve new branches and a loan production office. The acquisition of RBPI expanded the Corporation’s footprint within Montgomery, Chester, Berks and Philadelphia Counties in Pennsylvaniaunderwriting standards, portfolio mix, delinquency level, or term as well as Camdenfor changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.
The DCF methodology uses inputs of current and Mercer Counties in New Jersey.forecasted macroeconomic indicators to predict future loss rates. The current macroeconomic indicator utilized by the bank is the Pennsylvania unemployment rate. In building the CECL model, a correlation between this indicator and historic loss levels was developed, enabling a prediction of future loss rates related to future Pennsylvania unemployment rates. The portfolio segments utilizing the DCF methodology as of June 30, 2020 included: CRE - owner-occupied and nonowner-occupied loans, home equity lines of credit, residential mortgages (first and junior liens), construction loans and consumer loans.
The WARM methodology uses combined historic loss rates for the Bank and peer institutions, if necessary, gathered from Call Report filings. The selected period for which historic loss rates are used is dependent on management's evaluation of current conditions and expectations of future loss conditions. The portfolio segments utilizing the WARM methodology as of June 30, 2020 included leases and commercial and industrial loans.
Impact of COVID-19
In additionthe first quarter of 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic has resulted in authorities implementing numerous measures attempting to contain the RBPI Merger,spread and impact of COVID-19. Our banking products and services are delivered primarily in Southeastern Pennsylvania, Southern and Central New Jersey, and Delaware, each of which had a stay at home order in place and had closed all non-essential businesses during a period of the second quarter of 2020.
To address the economic impact in the U.S., in March and April 2020, the President signed into law four economic stimulus packages to provide relief to businesses and individuals, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Among other measures, the CARES Act created funding for the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), which provides loans to small businesses to keep their employees on payroll and make other eligible payments. The original funding for the PPP was fully allocated by mid-April 2020, with additional funding made available on April 24, 2020 under the Paycheck Protection Program and Health Care Enhancement Act.
On April 9, 2020, the Federal Reserve took additional steps to bolster the economy by providing additional funding sources for small and mid-sized businesses as well as for state and local governments as they work through cash flow stresses caused by the COVID-19 pandemic. Additionally, the Federal Reserve has taken other steps to provide fiscal and monetary stimuli, including reducing the federal funds rate and the interest rate on the Federal Reserve’s discount window, and implementing programs to promote liquidity in certain securities markets. The Federal Reserve, along with other U.S. banking regulators, has also issued interagency guidance to financial institutions that are working with borrowers affected by the COVID-19 pandemic.
We participated in the PPP and during the second quarter of 2020 originated 1,866 loans with a recorded investment of $307.9 million. Recognizing the significance of operational risk that this portfolio poses, and the continued complexity and uncertainty surrounding evolving regulatory pronouncements regarding various aspects of the PPP, management reviewed several options for continued servicing of the PPP loan portfolio through forgiveness and beyond. After thoughtful consideration, management decided that it is in the best interests of both the Bank and our PPP borrowers that the loans be serviced by an organization that has continuedthe servicing infrastructure in place to execute onsupport the significant volume and short timeframe involved in the complex and evolving PPP forgiveness process. In that regard, in late June the Bank sold substantially all of its strategies of diversificationPPP loans to The Loan Source, Inc., which, together with its servicing partner, ACAP SME, LLC, have taken over the forgiveness and acquiring and/or establishing specialty offices in strategically targeted areas where management believes there to be a high demandongoing servicing process for the Bank’s products and services. On May 24, 2017,PPP loans. In connection with the Bank completed its acquisition of Hirshorn Boothby, a full-service insurance agency established in 1931 and headquartered in the Chestnut Hill section of Philadelphia. Hirshorn Boothby was immediately merged into the Bank’s existing insurance subsidiary, BMT Insurance Advisors, Inc., formerly known as Powers Craft Parker and Beard, Inc., expanding the footprint of this growing segment.
On May 12, 2017,sale, the Corporation establishedrecognized a wealth management-focused office in Princeton, New Jersey which complements$2.4 million gain on the already-established presence in central New Jersey that was acquired in the RBPI Merger.
Beginningsale of approximately $292.1 million of PPP loans in the second quarter of 2017,2020. The remaining loans within the Bank’s Capital Markets department commenced operations focusingBank's PPP portfolio were sold in the third quarter of 2020 and did not result in a material impact on providing risk management servicesour Consolidated Financial Statements. Also, the Corporation recognized $1.8 million of net deferred PPP loan origination fees during the second quarter of 2020, which is included within interest and fees on loans and leases on the Consolidated Statement of Income.
To provide relief from the economic impacts of COVID-19, the Corporation has offered assistance to addressour commercial, consumer and small business clients by waiving fees for early CD redemptions, overdrafts, and minimum deposit balance requirements, as well as implemented consumer and commercial loan modification programs.
The Corporation’s modification program for consumer credit products includes a six-month deferral of principal and interest, with interest continuing to accrue on unpaid principal. Upon completion of the needsdeferral period, resumed payments will be applied to the interest accrued during the deferral period, followed by principal and interest payments through the extended maturity date. As of its commercial customer base. These capital markets capabilities enableJune 30, 2020, 209 consumer loans in the amount of $48.3 million were within their deferral periods under the program. As the Bank continues to offer hedging toolsreceive and process applications, management expects additional modifications under the program.
The Corporation’s modification programs for qualified commercial customersloan and lease products include a three- or six-month deferral of principal and interest or a three- or six-month period of interest-only payments, with interest continuing to accrue on unpaid principal. Upon completion of the deferral period, resumed payments will be applied to the interest accrued during the deferral period, followed by principal and interest payments through the usecontractual maturity date. As of interest rate swapsJune 30, 2020 1,532 commercial loans and options designed to mitigateleases in the interest rate risk on variable rate loans. This interest rate hedging offering allowsamount of $721.9 million were within their deferral periods under the program. As the Bank continues to participatereceive and leadprocess applications, management expects additional modifications under the program.
Based on the provisions of the CARES Act, short-term COVID-19 related modifications to consumer and commercial loans that were not more than 30 days past due as of December 31, 2019 are exempt from TDR classification under GAAP. In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to consumer or commercial loans that were less than 30 days past due as of the loan modification program implementation date are not considered TDRs. For more information, see Note 1 – Basis of Presentation, Principles of Consolidation, and Significant Accounting Policies and Note 4 –Loans and Leases to the Unaudited Consolidated Financial Statements.
As discussed in largermore detail below, we recorded an increase in PCL and longer-dated credits without incurring additional interest rate risk. Additional services will focusACL on assisting qualified customersloans and leases, both of which were driven by the current and forward-looking adverse economic impacts of the COVID-19 pandemic.
Due to the high degree of uncertainty surrounding the COVID-19 pandemic, the full extent of COVID-19’s effects on our business, operations or the economy as a whole are not yet known. However, the COVID-19 pandemic is expected to have a complex and significant adverse impact on the economy, the banking industry and the Corporation in hedging their foreign exchange riskfuture fiscal periods. For more information on how the risks related to COVID-19 may adversely affect our business, results of operations and meeting their trade finance needs through enhanced international services capabilities.financial condition, see Part II, Item 1A. Risk Factors.
Executive Overview
The following items highlight the Corporation’s results of operations for the three and ninesix months ended SeptemberJune 30, 2019,2020, as compared to the same period in 2018,2019, and the changes in its financial condition as of SeptemberJune 30, 20192020 as compared to December 31, 2018.2019. More detailed information related to these highlights can be found in the sections that follow.
Effective January 1, 2020, the Corporation adopted ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The Corporation adopted ASC 326 using the modified retrospective approach method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. In conjunction with the adoption of CECL, the Corporation has revised its segmentation to align with the methodology applied in determining the ACL for loans and leases under CECL, which is based on federal call report codes which classify loans based on the primary collateral supporting the loan. Segmentation prior to the adoption of CECL was based on product type or purpose. As such, certain reclassifications were made to conform prior-period amounts to current period presentation. For more information, see Note 1 – Basis of Presentation, Principles of Consolidation, and Significant Accounting Policies to the Unaudited Consolidated Financial Statements.
Three Month Results of Operations
•Net income attributable to the Corporation was $15.0 million, or $0.75 diluted earnings per share, for the three months ended SeptemberJune 30, 2019 was $16.4 million, a decrease of $322 thousand2020 as compared to $16.7$15.8 million, or $0.78 diluted earnings per share for the same period in 2018. Diluted earnings per share was $0.81 for the three months ended September 30, 2019 as compared to $0.82 for the same period in 2018.2019.
•Return on average equity (“ROAE”) and return on average assets (“ROAA”) for the three months ended SeptemberJune 30, 20192020 were 10.90%10.07% and 1.36%1.16%, respectively, as compared to ROAE and ROAA of 12.08%10.89% and 1.51%1.36% respectively, for the same period in 2018.2019.
•Tax-equivalent net interest income increased $666$741 thousand, or 1.8%2.0%, to $37.5 million for the three months ended SeptemberJune 30, 2019,2020, as compared to $36.9$36.7 million for the same period in 2018.2019.
•Provision for loancredit losses (“PCL”) on loans and lease losses (the “Provision”)leases of $919 thousand$4.3 million for the three months ended SeptemberJune 30, 20192020 was an increase of $255 thousand$2.7 million from the $664 thousand Provision$1.6 million PCL on loans and leases recorded for the same period in 2018.2019.
•Noninterest income of $19.5$20.6 million for the three months ended SeptemberJune 30, 20192020 increased $1.2 million$345 thousand as compared to $18.3$20.2 million for the same period in 2018.2019.
•Capital markets revenue of $3.0 million for the three months ended June 30, 2020 increased $1.5 million as compared to the same period in 2019. Fees for wealth management services capital markets revenue and insurance commissions of $10.8 million, $2.1$9.1 million and $1.8$1.3 million, respectively, for the three months ended SeptemberJune 30, 2019 increased $483 thousand, $1.42020 decreased $2.4 million and $88$394 thousand, respectively, as compared to the same period in 2018.2019.
•Noninterest expense of $35.2$34.6 million for the three months ended SeptemberJune 30, 2019 increased $1.6 million,2020 decreased $552 thousand, from $33.6$35.2 million for the same period in 2018.2019.
NineSix Month Results of Operations
•Net income attributable to the Corporation for the ninesix months ended SeptemberJune 30, 20192020 was $42.8$3.9 million, a decrease of $3.9$22.6 million as compared to $46.7$26.5 million for the same period in 2018.2019. Diluted earnings per share was $2.12$0.19 for the ninesix months ended SeptemberJune 30, 20192020 as compared to $2.28$1.31 for the same period in 2018.2019.
•ROAE and ROAA for the ninesix months ended SeptemberJune 30, 20192020 were 9.82%1.28% and 1.23%0.15%, respectively, as compared to 11.62%9.25% and 1.44%1.16% respectively, for the same period in 2018.2019.
•Tax-equivalent net interest income increased $235decreased $595 thousand, or 0.2%0.8%, to $112.0$73.9 million for the ninesix months ended SeptemberJune 30, 2019,2020, as compared to $111.8$74.5 million for the same period in 2018.2019.
•The ProvisionPCL on loans and leases of $6.3$36.6 million for the ninesix months ended SeptemberJune 30, 20192020 was an increase of $1.5$31.2 million from the $4.8$5.4 million ProvisionPCL on loans and leases recorded for the same period in 2018.2019.
•Noninterest income of $58.9$38.9 million for the ninesix months ended SeptemberJune 30, 2019 increased $1.0 million2020 decreased $608 thousand as compared to $57.9$39.5 million for the same period in 2018.2019.
•Fees for wealth management services and capitalCapital markets revenue of $32.7$5.3 million and $5.8 million, respectively, for the ninesix months ended SeptemberJune 30, 20192020 increased $1.4$1.6 million and $2.3 million, respectively, as compared to the same period in 2018.2019. Fees for wealth management services of $20.2 million for the six months ended June 30, 2020 decreased $1.7 million as compared to the same period in 2019. Insurance commissions of $5.2$2.8 million for the ninesix months ended SeptemberJune 30, 20192020 decreased $138$533 thousand as compared to the same period in 2018.2019.
•Noninterest expense of $110.1$71.1 million for the ninesix months ended SeptemberJune 30, 2019 increased $4.62020 decreased $3.8 million, from $105.5$74.9 million for the same period in 2018.2019.
Changes in Financial Condition
•Total assets of $4.83$5.27 billion as of SeptemberJune 30, 20192020 increased $176.2$8.1 million from $4.65$5.26 billion as of December 31, 2018.2019.
•Total shareholders’ equity of $600.9$603.7 million as of SeptemberJune 30, 2019 increased $36.22020 decreased $8.5 million from $564.7$612.2 million as of December 31, 2018.2019.
•Total portfolio loans and leases as of SeptemberJune 30, 20192020 were $3.54$3.72 billion, an increase of $113.6$32.9 million from $3.43$3.69 billion as of December 31, 2018.2019.
•Total non-performing loans and leases of $14.1$8.4 million represented 0.40%0.23% of portfolio loans and leases as of SeptemberJune 30, 20192020 as compared to $12.8$10.6 million, or 0.37%0.29% of portfolio loans and leases as of December 31, 2018.2019.
•The $20.8$55.0 million Allowance,ACL on loans and leases, as of SeptemberJune 30, 2019,2020, represented 0.59%1.48% of portfolio loans and leases, as compared to $19.4$22.6 million or 0.57%0.61% of portfolio loans and leases as of December 31, 2018.2019.
•Total deposits of $3.70$4.24 billion as of SeptemberJune 30, 20192020 increased $99.4$401.4 million from $3.60$3.84 billion as of December 31, 2018.2019.
•Wealth assets under management, administration, supervision and brokerage as of SeptemberJune 30, 20192020 were $15.61$17.01 billion, an increase of $2.18 billion$464.8 million from $13.43$16.55 billion as of December 31, 2018.2019.
Key Performance Ratios
Key financial performance ratios for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 are shown in the table below:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Return on average equity | Return on average equity | 10.90 | % | | 12.08 | % | | 9.82 | % | | 11.62 | % | Return on average equity | 10.07 | % | | 10.89 | % | | 1.28 | % | | 9.25 | % |
Return on average assets | Return on average assets | 1.36 | | | 1.51 | | | 1.23 | | | 1.44 | | Return on average assets | 1.16 | | | 1.36 | | | 0.15 | | | 1.16 | |
Tax-equivalent net interest margin | Tax-equivalent net interest margin | 3.54 | | | 3.69 | | | 3.61 | | | 3.81 | | Tax-equivalent net interest margin | 3.22 | | | 3.55 | | | 3.30 | | | 3.65 | |
Equity to assets ratio | Equity to assets ratio | 12.51 | | | 12.52 | | | 12.53 | | | 12.39 | | Equity to assets ratio | 11.49 | | | 12.50 | | | 12.07 | | | 12.54 | |
Basic earnings per share | Basic earnings per share | $ | 0.81 | | | $ | 0.82 | | | $ | 2.13 | | | $ | 2.31 | | Basic earnings per share | $ | 0.75 | | | $ | 0.78 | | | $ | 0.19 | | | $ | 1.31 | |
Diluted earnings per share | Diluted earnings per share | 0.81 | | | 0.82 | | | 2.12 | | | 2.28 | | Diluted earnings per share | 0.75 | | | 0.78 | | | 0.19 | | | 1.31 | |
Dividends paid or accrued per share | Dividends paid or accrued per share | 0.26 | | | 0.25 | | | 0.77 | | | 0.69 | | Dividends paid or accrued per share | 0.26 | | | 0.25 | | | 0.52 | | | 0.50 | |
Dividends paid or accrued per share to net income per basic common share | Dividends paid or accrued per share to net income per basic common share | 32.1 | % | | 30.5 | % | | 36.2 | % | | 29.9 | % | Dividends paid or accrued per share to net income per basic common share | 34.7 | % | | 32.1 | % | | 273.7 | % | | 38.2 | % |
The following table presents certain key period-end balances and ratios as of SeptemberJune 30, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | |
(dollars in millions, except per share amounts) | September 30, 2019 | | December 31, 2018 |
Book value per share | $ | 29.86 | | | $ | 28.01 | |
| | | |
Allowance as a percentage of portfolio loans and leases | 0.59 | % | | 0.57 | % |
Tier I capital to risk weighted assets | 11.33 | | | 10.92 | |
| | | |
Loan to deposit ratio | 95.7 | | | 95.2 | |
Wealth assets under management, administration, supervision and brokerage | $ | 15,609.8 | | | $ | 13,429.5 | |
Portfolio loans and leases | 3,540.7 | | | 3,427.2 | |
Total assets | 4,828.6 | | | 4,652.5 | |
Total shareholders’ equity | 600.9 | | | 564.7 | |
| | | | | | | | | | | |
(dollars in millions, except per share amounts) | June 30, 2020 | | December 31, 2019 |
Book value per share | $ | 30.29 | | | $ | 30.42 | |
| | | |
ACL on loans and leases as a percentage of portfolio loans and leases | 1.48 | % | | 0.61 | % |
Tier I capital to risk weighted assets | 11.27 | | | 11.42 | |
| | | |
Loan to deposit ratio | 87.7 | | | 96.0 | |
Wealth assets under management, administration, supervision and brokerage | $ | 17,012.9 | | | $ | 16,548.1 | |
Portfolio loans and leases | 3,722.2 | | | 3,689.3 | |
Total assets | 5,271.3 | | | 5,263.3 | |
Total shareholders’ equity | 603.7 | | | 612.2 | |
The following sections discuss, in greater detail, the Corporation’s results of operations for the three and ninesix months ended SeptemberJune 30, 2019,2020, as compared to the same period in 2018,2019, and the changes in its financial condition as of SeptemberJune 30, 20192020 as compared to December 31, 2018.2019.
Recent DevelopmentsOther Matters
Crusader Servicing Corporation (“Crusader”), which was an 80% owned subsidiary of Royal Bank America that was acquired by the Bank in the RBPI merger, along with the Bank as successor-in-interest to Royal Bank America, are defendants in the case captioned Snyder v. Crusader Servicing Corporation et al., Case No. 2007-01027, in the Court of Common Pleas of Montgomery County, Pennsylvania. The case involves claims brought by a former Crusader shareholder in 2007 against Crusader, its former directors and remaining shareholders related, among other things, to a purported failure to pay amounts allegedly due to Snyder for his shares of Crusader stock. On May 1, 2019, the Court rendered a decision in favor of Snyder and ordered Crusader to pay Snyder the amount of $2,190,000 plus interest at the rate of 6% from December 1, 2006. Both sides have filed for appeal withThe matter was appealed, and on March 18, 2020, the Superior Court of the Commonwealth of Pennsylvania returned an opinion reversing in part and Crusader is considering other strategic optionsaffirming in part the trial court's judgment. The effect of this was to vacate the judgment of $2,190,000 plus interest, and instead to require an appraisal process in accordance with respectCrusader's Shareholders' Agreement to this matter duringdetermine the pendencyvalue of the appeal.
Mr. Snyder's shares. We do not believe that this ruling and theany monetary award if any, ultimately payable by Crusader will be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of the Corporation.
Components of Net Income
Net income is comprised of five major elements:
•Net Interest Income, or the difference between the interest income earned on loans, leases and investments and the interest expense paid on deposits and borrowed funds;
•Provision for LoanCredit Losses on Loans and Lease LossesLeases, or the amount added to the AllowanceACL on loans and leases to provide for estimated inherent losses on portfolio loans and leases;
•Noninterest Income, which is made up primarily of wealth management revenue, capital markets revenue, gains and losses from the sale of residential mortgage loans, gains and losses from the sale of available for sale investment securities and other fees from loan and deposit services;
•Noninterest Expense, which consists primarily of salaries and employee benefits, occupancy, intangible asset amortization, professional fees, due diligence, merger-related and merger integration expenses, and other operating expenses; and
•Income Tax Expense, which includes state and federal jurisdictions.
TAX-EQUIVALENT NET INTEREST INCOME
Net interest income is the primary source of the Corporation’s revenue. The below tables presenttable presents a summary, for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, of the Corporation’s average balances and tax-equivalent yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The tax-equivalent net interest margin is the tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread is the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of noninterest-bearing liabilities represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity.
Three Months Ended SeptemberJune 30, 20192020 Compared to the Same Period in 20182019
For the three months ended SeptemberJune 30, 2019,2020, tax-equivalent net interest income increased $666$741 thousand, or 1.8%2.0%, to $37.5 million, as compared to $36.9$36.7 million for the same period in 2018.2019.
Items contributing to the increase were increasesin tax-equivalent net interest income included a decrease of $3.4$5.2 million in interest paid on deposits, partially offset by decreases of $4.1 million and $808$642 thousand in tax-equivalent interest and fees earned on loans and leases and tax-equivalent interest earnedincome on available for sale investment securities, respectively, for the three months ended June 30, 2020 as well as decreases of $159 thousand and $151 thousandcompared to the same period in interest paid on short-term borrowings and long-term FHLB advances, respectively. These increases to tax-equivalent net interest income were partially offset by a $4.0 million increase in interest paid2019.
Interest expense on deposits for the three months ended SeptemberJune 30, 20192020 decreased $5.2 million as compared to the same period in 2018.
2019. The $3.4 million increase in tax-equivalent interest and fees on loans and leasesdecrease was primarily relateddue to a 78 basis point decrease in the $153.2 million increase inrate paid on average loans to $3.53 billioninterest-bearing deposits for the three months ended SeptemberJune 30, 2019 as compared to $3.38 billion for the three months ended September 30, 2018 coupled with a 17 basis point increase in the yield on loans and leases2020 as compared to the same period in 2018.2019. The effect of the decrease in the tax-equivalent rate paid was partially offset by an increase of $174.3 million in average interest-bearing deposits for the three months ended June 30, 2020 as compared to the same period in 2019.
Tax-equivalent interest and fees earned on loans and leases for the three months ended June 30, 2020 decreased $4.1 million as compared to the same period in 2019. The $808 thousanddecrease was primarily due to a 95 basis point decrease in the tax-equivalent yield on average loans and leases for the three months ended June 30, 2020 as compared to the same period in 2019. The effect of the decrease in the tax-equivalent yield was partially offset by an increase of $415.8 million in average loans and leases for the three months ended June 30, 2020 as compared to same period in 2019. Included in tax-equivalent interest and fees earned on loans and leases for the three months ended June 30, 2020 was the recognition of $1.8 million of net deferred PPP loan origination fees.
Tax-equivalent interest income on available for sale investment securities for the three months ended June 30, 2020 decreased $642 thousand as compared to the same period in 2019. The decrease was primarily relateddue to a 27 basis point decrease in the tax-equivalent yield on average available for sale investment securities for the three months ended June 30, 2020 as compared to the $71.2same period in 2019 coupled with a decrease of $47.1 million increase in average available for sale investment securities for the third quarter of 2019three months ended June 30, 2020 as compared to the same period in 2019.
third quarter of 2018 coupled with a 27 basis point increase in the yield on available for sale investment securities as compared to the same period in 2018.
Interest expense on short-term borrowings and long-term FHLB advances for the three months ended September 30, 2019 decreased $159 thousand and $151 thousand, respectively as compared to the same period in 2018. Average short-term borrowings and average long-term FHLB advances decreased $38.2 million and $35.8 million, respectively, offset by a 10 and 19 basis point increase in the rate paid on short-term borrowings and long-term FHLB advances, respectively, as compared to the same period in 2018.
The $4.0 million increase in interest expense on deposits for the three months ended September 30, 2019 as compared to the same period in 2018 was primarily due to a 48 basis point increase in the rate paid on deposits as compared to the same period in 2018 coupled with a $283.0 million increase in average interest-bearing deposits as compared to the same period in 2018. The increase in rate paid was related to the competitive dynamics in the markets in which we operate and certain promotional interest rates offered during the first and second quarters of 2019.
NineSix Months Ended SeptemberJune 30, 20192020 Compared to the Same Period in 20182019
For the ninesix months ended SeptemberJune 30, 2019,2020, tax-equivalent net interest income increased $235decreased $595 thousand, or 0.2%0.8%, to $112.0$73.9 million, as compared to $111.8$74.5 million for the same period in 2018.2019.
Items contributing to the increase were increasesdecrease in tax-equivalent net interest income included decreases of $10.8$6.2 million and $2.0 million$967 thousand in tax-equivalent interest and fees earned on loans and leases and tax-equivalent interest earnedincome on available for sale investment securities, respectively, for the six months ended June 30, 2020 as well ascompared to the same period in 2019. The effect of these decreases of $656 thousand and $474 thousand in interest paid on long-term FHLB advances and short-term borrowings, respectively. These increases to tax-equivalent net interest income were partially offset by a $13.8decreases of $5.6 million increaseand $615 thousand in interest paid on deposits and interest paid on and short-term borrowings, respectively, for the ninesix months ended SeptemberJune 30, 20192020 as compared to the same period in 2018.2019.
The $10.8 million increase in tax-equivalentTax-equivalent interest and fees earned on loans and leases was primarily related to the $170.1 million increase in average loans to $3.51 billion for the ninesix months ended SeptemberJune 30, 2019 as compared to $3.34 billion for the nine months ended September 30, 2018 coupled with a 17 basis point increase in the yield on loans and leases2020 decreased $6.2 million as compared to the same period in 2018.2019. The decrease was primarily due to an 80 basis point decrease in the tax-equivalent yield on average loans and leases for the six months ended June 30, 2020 as compared to the same period in 2019. The effect of the decrease in the tax-equivalent yield was partially offset by an increase of $338.1 million in average loans and leases for the six months ended June 30, 2020 as compared to same period in 2019. Included in tax-equivalent interest and fees earned on loans and leases for the six months ended June 30, 2020 was the recognition of $1.8 million of net deferred PPP loan origination fees.
The $2.0 million increase in tax-equivalentTax-equivalent interest income on available for sale investment securities for the six months ended June 30, 2020 decreased $967 thousand as compared to the same period in 2019. The decrease was primarily relateddue to a 20 basis point decrease in the tax-equivalent yield on average available for sale investment securities for the six months ended June 30, 2020 as compared to the $47.1same period in 2019 coupled with a decrease of $39.8 million increase in average available for sale investment securities for the ninesix months ended SeptemberJune 30, 2019 as compared to the nine months ended September 30, 2018 coupled with a 29 basis point increase in the yield on available for sale investment securities2020 as compared to the same period in 2018.2019.
Interest expense on long-term FHLB advances and short-term borrowingsdeposits for the ninesix months ended SeptemberJune 30, 20192020 decreased $656 thousand and $474 thousand, respectively,$5.6 million as compared to the same period in 2018. Average long-term FHLB advances and average short-term borrowings decreased $51.2 million and $63.4 million, respectively, offset by an 18 and 412019. The decrease was primarily due to a 47 basis point increasedecrease in the rate paid on long-term FHLB advances and short-term borrowings, respectively,average interest-bearing deposits for the six months ended June 30, 2020 as compared to the same period in 2018.
2019. The $13.8effect of the decrease in the rate paid was partially offset by an increase of $176.6 million increase in interest expense onaverage interest-bearing deposits for the ninesix months ended SeptemberJune 30, 20192020 as compared to the same period in 2018 was primarily due to a 60 basis point increase in2019.
Interest expense on short-term borrowings for the rate paid on depositssix months ended June 30, 2020 decreased $615 thousand as compared to the same period in 2018 coupled with2019. The decrease was primarily due to a $274.5 million increase133 basis point decrease in the rate paid on average interest-bearing depositsshort-term borrowings for the six months ended June 30, 2020 as compared to the same period in 2018.2019. The increaseeffect of the decrease in the rate paid was relatedpartially offset by an increase of $25.9 million in average short-term borrowings for the six months ended June 30, 2020 as compared to the competitive dynamicssame period in the markets in which we operate and certain promotional interest rates offered during the first and second quarters of 2019.
Analyses of Interest Rates and Interest Differential
The tables below present the major asset and liability categories on an average daily balance basis for the periods presented, along with interest income, interest expense and key rates and yields.
| | | Three Months Ended September 30, | | | Three Months Ended June 30, | |
| | 2019 | | | | 2018 | | | 2020 | | | | 2019 | |
(dollars in thousands) | (dollars in thousands) | Average Balance | | Interest Income/ Expense | | Average Rates Earned/ Paid | | | Average Balance | | Interest Income/ Expense | | Average Rates Earned/ Paid | (dollars in thousands) | Average Balance | | Interest Income/ Expense | | Average Rates Earned/ Paid | | | Average Balance | | Interest Income/ Expense | | Average Rates Earned/ Paid |
Assets: | Assets: | | | | | | | | | | | | | Assets: | | | | | | | | | | | | |
Interest-bearing deposits with banks | Interest-bearing deposits with banks | $ | 48,597 | | | $ | 143 | | | 1.17 | % | | | $ | 37,467 | | | $ | 64 | | | 0.68 | % | Interest-bearing deposits with banks | $ | 195,966 | | | $ | 37 | | | 0.08 | % | | | $ | 37,843 | | | $ | 73 | | | 0.77 | % |
Investment securities - available for sale: | Investment securities - available for sale: | | | | Investment securities - available for sale: | | | |
Taxable | Taxable | 594,975 | | | 3,765 | | | 2.51 | | | | 514,360 | | | 2,910 | | | 2.24 | | Taxable | 516,823 | | | 2,775 | | | 2.16 | | | | 560,999 | | | 3,400 | | | 2.43 | |
Tax-exempt(4) | Tax-exempt(4) | 6,594 | | | 36 | | | 2.17 | | | | 16,056 | | | 83 | | | 2.05 | | Tax-exempt(4) | 4,572 | | | 26 | | | 2.29 | | | | 7,530 | | | 43 | | | 2.29 | |
Total investment securities – available for sale | Total investment securities – available for sale | 601,569 | | | 3,801 | | | 2.51 | | | | 530,416 | | | 2,993 | | | 2.24 | | Total investment securities – available for sale | 521,395 | | | 2,801 | | | 2.16 | | | | 568,529 | | | 3,443 | | | 2.43 | |
Investment securities – held to maturity | Investment securities – held to maturity | 12,360 | | | 80 | | | 2.57 | | | | 8,378 | | | 55 | | | 2.60 | | Investment securities – held to maturity | 13,126 | | | 73 | | | 2.24 | | | | 10,417 | | | 71 | | | 2.73 | |
Investment securities – trading | Investment securities – trading | 8,407 | | | 27 | | | 1.27 | | | | 8,204 | | | 30 | | | 1.45 | | Investment securities – trading | 7,800 | | | 24 | | | 1.24 | | | | 8,572 | | | 24 | | | 1.12 | |
Loans and leases(1)(2)(3)(4) | Loans and leases(1)(2)(3)(4) | 3,532,923 | | | 45,642 | | | 5.13 | | | | 3,379,699 | | | 42,214 | | | 4.96 | | Loans and leases(1)(2)(3)(4) | 3,940,032 | | | 40,779 | | | 4.16 | | | | 3,524,219 | | | 44,903 | | | 5.11 | |
Total interest-earning assets | Total interest-earning assets | 4,203,856 | | | 49,693 | | | 4.69 | | | | 3,964,164 | | | 45,356 | | | 4.54 | | Total interest-earning assets | 4,678,319 | | | 43,714 | | | 3.76 | | | | 4,149,580 | | | 48,514 | | | 4.69 | |
Cash and due from banks | Cash and due from banks | 12,890 | | | | 7,587 | | | Cash and due from banks | 16,263 | | | | 13,725 | | |
Allowance for loan and lease losses | (21,438) | | | | (19,467) | | | |
ACL on loans and leases | | ACL on loans and leases | (54,113) | | | | (20,844) | | |
Other assets | Other assets | 564,766 | | | | 423,864 | | | Other assets | 585,605 | | | | 509,164 | | |
Total assets | Total assets | $ | 4,760,074 | | | | $ | 4,376,148 | | | Total assets | $ | 5,226,074 | | | | $ | 4,651,625 | | |
Liabilities: | Liabilities: | | | | | | Liabilities: | | | | | |
Savings, NOW, and market rate accounts | Savings, NOW, and market rate accounts | $ | 1,996,181 | | | $ | 5,445 | | | 1.08 | | | | $ | 1,695,214 | | | $ | 2,425 | | | 0.57 | | Savings, NOW, and market rate accounts | $ | 2,313,150 | | | $ | 2,341 | | | 0.41 | | | | $ | 1,928,755 | | | $ | 5,040 | | | 1.05 | |
Wholesale deposits | Wholesale deposits | 299,309 | | | 1,729 | | | 2.29 | | | | 256,347 | | | 1,329 | | | 2.06 | | Wholesale deposits | 245,052 | | | 486 | | | 0.80 | | | | 345,782 | | | 2,143 | | | 2.49 | |
Retail time deposits | Retail time deposits | 480,736 | | | 2,336 | | | 1.93 | | | | 541,652 | | | 1,779 | | | 1.30 | | Retail time deposits | 410,911 | | | 1,649 | | | 1.61 | | | | 520,317 | | | 2,472 | | | 1.91 | |
Total interest-bearing deposits | Total interest-bearing deposits | 2,776,226 | | | 9,510 | | | 1.36 | | | | 2,493,213 | | | 5,533 | | | 0.88 | | Total interest-bearing deposits | 2,969,113 | | | 4,476 | | | 0.61 | | | | 2,794,854 | | | 9,655 | | | 1.39 | |
Short-term borrowings | Short-term borrowings | 169,985 | | | 937 | | | 2.19 | | | | 208,201 | | | 1,096 | | | 2.09 | | Short-term borrowings | 136,816 | | | 232 | | | 0.68 | | | | 68,529 | | | 357 | | | 2.09 | |
Long-term FHLB advances | Long-term FHLB advances | 45,698 | | | 243 | | | 2.11 | | | | 81,460 | | | 394 | | | 1.92 | | Long-term FHLB advances | 46,161 | | | 155 | | | 1.35 | | | | 52,397 | | | 269 | | | 2.06 | |
Subordinated notes | Subordinated notes | 98,634 | | | 1,145 | | | 4.61 | | | | 98,457 | | | 1,144 | | | 4.61 | | Subordinated notes | 98,770 | | | 1,144 | | | 4.66 | | | | 98,587 | | | 1,144 | | | 4.65 | |
Junior subordinated debt | Junior subordinated debt | 21,680 | | | 340 | | | 6.22 | | | | 21,511 | | | 337 | | | 6.22 | | Junior subordinated debt | 21,814 | | | 229 | | | 4.22 | | | | 21,637 | | | 352 | | | 6.53 | |
Total interest-bearing liabilities | Total interest-bearing liabilities | 3,112,223 | | | 12,175 | | | 1.55 | | | | 2,902,842 | | | 8,504 | | | 1.16 | | Total interest-bearing liabilities | 3,272,674 | | | 6,236 | | | 0.77 | | | | 3,036,004 | | | 11,777 | | | 1.56 | |
Noninterest-bearing deposits | Noninterest-bearing deposits | 903,314 | | | | 866,314 | | | Noninterest-bearing deposits | 1,126,139 | | | | 909,945 | | |
Other liabilities | Other liabilities | 149,226 | | | | 59,085 | | | Other liabilities | 226,698 | | | | 124,211 | | |
Total noninterest-bearing liabilities | Total noninterest-bearing liabilities | 1,052,540 | | | | 925,399 | | | Total noninterest-bearing liabilities | 1,352,837 | | | | 1,034,156 | | |
Total liabilities | Total liabilities | 4,164,763 | | | | 3,828,241 | | | Total liabilities | 4,625,511 | | | | 4,070,160 | | |
Shareholders’ equity | Shareholders’ equity | 595,311 | | | | 547,907 | | | Shareholders’ equity | 600,563 | | | | 581,465 | | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 4,760,074 | | | | $ | 4,376,148 | | | Total liabilities and shareholders’ equity | $ | 5,226,074 | | | | $ | 4,651,625 | | |
Net interest spread | Net interest spread | | | 3.14 | | | | | | 3.38 | | Net interest spread | | | 2.99 | | | | | | 3.13 | |
Effect of noninterest-bearing sources | Effect of noninterest-bearing sources | | 0.40 | | | | | 0.31 | | Effect of noninterest-bearing sources | | 0.23 | | | | | 0.42 | |
Net interest income/margin on earning assets(4) | Net interest income/margin on earning assets(4) | | $ | 37,518 | | | 3.54 | | | | | $ | 36,852 | | | 3.69 | | Net interest income/margin on earning assets(4) | | $ | 37,478 | | | 3.22 | | | | | $ | 36,737 | | | 3.55 | |
Tax-equivalent adjustment(4) | Tax-equivalent adjustment(4) | | $ | 120 | | | 0.01 | % | | | | $ | 123 | | | 0.01 | % | Tax-equivalent adjustment(4) | | $ | 93 | | | 0.01 | % | | | | $ | 126 | | | 0.01 | % |
(1)Non-accrual loans have been included in average loan balances, but interest on non-accrual loans has not been included for purposes of determining interest income.
(2)Includes portfolio loans and leases and loans held for sale.
(3)Interest on loans and leases includes net accretion of deferred fees of $885$258 thousand and $453$634 thousand for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively.
(4)Tax rate used for tax-equivalent calculations is 21% for 20192020 and 2018.2019.
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
| | 2019 | | | | 2018 | | | 2020 | | | | 2019 | |
(dollars in thousands) | (dollars in thousands) | Average Balance | | Interest Income/ Expense | | Average Rates Earned/ Paid | | | Average Balance | | Interest Income/ Expense | | Average Rates Earned/ Paid | (dollars in thousands) | Average Balance | | Interest Income/ Expense | | Average Rates Earned/ Paid | | | Average Balance | | Interest Income/ Expense | | Average Rates Earned/ Paid |
Assets: | Assets: | | | | | | | | | | | | | Assets: | | | | | | | | | | | | |
Interest-bearing deposits with banks | Interest-bearing deposits with banks | $ | 39,785 | | | $ | 348 | | | 1.17 | % | | | $ | 37,573 | | | $ | 181 | | | 0.64 | % | Interest-bearing deposits with banks | $ | 123,148 | | | $ | 148 | | | 0.24 | % | | | $ | 35,306 | | | $ | 205 | | | 1.17 | % |
Investment securities - available for sale: | Investment securities - available for sale: | | | | Investment securities - available for sale: | | | |
Taxable | Taxable | 566,742 | | | 10,528 | | | 2.48 | | | | 509,405 | | | 8,382 | | | 2.20 | | Taxable | 516,534 | | | 5,840 | | | 2.27 | | | | 552,391 | | | 6,763 | | | 2.47 | |
Tax-exempt(4) | Tax-exempt(4) | 7,961 | | | 134 | | | 2.25 | | | | 18,241 | | | 276 | | | 2.02 | | Tax-exempt(4) | 4,740 | | | 54 | | | 2.29 | | | | 8,656 | | | 98 | | | 2.28 | |
Total investment securities – available for sale | Total investment securities – available for sale | 574,703 | | | 10,662 | | | 2.48 | | | | 527,646 | | | 8,658 | | | 2.19 | | Total investment securities – available for sale | 521,274 | | | 5,894 | | | 2.27 | | | | 561,047 | | | 6,861 | | | 2.47 | |
Investment securities – held to maturity | Investment securities – held to maturity | 10,540 | | | 218 | | | 2.77 | | | | 8,054 | | | 171 | | | 2.84 | | Investment securities – held to maturity | 13,160 | | | 160 | | | 2.44 | | | | 9,615 | | | 138 | | | 2.89 | |
Investment securities – trading | Investment securities – trading | 8,206 | | | 73 | | | 1.19 | | | | 8,248 | | | 73 | | | 1.18 | | Investment securities – trading | 8,164 | | | 49 | | | 1.21 | | | | 8,103 | | | 46 | | | 1.14 | |
Loans and leases(1)(2)(3)(4) | Loans and leases(1)(2)(3)(4) | 3,511,829 | | | 135,503 | | | 5.16 | | | | 3,341,741 | | | 124,750 | | | 4.99 | | Loans and leases(1)(2)(3)(4) | 3,839,208 | | | 83,677 | | | 4.38 | | | | 3,501,107 | | | 89,861 | | | 5.18 | |
Total interest-earning assets | Total interest-earning assets | 4,145,063 | | | 146,804 | | | 4.74 | | | | 3,923,262 | | | 133,833 | | | 4.56 | | Total interest-earning assets | 4,504,954 | | | 89,928 | | | 4.01 | | | | 4,115,178 | | | 97,111 | | | 4.76 | |
Cash and due from banks | Cash and due from banks | 13,671 | | | | 8,468 | | | Cash and due from banks | 14,371 | | | | 14,068 | | |
Allowance for loan and lease losses | Allowance for loan and lease losses | (20,729) | | | | (18,386) | | | Allowance for loan and lease losses | (39,950) | | | | (20,368) | | |
Other assets | Other assets | 515,059 | | | | 418,261 | | | Other assets | 556,120 | | | | 489,794 | | |
Total assets | Total assets | $ | 4,653,064 | | | | $ | 4,331,605 | | | Total assets | $ | 5,035,495 | | | | $ | 4,598,672 | | |
Liabilities: | Liabilities: | | | | | | Liabilities: | | | | | |
Savings, NOW, and market rate accounts | Savings, NOW, and market rate accounts | $ | 1,908,405 | | | $ | 14,249 | | | 1.00 | | | | $ | 1,719,004 | | | $ | 5,977 | | | 0.46 | | Savings, NOW, and market rate accounts | $ | 2,255,215 | | | $ | 7,322 | | | 0.65 | | | | $ | 1,863,790 | | | $ | 8,804 | | | 0.95 | |
Wholesale deposits | Wholesale deposits | 329,103 | | | 5,884 | | | 2.39 | | | | 221,073 | | | 3,035 | | | 1.84 | | Wholesale deposits | 249,186 | | | 1,463 | | | 1.18 | | | | 344,247 | | | 4,155 | | | 2.43 | |
Retail time deposits | Retail time deposits | 511,290 | | | 7,129 | | | 1.86 | | | | 534,177 | | | 4,492 | | | 1.12 | | Retail time deposits | 407,011 | | | 3,328 | | | 1.64 | | | | 526,820 | | | 4,793 | | | 1.83 | |
Total interest-bearing deposits | Total interest-bearing deposits | 2,748,798 | | | 27,262 | | | 1.33 | | | | 2,474,254 | | | 13,504 | | | 0.73 | | Total interest-bearing deposits | 2,911,412 | | | 12,113 | | | 0.84 | | | | 2,734,857 | | | 17,752 | | | 1.31 | |
Short-term borrowings | Short-term borrowings | 132,100 | | | 2,237 | | | 2.26 | | | | 195,483 | | | 2,711 | | | 1.85 | | Short-term borrowings | 138,700 | | | 685 | | | 0.99 | | | | 112,844 | | | 1,300 | | | 2.32 | |
Long-term FHLB advances | Long-term FHLB advances | 51,125 | | | 790 | | | 2.07 | | | | 102,312 | | | 1,446 | | | 1.89 | | Long-term FHLB advances | 46,748 | | | 399 | | | 1.72 | | | | 53,883 | | | 547 | | | 2.05 | |
Subordinated notes | Subordinated notes | 98,588 | | | 3,434 | | | 4.66 | | | | 98,450 | | | 3,430 | | | 4.66 | | Subordinated notes | 98,748 | | | 2,289 | | | 4.66 | | | | 98,564 | | | 2,289 | | | 4.68 | |
Junior subordinated debt | Junior subordinated debt | 21,638 | | | 1,050 | | | 6.49 | | | | 21,470 | | | 946 | | | 5.89 | | Junior subordinated debt | 21,791 | | | 524 | | | 4.84 | | | | 21,616 | | | 710 | | | 6.62 | |
Total interest-bearing liabilities | Total interest-bearing liabilities | 3,052,249 | | | 34,773 | | | 1.52 | | | | 2,891,969 | | | 22,037 | | | 1.02 | | Total interest-bearing liabilities | 3,217,399 | | | 16,010 | | | 1.00 | | | | 3,021,764 | | | 22,598 | | | 1.51 | |
Noninterest-bearing deposits | Noninterest-bearing deposits | 895,111 | | | | 849,247 | | | Noninterest-bearing deposits | 1,010,202 | | | | 890,941 | | |
Other liabilities | Other liabilities | 122,665 | | | | 53,763 | | | Other liabilities | 200,107 | | | | 109,165 | | |
Total noninterest-bearing liabilities | Total noninterest-bearing liabilities | 1,017,776 | | | | 903,010 | | | Total noninterest-bearing liabilities | 1,210,309 | | | | 1,000,106 | | |
Total liabilities | Total liabilities | 4,070,025 | | | | 3,794,979 | | | Total liabilities | 4,427,708 | | | | 4,021,870 | | |
Shareholders’ equity | Shareholders’ equity | 583,039 | | | | 536,626 | | | Shareholders’ equity | 607,787 | | | | 576,802 | | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 4,653,064 | | | | $ | 4,331,605 | | | Total liabilities and shareholders’ equity | $ | 5,035,495 | | | | $ | 4,598,672 | | |
Net interest spread | Net interest spread | | | 3.22 | | | | | | 3.54 | | Net interest spread | | | 3.01 | | | | | | 3.25 | |
Effect of noninterest-bearing sources | Effect of noninterest-bearing sources | | 0.39 | | | | | 0.27 | | Effect of noninterest-bearing sources | | 0.29 | | | | | 0.40 | |
Net interest income/margin on earning assets(4) | Net interest income/margin on earning assets(4) | | $ | 112,031 | | | 3.61 | | | | | $ | 111,796 | | | 3.81 | | Net interest income/margin on earning assets(4) | | $ | 73,918 | | | 3.30 | | | | | $ | 74,513 | | | 3.65 | |
Tax-equivalent adjustment(4) | Tax-equivalent adjustment(4) | | $ | 375 | | | 0.01 | % | | | | $ | 312 | | | 0.01 | % | Tax-equivalent adjustment(4) | | $ | 200 | | | 0.01 | % | | | | $ | 255 | | | 0.01 | % |
(1)Non-accrual loans have been included in average loan balances, but interest on non-accrual loans has not been included for purposes of determining interest income.
(2)Includes portfolio loans and leases and loans held for sale.
(3)Interest on loans and leases includes deferred fees of $1.8 million$620 thousand and $1.2 million$919 thousand for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively.
(4)Tax rate used for tax-equivalent calculations is 21% for 20192020 and 2018.2019.
Rate/Volume Analysis (tax-equivalent basis)(1)
The rate/volume analysis in the table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for
the three and ninesix months ended SeptemberJune 30, 20192020 as compared to the same period in 2018,2019, allocated by rate and volume. The change in interest income and/or expense due to both volume and rate has been allocated to changes in volume.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 Compared to 2018 | | | | | | | | | | |
(dollars in thousands) | Three Months Ended September 30, | | | | | | Nine Months Ended September 30, | | | | |
increase/(decrease) | Volume | | Rate | | Total | | Volume | | Rate | | Total |
Interest Income: | | | | | | | | | | | |
Interest-bearing deposits with banks | $ | 19 | | | $ | 60 | | | $ | 79 | | | $ | 11 | | | $ | 156 | | | $ | 167 | |
Investment securities - taxable | 487 | | | 390 | | | 877 | | | 1,005 | | | 1,188 | | | 2,193 | |
Investment securities -nontaxable | (60) | | | 13 | | | (47) | | | (164) | | | 22 | | | (142) | |
Loans and leases | 1,915 | | | 1,513 | | | 3,428 | | | 6,313 | | | 4,440 | | | 10,753 | |
Total interest income | 2,361 | | | 1,976 | | | 4,337 | | | 7,165 | | | 5,806 | | | 12,971 | |
Interest expense: | | | | | | | | | | | |
Savings, NOW and market rate accounts | 436 | | | 2,584 | | | 3,020 | | | 645 | | | 7,627 | | | 8,272 | |
Wholesale deposits | 225 | | | 175 | | | 400 | | | 1,491 | | | 1,358 | | | 2,849 | |
Retail time deposits | (1,140) | | | 1,697 | | | 557 | | | (313) | | | 2,950 | | | 2,637 | |
Short-term borrowings | (411) | | | 252 | | | (159) | | | (1,065) | | | 591 | | | (474) | |
Long-term FHLB advances | (288) | | | 137 | | | (151) | | | (767) | | | 111 | | | (656) | |
Subordinated notes | 1 | | | — | | | 1 | | | 4 | | | — | | | 4 | |
Junior subordinated debt | 3 | | | — | | | 3 | | | 7 | | | 97 | | | 104 | |
Total interest expense | (1,174) | | | 4,845 | | | 3,671 | | | 2 | | | 12,734 | | | 12,736 | |
Interest differential | $ | 3,535 | | | $ | (2,869) | | | $ | 666 | | | $ | 7,163 | | | $ | (6,928) | | | $ | 235 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 Compared to 2019 | | | | | | | | | | |
(dollars in thousands) | Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
increase/(decrease) | Volume | | Rate | | Total | | Volume | | Rate | | Total |
Interest Income: | | | | | | | | | | | |
Interest-bearing deposits with banks | $ | 1,264 | | | $ | (1,300) | | | $ | (36) | | | $ | 1,056 | | | $ | (1,113) | | | $ | (57) | |
Investment securities - taxable | (211) | | | (412) | | | (623) | | | (337) | | | (561) | | | (898) | |
Investment securities -nontaxable | (17) | | | — | | | (17) | | | (45) | | | 1 | | | (44) | |
Loans and leases | 25,614 | | | (29,738) | | | (4,124) | | | 20,061 | | | (26,245) | | | (6,184) | |
Total interest income | 26,650 | | | (31,450) | | | (4,800) | | | 20,735 | | | (27,918) | | | (7,183) | |
Interest expense: | | | | | | | | | | | |
Savings, NOW and market rate accounts | 5,765 | | | (8,464) | | | (2,699) | | | 4,274 | | | (5,756) | | | (1,482) | |
Wholesale deposits | (625) | | | (1,032) | | | (1,657) | | | (1,146) | | | (1,546) | | | (2,692) | |
Retail time deposits | (518) | | | (305) | | | (823) | | | (1,083) | | | (382) | | | (1,465) | |
Short-term borrowings | 1,587 | | | (1,712) | | | (125) | | | 754 | | | (1,369) | | | (615) | |
Long-term FHLB advances | (32) | | | (82) | | | (114) | | | (72) | | | (76) | | | (148) | |
Subordinated notes | — | | | — | | | — | | | 12 | | | (12) | | | — | |
Junior subordinated debt | 20 | | | (143) | | | (123) | | | 17 | | | (203) | | | (186) | |
Total interest expense | 6,197 | | | (11,738) | | | (5,541) | | | 2,756 | | | (9,344) | | | (6,588) | |
Interest differential | $ | 20,453 | | | $ | (19,712) | | | $ | 741 | | | $ | 17,979 | | | $ | (18,574) | | | $ | (595) | |
(1) The tax rate used in the calculation of the tax-equivalent income is 21% for 20192020 and 2018.2019.
Tax-Equivalent Net Interest Margin
The tax-equivalent net interest margin of 3.54%3.22% for the three months ended SeptemberJune 30, 20192020 was a 1533 basis point decrease from 3.69%3.55% for the same period in 2018.2019. The main driver for the decrease in the tax-equivalent net interest margin was primarily due to the reduced interest rates during the three months ended June 30, 2020 as compared to the same period in 2019 and driven by management's active balance sheet management in the current interest rate and volume increases of interest-bearing deposits.environment.
The tax-equivalent net interest margin and related components for the past five consecutive quarters are shown in the table below:
| Quarter | Quarter | | Interest- Earning Asset Yield | | Interest- Bearing Liability Cost | | Net Interest Spread | | Effect of Noninterest Bearing Sources | | Net Interest Margin | Quarter | | Interest- Earning Asset Yield | | Interest- Bearing Liability Cost | | Net Interest Spread | | Effect of Noninterest Bearing Sources | | Net Interest Margin |
2nd Quarter 2020 | | 2nd Quarter 2020 | | 3.76% | | 0.77% | | 2.99% | | 0.23% | | 3.22% |
1st Quarter 2020 | | 1st Quarter 2020 | | 4.29 | | 1.24 | | 3.05 | | 0.33 | | 3.38 |
4th Quarter 2019 | | 4th Quarter 2019 | | 4.39 | | 1.41 | | 2.98 | | 0.38 | | 3.36 |
3rd Quarter 2019 | 3rd Quarter 2019 | | 4.69% | | | 1.55% | | | 3.14% | | | 0.40% | | | 3.54% | | 3rd Quarter 2019 | | 4.69 | | 1.55 | | 3.14 | | 0.40 | | 3.54 |
2nd Quarter 2019 | 2nd Quarter 2019 | | 4.69 | | | 1.56 | | | 3.13 | | | 0.42 | | | 3.55 | | 2nd Quarter 2019 | | 4.69 | | 1.56 | | 3.13 | | 0.42 | | 3.55 |
1st Quarter 2019 | | 4.83 | | | 1.46 | | | 3.37 | | | 0.38 | | | 3.75 | | |
4th Quarter 2018 | | 4.74 | | | 1.30 | | | 3.44 | | | 0.35 | | | 3.79 | | |
3rd Quarter 2018 | | 4.54 | | | 1.16 | | | 3.38 | | | 0.31 | | | 3.69 | | |
Interest Rate Sensitivity
Interest Rate Sensitivity
Management actively manages the Corporation’s interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income changes associated with interest rate movements and to achieve sustainable growth in net interest income. The Corporation’s Asset Liability Committee (“ALCO”), using policies approved by the Corporation’s Board of Directors, is responsible for the management of the Corporation’s interest rate sensitivity position. The Corporation manages interest rate sensitivity by changing the mix, pricing and re-pricing characteristics of its assets and liabilities. This is accomplished through the management of the investment portfolio, the pricings of loans and deposit offerings and through wholesale funding. Wholesale funding is available from multiple sources including borrowings from the FHLB, the
Federal Reserve Bank of Philadelphia’s discount window, federal funds from correspondent banks, certificates of deposit from institutional brokers, Certificate of Deposit Account Registry Service (“CDARS”), Insured Network Deposit (“IND”) Program, and Insured Cash Sweep (“ICS”).
Management utilizes several tools to measure the effect of interest rate risk on net interest income. These methods include gap analysis, market value of portfolio equity analysis, and net interest income simulations under various scenarios. The results of these analyses are compared to limits established by the Corporation’s ALCO policies and make adjustments as appropriate if the results are outside the established limits.
The below table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “shock”, in the yield curve and subjective adjustments in deposit pricing, might have on management’s projected net interest income over the next 12 months.
This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next twelve months. By definition, the simulation assumes static interest rates and does not incorporate forecasted changes in the yield curve. The changes to net interest income shown below are in compliance with the Corporation’s policy guidelines.
Summary of Interest Rate Simulation
| | | Change in Net Interest Income Over the Twelve Months Beginning After September 30, 2019 | | | Change in Net Interest Income Over the Twelve Months Beginning After December 31, 2018 | | | Change in Net Interest Income Over the Twelve Months Beginning After June 30, 2020 | | | Change in Net Interest Income Over the Twelve Months Beginning After December 31, 2019 | |
| | Amount | | Percentage | | Amount | | Percentage | | Amount | | Percentage | | Amount | | Percentage |
+300 basis points | +300 basis points | $ | 4,139 | | | 2.81 | % | | $ | 5,644 | | | 3.74 | % | +300 basis points | $ | 5,902 | | | 4.13 | % | | $ | 15,357 | | | 10.52 | % |
+200 basis points | +200 basis points | 2,748 | | | 1.87 | | | 3,734 | | | 2.47 | | +200 basis points | 4,291 | | | 3.01 | | | 10,217 | | | 7.00 | |
+100 basis points | +100 basis points | 1,337 | | | 0.91 | | | 1,860 | | | 1.23 | | +100 basis points | 2,534 | | | 1.78 | | | 5,079 | | | 3.48 | |
-100 basis points | -100 basis points | (4,229) | | | (2.87) | | | (6,546) | | | (4.34) | | -100 basis points | (894) | | | 0.63 | | | (6,817) | | | (4.67) | |
|
The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of SeptemberJune 30, 20192020 in the +100 basis point scenario, demonstrating that a 100 basis point increase in interest rates would have a positive impact on net interest income over the next 12 months. The balance sheet is significantly less asset sensitive in a rising-rate environment as of SeptemberJune 30, 20192020 than it was as of December 31, 2018. The decrease in sensitivity is2019. Rates declined significantly during the quarter due to economic conditions related to an increase inthe COVID-19 pandemic. The Bank responded to these concerns by decreasing rates on deposit accounts to offset some of the decline that it would experience on the asset side. The reduction of loss of net interest bearing deposits and wholesale borrowings that can reprice more frequently with market rates.income as rates decline 100 basis points is partially the result of floor rates being implemented on the asset side as well as the inability for rates to decline much further on the deposit side.
The interest rate simulation is an estimate based on assumptions, which are derived from past behavior of customers, along with expectations of future behavior relative to interest rate changes. In today’s economic environment and emerging from an extended period of very low interest rates, the reliability of management’s assumptions in the interest rate simulation model is more uncertain than in prior years. Actual customer behavior, as it relates to deposit activity, may be significantly different than expected behavior, which could cause an unexpected outcome and may result in lower net interest income than that derived from the analysis referenced above.
Gap Analysis
The interest sensitivity, or gap analysis, identifies interest rate risk by showing repricing gaps in the Corporation’s balance sheet. All assets and liabilities are reflected based on behavioral sensitivity, which is usually the earliest of: repricing, maturity, contractual amortization, prepayments or likely call dates. Non-maturity deposits, such as NOW, savings and money market accounts are spread over various time periods based on the expected sensitivity of these rates considering liquidity. Non-rate-sensitive assets and liabilities are spread over time periods to reflect management’s view of the maturity of these funds.
Non-maturity deposits (demand deposits in particular) are recognized by the industry to have different sensitivities to interest rate environments. Consequently, it is an accepted practice to spread non-maturity deposits over defined time periods to capture that sensitivity. Commercial demand deposits are often in the form of compensating balances, and fluctuate inversely to the level of interest rates; the maturity of these deposits is reported as having a shorter life than typical retail demand deposits. Additionally, the industry practice has suggested distribution limits for non-maturity deposits. However, management has taken a more conservative approach than these limits would suggest by forecasting these deposit types with a shorter maturity. These assumptions are also reflected in the above interest rate simulation.
The following table presents the Corporation’s gap analysis as of SeptemberJune 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | 0 to 90 Days | | 91 to 365 Days | | 1 - 5 Years | | Over 5 Years | | Non-Rate Sensitive | | Total |
Assets: | | | | | | | | | | | |
Interest-bearing deposits with banks | $ | 86.2 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 86.2 | |
Investment securities(1) | 93.2 | | | 113.7 | | | 286.6 | | | 131.9 | | | — | | | 625.4 | |
Loans and leases(2) | 1,506.4 | | | 375.6 | | | 1,305.5 | | | 359.0 | | | — | | | 3,546.5 | |
Allowance | — | | | — | | | — | | | — | | | (20.8) | | | (20.8) | |
Cash and due from banks | — | | | — | | | — | | | — | | | 8.5 | | | 8.5 | |
Operating lease right-of-use assets | 0.7 | | | 2.2 | | | 10.6 | | | 28.7 | | | — | | | 42.2 | |
Other assets | — | | | — | | | — | | | — | | | 540.6 | | | 540.6 | |
Total assets | 1,686.5 | | | 491.5 | | | 1,602.7 | | | 519.6 | | | 528.3 | | | 4,828.6 | |
Liabilities and shareholders’ equity: | | | | | | | | | | | |
Demand, noninterest-bearing | 25.4 | | | 76.2 | | | 263.6 | | | 539.2 | | | — | | | 904.4 | |
Savings, NOW and market rate | 82.4 | | | 247.2 | | | 774.1 | | | 906.7 | | | — | | | 2,010.4 | |
Time deposits | 160.9 | | | 185.2 | | | 119.7 | | | 1.6 | | | — | | | 467.4 | |
Wholesale non-maturity deposits | 274.1 | | | — | | | — | | | — | | | — | | | 274.1 | |
Wholesale time deposits | 41.7 | | | — | | | 0.4 | | | — | | | — | | | 42.1 | |
Short-term borrowings | 203.5 | | | — | | | — | | | — | | | — | | | 203.5 | |
Long-term FHLB advances | 17.5 | | | 7.5 | | | 19.7 | | | — | | | — | | | 44.6 | |
Subordinated notes | — | | | 30.0 | | | 68.7 | | | — | | | — | | | 98.7 | |
Junior subordinated debentures | 21.7 | | | — | | | — | | | — | | | — | | | 21.7 | |
Operating lease liabilities | 0.8 | | | 2.4 | | | 11.7 | | | 31.6 | | | — | | | 46.5 | |
Other liabilities | — | | | — | | | — | | | — | | | 114.2 | | | 114.2 | |
Shareholders’ equity | 21.5 | | | 64.4 | | | 343.4 | | | 171.6 | | | — | | | 600.9 | |
Total liabilities and shareholders’ equity | 849.5 | | | 612.9 | | | 1,601.3 | | | 1,650.7 | | | 114.2 | | | 4,828.6 | |
Interest-earning assets | 1,685.8 | | | 489.3 | | | 1,592.1 | | | 490.9 | | | — | | | 4,258.1 | |
Interest-bearing liabilities | 801.8 | | | 469.9 | | | 982.6 | | | 908.3 | | | — | | | 3,162.6 | |
Difference between interest-earning assets and interest-bearing liabilities | 884.0 | | | 19.4 | | | 609.5 | | | (417.4) | | | — | | | 1,095.5 | |
Cumulative difference between interest earning assets and interest-bearing liabilities | $ | 884.0 | | | $ | 903.4 | | | $ | 1,512.9 | | | $ | 1,095.5 | | | $ | — | | | $ | 1,095.5 | |
Cumulative earning assets as a % of cumulative interest-bearing liabilities | 210 | % | | 171 | % | | 167 | % | | 135 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | 0 to 90 Days | | 91 to 365 Days | | 1 - 5 Years | | Over 5 Years | | Non-Rate Sensitive | | Total |
Assets: | | | | | | | | | | | |
Interest-bearing deposits with banks | $ | 448.1 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 448.1 | |
Investment securities(1) | 89.2 | | | 123.1 | | | 231.0 | | | 107.7 | | | — | | | 551.0 | |
Loans and leases(2) | 1,374.6 | | | 497.1 | | | 1,395.0 | | | 459.6 | | | — | | | 3,726.3 | |
ACL on loans and leases | — | | | — | | | — | | | — | | | (55.0) | | | (55.0) | |
Cash and due from banks | — | | | — | | | — | | | — | | | 16.4 | | | 16.4 | |
Operating lease right-of-use assets | 0.7 | | | 2.2 | | | 10.4 | | | 26.0 | | | — | | | 39.3 | |
Other assets | — | | | — | | | — | | | — | | | 545.2 | | | 545.2 | |
Total assets | 1,912.6 | | | 622.4 | | | 1,636.4 | | | 593.3 | | | 506.6 | | | 5,271.3 | |
Liabilities and shareholders’ equity: | | | | | | | | | | | |
Demand, noninterest-bearing | 34.5 | | | 103.5 | | | 355.9 | | | 723.6 | | | — | | | 1,217.5 | |
Savings, NOW and market rate | 92.7 | | | 278.0 | | | 898.8 | | | 1,130.1 | | | — | | | 2,399.6 | |
Time deposits | 92.1 | | | 207.6 | | | 99.2 | | | 1.3 | | | — | | | 400.2 | |
Wholesale non-maturity deposits | 146.5 | | | — | | | — | | | — | | | — | | | 146.5 | |
Wholesale time deposits | 0.5 | | | 43.4 | | | 36.0 | | | — | | | — | | | 79.9 | |
Short-term borrowings | 28.9 | | | — | | | — | | | — | | | — | | | 28.9 | |
Long-term FHLB advances | — | | | 5.0 | | | 39.8 | | | — | | | — | | | 44.8 | |
Subordinated notes | 30.0 | | | — | | | 68.8 | | | — | | | — | | | 98.8 | |
Junior subordinated debentures | 21.8 | | | — | | | — | | | — | | | — | | | 21.8 | |
Operating lease liabilities | 0.8 | | | 2.4 | | | 11.6 | | | 28.9 | | | — | | | 43.7 | |
Other liabilities | — | | | — | | | — | | | — | | | 185.9 | | | 185.9 | |
Shareholders’ equity | 21.6 | | | 64.7 | | | 345.0 | | | 172.4 | | | — | | | 603.7 | |
Total liabilities and shareholders’ equity | 469.4 | | | 704.6 | | | 1,855.1 | | | 2,056.3 | | | 185.9 | | | 5,271.3 | |
Interest-earning assets | 1,911.9 | | | 620.2 | | | 1,626.0 | | | 567.3 | | | — | | | 4,725.4 | |
Interest-bearing liabilities | 412.5 | | | 534.0 | | | 1,142.6 | | | 1,131.4 | | | — | | | 3,220.5 | |
Difference between interest-earning assets and interest-bearing liabilities | 1,499.4 | | | 86.2 | | | 483.4 | | | (564.1) | | | — | | | 1,504.9 | |
Cumulative difference between interest earning assets and interest-bearing liabilities | $ | 1,499.4 | | | $ | 1,585.6 | | | $ | 2,069.0 | | | $ | 1,504.9 | | | $ | — | | | $ | 1,504.9 | |
Cumulative earning assets as a % of cumulative interest-bearing liabilities | 463 | % | | 268 | % | | 199 | % | | 147 | % | | | | |
(1) Investment securities include available for sale, held to maturity and trading.
(2) Loans include portfolio loans and leases and loans held for sale.
The table above indicates that the Corporation is asset-sensitive in the immediate 90-day time frame and may experience an increase in net interest income during that time period if rates rise. Conversely, if rates decline, net interest income may decline. It should be noted that the gap analysis is only one tool used to measure interest rate sensitivity and should be used in conjunction with other measures such as the interest rate simulation discussed above. The gap analysis measures the timing of changes in rate, but not the true weighting of any specific component of the Corporation’s balance sheet. The asset-sensitive position reflected in this gap analysis is similar to the Corporation’s position at December 31, 2018.2019.
PROVISION FOR LOANCREDIT LOSSES ON LOANS AND LEASE LOSSESLEASES
For the three and six months ended SeptemberJune 30, 2019,2020, the Corporation recorded a ProvisionPCL on loans and leases of $919 thousand, a $255 thousand increase$4.3 million and $36.6 million, respectively, bringing the June 30, 2020 ACL to $55.0 million, or 1.48% of portfolio loans and leases, as compared to the same period in 2018. The increase in Provision was primarily related to the change in specific Allowances assigned to impairedan ACL of $21.2 million, or 0.60% of portfolio loans and leases. Asleases, as of September 30, 2019, specific Allowances totaled $502 thousand, which was a $42 thousand increase from June 30, 2019, as compared to specific Allowances of $278 thousand as of September 30, 2018, which was a $148 thousand decrease from2019. The ACL at June 30, 2018.2020 reflects management's current estimate of expected future credit losses considering the adverse economic indicators and other assumptions largely driven by the COVID-19 pandemic. Net charge-offs for the third quarter of 2019 decreased slightly, by $54 thousand, to $1.3three months ended June 30, 2020 were $3.4 million as compared to $1.4$1.1 million for the same period in 2018.
For the nine months ended September 30, 2019, the Corporation recorded a Provision of $6.3 million, a $1.5 million increase as compared to the same period in 2018. The increase in Provision was largely related to the increase in net charge-offs of loans and leases for which a specific Allowance had not been previously established.2019. Net charge-offs for the ninesix months ended SeptemberJune 30, 20192020 were $4.9$7.5 million as compared to $3.7$3.6 million for the same period in 2018.2019.
The following table details the allocation of the ACL as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
Allocation of ACL | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
(dollars in thousands) | ACL | | % Loans and Leases to Total Loans and Leases | | ACL | | % Loans and Leases to Total Loans and Leases |
CRE - nonowner-occupied | $ | 15,331 | | | 37.0 | % | | $ | 7,960 | | | 36.2 | % |
CRE - owner-occupied | 5,083 | | | 14.6 | | | 2,825 | | | 14.3 | |
Home equity lines of credit | 1,627 | | | 5.2 | | | 1,114 | | | 6.1 | |
Residential mortgage - 1st liens | 8,198 | | | 18.7 | | | 2,501 | | | 19.2 | |
Residential mortgage - junior liens | 521 | | | 0.9 | | | 338 | | | 1.0 | |
Construction | 6,061 | | | 5.7 | | | 1,230 | | | 5.5 | |
Commercial & Industrial | 7,988 | | | 12.3 | | | 3,835 | | | 11.7 | |
Consumer | 440 | | | 1.2 | | | 438 | | | 1.6 | |
Leases | 9,725 | | | 4.5 | | | 2,361 | | | 4.5 | |
| | | | | | | |
Total ACL on loans and leases | $ | 54,974 | | | 100.0 | % | | $ | 22,602 | | | 100.0 | % |
Asset Quality and Analysis of Credit Risk
As of SeptemberJune 30, 2019,2020, total nonperforming loans and leases decreased by $1.3$2.2 million to $14.1$8.4 million, representing 0.40%0.23% of portfolio loans and leases, as compared to $12.8$10.6 million, or 0.37%0.29% of portfolio loans and leases, as of December 31, 2018.2019. The decrease in nonperforming loans and leases was related to the addition of $11.4 million of new nonperforming loans and leases during the nine months ended September 30, 2019, offset by pay-offs and pay-downs of $4.9$2.4 million, charge-offs of $1.7$2.7 million, upgrades to performing status of $1.1 million, foreclosures addedtransfers to OREO of $72$380 thousand and the sale of $2.4$1.7 million of loans and leases classified as nonperforming as of December 31, 2018.2019, offset by the addition of $5.0 million of new nonperforming loans and leases during the six months ended June 30, 2020. All nonperforming loans are evaluated for impairment and charged-off to net realizable value, when necessary.
As of SeptemberJune 30, 2019,2020, the AllowanceACL on loans and leases of $20.8$55.0 million represented 0.59%1.48% of portfolio loans and leases, an increase of two87 basis points from December 31, 2018.2019. The Allowancesignificant increase was driven by the current and forward-looking adverse economic impacts of the COVID-19 pandemic included in the estimation of expected credit losses on originated (non-acquired) portfolio loans as a percentage of originated (non-acquired) portfolio loans, was 0.66%and leases as of SeptemberJune 30, 20192020 as compared to 0.67% asour initial adoption of December 31, 2018. Loans acquired in mergers are recorded at fair value as of the date of acquisition. This fair value estimate takes into account an estimate of the expected lifetime losses of the acquired loans. As such, an acquired loan will not generally become subject to additional Allowance unless it becomes impaired.CECL effective January 1, 2020.
As of SeptemberJune 30, 2019,2020, the Corporation had $10.8$11.8 million of TDRs, of which $5.1$10.0 million were in compliance with modified terms and excluded from non-performing loans and leases. As of December 31, 2018,2019, the Corporation had $11.0$8.1 million of TDRs, of which $9.7$5.1 million were in compliance with modified terms, and were excluded from non-performing loans and leases. During the nine months ended SeptemberAs of June 30, 2019 $1.72020, 1,690 loan and lease modifications totaling $768.2 million, in partial charge-offs of twowhich were related to COVID-19 and were not classified as TDRs, which had been completed. For more information on our loan modification programs offered in compliance with modified termsresponse to the COVID-19 pandemic, which are not classified as TDRs, see COVID-19 Impact within ITEM 2. Management’s
AsDiscussion and Analysis of September 30, 2019,Results of Operation and Financial Condition and Note 1 – Basis of Presentation, Principles of Consolidation, and Significant Accounting Policies to the Corporation had a recorded investment of $19.2 million of impaired loans and leases which included $10.8 million of TDRs. Impaired loans and leases are those for which it is probable that the Corporation will not be able to collect all scheduled principal and interest in accordance with the original terms of the loans and leases. Impaired loans and leases as of December 31, 2018 totaled $22.6 million which included $11.0 million of TDRs. Refer to Note 5H in the Notes to Unaudited Consolidated Financial Statements for more information regarding the Corporation’s impaired loans and leases.Statements.
Management continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are taken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the borrower. Management believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall risk of loss.
Nonperforming Assets and Related Ratios
Nonperforming assets and related ratios as of SeptemberJune 30, 20192020 and December 31, 20182019 were as follows:
| (dollars in thousands) | (dollars in thousands) | September 30, 2019 | | December 31, 2018 | (dollars in thousands) | June 30, 2020 | | December 31, 2019 |
Nonperforming Assets: | Nonperforming Assets: | | | | Nonperforming Assets: | | | |
Nonperforming loans and leases | Nonperforming loans and leases | $ | 14,119 | | | $ | 12,820 | | Nonperforming loans and leases | $ | 8,418 | | | $ | 10,648 | |
Other real estate owned | Other real estate owned | 72 | | | 417 | | Other real estate owned | — | | | — | |
Total nonperforming assets | Total nonperforming assets | $ | 14,191 | | | $ | 13,237 | | Total nonperforming assets | $ | 8,418 | | | $ | 10,648 | |
| Troubled Debt Restructurings: | | |
Troubled Debt Restructurings(1): | | Troubled Debt Restructurings(1): | |
TDRs included in non-performing loans | TDRs included in non-performing loans | $ | 5,755 | | | $ | 1,217 | | TDRs included in non-performing loans | $ | 1,792 | | | $ | 3,018 | |
TDRs in compliance with modified terms | TDRs in compliance with modified terms | 5,069 | | | 9,745 | | TDRs in compliance with modified terms | 10,013 | | | 5,071 | |
Total TDRs | Total TDRs | $ | 10,824 | | | $ | 10,962 | | Total TDRs | $ | 11,805 | | | $ | 8,089 | |
| Loan and Lease quality indicators: | Loan and Lease quality indicators: | | Loan and Lease quality indicators: | |
Allowance for loan and lease losses to nonperforming loans and leases | 147.2 | % | | 151.5 | % | |
Allowance for credit losses on loans and leases to nonperforming loans and leases | | Allowance for credit losses on loans and leases to nonperforming loans and leases | 653.1 | % | | 212.3 | % |
Nonperforming loans and leases to total portfolio loans and leases | Nonperforming loans and leases to total portfolio loans and leases | 0.40 | | | 0.37 | | Nonperforming loans and leases to total portfolio loans and leases | 0.23 | | | 0.29 | |
Allowance for loan and lease losses to total portfolio loans and leases | 0.59 | | | 0.57 | | |
Allowance for credit losses on loans and leases to total portfolio loans and leases | | Allowance for credit losses on loans and leases to total portfolio loans and leases | 1.48 | | | 0.61 | |
Nonperforming assets to total loans and leases and OREO | Nonperforming assets to total loans and leases and OREO | 0.40 | | | 0.39 | | Nonperforming assets to total loans and leases and OREO | 0.23 | | | 0.29 | |
Nonperforming assets to total assets | Nonperforming assets to total assets | 0.29 | | | 0.28 | | Nonperforming assets to total assets | 0.16 | | | 0.20 | |
Total portfolio loans and leases | Total portfolio loans and leases | $ | 3,540,747 | | | $ | 3,427,154 | | Total portfolio loans and leases | $ | 3,722,165 | | | $ | 3,689,313 | |
Allowance for loan and lease losses | 20,777 | | | 19,426 | | |
Allowance for credit losses on loans and leases | | Allowance for credit losses on loans and leases | 54,974 | | | 22,602 | |
(1) For more information on our loan modification programs offered in response to the COVID-19 pandemic, which are not TDRs, see COVID-19 Impact within ITEM 2. Management’s Discussion and Analysis of Results of Operation and Financial Condition and Note 1 – Basis of Presentation, Principles of Consolidation, and Significant Accounting Policies to the Unaudited Consolidated Financial Statements.
NONINTEREST INCOME
Three Months Ended SeptemberJune 30, 20192020 Compared to the Same Period in 20182019
Noninterest income of $19.5$20.6 million for the three months ended SeptemberJune 30, 20192020 increased $1.2 million$345 thousand as compared to $18.3$20.2 million for the same period in 2018. Increases2019. The increase was primarily due to increases of $1.4$2.4 million and $483 thousand$1.5 million in net gain on sale of loans and capital markets revenue, respectively, partially offset by decreases of $2.4 million, $394 thousand, $265 thousand, and $249 thousand in fees for wealth management services, respectively, were partially offsetinsurance commissions, other operating income, and service charges on deposits, respectively. The increase in net gain on sale of loans was driven by a decrease$2.4 million gain on the sale of $916 thousandapproximately $292.1 million of other operating income.PPP loans in the second quarter of 2020. The increase in capital markets revenue was primarily due to increased volume and size of interest rate swap transactions with commercial loan customers and correspondent banks for the three months ended SeptemberJune 30, 20192020 as compared to the same period in 2018.2019. The decrease in other operating incomefees for wealth management services was primarily due to $1.2driven by $2.2 million of recoveries of purchase accounting fair value marks resulting from the pay offs of purchased credit impaired loans acquiredcosts incurred in the RBPI merger forsecond quarter of 2020 associated with the three months ended September 30, 2018 as compared to $11 thousand for the three months ended September 30, 2019.wind-down of BMT Investment Advisers.
NineSix Months Ended SeptemberJune 30, 20192020 Compared to the Same Period in 20182019
Noninterest income of $58.9$38.9 million for the ninesix months ended SeptemberJune 30, 2019 increased $1.0 million2020 decreased $608 thousand as compared to $57.9$39.5 million for the same period in 2018. Increases2019. The decrease was primarily due to decreases of $2.3$2.6 million, $1.7 million, and $1.4 million$533 thousand in capital markets revenue andother operating income, fees for wealth management services, and insurance commissions, respectively, were partially offset by increases of $2.8 million and $1.6 million in net gain on sale of loans and capital markets revenue, respectively. The
increase in net gain on sale of loans was driven by a decrease of $2.4 million gain on the sale of other operating income.approximately $292.1 million of PPP loans in the second quarter of 2020. The increase in capital markets revenue was primarily due to increased volume and size of interest rate swap transactions with commercial loan customers and correspondent banks for the ninesix months ended SeptemberJune 30, 20192020 as compared to the same period in 2018.2019. The increasedecrease in fees for wealth management services was primarily due to the $1.70 billion increase in wealth assets under management, administration, supervision and brokerage to $15.61 as of September 30, 2019 as compared to $13.91 billion as of September 30, 2018. The decrease in other operating income was primarily due to $4.2driven by $2.2 million of recoveries of purchase accounting fair value marks resulting from the pay offs of purchased credit impaired loans acquiredcosts incurred in the RBPI merger forsecond quarter of 2020 associated with the nine months ended September 30, 2018 as compared to $59 thousand for the nine months ended September 30, 2019.
The following table provides details of other operating income for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Visa debit card income | $ | 464 | | | $ | 441 | | | $ | 1,314 | | | $ | 1,297 | |
BOLI income | 312 | | | 300 | | | 909 | | | 876 | |
Commissions and fees | 348 | | | 201 | | | 1,047 | | | 926 | |
Safe deposit box rentals | 117 | | | 113 | | | 288 | | | 300 | |
Other investment income | 37 | | | 62 | | | 484 | | | 209 | |
Rental income | 7 | | | 41 | | | 23 | | | 129 | |
(Loss) gain on trading investments | (19) | | | 287 | | | 927 | | | 706 | |
Recovery of purchase accounting fair value loan mark | 11 | | | 1,191 | | | 59 | | | 4,195 | |
Miscellaneous other income | 978 | | | 535 | | | 3,103 | | | 1,905 | |
Other operating income | $ | 2,255 | | | $ | 3,171 | | | $ | 8,154 | | | $ | 10,543 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Visa debit card income | $ | 643 | | | $ | 431 | | | $ | 1,174 | | | $ | 850 | |
BOLI income | 330 | | | 303 | | | 650 | | | 597 | |
Commissions and fees | 264 | | | 344 | | | 568 | | | 699 | |
Safe deposit box rentals | 82 | | | 87 | | | 162 | | | 171 | |
Other investment income | 20 | | | 411 | | | 39 | | | 447 | |
Rental income | 8 | | | 7 | | | 17 | | | 16 | |
Gain on trading investments | 1,017 | | | 214 | | | 39 | | | 946 | |
Recovery of purchase accounting fair value loan mark | — | | | 36 | | | — | | | 48 | |
Miscellaneous other income | 423 | | | 1,219 | | | 695 | | | 2,125 | |
Other operating income | $ | 2,787 | | | $ | 3,052 | | | $ | 3,344 | | | $ | 5,899 | |
The following table provides supplemental information regarding mortgage loan originations and sales:
| | | As of or for the Three Months Ended September 30, | | | As of or for the Nine Months Ended September 30, | | | As of or for the Three Months Ended June 30, | | | As of or for the Six Months Ended June 30, | |
(dollars in thousands) | (dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 | (dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Mortgage originations | Mortgage originations | $ | 48,614 | | | $ | 47,786 | | | $ | 132,672 | | | $ | 109,604 | | Mortgage originations | $ | 38,771 | | | $ | 49,614 | | | $ | 68,134 | | | $ | 84,058 | |
Mortgage loans sold: | Mortgage loans sold: | | | | | Mortgage loans sold: | | | | |
Servicing retained | Servicing retained | — | | | — | | | — | | | 1,850 | | Servicing retained | — | | | — | | | — | | | — | |
Servicing released | Servicing released | 30,158 | | | 28,530 | | | 61,355 | | | 70,378 | | Servicing released | 31,984 | | | 21,979 | | | 46,883 | | | 31,197 | |
Total mortgage loans sold | Total mortgage loans sold | $ | 30,158 | | | $ | 28,530 | | | $ | 61,355 | | | $ | 72,228 | | Total mortgage loans sold | $ | 31,984 | | | $ | 21,979 | | | $ | 46,883 | | | $ | 31,197 | |
Percentage of originated mortgage loans sold | Percentage of originated mortgage loans sold | 62.0 | % | | 59.7 | % | | 46.2 | % | | 65.9 | % | Percentage of originated mortgage loans sold | 82.5 | % | | 44.3 | % | | 68.8 | % | | 37.1 | % |
Servicing retained % | Servicing retained % | — | | | — | | | — | | | 2.6 | | Servicing retained % | — | | | — | | | — | | | — | |
Servicing released % | Servicing released % | 100.0 | | | 100.0 | | | 100.0 | | | 97.4 | | Servicing released % | 100.0 | | | 100.0 | | | 100.0 | | | 100.0 | |
Residential mortgage loans serviced for others | Residential mortgage loans serviced for others | $ | 527,869 | | | $ | 596,162 | | | $ | 527,869 | | | $ | 596,162 | | Residential mortgage loans serviced for others | $ | 445,233 | | | $ | 545,743 | | | $ | 445,233 | | | $ | 545,743 | |
Mortgage servicing rights | Mortgage servicing rights | 4,580 | | | 5,328 | | | 4,580 | | | 5,328 | | Mortgage servicing rights | 3,440 | | | 4,744 | | | 3,440 | | | 4,744 | |
Gain on sale of mortgage loans | Gain on sale of mortgage loans | 471 | | | 228 | | | 1,354 | | | 992 | | Gain on sale of mortgage loans | 615 | | | 622 | | | 1,213 | | | 883 | |
Loan servicing and other fees | Loan servicing and other fees | 555 | | | 559 | | | 1,717 | | | 1,720 | | Loan servicing and other fees | 452 | | | 553 | | | 913 | | | 1,162 | |
Amortization of MSRs | Amortization of MSRs | 183 | | | 206 | | | 459 | | | 623 | | Amortization of MSRs | 453 | | | 156 | | | 557 | | | 276 | |
Recovery / (Impairment) of MSRs | 19 | | | 23 | | | (8) | | | 74 | | |
Impairment of MSRs | | Impairment of MSRs | (222) | | | (10) | | | (453) | | | (27) | |
Wealth Assets Under Management, Administration, Supervision and Brokerage (“Wealth Assets”)
Wealth Asset accounts are categorized into two groups. The first account group consists predominantly of clients whose fees are determined based on the market value of the assets held in their accounts (“Market Value” basis). The second account group consists predominantly of clients whose fees are set at fixed amounts (“Fixed Fee” basis), and, as such, are not affected by market value changes.
The following tables detail the composition of Wealth Assets as it relates to the calculation of fees for wealth management services:
| (dollars in thousands) | (dollars in thousands) | Wealth Assets as of: | | (dollars in thousands) | Wealth Assets as of: | |
Fee Basis | Fee Basis | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | Fee Basis | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | June 30, 2019 |
Market value | Market value | $ | 6,396,399 | | | $ | 6,346,861 | | | $ | 6,232,651 | | | $ | 5,764,189 | | | $ | 6,032,831 | | Market value | $ | 6,661,996 | | | $ | 6,001,999 | | | $ | 6,977,009 | | | $ | 6,396,399 | | | $ | 6,346,861 | |
Fixed fee | Fixed fee | 9,213,387 | | | 8,468,437 | | | 8,503,861 | | | 7,665,355 | | | 7,880,433 | | Fixed fee | 10,350,908 | | | 9,591,733 | | | 9,571,051 | | | 9,213,387 | | | 8,468,437 | |
Total | Total | $ | 15,609,786 | | | $ | 14,815,298 | | | $ | 14,736,512 | | | $ | 13,429,544 | | | $ | 13,913,264 | | Total | $ | 17,012,904 | | | $ | 15,593,732 | | | $ | 16,548,060 | | | $ | 15,609,786 | | | $ | 14,815,298 | |
| | | Percentage of Wealth Assets as of: | | | Percentage of Wealth Assets as of: | |
Fee Basis | Fee Basis | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | Fee Basis | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | June 30, 2019 |
Market value | Market value | 41.0 | % | | 42.8 | % | | 42.3 | % | | 42.9 | % | | 43.4 | % | Market value | 39.2 | % | | 38.5 | % | | 42.2 | % | | 41.0 | % | | 42.8 | % |
Fixed fee | Fixed fee | 59.0 | % | | 57.2 | % | | 57.7 | % | | 57.1 | % | | 56.6 | % | Fixed fee | 60.8 | % | | 61.5 | % | | 57.8 | % | | 59.0 | % | | 57.2 | % |
Total | Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
The following tables detail the composition of fees for wealth management services for the periods indicated:
| (dollars in thousands) | (dollars in thousands) | For the Three Months Ended: | | (dollars in thousands) | For the Three Months Ended: | |
Fee Basis | Fee Basis | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | Fee Basis | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | June 30, 2019 |
Market value | Market value | $ | 7,924 | | | $ | 7,802 | | | $ | 7,618 | | | $ | 7,801 | | | $ | 7,841 | | Market value | $ | 5,525 | | | $ | 8,131 | | | $ | 8,126 | | | $ | 7,924 | | | $ | 7,802 | |
Fixed fee | Fixed fee | 2,902 | | | 3,708 | | | 2,774 | | | 3,217 | | | 2,501 | | Fixed fee | 3,544 | | | 3,037 | | | 3,546 | | | 2,902 | | | 3,708 | |
Total | Total | $ | 10,826 | | | $ | 11,510 | | | $ | 10,392 | | | $ | 11,018 | | | $ | 10,342 | | Total | $ | 9,069 | | | $ | 11,168 | | | $ | 11,672 | | | $ | 10,826 | | | $ | 11,510 | |
| | | Percentage of Fees for Wealth Management for the Three Months Ended: | | | Percentage of Fees for Wealth Management for the Three Months Ended: | |
Fee Basis | Fee Basis | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | Fee Basis | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | June 30, 2019 |
Market value | Market value | 73.2 | % | | 67.8 | % | | 73.3 | % | | 70.8 | % | | 75.8 | % | Market value | 60.9 | % | | 72.8 | % | | 69.6 | % | | 73.2 | % | | 67.8 | % |
Fixed fee | Fixed fee | 26.8 | % | | 32.2 | % | | 26.7 | % | | 29.2 | % | | 24.2 | % | Fixed fee | 39.1 | % | | 27.2 | % | | 30.4 | % | | 26.8 | % | | 32.2 | % |
Total | Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Customer Derivatives
To accommodate the risk management needs of qualified commercial customers, the Bank enters into financial derivative transactions consisting of interest rate swaps, options, risk participation agreements and foreign exchange contracts. Derivative financial instruments involve, to varying degrees, interest rate, market and credit risk. Market risk exposure from customer derivative positions is managed by simultaneously entering into matching transactions with institutional dealer counterparties that offset customer contracts in notional amount and term. Derivative contracts create counterparty credit risk with both the Bank’s customers and with institutional dealer counterparties. The Corporation manages customer counterparty credit risk through its credit policy, approval processes, monitoring procedures and by obtaining adequate collateral, when appropriate. The Bank seeks to minimize dealer counterparty credit risk by establishing credit limits and collateral agreements through industry standard agreements published by the International Swaps and Derivatives Association (ISDA) and associated credit support annex (CSA) agreements. None of the Bank’s outstanding derivative contracts associated with the customer derivative program is designated as a hedge and none is entered into for speculative purposes. Derivative instruments are recorded at fair value, with changes in fair values recognized in earnings as components of noninterest income and noninterest expense on the consolidated statements of income.
NONINTEREST EXPENSE
Three Months Ended SeptemberJune 30, 20192020 Compared to the Same Period in 20182019
Noninterest expense of $34.6 million for the three months ended June 30, 2020 decreased $552 thousand as compared to $35.2 million for the same period in 2019. The decrease was primarily due to decreases of $448 thousand, $397 thousand, and $308 thousand in furniture, fixtures and equipment expenses, Pennsylvania bank shares tax, and advertising expenses, respectively, partially offset by increases of $512 thousand and $259 thousand in other operating expenses and professional fees, respectively.
Six Months Ended June 30, 2020 Compared to the Same Period in 2019
Noninterest expense for the threesix months ended SeptemberJune 30, 2019 increased $1.62020 decreased $3.8 million, to $35.2$71.1 million, as compared to $74.9 million for the same period in 2018. Contributing2019. The decrease was primarily due to the increase were increasesdecreases of $1.2$4.0 million, $291 thousand, $265$762 thousand, and $238$690 thousand in salaries and wages, occupancyemployee benefits, and Pennsylvania bank premises expenses, furniture, fixtures and equipment expenses, and advertising expenses, respectively. Partially offsetting these increases were decreasesshares tax, respectively, partially offset by an increase of $389 thousand and $371 thousand$1.8 million in due diligence, merger-related and merger integration expenses and other operating expenses, respectively.
Nine Months Ended September 30, 2019 Compared to the Same Period in 2018
Noninterest expense for the nine months ended September 30, 2019 increased $4.6 million, to $110.1 million, as compared to the same period in 2018. Contributing to the increase were increases of $7.0 million and $830 thousandexpenses. The decrease in salaries and wages and employee benefits respectively. Duringwas largely driven by a pre-tax, non-recurring, charge of $4.5 million in the first quarter of 2019 the Corporation adopted arelated to Corporation’s voluntary Years of Service Incentive Program (the “Incentive Program”), which offered certain benefits to eligible employees who met the Incentive Program requirements and voluntarily exited from service with the Corporation, the Bank or one of their subsidiaries. The increasesincrease in salaries and wages and employee benefits were largelyother operating expenses was primarily driven by a pre-tax, non-recurring, charge$2.3 million increase in provision for credit losses on off-balance sheet credit exposures primarily driven by the adverse economic impacts of $4.5 million related to the Incentive Program recognized duringCOVID-19 pandemic as well as the first quarterCorporation’s adoption of 2019. Also contributing to the increase were increases of $1.2 million, $1.0 million, $921 thousand, and $411 thousand in furniture, fixtures and equipment expenses, professional fees, occupancy and bank premises expenses, and other operating expenses, respectively. Partially offsetting these increases in noninterest expense was a decrease of $7.8 million in due diligence, merger-related and merger integration expenses for the nine months ended September 30, 2019 as compared to the same period in 2018.CECL effective January 1, 2020.
The following table provides details of other operating expenses for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Contributions | $ | 349 | | | $ | 361 | | | $ | 1,103 | | | $ | 990 | |
Deferred compensation expense | (49) | | | 237 | | | 672 | | | 489 | |
Director fees | 144 | | | 169 | | | 430 | | | 507 | |
Dues and subscriptions | 406 | | | 274 | | | 1,225 | | | 781 | |
FDIC insurance(1) | — | | | 493 | | | 910 | | | 1,245 | |
| | | | | | | |
Insurance | 224 | | | 214 | | | 655 | | | 655 | |
Loan processing | 127 | | | 475 | | | 578 | | | 772 | |
Miscellaneous other expenses | 1,550 | | | 901 | | | 3,163 | | | 3,028 | |
MSR amortization and impairment | 165 | | | 184 | | | 468 | | | 550 | |
Other taxes | 30 | | | 11 | | | 153 | | | 48 | |
Outsourced services | 65 | | | 78 | | | 195 | | | 211 | |
Wealth custodian fees | 101 | | | 88 | | | 317 | | | 324 | |
Postage | 141 | | | 202 | | | 531 | | | 557 | |
Stationary and supplies | 163 | | | 128 | | | 419 | | | 391 | |
Telephone and data lines | 432 | | | 500 | | | 1,302 | | | 1,436 | |
Temporary help and recruiting | 182 | | | 82 | | | 562 | | | 239 | |
Travel and entertainment | 271 | | | 265 | | | 780 | | | 741 | |
Other operating expenses | $ | 4,301 | | | $ | 4,668 | | | $ | 13,463 | | | $ | 12,970 | |
(1) Includes a FDIC small bank assessment credit of $407 thousand for the three and nine months ended September 30, 2019. The FDIC notified the Bank during September 2019 that the required deposit insurance fund reserve ratio was met at June 30, 2019, triggering the application of small bank credits. The Bank's total FDIC small bank assessment credit was $1.1 million, and the remaining credit of $655 thousand is expected to be applied in subsequent quarters dependent upon the deposit insurance fund reserve ratio. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Contributions | $ | 521 | | | $ | 410 | | | $ | 968 | | | $ | 754 | |
Deferred compensation expense | 654 | | | 178 | | | (441) | | | 721 | |
Director fees | 151 | | | 141 | | | 304 | | | 286 | |
Dues and subscriptions | 523 | | | 524 | | | 884 | | | 819 | |
FDIC insurance | 673 | | | 509 | | | 823 | | | 910 | |
| | | | | | | |
Insurance | 302 | | | 217 | | | 541 | | | 431 | |
Loan processing | 139 | | | 199 | | | 282 | | | 451 | |
Miscellaneous other expenses | 1,331 | | | 761 | | | 2,651 | | | 1,751 | |
MSR amortization and impairment | 675 | | | 166 | | | 1,010 | | | 303 | |
Other taxes | 2 | | | 33 | | | 24 | | | 123 | |
Outsourced services | 63 | | | 65 | | | 125 | | | 130 | |
Wealth custodian fees | 116 | | | 98 | | | 229 | | | 216 | |
Postage | 158 | | | 188 | | | 314 | | | 390 | |
(Release of reserve) / provision for credit losses on off-balance sheet credit exposures | (867) | | | (17) | | | 2,148 | | | (138) | |
Stationary and supplies | 79 | | | 120 | | | 224 | | | 256 | |
Telephone and data lines | 438 | | | 446 | | | 866 | | | 870 | |
Temporary help and recruiting | 67 | | | 174 | | | 134 | | | 380 | |
Travel and entertainment | 35 | | | 336 | | | 260 | | | 509 | |
Other operating expenses | $ | 5,060 | | | $ | 4,548 | | | $ | 11,346 | | | $ | 9,162 | |
INCOME TAXES
Income tax expense for the three months ended SeptemberJune 30, 2019 increased $3362020 was $4.0 million, a decrease of $229 thousand as compared to $4.4$4.2 million for the same period in 2019. The effective tax rate for the three months ended June 30, 2020 was 21.1%, relatively unchanged as compared to 21.2% for the same period in 2019.
Income tax expense for the six months ended June 30, 2020 was $1.1 million, a decrease of $5.9 million as compared to $7.0 million for the same period in 2018.2019. Income before income taxes decreased $28.6 million for the six months ended June 30, 2020 as compared for the same period in 2019. The effective tax rate for the six months ended June 30, 2020 increased to 21.5% from 20.9% for the same period in 2019. The increase in the effective tax rate was primarily due to the $281a $144 thousand decrease in net discrete tax benefits for the threesix months ended SeptemberJune 30, 20192020 as compared to the same period in 2018. These discrete items were the result of excess tax benefits from stock-based compensation as well as the re-measurement of deferred tax items related to Tax Reform. The effective tax rate for the three months ended September 30, 2019 increased to 21.2% from 19.6% for the same period in 2018.
Income tax expense for the nine months ended September 30, 2019 decreased $1.0 million, to $11.4 million, as compared to the same period in 2018. The decrease was primarily due to the $4.9 million decrease in income before income taxes for the nine months ended September 30, 2019 as compared to the same period in 2018. Partially offsetting the increase was a $33 thousand decrease in net discrete tax benefits for the nine months ended September 30, 2019 as compared to the same period in 2018. These discrete items were the result of excess tax benefits from stock-based compensation as well as the re-measurement of deferred tax items related to Tax Reform. The effective tax rate for the nine months ended September 30, 2019 was 21.2%, unchanged from the same period in 2018.2019.
BALANCE SHEET ANALYSIS
Total assets of $4.83$5.27 billion as of SeptemberJune 30, 20192020 increased $176.2$8.1 million from $4.65$5.26 billion as of December 31, 2018.2019. The following sections detail the balance sheet changes:
Loans and Leases
The table below compares the portfolio loans and leases outstanding at SeptemberJune 30, 20192020 to December 31, 2018:2019:
| | | September 30, 2019 | | | December 31, 2018 | | | Change | | | June 30, 2020 | | | December 31, 2019 | | | Change | |
(dollars in thousands) | (dollars in thousands) | Balance | | Percent of Portfolio | | Balance | | Percent of Portfolio | | Amount | | Percent | (dollars in thousands) | Balance | | Percent of Portfolio | | Balance | | Percent of Portfolio | | Amount | | Percent |
Commercial mortgage | $ | 1,762,382 | | | 49.8 | % | | $ | 1,657,436 | | | 48.4 | % | | $ | 104,946 | | | 6.3 | % | |
Home equity lines & loans | 198,030 | | | 5.6 | | | 207,351 | | | 6.1 | | | (9,321) | | | (4.5) | | |
Residential mortgage | 505,304 | | | 14.3 | | | 494,355 | | | 14.4 | | | 10,949 | | | 2.2 | | |
CRE - nonowner-occupied | | CRE - nonowner-occupied | $ | 1,375,904 | | | 37.0 | % | | $ | 1,337,167 | | | 36.2 | % | | $ | 38,737 | | | 2.9 | % |
CRE - owner-occupied | | CRE - owner-occupied | 542,688 | | | 14.6 | | | 527,607 | | | 14.3 | | | 15,081 | | | 2.9 | |
Home equity lines of credit | | Home equity lines of credit | 194,767 | | | 5.2 | | | 224,262 | | | 6.1 | | | (29,495) | | | (13.2) | |
Residential mortgage - 1st liens | | Residential mortgage - 1st liens | 695,270 | | | 18.7 | | | 706,690 | | | 19.2 | | | (11,420) | | | (1.6) | |
Residential mortgage - jr. liens | | Residential mortgage - jr. liens | 33,644 | | | 0.9 | | | 36,843 | | | 1.0 | | | (3,199) | | | (8.7) | |
Construction | Construction | 151,593 | | | 4.3 | | | 181,078 | | | 5.3 | | | (29,485) | | | (16.3) | | Construction | 212,374 | | | 5.7 | | | 202,198 | | | 5.5 | | | 10,176 | | | 5.0 | |
Commercial and industrial | 709,808 | | | 20.0 | | | 695,584 | | | 20.3 | | | 14,224 | | | 2.0 | | |
Commercial & Industrial | | Commercial & Industrial | 457,529 | | | 12.3 | | | 432,227 | | | 11.7 | | | 25,302 | | | 5.9 | |
Consumer | Consumer | 50,481 | | | 1.4 | | | 46,814 | | | 1.4 | | | 3,667 | | | 7.8 | | Consumer | 43,762 | | | 1.2 | | | 57,241 | | | 1.6 | | | (13,479) | | | (23.5) | |
Leases | Leases | 163,149 | | | 4.6 | | | 144,536 | | | 4.2 | | | 18,613 | | | 12.9 | | Leases | 166,227 | | | 4.5 | | | 165,078 | | | 4.5 | | | 1,149 | | | 0.7 | |
Total portfolio loans and leases | Total portfolio loans and leases | 3,540,747 | | | 100.0 | | | 3,427,154 | | | 100.0 | | | 113,593 | | | 3.3 | | Total portfolio loans and leases | 3,722,165 | | | 100.0 | % | | 3,689,313 | | | 100.0 | % | | 32,852 | | | 0.9 | |
Loans held for sale | Loans held for sale | 5,767 | | | 1,749 | | | 4,018 | | | 229.7 | | Loans held for sale | 4,116 | | | 4,249 | | | (133) | | | (3.1) | |
Total loans and leases | Total loans and leases | $ | 3,546,514 | | | $ | 3,428,903 | | | $ | 117,611 | | | 3.4 | | Total loans and leases | $ | 3,726,281 | | | $ | 3,693,562 | | | $ | 32,719 | | | 0.9 | % |
Investment Securities
Investment securities available for sale as of SeptemberJune 30, 20192020 totaled $604.2$530.6 million, as compared to $737.4 million$1.01 billion as of December 31, 2018.2019. The decrease was primarily related to the maturing of $200.0$500.0 million of short-term U.S. Treasury securities in the first quarter of 2019,2020, partially offset by a $99.0increases of $12.1 million, increase in$11.2 million, and $8.0 million of U.S. government and agency securities, mortgage-backed securities.securities, and corporate bonds, respectively.
Deposits
Deposits as of SeptemberJune 30, 20192020 and December 31, 20182019 were as follows:
| | | September 30, 2019 | | | December 31, 2018 | | | Change | | | June 30, 2020 | | | December 31, 2019 | | | Change | |
(dollars in thousands) | (dollars in thousands) | Balance | | Percent of Deposits | | Balance | | Percent of Deposits | | Amount | | Percent | (dollars in thousands) | Balance | | Percent of Deposits | | Balance | | Percent of Deposits | | Amount | | Percent |
Interest-bearing demand | Interest-bearing demand | $ | 778,809 | | | 21.1 | % | | $ | 664,749 | | | 18.5 | % | | $ | 114,060 | | | 17.2 | % | Interest-bearing demand | $ | 910,441 | | | 21.5 | % | | $ | 944,915 | | | 24.6 | % | | $ | (34,474) | | | (3.6) | % |
Money market | Money market | 983,170 | | | 26.6 | | | 862,644 | | | 24.0 | | | 120,526 | | | 14.0 | | Money market | 1,239,523 | | | 29.2 | | | 1,106,478 | | | 28.8 | | | 133,045 | | | 12.0 | |
Savings | Savings | 248,539 | | | 6.7 | | | 247,081 | | | 6.9 | | | 1,458 | | | 0.6 | | Savings | 249,636 | | | 5.9 | | | 220,450 | | | 5.7 | | | 29,186 | | | 13.2 | |
Retail time deposits | Retail time deposits | 467,346 | | | 12.6 | | | 542,702 | | | 15.1 | | | (75,356) | | | (13.9) | | Retail time deposits | 400,186 | | | 9.4 | | | 405,123 | | | 10.5 | | | (4,937) | | | (1.2) | |
Wholesale non-maturity deposits | Wholesale non-maturity deposits | 274,121 | | | 7.4 | | | 55,031 | | | 1.5 | | | 219,090 | | | 398.1 | | Wholesale non-maturity deposits | 146,463 | | | 3.5 | | | 177,865 | | | 4.6 | | | (31,402) | | | (17.7) | |
Wholesale time deposits | Wholesale time deposits | 42,094 | | | 1.1 | | | 325,261 | | | 9.0 | | | (283,167) | | | (87.1) | | Wholesale time deposits | 79,903 | | | 1.9 | | | 89,241 | | | 2.3 | | | (9,338) | | | (10.5) | |
Interest-bearing deposits | Interest-bearing deposits | 2,794,079 | | | 75.5 | | | 2,697,468 | | | 74.9 | | | 96,611 | | | 3.6 | | Interest-bearing deposits | 3,026,152 | | | 71.3 | | | 2,944,072 | | | 76.6 | | | 82,080 | | | 2.8 | |
Noninterest-bearing deposits | Noninterest-bearing deposits | 904,409 | | | 24.5 | | | 901,619 | | | 25.1 | | | 2,790 | | | 0.3 | | Noninterest-bearing deposits | 1,217,496 | | | 28.7 | | | 898,173 | | | 23.4 | | | 319,323 | | | 35.6 | |
Total deposits | Total deposits | $ | 3,698,488 | | | 100.0 | | | $ | 3,599,087 | | | 100.0 | | | $ | 99,401 | | | 2.8 | | Total deposits | $ | 4,243,648 | | | 100.0 | % | | $ | 3,842,245 | | | 100.0 | % | | $ | 401,403 | | | 10.4 | % |
Borrowings
Borrowings as of SeptemberJune 30, 20192020 and December 31, 20182019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | | | December 31, 2018 | | | | Change | | |
(dollars in thousands) | Balance | | Percent of Borrowings | | Balance | | Percent of Borrowings | | Amount | | Percent |
Short-term borrowings | $ | 203,471 | | | 55.2 | % | | $ | 252,367 | | | 59.0 | % | | $ | (48,896) | | | (19.4) | % |
Long-term FHLB advances | 44,735 | | | 12.1 | | | 55,374 | | | 12.9 | | | (10,639) | | | (19.2) | |
Subordinated notes | 98,660 | | | 26.8 | | | 98,526 | | | 23.0 | | | 134 | | | 0.1 | |
Junior subordinated debentures | 21,709 | | | 5.9 | | | 21,580 | | | 5.0 | | | 129 | | | 0.6 | |
Total borrowed funds | $ | 368,575 | | | 100.0 | | | $ | 427,847 | | | 100.0 | | | $ | (59,272) | | | (13.9) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | | | Change | | |
(dollars in thousands) | Balance | | Percent of Borrowings | | Balance | | Percent of Borrowings | | Amount | | Percent |
Short-term borrowings | $ | 28,891 | | | 14.9 | % | | $ | 493,219 | | | 74.1 | % | | $ | (464,328) | | | (94.1) | % |
Long-term FHLB advances | 44,837 | | | 23.1 | | | 52,269 | | | 7.8 | | | (7,432) | | | (14.2) | |
Subordinated notes | 98,794 | | | 50.8 | | | 98,705 | | | 14.8 | | | 89 | | | 0.1 | |
Junior subordinated debentures | 21,843 | | | 11.2 | | | 21,753 | | | 3.3 | | | 90 | | | 0.4 | |
Total borrowed funds | $ | 194,365 | | | 100.0 | % | | $ | 665,946 | | | 100.0 | % | | $ | (471,581) | | | (70.8) | % |
Capital
Consolidated shareholders' equity of the Corporation was $600.9$603.7 million, or 12.4%11.5% of total assets, as of SeptemberJune 30, 2019,2020, as compared to $564.7$612.2 million, or 12.1%11.6% of total assets, as of December 31, 2018.2019. The following table presents BMBC’s and Bank’s regulatory capital ratios and the minimum capital requirements for the Bank to be considered “Well Capitalized” by regulators as of SeptemberJune 30, 20192020 and December 31, 2018:2019:
| | | Actual | | | Minimum to be Well Capitalized | | | Actual | | | Minimum to be Well Capitalized | |
(dollars in thousands) | (dollars in thousands) | Amount | | Ratio | | Amount | | Ratio | (dollars in thousands) | Amount | | Ratio | | Amount | | Ratio |
September 30, 2019 | | | | | | | | |
June 30, 2020 | | June 30, 2020 | | | | | | | |
Total capital to risk weighted assets: | Total capital to risk weighted assets: | | | | | | | | Total capital to risk weighted assets: | | | | | | | |
BMBC | BMBC | $ | 532,335 | | | 14.61 | % | | $ | 364,283 | | | 10.00 | % | BMBC | $ | 569,428 | | | 15.14 | % | | $ | 375,986 | | | 10.00 | % |
Bank | Bank | 464,133 | | | 12.75 | | | 364,042 | | | 10.00 | | Bank | 485,780 | | | 12.93 | | | 375,633 | | | 10.00 | |
Tier I capital to risk weighted assets: | Tier I capital to risk weighted assets: | | Tier I capital to risk weighted assets: | |
BMBC | BMBC | 412,717 | | | 11.33 | | | 291,426 | | | 8.00 | | BMBC | 423,762 | | | 11.27 | | | 300,789 | | | 8.00 | |
Bank | Bank | 443,175 | | | 12.17 | | | 291,233 | | | 8.00 | | Bank | 438,908 | | | 11.68 | | | 300,506 | | | 8.00 | |
Common equity Tier I risk weighted assets: | Common equity Tier I risk weighted assets: | | Common equity Tier I risk weighted assets: | |
BMBC | BMBC | 391,702 | | | 10.75 | | | 236,784 | | | 6.50 | | BMBC | 402,646 | | | 10.71 | | | 244,391 | | | 6.50 | |
Bank | Bank | 443,175 | | | 12.17 | | | 236,627 | | | 6.50 | | Bank | 438,908 | | | 11.68 | | | 244,161 | | | 6.50 | |
Tier I leverage ratio (Tier I capital to total quarterly average assets): | Tier I leverage ratio (Tier I capital to total quarterly average assets): | | Tier I leverage ratio (Tier I capital to total quarterly average assets): | |
BMBC | BMBC | 412,717 | | | 9.07 | | | 227,422 | | | 5.00 | | BMBC | 423,762 | | | 8.44 | | | 250,950 | | | 5.00 | |
Bank | Bank | 443,175 | | | 9.75 | | | 227,207 | | | 5.00 | | Bank | 438,908 | | | 8.75 | | | 250,775 | | | 5.00 | |
| | December 31, 2018 | | | | | | | | |
December 31, 2019 | | December 31, 2019 | | | | | | | |
Total capital to risk weighted assets: | Total capital to risk weighted assets: | | | | | | | | Total capital to risk weighted assets: | | | | | | | |
BMBC | BMBC | 500,375 | | | 14.30 | | | 349,918 | | | 10.00 | | BMBC | 547,440 | | | 14.69 | | | 372,690 | | | 10.00 | |
Bank | Bank | 419,136 | | | 11.99 | | | 349,692 | | | 10.00 | | Bank | 450,212 | | | 12.09 | | | 372,435 | | | 10.00 | |
Tier I capital to risk weighted assets: | Tier I capital to risk weighted assets: | | Tier I capital to risk weighted assets: | |
BMBC | BMBC | 382,151 | | | 10.92 | | | 279,934 | | | 8.00 | | BMBC | 425,773 | | | 11.42 | | | 298,152 | | | 8.00 | |
Bank | Bank | 399,438 | | | 11.42 | | | 279,754 | | | 8.00 | | Bank | 427,250 | | | 11.47 | | | 297,948 | | | 8.00 | |
Common equity Tier I risk weighted assets: | Common equity Tier I risk weighted assets: | | Common equity Tier I risk weighted assets: | |
BMBC | BMBC | 361,256 | | | 10.32 | | | 227,446 | | | 6.50 | | BMBC | 404,715 | | | 10.86 | | | 242,249 | | | 6.50 | |
Bank | Bank | 399,438 | | | 11.42 | | | 227,300 | | | 6.50 | | Bank | 427,250 | | | 11.47 | | | 242,083 | | | 6.50 | |
Tier I leverage ratio (Tier I capital to total quarterly average assets): | Tier I leverage ratio (Tier I capital to total quarterly average assets): | | Tier I leverage ratio (Tier I capital to total quarterly average assets): | |
BMBC | BMBC | 382,151 | | | 9.06 | | | 210,830 | | | 5.00 | | BMBC | 425,773 | | | 9.33 | | | 228,216 | | | 5.00 | |
Bank | Bank | 399,438 | | | 9.48 | | | 216,615 | | | 5.00 | | Bank | 427,250 | | | 9.37 | | | 227,997 | | | 5.00 | |
|
The capital ratiosIn March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations with an alternative option to delay for the Bank and BMBC, astwo years an estimate of September 30, 2019, as shown in the above tables, indicate levels above the regulatory minimum to be considered “well capitalized.” AllCECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. The June 30, 2020 ratios increased from their December 31, 2018 levels primarily as a resultreflect the Corporation's election of the increase in retained earnings, and partially offset by the adoption of ASU 2016-02 (Topic 842), “Leases”, which resulted in $42.2 million of operating lease right-of-use assets being risk weighted at 100% as of September 30, 2019.five-year transition provision.
Liquidity
BMBC’s liquidity position is managed on a daily basis as part of the daily settlement function and continuously as part of the formal asset liability management process. The Bank’s liquidity is maintained by managing its core deposits as the primary source, purchasing federal funds, selling loans in the secondary market, borrowing from the FHLB and the FRB, maintaining a highly liquid investment portfolio, and purchasing and issuing wholesale certificates of deposit as its secondary sources.
Unused availability is detailed on the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Available Funds as of September 30, 2019 | | Percent of Total Borrowing Capacity | | Available Funds as of December 31, 2018
| | Percent of Total Borrowing Capacity | | Dollar Change | | Percent Change |
FHLB of Pittsburgh | $ | 1,389.4 | | | 85.9 | % | | $ | 1,245.4 | | | 74.4 | % | | $ | 144.0 | | | 11.6 | % |
FRB of Philadelphia | 164.7 | | | 100.0 | | | 140.4 | | | 100.0 | | | 24.3 | | | 17.3 | |
Fed Funds Lines (seven banks) | 79.0 | | | 100.0 | | | 79.0 | | | 100.0 | | | — | | | — | |
Total | $ | 1,633.1 | | | 87.7 | | | $ | 1,464.8 | | | 77.6 | | | $ | 168.3 | | | 11.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Available Funds as of June 30, 2020 | | Percent of Total Borrowing Capacity | | Available Funds as of December 31, 2019 | | Percent of Total Borrowing Capacity | | Dollar Change | | Percent Change |
FHLB of Pittsburgh | $ | 1,783.7 | | | 97.5 | % | | $ | 1,110.6 | | | 67.5 | % | | $ | 673.1 | | | 60.6 | % |
FRB of Philadelphia | 166.8 | | | 100.0 | | | 174.3 | | | 100.0 | | | (7.5) | | | (4.3) | |
Fed Funds Lines (six banks) | 74.0 | | | 100.0 | | | 79.0 | | | 100.0 | | | (5.0) | | | (6.3) | |
Total | $ | 2,024.5 | | | 97.8 | | | $ | 1,363.9 | | | 71.8 | | | $ | 660.6 | | | 48.4 | |
Quarterly, the ALCO reviews the Corporation’s liquidity position and reports its findings to BMBC’s Board of Directors.
The Corporation has an agreement with INDInsured Network Deposits to provide up to $55$175 million, excluding accrued interest, of money market and NOW funds at an agreed upon interest rate equal to the current Fed Funds rate plus 20 basis points. The Corporation had $43.8$146.5 million in balances as of SeptemberJune 30, 20192020 under this program.
Management continually evaluates its borrowing capacity and sources of liquidity. Management currently believes that it has sufficient capacity to fund expected short- and long-term earning asset growth with wholesale sources, along with deposit growth from its internal branch and wealth products.
Discussion of Segments
The Corporation has two principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking and Wealth Management (see Note 2322 in the accompanying Notes to Unaudited Consolidated Financial Statements).
The Wealth Management segment recorded a pre-tax segment profit (“PTSP”) of $4.0$1.7 million and $11.9$5.8 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, as compared to a PTSP of $4.1$4.9 million and $12.7$7.9 million for the same periods in 2018. The Wealth Management segment provided 19.5%2019. Fees for wealth management services decreased $2.4 million and 22.0% of the Corporation’s pre-tax profit$1.7 million, respectively, for the three and ninesix months ended SeptemberJune 30, 2019, as compared to 20.0% and 21.5% for the same periods in 2018. For the three and nine months ended September 30, 2019, fees for wealth management services increased $483 thousand and $1.4 million, respectively,2020 as compared to the same periods in 2018. Insurance commissions increased $88 thousand2019. The decrease in PTSP and decreased $138 thousand, respectively,fees for wealth management services for the three and ninesix months ended SeptemberJune 30, 20192020 as compared to the same periods in 2018. The Corporation anticipates that2019 was primarily driven by $2.2 million of costs incurred in the second quarter of 2020 associated with the wind-down of BMT Investment Advisers. Also contributing to the decrease in PTSP were decreases in insurance commissions of $394 thousand and $533 thousand for the three and six months ended June 30, 2020 as compared to the same periods in 2019. Effective January 1, 2020, the business of Lau Associates LLC which is reported in the Wealth Management segment, will bewas transitioned into the Wealth Management Division of the Bank, also reported in the Wealth Management segment, effective during the first quarter of 2020.segment.
The Banking segment recorded a PTSP of $16.7$17.3 million and $42.3 milliona pre-tax segment loss of $860 thousand for the three and ninesix months ended SeptemberJune 30, 2019,2020, as compared to a PTSP of $16.6$15.1 million and $46.4$25.6 million for the same periods in 2018.2019. The Banking segment provided 80.5% and 78.0% of the Corporation’s pre-tax profitdecrease in PTSP for the three and nine month periodssix months ended SeptemberJune 30, 2019,2020 as compared to 80.0% and 78.5% for the same periodsperiod in 2018.2019 was primarily driven by the first quarter 2020 provision for credit losses on loans and leases, as calculated under the CECL framework, driven by the COVID-19 pandemic.
Off Balance Sheet Arrangements
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at SeptemberJune 30, 20192020 were $776.2$826.3 million, as compared to $867.2$828.9 million at December 31, 2018.2019.
Standby letters of credit are conditional commitments issued by the Bank to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Bank’s obligation under standby letters of credit at SeptemberJune 30, 20192020 amounted to $34.3$13.2 million, as compared to $21.2$20.7 million at December 31, 2018.2019.
Estimated fair values of the Corporation’s off-balance sheet arrangements are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet arrangements.
Contractual Cash Obligations of the Corporation as of SeptemberJune 30, 20192020:
| (dollars in thousands) | (dollars in thousands) | Total | | Within 1 Year | | 2 - 3 Years | | 4 - 5 Years | | After 5 Years | (dollars in thousands) | Total | | Less Than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More Than 5 Years |
Deposits without a stated maturity | Deposits without a stated maturity | $ | 3,189,048 | | | $ | 3,189,048 | | | $ | — | | | $ | — | | | $ | — | | Deposits without a stated maturity | $ | 3,763,559 | | | $ | 3,763,559 | | | $ | — | | | $ | — | | | $ | — | |
Wholesale and retail time deposit | Wholesale and retail time deposit | 509,440 | | | 387,640 | | | 111,878 | | | 9,115 | | | 807 | | Wholesale and retail time deposit | 480,089 | | | 343,479 | | | 122,473 | | | 13,255 | | | 882 | |
Short-term borrowings | Short-term borrowings | 203,471 | | | 203,471 | | | — | | | — | | | — | | Short-term borrowings | 28,891 | | | 28,891 | | | — | | | — | | | — | |
Long-term FHLB Advances | Long-term FHLB Advances | 44,735 | | | 24,863 | | | 19,872 | | | — | | | — | | Long-term FHLB Advances | 44,837 | | | 4,861 | | | 39,976 | | | — | | | — | |
Subordinated Notes | Subordinated Notes | 100,000 | | | — | | | — | | | — | | | 100,000 | | Subordinated Notes | 100,000 | | | — | | | — | | | — | | | 100,000 | |
Junior subordinated debentures | Junior subordinated debentures | 25,800 | | | — | | | — | | | — | | | 25,800 | | Junior subordinated debentures | 25,800 | | | — | | | — | | | — | | | 25,800 | |
Operating lease liabilities | Operating lease liabilities | 60,632 | | | 4,843 | | | 8,838 | | | 8,150 | | | 38,801 | | Operating lease liabilities | 56,467 | | | 4,680 | | | 8,395 | | | 8,145 | | | 35,247 | |
Purchase obligations | Purchase obligations | 7,170 | | | 4,592 | | | 2,578 | | | — | | | — | | Purchase obligations | 22,785 | | | 6,560 | | | 9,161 | | | 3,904 | | | 3,160 | |
Total | Total | $ | 4,140,296 | | | $ | 3,814,457 | | | $ | 143,166 | | | $ | 17,265 | | | $ | 165,408 | | Total | $ | 4,522,428 | | | $ | 4,152,030 | | | $ | 180,005 | | | $ | 25,304 | | | $ | 165,089 | |
Other Information
Effects of Inflation
Inflation has some impact on the Corporation’s operating costs. Unlike many industrial companies, however, substantially all of the Corporation’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation’s performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.
Effects of Government Monetary Policies
The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect rates charged on loans or paid for deposits.
The Corporation is a member of the Federal Reserve System and, therefore, the policies and regulations of the Federal Reserve Board have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Corporation’s operations in the future. The effect of such policies and regulations upon the future business and earnings of the Corporation cannot be predicted.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks
See the discussion of quantitative and qualitative disclosures about market risks in the Corporation’s 20182019 Annual Report, as updated by the disclosure in “Management’s Discussion and Analysis of Results of Operations – Impact of COVID-19,” “–Interest Rate Sensitivity,” “– Summary of Interest Rate Simulation,” “Customer Derivatives” and “– Gap Analysis” in this Quarterly Report on Form 10-Q.
ITEM 4. Controls and Procedures
As of the end of the period covered by this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer, Francis J. Leto, and Chief
Financial Officer, Michael W. Harrington, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of SeptemberJune 30, 2019.2020.
ThereThe adoption of ASU 2016-13 (Topic 326 - Credit Losses) required the implementation of new accounting policies and procedures which changed the Corporation's internal controls over financial reporting for the analysis of the allowance for credit losses and related disclosures. Other than the changes related to the adoption of ASU 2016-13 (Topic 326 - Credit Losses), there were no changes during the period covered by this Quarterly Report on Form 10-Q in the Corporation’s internal controls over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.those controls.
PART II OTHER INFORMATION.
ITEM 1. Legal Proceedings.
The information required by this Item is set forth in the “Legal Matters” discussion in Note 2221 “Contingencies” in the Notes to Unaudited Consolidated Financial Statements in Part I Item I of this Form 10-Q, which is incorporated herein by reference in response to this Item.
ITEM 1A. Risk Factors
ForThe section titled Risk Factors in Part I, Item 1A of our 2019 Annual Report includes a discussion of the many risks and uncertainties we face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in the Corporation. The information regardingpresented below provides an update to, and should be read in conjunction with, the risk factors affectingand other information contained in our 2019 Annual Report.
The recent global coronavirus (COVID-19) pandemic has led to periods of significant volatility in financial, commodities and other markets and could harm our business and results of operations.
In December 2019, a novel strain of coronavirus (COVID-19) was first reported in Wuhan, Hubei Province, China. Since then, COVID-19 infections have spread to additional countries including the Corporation, please seeUnited States. In March 2020, the cautionary language regarding forward-looking statementsWorld Health Organization declared COVID-19 to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus pandemic on our business, and there is no guarantee that our efforts to address or mitigate the adverse impacts of the coronavirus will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on our customers and on our business, financial condition and results of operations as well as our growth strategy.
Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of COVID-19 has caused and could continue to cause severe disruptions in the introductionU.S. economy at large, and has resulted and may continue to Item 2result in disruptions to our customers’ businesses, and a decrease in consumer confidence and business generally. In addition, recent actions by US federal, state and local governments to address the pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, may have a significant adverse effect on our customers and the markets in which we conduct our business. The extent of Part Iimpacts resulting from the coronavirus pandemic and other events beyond our control will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus pandemic and actions taken to contain the coronavirus or its impact, among others.
Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans. The escalation of the pandemic may also negatively impact regional economic conditions for a period of time, resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability.
For a description of the impact the COVID-19 pandemic has had on our business and results of operations during the period covered by this Quarterly Report on Form 10-Q, see “Management’s Discussion and Part I, Item 1AAnalysis of our 2018 Annual Report, whichResults of Operation and Financial Condition – Impact of COVID-19” beginning at page 61. If the global response to contain COVID-19 escalates or is supplemented by theunsuccessful, we could experience additional risk factor set forth below or included in other reports we file with the SEC. There have been noeffects, including a material changes to the risk factors described in our 2018 Annual Report.
Increased regulatory oversight, uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the results of our operations.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offering Rate (“LIBOR”), announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Efforts in the United States to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee of the Federal Reserve Board and the Federal Reserve Bank of New York. Uncertainty as to the nature of alternative reference rates and as to potential changes in other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and to a lesser extent securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated debentures and trust preferred securities. If LIBOR rates are no longer available, any successor or replacement interest rates may perform differently and we may incur significant costs to transition both our borrowing arrangements and the loan agreements with our customers from LIBOR, which may have an adverse effect, on our business, financial condition, results of operations. The impact of alternatives to LIBOR on the valuations, pricingoperations and operation of our financial instruments is not yet known.cash flows.
The spread of the COVID-19 outbreak and the governmental responses may disrupt banking and other financial activity in the areas in which we operate and could potentially create widespread business continuity issues for us.
The outbreak of COVID-19 and the U.S. federal, state and local governmental responses may result in a disruption in the services we provide. We rely on our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services or experience interruptions in their ability to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the coronavirus pandemic could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to infection, quarantine or other effects and restrictions of a COVID-19 outbreak in our market areas. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. If we are unable to promptly recover from such business disruptions, our business and financial conditions and results of operations would be adversely affected. We also may incur additional costs to remedy damages caused by such disruptions, which could adversely affect our financial condition and results of operations.
Our past participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.
We participated as a lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. As previously announced, we have sold our PPP loan portfolio, however, we may be required to repurchase, and as a result be exposed to credit risk, on sold PPP loans in certain circumstances if a determination is made by the SBA that there was a deficiency by the Bank with respect to the manner in which the loan was originated, funded, or serviced.
Interest rate volatility stemming from the COVID-19 pandemic could negatively affect our net interest income, lending activities, deposits and profitability.
Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19.In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.
We are subject to increasing credit risk as a result of the COVID-19 pandemic, which could adversely impact our profitability.
Our business depends on our ability to successfully measure and manage credit risk. As a commercial lender, we are exposed to the risk that the principal of, or interest on, a loan will not be paid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover our outstanding exposure. In addition, we are exposed to risks with respect to the risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual loans and borrowers. As the overall economic climate in the U.S., generally, and in our market areas specifically, experiences material disruption due to the COVID-19 pandemic, our borrowers may experience difficulties in repaying their loans and governmental actions may provide payment relief to borrowers affected by COVID-19 and preclude our ability to initiate foreclosure proceedings in certain circumstances and, as a result, the collateral we hold may decrease in value or become illiquid, and the level of our nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for credit losses. Additional factors related to the credit quality of certain commercial real estate and multifamily residential loans include the duration of state and local moratoriums on evictions for non-payment of rent or other fees. The payment on these loans that are secured by income producing properties are typically dependent on the successful operation of the related real estate property and may subject us to risks from adverse conditions in the real estate market or the general economy.
We are actively working to support our borrowers to mitigate the impact of the COVID-19 pandemic on them and on our loan portfolio, including through loan modifications that defer payments for those who experienced a hardship as a result of the COVID-19 pandemic. Although recent regulatory guidance provides that such loan modifications are exempt from the calculation and reporting of TDRs and loan delinquencies, we cannot predict whether such loan modifications may ultimately have an adverse impact on our profitability in future periods. Our inability to successfully manage the increased credit risk caused by the COVID-19 pandemic could have a material adverse effect on our business, financial condition and results of operations.
Unpredictable future developments related to or resulting from the COVID-19 pandemic could materially and adversely affect our business and results of operations.
Because there have been no comparable recent global pandemics that resulted in a similar global impact, we do not yet know the full extent of the COVID-19 pandemic’seffects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic.We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on us. However, if the pandemic continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in our 2019 Annual Report will be heightened.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase
The following table presents the shares repurchased by the Corporation during the thirdsecond quarter of 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased(1)(2) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3) | | Maximum Number of Shares that May Yet Be Purchased Under the Plan or Programs |
July 1, 2019 – July 31, 2019 | 110 | | | $ | 37.39 | | | — | | | 971,524 | |
August 1, 2019 – August 31, 2019 | 69,195 | | | $ | 35.52 | | | 54,291 | | | 917,233 | |
September 1, 2019 – September 30, 2019 | 1,544 | | | $ | 37.22 | | | — | | | 917,233 | |
Total | 70,849 | | | $ | 35.37 | | | 54,291 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased(1)(2) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3) | | Maximum Number of Shares that May Yet Be Purchased Under the Plan or Programs |
April 1, 2020 – April 30, 2020 | 414 | | | $ | 25.56 | | | — | | | 710,032 | |
May 1, 2020 – May 31, 2020 | 953 | | | $ | 27.98 | | | ��� | | | 710,032 | |
June 1, 2020 – June 30, 2020 | 2,879 | | | $ | 27.78 | | | — | | | 710,032 | |
Total | 4,246 | | | $ | 27.61 | | | — | | | |
(1)On SeptemberJune 30, 2019, 1,5442020, 2,017 shares were purchased by the Corporation’s deferred compensation plans through open market transactions.
(2)Includes shares purchased to cover statutory tax withholding requirements on vested stock awards for certain officers of BMBC or the Bank as follows: 110414 shares on July 2, 2019, 2,054April 4, 2020, 953 shares on August 11, 2019,May 6, 2020, and 12,850862 shares on August 12, 2019.June 5, 2020.
(3)On April 18, 2019, BMBC announced a new stock repurchase program (the “2019 Program”) pursuant to which the Corporation may repurchase up to 1,000,000 shares of BMBC's common stock. Under the 2019 Program, the Corporation may repurchase BMBC's common stock at any price, but the aggregate purchase price is not to exceed $45 million. All share repurchasesNo shares were repurchased during the period presented under the 2019 Program were accomplished in open market transactions.three months ended June 30, 2020. As of SeptemberJune 30, 2019,2020, the maximum number of shares remaining authorized for repurchase under the 2019 Program was 917,233,710,032, at an aggregate purchase price not to exceed $42.0$34.8 million.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures.
Not applicable.
ITEM 5. Other Information
As previously reported in the Corporation’s Current Report on Form 8-K filed with the SEC on April 4, 2019 (the “Form 8-K”), Alison Eichert, formerly the Executive Vice President and Chief Administrative Officer of the Bank and Vice President of the Corporation (together with the Bank, the “Company”), retired effective October 1, 2019. In connection with her retirement, the Company and Ms. Eichert entered into a Voluntary Separation Agreement on November 5, 2019 pursuant to which Ms. Eichert will receive the following benefits, subject to applicable withholdings and to her execution and non-revocation of a general release of claims and continuing compliance with certain restrictive covenant obligations: (i) $793,056 in cash, (ii) a pro-rated (based on her days of employment in 2019) annual incentive award under the Company’s Annual Incentive Methodology, which will be paid concurrently with the payment of annual incentive awards to the Company’s named executive officers based on 2019 performance, (iii) subsidized group health insurance coverage at active employee rates through October 1, 2022, and (iv) with respect to the Restricted Stock Units (“RSUs”) granted August 11, 2017 and August 9, 2018, which were referenced in the Form 8-K, as well as RSUs granted on February 14, 2019, the forfeiture provisions applicable to such RSUs have been waived on November 4, 2019 so that such RSUs will continue to be eligible for vesting as if Ms. Eichert remained an employee through the applicable vesting date, provided that the vesting of the performance based portion of the RSUs continue to remain subject to actual achievement of the applicable performance objectives. As a point of clarification to the Company’s prior disclosure in the Form 8-K, Ms. Eichert was eligible to receive contributions in accordance with the Company’s Amended and Restated Supplemental Employee Retirement Plan or Executive Deferred Compensation Plan, as applicable, through her last day of employment, October 1, 2019, but will not be eligible to receive any contributions under such plans as if she remained employed beyond her final date of employment. The form of Voluntary Separation Agreement was filed as Exhibit 10.4 to the Corporation’s Quarterly Report on Form 10-Q for the Fiscal Quarter ended March 31, 2019 filed with the SEC on May 8, 2019.
None.
ITEM 6. Exhibits
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Exhibit No. | | Description and References |
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3.1 | | | |
3.2 | | | |
31.1 | | | |
31.2 | | | |
*32.1 | | | |
*32.2 | | | |
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101.INS XBRL | | Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL Document |
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101.SCH XBRL | | Taxonomy Extension Schema Document, filed herewith |
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101.CAL XBRL | | Taxonomy Extension Calculation Linkbase Document, filed herewith |
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101.DEF XBRL | | Taxonomy Extension Definition Linkbase Document, filed herewith |
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101.LAB XBRL | | Taxonomy Extension Label Linkbase Document, filed herewith |
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101.PRE XBRL | | Taxonomy Extension Presentation Linkbase Document, filed herewith |
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104 | | The cover page of Bryn Mawr Bank Corporation's Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2019,2020, formatted in Inline XBRL (contained in Exhibit 101) |
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*Furnished herewith. Notwithstanding any incorporation of this Quarterly Statement on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with one (*) shall not be deemed incorporated by reference to any other filing unless specifically otherwise set forth herein or therein. | | |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | |
| | | BRYN MAWR BANK CORPORATION | |
| | | | |
Date: November 6, 2019August 10, 2020 | | | By: | /s/ Francis J. Leto |
| | | | Francis J. Leto |
| | | | Chief Executive Officer |
| | | | (Principal Executive Officer) |
| | | | |
| | | | |
Date: November 6, 2019August 10, 2020 | | | By: | /s/ Michael W. Harrington |
| | | | Michael W. Harrington |
| | | | Chief Financial Officer |
| | | | (Principal Financial Officer) |