UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 |
For the Quarterly Period EndedSeptemberquarterly period ended June 30, 20172020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 |
For the Transition Periodtransition period from ___________to_______________________ to _______________
Commission File Number: 0-26850
Commission file number0-26850Premier Financial Corp.
(Exact Name of Registrant as Specified in its Charter)
First Defiance Financial Corp.
(Exact name of registrant as specified in its charter)
Ohio | 34-1803915 | |
(State or other jurisdiction of | ||
incorporation or organization) | (I.R.S. Employer | |
601 Clinton Street Defiance, | 43512 | |
(Address of principal executive | (Zip Code) |
Registrant'sRegistrant’s telephone number, including area code:(419) 782-5015
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, Par Value $0.01 Per Share | PFC | The NASDAQ Stock Market |
Indicate by check mark 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. Yesx☒ No¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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). Yesx☒ No¨
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“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 | ☐ |
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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨☐ Nox
APPLICABLE ONLY TO CORPORATE ISSUERS☒
Indicate by check mark whether the number of shares outstanding of eachregistrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the issuer's classesSecurities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
As of August 1, 2020, the registrant had 37,296,613 shares of common stock, as of the latest practical date. Common Stock, $.01 Par Value – 10,155,833 shares outstanding at October 31, 2017.par value per share, outstanding.
FIRST DEFIANCE
PREMIER FINANCIAL CORP.
INDEX
Page Number | ||||
Item 1. | 2 | |||
2 | ||||
4 | ||||
5 | ||||
6 | ||||
8 | ||||
9 | ||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 50 | ||
Item | 74 | |||
Item | 75 | |||
Item | 76 | |||
Item 1A. | 76 | |||
Item | 76 | |||
Item | 76 | |||
Item | 76 | |||
Item | 76 | |||
Item | 76 | |||
78 |
1
PART I-FINANCIAL INFORMATION
FIRST DEFIANCEPREMIER FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except share and per share data)
September 30, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
Cash and cash equivalents: | ||||||||
Cash and amounts due from depository institutions | $ | 55,731 | $ | 53,003 | ||||
Federal funds sold | 69,000 | 46,000 | ||||||
124,731 | 99,003 | |||||||
Securities: | ||||||||
Available-for-sale, carried at fair value | 260,034 | 250,992 | ||||||
Held-to-maturity, carried at amortized cost (fair value $728 and $187 at September 30, 2017 and December 31, 2016, respectively) | 728 | 184 | ||||||
260,762 | 251,176 | |||||||
Loans held for sale | 12,200 | 9,607 | ||||||
Loans receivable, net of allowance of $26,341 at September 30, 2017 and $25,884 at December 31, 2016, respectively | 2,249,701 | 1,914,603 | ||||||
Mortgage servicing rights | 9,693 | 9,595 | ||||||
Accrued interest receivable | 9,864 | 6,760 | ||||||
Federal Home Loan Bank stock | 15,992 | 13,798 | ||||||
Bank owned life insurance | 65,811 | 52,817 | ||||||
Premises and equipment | 41,536 | 36,958 | ||||||
Real estate and other assets held for sale | 532 | 455 | ||||||
Goodwill | 98,370 | 61,798 | ||||||
Core deposit and other intangibles | 6,061 | 1,336 | ||||||
Deferred taxes | 1,042 | 2,212 | ||||||
Other assets | 38,735 | 17,479 | ||||||
Total assets | $ | 2,935,030 | $ | 2,477,597 |
(continued)
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash and amounts due from depository institutions |
| $ | 78,213 |
|
| $ | 46,254 |
|
Interest-bearing deposits |
|
| 114,468 |
|
|
| 85,000 |
|
|
|
| 192,681 |
|
|
| 131,254 |
|
Securities available-for-sale, carried at fair value |
|
| 567,527 |
|
|
| 283,448 |
|
Loans held for sale, carried at fair value |
|
| 160,467 |
|
|
| — |
|
Loans held for sale, at lower of cost or market |
|
| — |
|
|
| 18,008 |
|
Loans receivable, net of allowance for credit losses of $88,555 at June 30, 2020 and $31,243 at December 31, 2019, respectively |
|
| 5,368,683 |
|
|
| 2,746,321 |
|
Mortgage servicing rights |
|
| 14,646 |
|
|
| 10,267 |
|
Accrued interest receivable |
|
| 23,694 |
|
|
| 10,244 |
|
Federal Home Loan Bank stock |
|
| 45,955 |
|
|
| 11,915 |
|
Bank owned life insurance |
|
| 143,097 |
|
|
| 75,544 |
|
Premises and equipment |
|
| 59,533 |
|
|
| 39,563 |
|
Real estate and other assets held for sale |
|
| 573 |
|
|
| 100 |
|
Goodwill |
|
| 317,948 |
|
|
| 100,069 |
|
Core deposit and other intangibles |
|
| 33,731 |
|
|
| 3,772 |
|
Other assets |
|
| 85,276 |
|
|
| 38,487 |
|
Total assets |
| $ | 7,013,811 |
|
| $ | 3,468,992 |
|
FIRST DEFIANCE(continued)
2
PREMIER FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except share and per share data)
September 30, 2017 | December 31, 2016 | |||||||
Liabilities and stockholders’ equity | ||||||||
Liabilities: | ||||||||
Deposits | $ | 2,360,675 | $ | 1,981,628 | ||||
Advances from the Federal Home Loan Bank | 104,555 | 103,943 | ||||||
Subordinated debentures | 36,083 | 36,083 | ||||||
Securities sold under repurchase agreements | 22,939 | 31,816 | ||||||
Notes Payable | 6,500 | - | ||||||
Advance payments by borrowers | 2,265 | 2,650 | ||||||
Other liabilities | 34,089 | 28,459 | ||||||
Total liabilities | 2,567,106 | 2,184,579 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.01 par value per share: 37,000 shares authorized; no shares issued | – | – | ||||||
Preferred stock, $.01 par value per share: 4,963,000 shares authorized; no shares issued | – | – | ||||||
Common stock, $.01 par value per share: | ||||||||
25,000,000 shares authorized; 12,712,840 and 12,720,347 shares issued and 10,149,184 and 8,983,206 shares outstanding, respectively | 127 | 127 | ||||||
Additional paid-in capital | 160,653 | 126,390 | ||||||
Accumulated other comprehensive income, net of tax of $1,151 and $117, respectively | 2,138 | 215 | ||||||
Retained earnings | 256,041 | 240,592 | ||||||
Treasury stock, at cost, 2,563,656 and 3,737,141 shares respectively | (51,035 | ) | (74,306 | ) | ||||
Total stockholders’ equity | 367,924 | 293,018 | ||||||
Total liabilities and stockholders’ equity | $ | 2,935,030 | $ | 2,477,597 |
See accompanying notes
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Deposits |
| $ | 5,759,843 |
|
| $ | 2,870,325 |
|
Advances from the Federal Home Loan Bank and PPPLF advances |
|
| 139,327 |
|
|
| 85,063 |
|
Subordinated debentures |
|
| 36,083 |
|
|
| 36,083 |
|
Securities sold under repurchase agreements |
|
| 6,948 |
|
|
| 2,999 |
|
Advance payments by borrowers |
|
| 31,470 |
|
|
| 5,491 |
|
Other liabilities |
|
| 99,172 |
|
|
| 42,864 |
|
Total liabilities |
|
| 6,072,843 |
|
|
| 3,042,825 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value per share: 37,000 shares authorized; 0 shares issued |
| — |
|
| — |
| ||
Preferred stock, $.01 par value per share: 4,963,000 shares authorized; 0 shares issued |
| — |
|
| — |
| ||
Common stock, $.01 par value per share: 50,000,000 shares authorized; 43,297,259 and 25,371,086 shares issued and 37,296,069 and 19,729,886 shares outstanding at June 30, 2020 and December 31, 2019, respectively |
|
| 306 |
|
|
| 127 |
|
Additional paid-in capital |
|
| 688,574 |
|
|
| 161,955 |
|
Accumulated other comprehensive income, net of tax of $3,871 and $1,221, respectively |
|
| 14,564 |
|
|
| 4,595 |
|
Retained earnings |
|
| 316,321 |
|
|
| 329,175 |
|
Treasury stock, at cost, 6,001,191 shares at June 30, 2020 and 5,641,200 shares at December 31, 2019 |
|
| (78,797 | ) |
|
| (69,685 | ) |
Total stockholders’ equity |
|
| 940,968 |
|
|
| 426,167 |
|
Total liabilities and stockholders’ equity |
| $ | 7,013,811 |
|
| $ | 3,468,992 |
|
FIRST DEFIANCESee accompanying notes.
3
PREMIER FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except share and per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Interest Income | ||||||||||||||||
Loans | $ | 25,975 | $ | 20,264 | $ | 73,263 | $ | 59,242 | ||||||||
Investment securities: | ||||||||||||||||
Taxable | 896 | 767 | 2,817 | 2,391 | ||||||||||||
Non-taxable | 792 | 731 | 2,378 | 2,280 | ||||||||||||
Interest-bearing deposits | 209 | 104 | 555 | 287 | ||||||||||||
FHLB stock dividends | 209 | 137 | 562 | 413 | ||||||||||||
Total interest income | 28,081 | 22,003 | 79,575 | 64,613 | ||||||||||||
Interest Expense | ||||||||||||||||
Deposits | 2,391 | 1,635 | 6,357 | 4,613 | ||||||||||||
FHLB advances and other | 431 | 322 | 1,211 | 940 | ||||||||||||
Subordinated debentures | 239 | 191 | 682 | 548 | ||||||||||||
Notes payable | 13 | 35 | 41 | 108 | ||||||||||||
Total interest expense | 3,074 | 2,183 | 8,291 | 6,209 | ||||||||||||
Net interest income | 25,007 | 19,820 | 71,284 | 58,404 | ||||||||||||
Provision for loan losses | 462 | 15 | 2,635 | 432 | ||||||||||||
Net interest income after provision for loan losses | 24,545 | 19,805 | 68,649 | 57,972 | ||||||||||||
Non-interest Income | ||||||||||||||||
Service fees and other charges | 3,153 | 2,765 | 9,073 | 8,208 | ||||||||||||
Insurance commissions | 3,082 | 2,473 | 9,834 | 8,113 | ||||||||||||
Mortgage banking income | 1,698 | 2,039 | 5,266 | 5,342 | ||||||||||||
Gain on sale of non-mortgage loans | 82 | 148 | 172 | 604 | ||||||||||||
Gain on sale or call of securities | 158 | 151 | 425 | 509 | ||||||||||||
Trust income | 486 | 420 | 1,400 | 1,256 | ||||||||||||
Income from Bank Owned Life Insurance | 421 | 225 | 2,666 | 686 | ||||||||||||
Other non-interest income | 415 | 305 | 1,348 | 1,019 | ||||||||||||
Total non-interest income | 9,495 | 8,526 | 30,184 | 25,737 | ||||||||||||
Non-interest Expense | ||||||||||||||||
Compensation and benefits | 11,780 | 10,295 | 37,588 | 30,250 | ||||||||||||
Occupancy | 1,960 | 1,822 | 5,751 | 5,435 | ||||||||||||
FDIC insurance premium | 330 | 352 | 973 | 1,008 | ||||||||||||
Financial institutions tax | 404 | 446 | 1,418 | 1,339 | ||||||||||||
Data processing | 1,874 | 1,622 | 5,832 | 4,723 | ||||||||||||
Amortization of intangibles | 364 | 115 | 931 | 419 | ||||||||||||
Other non-interest expense | 3,728 | 3,640 | 11,718 | 9,739 | ||||||||||||
Total non-interest expense | 20,440 | 18,292 | 64,211 | 52,913 | ||||||||||||
Income before income taxes | 13,600 | 10,039 | 34,622 | 30,796 | ||||||||||||
Federal income taxes | 4,219 | 2,994 | 11,753 | 9,318 | ||||||||||||
Net Income | $ | 9,381 | $ | 7,045 | $ | 22,869 | $ | 21,478 | ||||||||
Earnings per common share (Note 6) | ||||||||||||||||
Basic | $ | 0.92 | $ | 0.78 | $ | 2.31 | $ | 2.39 | ||||||||
Diluted | $ | 0.92 | $ | 0.78 | $ | 2.29 | $ | 2.37 | ||||||||
Dividends declared per share (Note 5) | $ | 0.25 | $ | 0.22 | $ | 0.75 | $ | 0.66 | ||||||||
Average common shares outstanding (Note 6) | ||||||||||||||||
Basic | 10,149 | 8,976 | 9,913 | 8,980 | ||||||||||||
Diluted | 10,209 | 9,050 | 9,970 | 9,050 |
See accompanying notes.
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| |||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
| $ | 58,796 |
|
| $ | 32,660 |
|
| $ | 110,256 |
|
| $ | 63,874 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 2,047 |
|
|
| 1,289 |
|
|
| 3,914 |
|
|
| 2,655 |
|
Non-taxable |
|
| 876 |
|
|
| 849 |
|
|
| 1,727 |
|
|
| 1,688 |
|
Interest-bearing deposits |
|
| 79 |
|
|
| 260 |
|
|
| 309 |
|
|
| 545 |
|
FHLB stock dividends |
|
| 651 |
|
|
| 183 |
|
|
| 766 |
|
|
| 398 |
|
Total interest income |
|
| 62,449 |
|
|
| 35,241 |
|
|
| 116,972 |
|
|
| 69,160 |
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 7,435 |
|
|
| 5,581 |
|
|
| 15,206 |
|
|
| 10,586 |
|
FHLB advances and other |
|
| 516 |
|
|
| 304 |
|
|
| 1,523 |
|
|
| 580 |
|
Subordinated debentures |
|
| 179 |
|
|
| 350 |
|
|
| 452 |
|
|
| 714 |
|
Notes payable |
|
| 15 |
|
|
| 17 |
|
|
| 24 |
|
|
| 21 |
|
Total interest expense |
|
| 8,145 |
|
|
| 6,252 |
|
|
| 17,205 |
|
|
| 11,901 |
|
Net interest income |
|
| 54,304 |
|
|
| 28,989 |
|
|
| 99,767 |
|
|
| 57,259 |
|
Credit loss expense - loans and leases (1) |
|
| 1,868 |
|
|
| 282 |
|
|
| 45,655 |
|
|
| 494 |
|
Credit loss expense (benefit) - unfunded commitments (1) |
|
| 1,107 |
|
|
| (85 | ) |
|
| 2,565 |
|
|
| 1 |
|
Net interest income after credit loss expense |
|
| 51,329 |
|
|
| 28,792 |
|
|
| 51,547 |
|
|
| 56,764 |
|
Non-interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees and other charges |
|
| 5,614 |
|
|
| 3,301 |
|
|
| 10,797 |
|
|
| 6,308 |
|
Insurance commissions |
|
| 4,005 |
|
|
| 3,616 |
|
|
| 9,160 |
|
|
| 7,731 |
|
Mortgage banking income |
|
| 9,868 |
|
|
| 2,137 |
|
|
| 10,716 |
|
|
| 3,978 |
|
Gain on sale of non-mortgage loans |
|
| — |
|
|
| 21 |
|
|
| 234 |
|
|
| 110 |
|
Loss on sale of securities available for sale |
|
| (2 | ) |
|
| — |
|
|
| (2 | ) |
|
| — |
|
Wealth management income |
|
| 1,802 |
|
|
| 660 |
|
|
| 2,893 |
|
|
| 1,358 |
|
Income from Bank Owned Life Insurance |
|
| 838 |
|
|
| 527 |
|
|
| 1,619 |
|
|
| 919 |
|
Other non-interest income |
|
| 890 |
|
|
| 224 |
|
|
| 1,597 |
|
|
| 895 |
|
Total non-interest income |
|
| 23,015 |
|
|
| 10,486 |
|
|
| 37,014 |
|
|
| 21,299 |
|
Non-interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
| 19,575 |
|
|
| 14,398 |
|
|
| 37,160 |
|
|
| 28,483 |
|
Occupancy |
|
| 4,128 |
|
|
| 2,304 |
|
|
| 7,859 |
|
|
| 4,545 |
|
FDIC insurance premium |
|
| 411 |
|
|
| 258 |
|
|
| 903 |
|
|
| 531 |
|
Financial institutions tax |
|
| 1,116 |
|
|
| 556 |
|
|
| 1,950 |
|
|
| 1,112 |
|
Data processing |
|
| 3,805 |
|
|
| 2,267 |
|
|
| 6,845 |
|
|
| 4,564 |
|
Acquisition related charges |
|
| 2,099 |
|
|
| — |
|
|
| 13,585 |
|
|
| — |
|
Amortization of intangibles |
|
| 1,809 |
|
|
| 276 |
|
|
| 3,054 |
|
|
| 575 |
|
Other non-interest expense |
|
| 5,041 |
|
|
| 4,261 |
|
|
| 8,937 |
|
|
| 9,290 |
|
Total non-interest expense |
|
| 37,984 |
|
|
| 24,320 |
|
|
| 80,293 |
|
|
| 49,100 |
|
Income before income taxes |
|
| 36,360 |
|
|
| 14,958 |
|
|
| 8,268 |
|
|
| 28,963 |
|
Federal income taxes |
|
| 7,303 |
|
|
| 2,759 |
|
|
| 1,693 |
|
|
| 5,282 |
|
Net income |
| $ | 29,057 |
|
| $ | 12,199 |
|
| $ | 6,575 |
|
| $ | 23,681 |
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.78 |
|
| $ | 0.62 |
|
| $ | 0.19 |
|
| $ | 1.19 |
|
Diluted |
| $ | 0.78 |
|
| $ | 0.61 |
|
| $ | 0.19 |
|
| $ | 1.19 |
|
(1) | Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology. |
FIRST DEFIANCESee accompanying notes.
PREMIER FINANCIAL CORP.
Consolidated Condensed Statements of Comprehensive Income
(UNAUDITED)
(Amounts in Thousands)
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net income |
| $ | 29,057 |
|
| $ | 12,199 |
|
| $ | 6,575 |
|
| $ | 23,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities available for sale |
|
| 3,160 |
|
|
| 3,289 |
|
|
| 12,618 |
|
|
| 7,892 |
|
Reclassification adjustment for securities (losses) included in net income |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
Income tax effect |
|
| (666 | ) |
|
| (691 | ) |
|
| (2,651 | ) |
|
| (1,659 | ) |
Net of tax amount |
|
| 2,496 |
|
|
| 2,598 |
|
|
| 9,969 |
|
|
| 6,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain/(loss) on postretirement benefit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for deferred tax on defined benefit postretirement medical plan |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 82 |
|
Net of tax amount |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
| 2,496 |
|
|
| 2,598 |
|
|
| 9,969 |
|
|
| 6,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
| $ | 31,553 |
|
| $ | 14,797 |
|
| $ | 16,544 |
|
| $ | 29,996 |
|
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 9,381 | $ | 7,045 | $ | 22,869 | $ | 21,478 | ||||||||
Other comprehensive income: | ||||||||||||||||
Unrealized gains (losses) on securities available for sale | (777 | ) | 69 | 3,383 | 2,579 | |||||||||||
Reclassification adjustment for security gains included in net income(1) | (158 | ) | (151 | ) | (425 | ) | (509 | ) | ||||||||
Income tax expense | 327 | 29 | (1,035 | ) | (725 | ) | ||||||||||
Other comprehensive income | (608 | ) | (53 | ) | 1,923 | 1,345 | ||||||||||
Comprehensive income | $ | 8,773 | $ | 6,992 | $ | 24,792 | $ | 22,823 |
(1) Amounts are included in gains on sale or call of securities on the consolidated condensed statements of income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended September 30, 2017 and 2016 was $55 and $53, respectively. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the nine months ended September 30, 2017 and 2016 was $148 and $178, respectively.See accompanying notes.
FIRST DEFIANCEPREMIER FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders’ Equity
(UNAUDITED)
(Amounts in Thousands, except share data)
Accumulated | ||||||||||||||||||||||||||||||||
Common | Additional | Other | Total | |||||||||||||||||||||||||||||
Preferred | Stock | Common | Paid-In | Comprehensive | Retained | Treasury | Stockholders’ | |||||||||||||||||||||||||
Stock | Shares | Stock | Capital | Income | Earnings | Stock | Equity | |||||||||||||||||||||||||
Balance at January 1, 2017 | $ | - | 8,983,206 | $ | 127 | $ | 126,390 | $ | 215 | $ | 240,592 | $ | (74,306 | ) | $ | 293,018 | ||||||||||||||||
Net income | 22,869 | 22,869 | ||||||||||||||||||||||||||||||
Other comprehensive income | 1,923 | 1,923 | ||||||||||||||||||||||||||||||
Stock based compensation expenses | 133 | 133 | ||||||||||||||||||||||||||||||
Shares issued under stock option plan, net of 7,507 repurchased and retired | 4,043 | 51 | (83 | ) | 230 | 198 | ||||||||||||||||||||||||||
Capital stock issuance | 1,139,502 | 33,792 | 22,740 | 56,532 | ||||||||||||||||||||||||||||
Restricted share activity under stock incentive plans | 21,377 | 254 | (17 | ) | 280 | 517 | ||||||||||||||||||||||||||
Shares issued from direct stock sales | 1,056 | 33 | 21 | 54 | ||||||||||||||||||||||||||||
Common stock dividends declared | (7,320 | ) | (7,320 | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2017 | $ | - | 10,149,184 | $ | 127 | $ | 160,653 | $ | 2,138 | $ | 256,041 | $ | (51,035 | ) | $ | 367,924 | ||||||||||||||||
Balance at January 1, 2016 | $ | - | 9,102,831 | $ | 127 | $ | 125,734 | $ | 3,622 | $ | 219,737 | $ | (69,023 | ) | $ | 280,197 | ||||||||||||||||
Net income | 21,478 | 21,478 | ||||||||||||||||||||||||||||||
Other comprehensive income | 1,345 | 1,345 | ||||||||||||||||||||||||||||||
Stock based compensation expenses | 226 | 226 | ||||||||||||||||||||||||||||||
Shares issued under stock option plan, net of 1,612 repurchased and retired | 33,808 | (18 | ) | (26 | ) | 711 | 667 | |||||||||||||||||||||||||
Restricted share activity under stock incentive plans | 10,405 | 236 | (72 | ) | 225 | 389 | ||||||||||||||||||||||||||
Shares issued from direct stock sales | 1,068 | 22 | 21 | 43 | ||||||||||||||||||||||||||||
Shares repurchased | (167,746 | ) | (6,293 | ) | (6,293 | ) | ||||||||||||||||||||||||||
Common stock dividends declared | (5,914 | ) | (5,914 | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2016 | $ | - | 8,980,366 | $ | 127 | $ | 126,200 | $ | 4,967 | $ | 235,203 | $ | (74,359 | ) | $ | 292,138 |
|
| Preferred Stock |
|
| Common Stock Shares |
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Accumulated Other Comprehensive Income |
|
| Retained Earnings |
|
| Treasury Stock |
|
| Total Stockholders Equity |
| ||||||||
Balance at January 1, 2020 |
| $ | — |
|
|
| 19,729,886 |
|
| $ | 127 |
|
| $ | 161,955 |
|
| $ | 4,595 |
|
| $ | 329,175 |
|
| $ | (69,685 | ) |
| $ | 426,167 |
|
Net (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (22,482 | ) |
|
|
|
|
|
| (22,482 | ) |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7,473 |
|
|
|
|
|
|
|
|
|
|
| 7,473 |
|
Adoption of ASC 326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,566 | ) |
|
|
|
|
|
| (2,566 | ) |
Deferred compensation plan |
|
|
|
|
|
| 7,524 |
|
|
|
|
|
|
| (94 | ) |
|
|
|
|
|
|
|
|
|
| 94 |
|
|
| — |
|
Stock based compensation expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,230 |
|
|
|
|
|
|
|
|
|
|
| 6 |
|
|
| 1,236 |
|
Capital stock issuance related to acquisition |
|
|
|
|
|
| 17,927,017 |
|
|
| 179 |
|
|
| 526,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 526,875 |
|
Vesting of incentive plans |
|
|
|
|
|
| 39,548 |
|
|
|
|
|
|
| (1,989 | ) |
|
|
|
|
|
|
|
|
|
| 493 |
|
|
| (1,496 | ) |
Restricted share issuance |
|
|
|
|
|
| 13,349 |
|
|
|
|
|
|
| 198 |
|
|
|
|
|
|
| (374 | ) |
|
| 176 |
|
|
| — |
|
Restricted share forfeitures |
|
|
|
|
|
| (750 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
Shares repurchased |
|
|
|
|
|
| (430,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (10,078 | ) |
|
| (10,078 | ) |
Common stock dividend payment ($0.22 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8,286 | ) |
|
|
|
|
|
| (8,286 | ) |
Balance at March 31, 2020 |
| $ | — |
|
|
| 37,286,574 |
|
| $ | 306 |
|
| $ | 687,996 |
|
| $ | 12,068 |
|
| $ | 295,467 |
|
| $ | (78,994 | ) |
| $ | 916,843 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 29,057 |
|
|
|
|
|
|
| 29,057 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,496 |
|
|
|
|
|
|
|
|
|
|
| 2,496 |
|
Deferred compensation plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 166 |
|
|
|
|
|
|
|
|
|
|
| (166 | ) |
|
| — |
|
Stock based compensation expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 356 |
|
Adjustment for capital stock issuance |
|
|
|
|
|
| (843 | ) |
|
|
|
|
|
| (25 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (25 | ) |
Fair value of option exchange from merger |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 461 |
|
Prior period adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (258 | ) |
|
|
|
|
|
|
|
|
|
| 258 |
|
|
| — |
|
Shares issued under stock option plan |
|
|
|
|
|
| 11,408 |
|
|
|
|
|
|
| (122 | ) |
|
|
|
|
|
|
|
|
|
| 122 |
|
|
| — |
|
Shares repurchased |
|
|
|
|
|
| (1,070 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (17 | ) |
|
| (17 | ) |
Common stock dividend payment ($0.22 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8,203 | ) |
|
|
|
|
|
| (8,203 | ) |
Balance at June 30, 2020 |
| $ | — |
|
| $ | 37,296,069 |
|
| $ | 306 |
|
| $ | 688,574 |
|
| $ | 14,564 |
|
| $ | 316,321 |
|
| $ | (78,797 | ) |
| $ | 940,968 |
|
|
| Preferred Stock |
|
| Common Stock Shares |
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Accumulated Other Comprehensive Income |
|
| Retained Earnings |
|
| Treasury Stock |
|
| Total Stockholders Equity |
| ||||||||
Balance at January 1, 2019 |
| $ | — |
|
|
| 20,171,392 |
|
| $ | 127 |
|
| $ | 161,593 |
|
| $ | (2,148 | ) |
| $ | 295,588 |
|
| $ | (55,571 | ) |
| $ | 399,589 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 11,482 |
|
|
|
|
|
|
| 11,482 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,717 |
|
|
|
|
|
|
|
|
|
|
| 3,717 |
|
Deferred compensation plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (22 | ) |
|
|
|
|
|
|
|
|
|
| 42 |
|
|
| 20 |
|
Stock based compensation expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 11 |
|
Shares issued under stock option plan, net of 178 repurchased and retired |
|
|
|
|
|
| 17,822 |
|
|
|
|
|
|
| (22 | ) |
|
|
|
|
|
| (5 | ) |
|
| 212 |
|
|
| 185 |
|
Restricted share activity under stock incentive plans net of 25,195 repurchased and retired |
|
|
|
|
|
| 38,890 |
|
|
|
|
|
|
| (751 | ) |
|
|
|
|
|
|
|
|
|
| 440 |
|
|
| (311 | ) |
Shares issued from direct stock sales |
|
|
|
|
|
| 1,065 |
|
|
|
|
|
|
| 19 |
|
|
|
|
|
|
|
|
|
|
| 12 |
|
|
| 31 |
|
Shares repurchased |
|
|
|
|
|
| (515,977 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (15,147 | ) |
|
| (15,147 | ) |
Common stock dividend payment ($0.19 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3,788 | ) |
|
|
|
|
|
| (3,788 | ) |
Balance at March 31, 2019 |
| $ | — |
|
| $ | 19,713,192 |
|
| $ | 127 |
|
| $ | 160,828 |
|
| $ | 1,569 |
|
| $ | 303,277 |
|
| $ | (70,012 | ) |
| $ | 395,789 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,199 |
|
|
|
|
|
|
| 12,199 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,598 |
|
|
|
|
|
|
|
|
|
|
| 2,598 |
|
Deferred compensation plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (12 | ) |
|
|
|
|
|
|
|
|
|
| 29 |
|
|
| 17 |
|
Stock based compensation expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 255 |
|
Shares issued under stock option plan, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of 0 repurchased and retired |
|
|
|
|
|
| 1,200 |
|
|
|
|
|
|
| (9 | ) |
|
|
|
|
|
|
|
|
|
| 15 |
|
|
| 6 |
|
Restricted share activity under stock incentive plans net of 2,533 repurchased and retired |
|
|
|
|
|
| 12,304 |
|
|
|
|
|
|
| 129 |
|
|
|
|
|
|
| (153 | ) |
|
| 98 |
|
|
| 74 |
|
Shares issued from direct stock sales |
|
|
|
|
|
| 934 |
|
|
|
|
|
|
| 14 |
|
|
|
|
|
|
|
|
|
|
| 11 |
|
|
| 25 |
|
Common stock dividend payment ($0.19 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3,747 | ) |
|
|
|
|
|
| (3,747 | ) |
Balance at June 30, 2019 |
| $ | — |
|
| $ | 19,727,630 |
|
| $ | 127 |
|
| $ | 161,205 |
|
| $ | 4,167 |
|
| $ | 311,576 |
|
| $ | (69,859 | ) |
| $ | 407,216 |
|
See accompanying notes.
PREMIER FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
|
| Six Months Ended June 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 6,575 |
|
| $ | 23,681 |
|
Items not requiring (providing) cash: |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
| 48,220 |
|
|
| 495 |
|
Depreciation |
|
| 3,105 |
|
|
| 2,073 |
|
Amortization of mortgage servicing rights, net of impairment charges/recoveries |
|
| 9,198 |
|
|
| 980 |
|
Amortization of core deposit and other intangible assets |
|
| 3,054 |
|
|
| 575 |
|
Net accretion of premiums and discounts on loans and deposits |
|
| (4,458 | ) |
|
| (450 | ) |
Amortization of premiums and discounts on securities |
|
| 1,851 |
|
|
| 633 |
|
Change in deferred taxes |
|
| (10,418 | ) |
|
| (246 | ) |
Proceeds from the sale of loans held for sale |
|
| 331,341 |
|
|
| 99,438 |
|
Originations of loans held for sale |
|
| (406,074 | ) |
|
| (104,974 | ) |
Gain from sale of loans |
|
| (16,666 | ) |
|
| (3,186 | ) |
Loss on sale or write down of property plant and equipment |
|
| — |
|
|
| 10 |
|
Gain/loss on sale / write-down of real estate and other assets held for sale |
|
| 17 |
|
|
| 278 |
|
Loss on sale of available for sale securities |
|
| 2 |
|
|
| — |
|
Stock option expense |
|
| 1,592 |
|
|
| 266 |
|
Restricted stock vesting |
|
| (1,496 | ) |
|
| (239 | ) |
Income from bank owned life insurance |
|
| (1,619 | ) |
|
| (919 | ) |
Excess tax benefit on stock compensation plans |
|
| — |
|
|
| (106 | ) |
Changes in: |
|
|
|
|
|
|
|
|
Other assets |
|
| (20,255 | ) |
|
| (6,548 | ) |
Other liabilities |
|
| 22,123 |
|
|
| 1,246 |
|
Net cash provided by operating activities |
|
| (33,908 | ) |
|
| 13,007 |
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from maturities of held-to maturity securities |
|
| — |
|
|
| 38 |
|
Proceeds from maturities, calls and pay-downs of available-for-sale securities |
|
| 50,544 |
|
|
| 16,432 |
|
Proceeds from sale of available-for-sale securities |
|
| 622 |
|
|
| — |
|
Proceeds from sale of premises and equipment, real estate and other assets held for sale |
|
| 509 |
|
|
| 1,073 |
|
Proceeds from sale of non-mortgage loans |
|
| 5,241 |
|
|
| 14,378 |
|
Purchases of available-for-sale securities |
|
| (61,725 | ) |
|
| (11,211 | ) |
Net change in Federal Home Loan Bank stock |
|
| (21,287 | ) |
|
| 2,302 |
|
Net cash from acquisition (Reference Footnote 17 Business Combinations) |
|
| 52,580 |
|
|
| — |
|
Cash paid for acquisition (Reference Footnote 17 Business Combinations) |
|
| (132 | ) |
|
| — |
|
Purchases of premises and equipment, net |
|
| (2,822 | ) |
|
| (1,372 | ) |
Investment in bank owned life insurance |
|
| — |
|
|
| (6,600 | ) |
Proceeds from bank owned life insurance death benefit |
|
| — |
|
|
| 93 |
|
Net increase in loans receivable |
|
| (386,945 | ) |
|
| (98,035 | ) |
Net cash used by investing activities |
|
| (363,415 | ) |
|
| (82,902 | ) |
Financing Activities |
|
|
|
|
|
|
|
|
Net increase in deposits and advance payments by borrowers |
|
| 808,121 |
|
|
| 59,652 |
|
Net change in Federal Home Loan Bank advances and PPPLF |
|
| (326,736 | ) |
|
| 19,989 |
|
Decrease in securities sold under repurchase agreements |
|
| 3,949 |
|
|
| (2,677 | ) |
Net cash paid for repurchase of common stock |
|
| (10,095 | ) |
|
| (15,147 | ) |
Proceeds from exercise of stock options |
|
| — |
|
|
| 191 |
|
Proceeds from direct stock sales |
|
| — |
|
|
| 57 |
|
Cash dividends paid on common stock |
|
| (16,489 | ) |
|
| (7,535 | ) |
Net cash provided by financing activities |
|
| 458,750 |
|
|
| 54,530 |
|
Increase in cash and cash equivalents |
|
| 61,427 |
|
|
| (15,365 | ) |
Cash and cash equivalents at beginning of period |
|
| 131,254 |
|
|
| 98,962 |
|
Cash and cash equivalents at end of period |
| $ | 192,681 |
|
| $ | 83,597 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
| $ | 17,751 |
|
| $ | 11,811 |
|
Income taxes paid |
| $ | — |
|
| $ | 4,200 |
|
Initial recognition of right-of-use asset |
| $ | 10,100 |
|
| $ | 8,808 |
|
Initial recognition of lease liability |
| $ | 10,249 |
|
| $ | 9,339 |
|
Initial recognition of ASC 326 |
| $ | 2,566 |
|
| $ | — |
|
Transfers from loans to real estate and other assets held for sale |
| $ | 97 |
|
| $ | 146 |
|
Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Operating Activities | ||||||||
Net income | $ | 22,869 | $ | 21,478 | ||||
Items not requiring (providing) cash | ||||||||
Provision for loan losses | 2,635 | 432 | ||||||
Depreciation | 2,674 | 2,514 | ||||||
Amortization of mortgage servicing rights, net of impairment recoveries | 1,080 | 1,399 | ||||||
Amortization of core deposit and other intangible assets | 931 | 419 | ||||||
Net amortization (accretion)of premiums and discounts on loans and deposits | (602 | ) | 254 | |||||
Amortization of premiums and discounts on securities | 935 | 627 | ||||||
Change in deferred taxes | 220 | 174 | ||||||
Proceeds from the sale of loans held for sale | 157,127 | 197,167 | ||||||
Originations of loans held for sale | (157,321 | ) | (198,839 | ) | ||||
Gain from sale of loans | (3,749 | ) | (4,707 | ) | ||||
Gain from sale or call of securities | (425 | ) | (509 | ) | ||||
Loss on sale or disposal of premises and equipment | 48 | - | ||||||
Gain on sale / write-down of real estate and other assets held for sale | (57 | ) | (269 | ) | ||||
Stock option expense | 133 | 226 | ||||||
Restricted stock expense | 517 | 389 | ||||||
Income from bank owned life insurance | (2,666 | ) | (686 | ) | ||||
Excess tax benefit on stock compensation plans | (168 | ) | (184 | ) | ||||
Changes in: | ||||||||
Accrued interest receivable | (1,782 | ) | (1,281 | ) | ||||
Other assets | (2,743 | ) | (3,475 | ) | ||||
Other liabilities | 2,348 | 1,174 | ||||||
Net cash provided by operating activities | 22,004 | 16,303 | ||||||
Investing Activities | ||||||||
Proceeds from maturities of held-to-maturity securities | 48 | 52 | ||||||
Proceeds from maturities, calls and pay-downs of available-for-sale securities | 20,339 | 25,765 | ||||||
Proceeds from sale of premises and equipment, real estate and other assets held for sale | 1,028 | 1,368 | ||||||
Proceeds from the sale of available-for-sale securities | 18,047 | 14,871 | ||||||
Proceeds from sale of non-mortgage loans | 19,142 | 13,967 | ||||||
Purchases of available-for-sale securities | (41,235 | ) | (35,538 | ) | ||||
Proceeds from Federal Home Loan stock redemption | - | 1 | ||||||
Net cash received in acquisitions | 19,359 | - | ||||||
Investment in bank owned life insurance | (20,000 | ) | - | |||||
Purchase of portfolio mortgage loans | (11,476 | ) | - | |||||
Purchases of premises and equipment, net | (2,491 | ) | (1,289 | ) | ||||
Net increase in loans receivable | (59,339 | ) | (137,511 | ) | ||||
Net cash used by investing activities | (56,578 | ) | (118,314 | ) | ||||
Financing Activities | ||||||||
Net increase in deposits and advance payments by borrowers | 70,539 | 90,949 | ||||||
Repayment of Federal Home Loan Bank advances | (792 | ) | (718 | ) | ||||
Proceeds from Federal Home Loan Bank advances | - | 55,000 | ||||||
Increase in notes payable | 6,500 | - | ||||||
Decrease in securities sold under repurchase agreements | (8,877 | ) | (6,695 | ) | ||||
Proceeds from exercise of stock options | 198 | 667 | ||||||
Proceeds from direct stock sales | 54 | 43 | ||||||
Net cash paid for repurchase of common stock | - | (6,293 | ) | |||||
Cash dividends paid on common stock | (7,320 | ) | (5,914 | ) | ||||
Net cash provided by financing activities | 60,302 | 127,039 | ||||||
Increase (decrease) in cash and cash equivalents | 25,728 | 25,028 | ||||||
Cash and cash equivalents at beginning of period | 99,003 | 79,769 | ||||||
Cash and cash equivalents at end of period | $ | 124,731 | $ | 104,797 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 8,177 | $ | 6,151 | ||||
Income taxes paid | $ | 10,900 | $ | 9,900 | ||||
Transfers from loans to real estate and other assets held for sale | $ | 328 | $ | 526 | ||||
Securities purchased but not yet settled | $ | - | $ | 935 | ||||
Sale of bank owned life insurance not yet settled | $ | 17,840 | $ | - |
See accompanying notes.
Refer to Note 18 – Business Combinations for non-cash activity.
PREMIER FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (UNAUDITED)
June 30, 2020 and 2019
1. | Basis of Presentation |
1. Basis of Presentation
On June 19, 2020, First Defiance Financial Corp. (the “Company”) changed its name to Premier Financial Corp. (“First Defiance”Premier” or the “Company”). In connection with the name change, Premier’s stock continued to be traded on the NASDAQ Global Select Market, but under the ticker PFC. On this same date, First Federal Bank of the Midwest, the wholly owned subsidiary of the Company, changed its name to Premier Bank (the “Bank”).
Premier is a unitary thriftfinancial holding company that conducts business through its three wholly ownedwholly-owned subsidiaries, First Federalthe Bank, of the Midwest (“First Federal”), First Insurance Group of the Midwest, Inc. (“First Insurance”), and First Defiance Risk Management Inc. (“First Defiance Risk Management”), HSB Capital, LLC (“HSB Capital”), and HSB Insurance, Inc. (“HSB Insurance”). All significant intercompany transactions and balances are eliminated in consolidation.
On January 31, 2020, Premier completed its previously announced acquisition of United Community Financial Corp., an Ohio corporation (“UCFC”), pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 9, 2019, by and between Premier and UCFC. At the effective time of the merger (the “Merger”), UCFC merged with and into Premier, with Premier surviving the Merger. Simultaneously with the completion of the Merger, Premier converted from a unitary thrift holding company to a bank holding company, making an election to be a financial holding company.
Immediately following the Merger, the Bank, acquired UCFC’s wholly-owned bank subsidiary, Home Savings Bank (“Home Savings”). Immediately prior to the merger of the banks, the Bank converted from a federal thrift into an Ohio state-chartered bank. In addition, immediately following the merger of the banks, UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC and United American Financial Services, Inc., each merged into First FederalInsurance, with First Insurance surviving the mergers. Premier acquired 2 additional subsidiaries in the Merger, HSB Capital and HSB Insurance.
The Bank is primarily engaged in attractingcommunity banking. It attracts deposits from the general public through its offices and usingwebsite, and uses those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential non-residential real estate loans, commercial real estate loans, commercial loans, home improvement and home equity loans and consumer loans and providing a broad range of depository, trust and wealth management services.loans. In addition, First Federalthe Bank invests in U.S. Treasury and federal government agency obligations, obligations of the State of Ohiostates and its political subdivisions, mortgage-backed securities that are issued by federal agencies, including real estate mortgage investment conduits (“REMICs”) and collateralized mortgage obligations (“CMOs”), and corporate bonds. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a member of the Federal Home Loan Bank (“FHLB”) System.
HSB Capital was formed as an Ohio limited liability company by UCFC during 2016 for the purpose of providing mezzanine funding for customers of Home Savings. Mezzanine loans are offered by HSB Capital to customers in the Company’s market area and are expected to be repaid from the cash flow from operations of the business.
First Insurance is an insurance agency that conducts business throughthroughout Premier’s markets. The Maumee and Oregon, Ohio, offices locatedwere consolidated into a new office in the Defiance, Maumee, Oregon, Bryan, Lima, Archbold, Fostoria, Tiffin, Findlay and Bowling Green,Sylvania, Ohio, areas.in January 2018. First Insurance offers property and casualty insurance, life insurance and group health insurance.
First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company that insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer.
HSB Insurance was formed on June 1, 2017, as a Delaware-based captive insurance company that insures against certain risks that are unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible by pooling resources with several other insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.
HSB Insurance is subject to regulations of the State of Delaware and undergoes periodic examinations by the Delaware Division of Insurance.
The consolidated condensed statement of financial condition at December 31, 2016 has been2019, was derived from the audited financial statements at that date, which were included in First Defiance’sPremier’s Annual Report on Form 10-K for the year ended December 31, 2016.
2019 (the “2019 Form 10-K”).
The accompanying consolidated condensed financial statements as of SeptemberJune 30, 20172020, and for the three and ninesix month periods ended SeptemberJune 30, 20172020 and 20162019 have been prepared by First Defiancethe Company without audit and do not include information or footnotes necessary for the complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States.States (“GAAP”). These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in First Defiance's 2016 Annual Report onthe 2019 Form 10-K for the year ended December 31, 2016.10-K. However, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for the fair statementpresentation of results in the financial statements have been made. The results for the three and nine month periodsperiod ended SeptemberJune 30, 20172020, are not necessarily indicative of the results that may be expected for the entire year.
The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Business and consumer customers of the Bank are experiencing varying degrees of financial distress, which is expected to continue over the coming months and will likely adversely affect their ability to pay interest and principal on their loans and the value of the collateral securing their obligations may decline. These uncertainties may negatively impact the Statement of Financial Condition, the Statement of Income and the Statement of Cash Flows of the Company. The Company tests goodwill at least annually and, more frequently, if events or changes in circumstances indicate that it may be more likely than not that there is a possible impairment. Due to the ongoing economic impacts from the COVID-19 pandemic, the Company conducted a quantitative interim goodwill impairment assessment at June 30, 2020. The impairment assessment compares the fair value of identified reporting units with their carrying amount (including goodwill). If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. The Company's interim assessment estimated fair value on an income approach that incorporated a discounted cash flow model that involves management assumptions based upon future growth projections, which include estimates of the COVID-19 impact on the Company’s business. Results of the interim assessment indicated no goodwill impairment as of June 30, 2020. The Company will continue to monitor its goodwill for possible impairment.
2. | Significant Accounting Policies |
Accounting Standards Adopted in 2020
ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement by removing, modifying and adding certain requirements. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of this ASU. An entity is permitted to early adopt and remove or modify disclosures upon issuance of the ASU and delay adoption of the additional disclosures until their effective date. The adoption of this guidance on January 1, 2020 did not have a material impact on the Company’s consolidated financial statements.
ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment: Issued in January 2017, ASU 2017-04 simplifies the manner in which 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. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 became effective for the Company on January 1, 2020, and the amendments of this ASU will be applicable to the goodwill impairment testing for 2020. The Company performed a goodwill impairment test as of June 30, 2020 utilizing a discounted cash flow analysis. The results of this analysis indicate 0 impairment of the Company’s goodwill at this time.
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments:Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. The amendments of ASU 2016-13, and all subsequent ASUs issued by FASB to provide additional guidance and clarification related to this Topic, became effective for the Company on January 1, 2020.
As a result of adopting the amendments of ASU 2016-13, the Company recorded an increase to its allowance for credit losses of $2.4 million and an increase to its allowance for credit losses on off-balance sheet credit exposures of $0.9 million resulting in a one-time cumulative effect adjustment through retained earnings of $2.6 million net of $.7 million tax at the date of adoption. This adjustment included a qualitative adjustment to the allowance for credit losses related to loans and an allowance on off-balance sheet credit exposures. The Company estimates losses over an approximate one-year forecast period using Moody’s baseline economic forecasts, and then reverts to longer term historical loss experience over a three-year period.
Accounting Standards not yet adopted:
ASU No. 2020-04: Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848): This guidance provides temporary options to ease the potential burden in accounting for reference rate reform. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective as of March 12, 2020 through December 31, 2022. The Company anticipates being fully prepared to implement a replacement for the reference rate and has determined that any change will not have a material impact to the consolidated financial statements.
3. | Fair Value |
FASB ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on the best information available. In that regard, FASB ASC Topic 820 established a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
• | Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
| • | Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include 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, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by a correlation or other means. |
• | Level 3: Unobservable inputs for determining fair value of assets and liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. |
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Available for sale securities - Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs where the Company obtains fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and conditions, among other things. Securities in Level 2 include U.S. federal government agencies, mortgage-backed securities, corporate bonds and municipal securities.
Loans held for sale, carried at fair value – The Company elected the fair value option for all conventional residential one-to four-family loans held for sale and all permanent construction loans held for sale that were acquired from UCFC in the Merger. In addition, the Company has elected the fair value option for all loans held for sale originated after January 31, 2020.
The fair value of conventional loans held for sale is determined using the current 15 day forward contract price for either 15 or year conventional mortgages and the 60 day forward contract price for either 15 or 30 year Federal Housing Authority mortgages (Level 2). The fair value of permanent construction loans held for sale is determined using the current 60 day forward contract price for 15 or 30 years conventional mortgages which is then adjusted for unobservable market data such as estimated fall out rates and estimated time from origination to completion of construction (Level 3).
Impaired loans - Fair values for impaired collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investor’s required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Real estate held for sale - Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are then reviewed monthly by members of the asset review committee for valuation changes and are accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which may utilize a single valuation approach or a combination of approaches including cost, comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s asset quality or collections department reviews the assumptions and approaches utilized in the appraisal. Appraisal values are discounted from 0% to 30% to account for other factors that may impact the value of collateral. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which include but are not limited to: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.
Mortgage servicing rights - On a quarterly basis, mortgage servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level based on a model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and are validated against available market data (Level 2).
Mortgage banking derivative - The fair value of mortgage banking derivatives are evaluated monthly based on derivative valuation models using quoted prices for similar assets adjusted for specific attributes of the commitments and other observable market data at the valuation date (Level 2).
Purchased and written certificate of deposit option – The Company acquired purchased and written certificate of deposit options in its Merger with UCFC. These written and purchased options are mirror derivative instruments which are carried at fair value on the statement of financial condition. The Company uses an independent third party that performs a market valuation analysis for purchased and written certificate of deposit options. (Level 2)
Interest rate swaps – The Company periodically enters into interest rate swap agreements with its commercial customers who desire a fixed rate loan term that is longer than the Company is willing to extend. The Company then enters into a reciprocal swap agreement with a third party that offsets the interest rate risk from the interest rate swap extended to the customer. The interest rate swaps are derivative instruments which are carried at fair value on the statement of financial condition. The Company uses an independent third party that performs a market valuation analysis for both swap positions. (Level 2)
The following table summarizes the financial assets measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Assets and Liabilities Measured on a Recurring Basis
June 30, 2020 |
| Level 1 Inputs |
|
| Level 2 Inputs |
|
| Level 3 Inputs |
|
| Total Fair Value |
| ||||
|
| (In Thousands) |
| |||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. federal government corporations and agencies |
| $ | — |
|
| $ | 40,819 |
|
| $ | — |
|
| $ | 40,819 |
|
Mortgage-backed securities |
|
| — |
|
|
| 233,888 |
|
|
| — |
|
|
| 233,888 |
|
Collateralized mortgage obligations |
|
| — |
|
|
| 124,678 |
|
|
| — |
|
|
| 124,678 |
|
Corporate bonds |
|
| — |
|
|
| 25,229 |
|
|
| — |
|
|
| 25,229 |
|
Obligations of state and political subdivisions |
|
| — |
|
|
| 142,913 |
|
|
| — |
|
|
| 142,913 |
|
Loans held for sale, at fair value |
|
| — |
|
|
| 84,728 |
|
|
| 75,739 |
|
|
| 160,467 |
|
Purchased certificate of deposit option |
|
| — |
|
|
| 81 |
|
|
| — |
|
|
| 81 |
|
Interest rate swaps |
|
| — |
|
|
| 2,450 |
|
|
| — |
|
|
| 2,450 |
|
Mortgage banking derivative |
|
| — |
|
|
| 7,167 |
|
|
| — |
|
|
| 7,167 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written certificate of deposit option |
|
| — |
|
|
| 81 |
|
|
| — |
|
|
| 81 |
|
Interest rate swaps |
|
| — |
|
|
| 2,733 |
|
|
| — |
|
|
| 2,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
| Level 1 Inputs |
|
| Level 2 Inputs |
|
| Level 3 Inputs |
|
| Total Fair Value |
| ||||
|
| (In Thousands) |
| |||||||||||||
Available for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. federal government corporations and agencies |
| $ | — |
|
| $ | 2,524 |
|
| $ | — |
|
| $ | 2,524 |
|
Mortgage-backed securities |
|
| — |
|
|
| 89,647 |
|
|
| — |
|
|
| 89,647 |
|
REMICs |
|
| — |
|
|
| 1,636 |
|
|
| — |
|
|
| 1,636 |
|
Collateralized mortgage obligations |
|
| — |
|
|
| 82,101 |
|
|
| — |
|
|
| 82,101 |
|
Corporate bonds |
|
| — |
|
|
| 12,101 |
|
|
| — |
|
|
| 12,101 |
|
Obligations of state and political subdivisions |
|
| — |
|
|
| 92,028 |
|
|
| 3,411 |
|
|
| 95,439 |
|
Mortgage banking derivative - asset |
|
| — |
|
|
| 892 |
|
|
| — |
|
|
| 892 |
|
2.Significant Accounting Policies
Use of Estimates
The preparationtable below presents a reconciliation of consolidated financial statements in conformity with accounting principles generally acceptedall assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six month periods ended June 30, 2020 and 2019.
| Construction loans held for sale |
| |||||||||||||
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Balance of recurring Level 3 assets at beginning of period | $ | 44,420 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Total gains (losses) for the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in change in fair value of loans held for sale |
| 2,238 |
|
|
| — |
|
|
| 7,201 |
|
|
| — |
|
Originations |
| 32,685 |
|
|
| — |
|
|
| 42,265 |
|
|
| — |
|
Acquired in acquisition |
| — |
|
|
| — |
|
|
| 37,711 |
|
|
| — |
|
Sales |
| (3,604 | ) |
|
| — |
|
|
| (11,438 | ) |
|
| — |
|
Balance of recurring Level 3 assets at end of period | $ | 75,739 |
|
| $ | — |
|
| $ | 75,739 |
|
| $ | — |
|
| Securities available-for-sale |
| |||||||||||||
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Balance of recurring Level 3 assets at beginning of period | $ | 5,830 |
|
| $ | — |
|
| $ | 3,411 |
|
| $ | — |
|
Balance of Level 3 assets moved to Level 2 during the period |
| (5,830 | ) |
|
| — |
|
|
| (3,411 | ) |
|
| — |
|
Balance of recurring Level 3 assets at end of period | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
For Level 3 assets and liabilities measured at fair value on a recurring basis as of June 30, 2020, the significant unobservable inputs used in the United Statesfair value measurements were as follows:
|
| Fair Value |
|
| Valuation Technique |
| Unobservable Inputs |
| Range of Inputs | |
|
|
|
|
|
| (Dollars in Thousands) | ||||
Construction loans held for sale |
| $ | 75,739 |
|
| Comparable sales |
| Time discount using the 60 day forward contract |
| 0.00% - 2.08% |
The following table summarizes the financial assets measured at fair value on a non-recurring basis segregated by the level of America requires managementthe valuation inputs within the fair value hierarchy utilized to make estimatesmeasure fair value:
Assets and assumptionsLiabilities Measured on a Non-Recurring Basis
June 30, 2020 |
| Level 1 Inputs |
|
| Level 2 Inputs |
|
| Level 3 Inputs |
|
| Total Fair Value |
| ||||
|
| (In Thousands) |
| |||||||||||||
Impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Commercial |
|
| — |
|
|
| — |
|
|
| 80 |
|
|
| 80 |
|
Total impaired loans |
|
| — |
|
|
| — |
|
|
| 80 |
|
|
| 80 |
|
Mortgage servicing rights |
|
| — |
|
|
| 14,646 |
|
|
| — |
|
|
| 14,646 |
|
December 31, 2019 |
| Level 1 Inputs |
|
| Level 2 Inputs |
|
| Level 3 Inputs |
|
| Total Fair Value |
| ||||
|
| (In Thousands) |
| |||||||||||||
Impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
| $ | — |
|
| $ | — |
|
| $ | 68 |
|
| $ | 68 |
|
Commercial |
|
| — |
|
|
| — |
|
|
| 38 |
|
|
| 38 |
|
Total impaired loans |
|
| — |
|
|
| — |
|
|
| 106 |
|
|
| 106 |
|
Mortgage servicing rights |
|
| — |
|
|
| 273 |
|
|
| — |
|
|
| 273 |
|
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2020, the significant unobservable inputs used in the fair value measurements were as follows:
|
| Fair Value |
|
| Valuation Technique |
| Unobservable Inputs |
| Range of Inputs |
| Weighted Average |
| ||
|
|
|
|
|
| (Dollars in Thousands) |
| |||||||
Impaired Loans- Applies to all loan Classes |
| $ | 80 |
|
| Appraisals which utilize sales comparison, net income and cost approach |
| Discounts for collection issues and changes in market conditions |
| 10-13% |
|
| 10.86 | % |
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
|
| Fair Value |
|
| Valuation Technique |
| Unobservable Inputs |
| Range of Inputs |
| Weighted Average |
| ||
|
|
|
|
|
| (Dollars in Thousands) |
| |||||||
Impaired Loans- Applies to all loan classes |
| $ | 106 |
|
| Appraisals which utilize sales comparison, net income and cost approach |
| Discounts for collection issues and changes in market conditions |
| 10-13% |
|
| 10.86 | % |
The Company has elected the fair value option for new applications taken post January 31, 2020, and subsequently originated for residential mortgage and permanent construction loans held for sale. These loans are intended for sale and the Company believes that affectfair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policies. NaN of these loans are 90 or more days past due 0r on nonaccrual status as of June 30, 2020. There were 0 loans at December 31, 2019, where the fair value option had been elected.
The aggregate fair value of the residential mortgage loans held for sale at June 30, 2020 was $84.7 million and they had a contractual balance of $80.4 million for this same period. The difference between these two figures is recorded in gains and losses on the sale of loans held for sale. For the three and six months ended June 30, 2020, $3.7 million and $4.3 million, respectively, was recorded in gains on the sale of loans held for sale for the change in fair value.
The aggregate fair value of the permanent construction loans held for sale at June 30, 2020 was $75.7 million and they had a contractual balance of $68.5 million for this same period. The difference between these two figures is recorded in gains and losses on the sale of loans held for sale. For the three and six months ended June 30, 2020, $1.6 million and $7.2 million, respectively, was recorded in gains on the sale of loans held for sale for the change in fair value.
In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of June 30, 2020, and December 31, 2019. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Premier.
Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and therefore the results may not be precise. Subjective factors include, among other things, estimated cash flows, risk characteristics and interest rates, all of which are subject to change. With the exception of investment securities, the Company’s financial instruments are not readily marketable and market prices do not exist. Since negotiated prices for the instruments, which are not readily marketable, depend greatly on the motivation of the buyer and seller, the amounts reportedthat will actually be realized or paid per settlement or maturity of these instruments could be significantly different.
The carrying amount of cash and cash equivalents and notes payable, as a result of their short-term nature, is considered to be equal to fair value and are classified as Level 1.
It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.
The Company’s loans were valued on an individual basis, with consideration given to the loans’ underlying characteristics, including account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loss exposures, and remaining balances. The model utilizes a discounted cash flow approach to estimate the fair value of the loans using assumptions for the coupon rates, remaining maturities, prepayment speeds, projected default probabilities, losses given defaults, and estimates of prevailing discount rates. The discounted cash flow approach models the credit losses directly in the consolidated financial statementsprojected cash flows. The model applies various assumptions regarding credit, interest, and accompanying notes. These estimatesprepayment risks for the loans based on loan types, payment types and assumptions affectfixed or variable classifications. The estimated fair value of impaired loans is based on the fair value of the collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate). All impaired loans are classified as Level 3 within the valuation hierarchy.
The fair value of accrued interest receivable is equal to the carrying amounts reportedresulting in a Level 2 or Level 3 classification which is consistent with its underlying value.
The fair value of non-interest bearing deposits are considered equal to the amount payable on demand at the reporting date (i.e. carrying value) and are classified as Level 1. The fair value of savings, checking and certain money market accounts are equal to their carrying amounts and are a Level 2 classification. Fair values of fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
The fair values of securities sold under repurchase agreements are equal to their carrying amounts resulting in a Level 1 classification. The carrying value of subordinated debentures was considered to be the carrying value as the debt is floating rate and can be prepaid at any time without penalty.
FHLB advances with maturities greater than 90 days are valued based on a discounted cash flow analysis, using interest rates currently being quoted for similar characteristics and maturities resulting in a Level 2 classification. The cost or value of any call or put options is based on the estimated cost to settle the option at June 30, 2020.
|
|
|
|
|
| Fair Value Measurements at June 30, 2020 |
| |||||||||||||
|
|
|
|
|
| (In Thousands) |
| |||||||||||||
|
| Carrying Value |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 192,681 |
|
| $ | 192,681 |
|
| $ | 192,681 |
|
| $ | — |
|
| $ | — |
|
Investment securities |
|
| 567,527 |
|
|
| 567,527 |
|
|
| — |
|
|
| 567,527 |
|
|
| — |
|
Federal Home Loan Bank Stock |
|
| 45,955 |
|
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
| ||||
Loans receivable, net |
|
| 5,368,683 |
|
|
| 5,447,099 |
|
|
| — |
|
|
| — |
|
|
| 5,447,099 |
|
Loans held for sale, carried at fair value |
|
| 160,467 |
|
|
| 160,467 |
|
|
| — |
|
|
| 84,728 |
|
|
| 75,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ | 5,759,843 |
|
| $ | 5,775,526 |
|
| $ | 4,487,978 |
|
| $ | 1,287,548 |
|
| $ | — |
|
Advances from Federal Home Loan Bank and PPPLF |
|
| 139,327 |
|
|
| 140,532 |
|
|
| — |
|
|
| 140,532 |
|
|
| — |
|
Securities sold under repurchase agreements |
|
| 6,948 |
|
|
| 6,933 |
|
|
| — |
|
|
| 6,933 |
|
|
| — |
|
Subordinated debentures |
|
| 36,083 |
|
|
| 36,083 |
|
|
| — |
|
|
| 36,083 |
|
|
| — |
|
|
|
|
|
|
| Fair Value Measurements at December 31, 2019 |
| |||||||||||||
|
|
|
|
|
| (In Thousands) |
| |||||||||||||
|
| Carrying Value |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 131,254 |
|
| $ | 131,254 |
|
| $ | 131,254 |
|
| $ | — |
|
| $ | — |
|
Investment securities |
|
| 283,448 |
|
|
| 283,448 |
|
|
| — |
|
|
| 280,037 |
|
|
| 3,411 |
|
FHLB Stock |
|
| 11,915 |
|
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
| ||||
Loans, net, including loans held for sale |
|
| 2,764,329 |
|
|
| 2,756,092 |
|
|
| — |
|
|
| 18,456 |
|
|
| 2,737,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ | 2,870,325 |
|
| $ | 2,871,166 |
|
| $ | 2,131,537 |
|
| $ | 739,629 |
|
| $ | — |
|
Advances from FHLB |
|
| 85,063 |
|
|
| 85,003 |
|
|
| — |
|
|
| 85,003 |
|
|
| — |
|
Securities sold under repurchase agreements |
|
| 2,999 |
|
|
| 2,999 |
|
|
| 2,999 |
|
|
| — |
|
|
| — |
|
Subordinated debentures |
|
| 36,083 |
|
|
| 36,083 |
|
|
| — |
|
|
| 36,083 |
|
|
| — |
|
4. | Stock Compensation Plans |
Premier has established equity based compensation plans for its directors and employees. On February 27, 2018, the Board adopted, and the shareholders approved at the 2018 Annual Shareholders Meeting, the Premier Financial Corp. 2018 Equity Incentive Plan (the “2018 Equity Plan”). The 2018 Equity Plan replaced all existing plans, although the Company’s former equity plans remain in existence to the extent there were outstanding grants thereunder at the time the 2018 Equity Plan was approved. In addition, as a result of the Merger, Premier assumed certain outstanding stock options granted under UCFC’s Amended and Restated 2007 Long-Term Incentive Plan and UCFC’s 2015 Long Term Incentive Plan (the “UCFC 2015 Plan”). Premier also assumed the UCFC 2015 Plan with respect to the available shares under the UCFC 2015 Plan as of the effective date of the Merger, with appropriate adjustments to the number of shares available to reflect the Merger. The stock options assumed from UCFC in the financial statementsMerger will become exercisable solely to purchase shares of Premier, with appropriate adjustments to the number of shares subject to the assumed stock options and the disclosures provided,exercise price of such stock options. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2018 Equity Plan. The 2018 Equity Plan allows for issuance of up to 900,000 common shares through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or other stock-based awards.
As of June 30, 2020, 37,761 options to acquire Premier shares were outstanding at option prices based on the market value of the underlying shares on the date the options were granted. On the date of the Merger, 39,983 Premier options were exchanged for all of the outstanding stock options on the books of UCFC at the same conversion price and actual resultsratio applied to UCFC common shares at January 31, 2020. All of these options were fully vested at the time of acquisition. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date. Options granted in prior years vest 20% per year.
The Company has approved a Short-Term Incentive Plan (“STIP”) and a Long-Term Equity Incentive Plan (“LTIP”) for selected members of management.
Under the 2019 and 2020 STIPs, the participants could differ.earn between 10% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of benefits under the STIPs is determined as of December 31 of the same year and paid out in cash in the first quarter of the following year. The participants are required to be employed on the day of payout in order to receive the payment.
Under each LTIP, the participants could earn between 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company plans to grant these RSU’s to participants in the second quarter of 2020. The amount of benefit under each LTIP will be determined individually at the end of the 36 month performance period ending December 31. The benefits earned under each LTIP will be paid out in equity in the first quarter following the end of the performance period. The participants are required to be employed on the day of payout in order to receive the payment.
In the six months ended June 30, 2020, the Company also granted 13,349 shares of restricted stock to directors. These shares have a one-year vesting period.
Following is stock option activity under the plans during the six months ended June 30, 2020:
|
| Options Outstanding |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term (in years) |
|
| Aggregate Intrinsic Value (in 000’s) |
| ||||
Options outstanding, January 1, 2020 |
|
| 17,700 |
|
| $ | 17.60 |
|
|
|
|
|
|
|
|
|
Forfeited or cancelled |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (19,922 | ) |
|
| 7.10 |
|
|
|
|
|
|
|
|
|
Exchanged |
|
| 39,983 |
|
|
| 16.00 |
|
|
|
|
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Options outstanding, June 30, 2020 |
|
| 37,761 |
|
| $ | 21.44 |
|
|
| 6.23 |
|
| $ | 23 |
|
Exercisable at June 30, 2020 |
|
| 35,861 |
|
| $ | 21.58 |
|
|
| 6.27 |
|
| $ | 23 |
|
All of the 39,983 options exchanged are associated with the conversion of all of the outstanding stock options on the books of UCFC into stock options of Premier. The options had a fair value of $461,000, or $11.52 per share, and were part of the consideration paid by the Company.
Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows (in thousands):
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Proceeds of options exercised |
| $ | — |
|
| $ | 6 |
|
| $ | — |
|
| $ | 191 |
|
Related tax benefit recognized |
|
| 40 |
|
|
| — |
|
|
| 40 |
|
|
| 4 |
|
Intrinsic value of options exercised |
|
| 189 |
|
|
| 30 |
|
|
| 189 |
|
|
| 390 |
|
As of June 30, 2020, there was $7,000 of total unrecognized compensation cost related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of 0.52 years.
At June 30, 2020, 147,795 RSUs and 52,392 restricted stock grants were unvested. Compensation expense related to RSUs and STIP is recognized over the performance period based on the achievements of targets as established under the plan documents. Total expense of $974,000 and $2.0 million was recorded during the three and six months ended June 30, 2020, compared to expense of $437,000 and $960,000 for the three and six months ended June 30, 2019. There was approximately $1.6 million and $1.2 million included within other liabilities at June 30, 2020 and December 31, 2019, respectively, related to the STIP.
|
| Restricted Stock Units |
|
| Stock Grants |
| ||||||||||
Unvested Shares |
| Shares |
|
| Weighted- Average Grant Date Fair Value |
|
| Shares |
|
| Weighted- Average Grant Date Fair Value |
| ||||
Unvested at January 1, 2020 |
|
| 158,470 |
|
| $ | 25.72 |
|
|
| 48,545 |
|
| $ | 27.49 |
|
Granted |
|
| 101,666 |
|
|
| 29.09 |
|
|
| 13,349 |
|
|
| 25.75 |
|
Vested |
|
| (86,050 | ) |
|
| 25.48 |
|
|
| (9,502 | ) |
|
| 27.84 |
|
Forfeited |
|
| (26,291 | ) |
|
| 25.58 |
|
|
| — |
|
|
| — |
|
Unvested at June 30, 2020 |
|
| 147,795 |
|
| $ | 28.20 |
|
|
| 52,392 |
|
| $ | 26.99 |
|
The maximum amount of compensation expense that may be recorded for the active LTIPs at June 30, 2020, is approximately $2.7 million of which $2.2 million is unrecognized at June 30, 2020, and will be recognized over the remaining performance periods.
5. | Dividends on Common Stock |
Premier declared and paid a $0.22 per common stock dividend in the second quarter of 2020 and declared and paid a $0.19 per common stock dividend in the second quarter of 2019.
6. | Earnings Per Common Share |
Basic earnings per share are calculated using the two-class method. The two-class method is an earnings allocation formula under which earnings per share is calculated from common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain non-forfeitable rights to dividends are considered participating securities (i.e., unvested restricted stock), not subject to performance based measures.
The following table sets forth the computation of basic and diluted earnings per common share:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
| (In Thousands, except per share data) |
| |||||||||||||
Basic Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
| $ | 29,057 |
|
| $ | 12,199 |
|
| $ | 6,575 |
|
| $ | 23,681 |
|
Less: income allocated to participating securities |
|
| 44 |
|
|
| 1 |
|
|
| 10 |
|
|
| 2 |
|
Net income allocated to common shareholders |
|
| 29,013 |
|
|
| 12,198 |
|
|
| 6,565 |
|
|
| 23,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding including participating securities |
|
| 37,347 |
|
|
| 19,791 |
|
|
| 34,534 |
|
|
| 19,908 |
|
Less: Participating securities |
|
| 57 |
|
|
| 11 |
|
|
| 50 |
|
|
| 11 |
|
Average common shares |
|
| 37,290 |
|
|
| 19,780 |
|
|
| 34,484 |
|
|
| 19,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
| $ | 0.78 |
|
| $ | 0.62 |
|
| $ | 0.19 |
|
| $ | 1.19 |
|
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common shareholders |
| $ | 29,013 |
|
| $ | 12,198 |
|
| $ | 6,565 |
|
| $ | 23,679 |
|
Weighted average common shares outstanding for basic (loss) earnings per common share |
|
| 37,290 |
|
|
| 19,780 |
|
|
| 34,484 |
|
|
| 19,897 |
|
Add: Dilutive effects of stock options |
|
| 33 |
|
|
| 80 |
|
|
| 42 |
|
|
| 79 |
|
Average shares and dilutive potential common shares |
|
| 37,323 |
|
|
| 19,860 |
|
|
| 34,526 |
|
|
| 19,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
| $ | 0.78 |
|
| $ | 0.61 |
|
| $ | 0.19 |
|
| $ | 1.19 |
|
There were 17,100 and 15,411 shares for the three and six month periods ending June 30, 2020, respectively, that were excluded from the diluted earnings per common share calculation as they were anti-dilutive. There were 6,171 shares for both the three and six month periods in 2019 that were excluded from the diluted earnings per common share calculation as they were anti-dilutive.
7. | Investment Securities |
The following is a summary of available-for-sale securities:
|
| Amortized Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized Losses |
|
| Fair Value |
| ||||
|
| (In Thousands) |
| |||||||||||||
At June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government corporations and agencies |
| $ | 39,215 |
|
| $ | 1,604 |
|
| $ | — |
|
| $ | 40,819 |
|
Mortgage-backed securities |
|
| 226,329 |
|
|
| 7,586 |
|
|
| (27 | ) |
|
| 233,888 |
|
Collateralized mortgage obligations |
|
| 121,043 |
|
|
| 3,635 |
|
|
| — |
|
|
| 124,678 |
|
Corporate bonds |
|
| 25,326 |
|
|
| 194 |
|
|
| (291 | ) |
|
| 25,229 |
|
Obligations of state and political subdivisions |
|
| 136,869 |
|
|
| 6,139 |
|
|
| (95 | ) |
|
| 142,913 |
|
Total Available-for-Sale |
| $ | 548,782 |
|
| $ | 19,158 |
|
| $ | (413 | ) |
| $ | 567,527 |
|
As a result of the Merger, securities with a fair value of $262.8 million were acquired on January 31, 2020.
|
| Amortized Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized Losses |
|
| Fair Value |
| ||||
|
| (In Thousands) |
| |||||||||||||
At December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government corporations and agencies |
| $ | 2,518 |
|
| $ | 6 |
|
| $ | — |
|
| $ | 2,524 |
|
Mortgage-backed securities |
|
| 88,380 |
|
|
| 1,380 |
|
|
| (113 | ) |
|
| 89,647 |
|
Collateralized mortgage obligations |
|
| 83,008 |
|
|
| 814 |
|
|
| (85 | ) |
|
| 83,737 |
|
Corporate bonds |
|
| 12,011 |
|
|
| 90 |
|
|
| — |
|
|
| 12,101 |
|
Obligations of state and political subdivisions |
|
| 91,406 |
|
|
| 4,042 |
|
|
| (9 | ) |
|
| 95,439 |
|
Total Available-for-Sale |
| $ | 277,323 |
|
| $ | 6,332 |
|
| $ | (207 | ) |
| $ | 283,448 |
|
The amortized cost and fair value of the investment securities portfolio at June 30, 2020, are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMO”) which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.
|
| Available-for-Sale |
| |||||
|
| Amortized Cost |
|
| Fair Value |
| ||
|
| (In Thousands) |
| |||||
Due in one year or less |
| $ | 4,393 |
|
| $ | 4,421 |
|
Due after one year through five years |
|
| 17,894 |
|
|
| 17,969 |
|
Due after five years through ten years |
|
| 69,714 |
|
|
| 72,411 |
|
Due after ten years |
|
| 109,409 |
|
|
| 114,160 |
|
MBS/CMO |
|
| 347,372 |
|
|
| 358,566 |
|
|
| $ | 548,782 |
|
| $ | 567,527 |
|
Investment securities with a carrying amount of $218.5 million at June 30, 2020, were pledged as collateral on public deposits and securities sold under repurchase agreements.
The following tables summarize Premier’s securities that were in an unrealized loss position at June 30, 2020, and December 31, 2019:
|
| Duration of Unrealized Loss Position |
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total |
| |||||||||||||||
|
| Fair Value |
|
| Gross Unrealized Loss |
|
| Fair Value |
|
| Gross Unrealized Loss |
|
| Fair Value |
|
| Unrealized Losses |
| ||||||
|
| (In Thousands) |
| |||||||||||||||||||||
At June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
| — |
|
|
| — |
|
|
| 10,269 |
|
|
| (27 | ) |
|
| 10,269 |
|
|
| (27 | ) |
Corporate bonds |
|
| — |
|
|
| — |
|
|
| 7,985 |
|
|
| (291 | ) |
|
| 7,985 |
|
|
| (291 | ) |
Obligations of state and political subdivisions |
|
| — |
|
|
| — |
|
|
| 2,705 |
|
|
| (95 | ) |
|
| 2,705 |
|
|
| (95 | ) |
Total temporarily impaired securities |
| $ | — |
|
| $ | — |
|
| $ | 20,959 |
|
| $ | (413 | ) |
| $ | 20,959 |
|
| $ | (413 | ) |
|
| Duration of Unrealized Loss Position |
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total |
| |||||||||||||||
|
| Fair Value |
|
| Gross Unrealized Loss |
|
| Fair Value |
|
| Gross Unrealized Loss |
|
| Fair Value |
|
| Unrealized Losses |
| ||||||
|
| (In Thousands) |
| |||||||||||||||||||||
At December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
| $ | 13,830 |
|
| $ | (42 | ) |
| $ | 9,721 |
|
| $ | (71 | ) |
| $ | 23,551 |
|
| $ | (113 | ) |
Collateralized mortgage obligations |
|
| 7,448 |
|
|
| (29 | ) |
|
| 5,549 |
|
|
| (56 | ) |
|
| 12,997 |
|
|
| (85 | ) |
Obligations of state and political subdivisions |
|
| 1,413 |
|
|
| (9 | ) |
|
| - |
|
|
| - |
|
|
| 1,413 |
|
|
| (9 | ) |
Total temporarily impaired securities |
| $ | 22,691 |
|
| $ | (80 | ) |
| $ | 15,270 |
|
| $ | (127 | ) |
| $ | 37,961 |
|
| $ | (207 | ) |
The Company realized losses from the sale of investment securities totaling $2,000 in the three and six month period ending June 30, 2020. There were 0 sales of securities during the six months ended June 30, 2019.
ASU 2016-13 makes targeted improvements to the accounting for credit losses on securities available for sale. The concept of other than-temporarily impaired has been replaced with the allowance for credit losses. Unlike securities held to maturity, securities available for sale are evaluated on an individual level and pooling of securities is not allowed.
Quarterly, the Company evaluates if any security has a fair value less than its amortized cost. Once these securities are identified, in order to determine whether a decline in fair value resulted from a credit loss or other factors, the Company performs further analysis as outlined below:
|
| Review the
|
• | Any securities that are downgraded by a third party ratings company above would be subjected to additional analysis that may include, but is not limited |
in securities |
• | If the Company determines that a credit
|
8. | Loans |
Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics. Loans receivable consist of the following:
The following table discloses allowance for credit loss activity for the quarters ended June 30, 2020 and 2019 by portfolio segment (In Thousands):
The following table discloses allowance for credit loss activity for the six months ended June 30, 2020 and 2019 by portfolio segment (In Thousands):
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2019 (in thousands):
The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans for the three and six months ended June 31, 2019 (in thousands):
Three Months Ended June 30, 2019 Six Months Ended June 30, 2019 Average Balance Interest Income Recognized Cash Basis Income Recognized Average Balance Interest Income Recognized Cash Basis Income Recognized Residential Owner Occupied $ 5,212 $ 46 $ 44 $ 4,882 $ 110 $ 104 Residential Non Owner Occupied 2,040 26 26 2,060 56 56 Total Residential Real Estate 7,252 72 70 6,942 166 160 CRE Owner Occupied 7,514 57 45 7,439 223 177 CRE Non Owner Occupied 1,942 18 18 1,966 51 44 Multi-Family Real Estate 305 7 7 819 27 27 Agriculture Land 13,734 170 94 13,319 376 291 Other CRE 796 19 17 975 53 50 Total Commercial Real Estate 24,291 271 181 24,518 730 589 Construction — — — — — — Commercial Working Capital 7,594 83 71 7,842 226 162 Agriculture Production — — — — — — Commercial Other 1,549 21 21 1,709 48 45 Total Commercial 9,143 104 92 9,551 274 207 Home Equity and Improvement 889 6 5 905 20 18 Consumer Finance 25 — — 30 1 1 Total Impaired Loans $ 41,600 $ 453 $ 348 $ 41,946 $ 1,191 $ 975 The following table presents the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of June 30, 2020 (in thousands):
The following table presents loans individually evaluated for impairment by class of loans (in thousands):
*Presented gross of charge-offs Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. All loans greater than 90 days past due are placed on non-accrual status. Effective January 1, 2020 with the adoption of ASC Topic 326, the Company began including non-accrual purchase credit deteriorated (PCD) loans in its non-performing loans. As such, the non-performing loans as of June 30, 2020 include PCD loans accounted for pursuant to ASC Topic 326 as these loans are individually evaluated. The non-performing loans do not include PCD (formerly purchase credit impaired (PCI)) loans as of December 31, 2019, as the PCD loans prior to adopting ASC Topic 326 were evaluated on a pool basis. The following table presents the current balance of the aggregate amounts of non-performing assets, comprised of non-performing loans and real estate owned as of the dates indicated:
June 30, 2020 December 31, 2019 (In Thousands) Non-accrual loans $ 39,470 $ 13,437 Loans over 90 days past due and still accruing — — Total non-performing loans 39,470 13,437 Real estate and other assets held for sale 573 100 Total non-performing assets $ 40,043 $ 13,537 Troubled debt restructuring, still accruing $ 7,916 $ 8,486 The following table presents the aging of the amortized cost in past due and non- accrual loans as of June 30, 2020, by class of loans (In Thousands):
The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2019, by class of loans (In Thousands):
Troubled Debt Restructurings As of June 30, 2020, and December 31, 2019, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of $18.8 million and $15.1 million, respectively. The Company allocated $355,000 and $388,000 of specific reserves to those loans at June 30, 2020, and December 31, 2019, respectively, and had committed to lend additional amounts totaling up to $235,000 and $226,000 at June 30, 2020, and December 31, 2019, respectively. The Company has responded to the pandemic in numerous ways, including by actively participating in the Paycheck Protection Program (“PPP”) and distributing $434 million to small businesses in our markets. Additionally, the Company is working with borrowers impacted by the COVID-19 pandemic and providing modifications to include either interest only deferral or principal and interest deferral. These modifications range from two to six months. Through June 30, 2020, the Company had approximately 1,354 deferrals totaling $813 million. A majority of these modifications are excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. In accordance with this guidance, such modified loans will be considered current and will continue to accrue interest during the deferral period. A breakout of deferrals by loan category is as follows (in thousands):
| Balance deferred |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 65,754 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 561,699 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction | 46,010 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | 131,923 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home equity and |
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
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Total |
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The following table is a breakout of commercial deferrals which represent $740 million of the total $813 million deferred (in thousands):.
The following table discloses allowance for loan loss activity for the quarters ended September 30, 2017 and 2016 by portfolio segment (In Thousands):
Quarter Ended September 30, 2017 | 1-4 Family Residential Real Estate | Multi- Family Residential Real Estate | Commercial Real Estate | Construction | Commercial | Home Equity and Improvement | Consumer Finance | Total | ||||||||||||||||||||||||
Beginning Allowance | $ | 2,641 | $ | 2,193 | $ | 10,136 | $ | 540 | $ | 7,973 | $ | 2,199 | $ | 233 | $ | 25,915 | ||||||||||||||||
Charge-Offs | (60 | ) | 0 | 0 | 0 | (64 | ) | (92 | ) | (20 | ) | (236 | ) | |||||||||||||||||||
Recoveries | 11 | 0 | 103 | 0 | 18 | 59 | 9 | 200 | ||||||||||||||||||||||||
Provisions | (54 | ) | 110 | 232 | 38 | 98 | 19 | 19 | 462 | |||||||||||||||||||||||
Ending Allowance | $ | 2,538 | $ | 2,303 | $ | 10,471 | $ | 578 | $ | 8,025 | $ | 2,185 | $ | 241 | $ | 26,341 | ||||||||||||||||
Quarter Ended September 30, 2016 | 1-4 Family Residential Real Estate | Multi- Family Residential Real Estate | Commercial Real Estate | Construction | Commercial | Home Equity and Improvement | Consumer Finance | Total | ||||||||||||||||||||||||
Beginning Allowance | $ | 2,839 | $ | 2,365 | $ | 10,904 | $ | 633 | $ | 6,740 | $ | 2,278 | $ | 189 | $ | 25,948 | ||||||||||||||||
Charge-Offs | (111 | ) | 0 | (79 | ) | 0 | (26 | ) | (74 | ) | (24 | ) | (314 | ) | ||||||||||||||||||
Recoveries | 3 | 0 | 62 | 0 | 159 | 40 | 10 | 274 | ||||||||||||||||||||||||
Provisions | (299 | ) | (185 | ) | (280 | ) | (221 | ) | 1,006 | (47 | ) | 41 | 15 | |||||||||||||||||||
Ending Allowance | $ | 2,432 | $ | 2,180 | $ | 10,607 | $ | 412 | $ | 7,879 | $ | 2,197 | $ | 216 | $ | 25,923 |
The following table discloses allowance for loan loss activity for the year-to-date periods ended September 30, 2017 and 2016 by portfolio segment and impairment method (In Thousands):
Year-to-date Period Ended September 30, 2017 | 1-4 Family Residential Real Estate | Multi- Family Residential Real Estate | Commercial Real Estate | Construction | Commercial | Home Equity and Improvement | Consumer Finance | Total | ||||||||||||||||||||||||
Beginning Allowance | $ | 2,627 | $ | 2,228 | $ | 10,625 | $ | 450 | $ | 7,361 | $ | 2,386 | $ | 207 | $ | 25,884 | ||||||||||||||||
Charge-Offs | (109 | ) | 0 | (400 | ) | 0 | (2,091 | ) | (246 | ) | (112 | ) | (2,958 | ) | ||||||||||||||||||
Recoveries | 100 | 32 | 220 | 0 | 227 | 118 | 83 | 780 | ||||||||||||||||||||||||
Provisions | (80 | ) | 43 | 26 | 128 | 2,528 | (73 | ) | 63 | 2,635 | ||||||||||||||||||||||
Ending Allowance | $ | 2,538 | $ | 2,303 | $ | 10,471 | $ | 578 | $ | 8,025 | $ | 2,185 | $ | 241 | $ | 26,341 | ||||||||||||||||
Year-to-date Period Ended September 30, 2016 | 1-4 Family Residential Real Estate | Multi- Family Residential Real Estate | Commercial Real Estate | Construction | Commercial | Home Equity and Improvement | Consumer Finance | Total | ||||||||||||||||||||||||
Beginning Allowance | $ | 3,212 | $ | 2,151 | $ | 11,772 | $ | 517 | $ | 5,255 | $ | 2,304 | $ | 171 | $ | 25,382 | ||||||||||||||||
Charge-Offs | (203 | ) | 0 | (92 | ) | 0 | (381 | ) | (170 | ) | (41 | ) | (887 | ) | ||||||||||||||||||
Recoveries | 123 | 0 | 468 | 0 | 234 | 113 | 58 | 996 | ||||||||||||||||||||||||
Provisions | (700 | ) | 29 | (1,541 | ) | (105 | ) | 2,771 | (50 | ) | 28 | 432 | ||||||||||||||||||||
Ending Allowance | $ | 2,432 | $ | 2,180 | $ | 10,607 | $ | 412 | $ | 7,879 | $ | 2,197 | $ | 216 | $ | 25,923 |
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2017 (In Thousands):
1-4 Family | Multi Family | |||||||||||||||||||||||||||||||
Residential | Residential | Commercial | Home Equity | Consumer | ||||||||||||||||||||||||||||
Real Estate | Real Estate | Real Estate | Construction | Commercial | & Improvement | Finance | Total | |||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 165 | $ | 3 | $ | 109 | $ | - | $ | 56 | $ | 281 | $ | $ | 614 | |||||||||||||||||
Collectively evaluated for impairment | 2,373 | 2,300 | 10,362 | 578 | 7,969 | 1,904 | 241 | 25,727 | ||||||||||||||||||||||||
Acquired with deteriorated credit quality | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total ending allowance balance | $ | 2,538 | $ | 2,303 | $ | 10,471 | $ | 578 | $ | 8,025 | $ | 2,185 | $ | 241 | $ | 26,341 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 6,975 | $ | 2,069 | $ | 30,387 | $ | - | $ | 14,019 | $ | 1,199 | $ | 51 | $ | 54,700 | ||||||||||||||||
Loans collectively evaluated for impairment | 263,456 | 210,030 | 964,767 | 129,333 | 497,712 | 131,562 | 28,967 | 2,225,827 | ||||||||||||||||||||||||
Loans acquired with deteriorated credit quality | 1,092 | 303 | 2,137 | - | 333 | - | - | 3,865 | ||||||||||||||||||||||||
Total ending loans balance | $ | 271,523 | $ | 212,402 | $ | 997,291 | $ | 129,333 | $ | 512,064 | $ | 132,761 | $ | 29,018 | $ | 2,284,392 |
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2016 (In Thousands):
1-4 Family | Multi Family | |||||||||||||||||||||||||||||||
Residential | Residential | Commercial | Home Equity | Consumer | ||||||||||||||||||||||||||||
Real Estate | Real Estate | Real Estate | Construction | Commercial | & Improvement | Finance | Total | |||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 202 | $ | 4 | $ | 255 | $ | - | $ | 35 | $ | 313 | $ | - | $ | 809 | ||||||||||||||||
Collectively evaluated for impairment | 2,425 | 2,224 | 10,370 | 450 | 7,326 | 2,073 | 207 | 25,075 | ||||||||||||||||||||||||
Acquired with deteriorated credit quality | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total ending allowance balance | $ | 2,627 | $ | 2,228 | $ | 10,625 | $ | 450 | $ | 7,361 | $ | 2,386 | $ | 207 | $ | 25,884 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 6,898 | $ | 3,483 | $ | 13,570 | $ | - | $ | 2,154 | $ | 1,269 | $ | 59 | $ | 27,433 | ||||||||||||||||
Loans collectively evaluated for impairment | 200,907 | 193,714 | 832,446 | 89,244 | 468,246 | 117,744 | 16,625 | 1,918,926 | ||||||||||||||||||||||||
Loans acquired with deteriorated credit quality | - | - | - | - | 11 | - | - | 11 | ||||||||||||||||||||||||
Total ending loans balance | $ | 207,805 | $ | 197,197 | $ | 846,016 | $ | 89,244 | $ | 470,411 | $ | 119,013 | $ | 16,684 | $ | 1,946,370 |
The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands):
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | |||||||||||||||||||||||
Average Balance | Interest Income Recognized | Cash Basis Income Recognized | Average Balance | Interest Income Recognized | Cash Basis Income Recognized | |||||||||||||||||||
Residential Owner Occupied | $ | 4,188 | $ | 37 | $ | 37 | $ | 3,699 | $ | 99 | $ | 99 | ||||||||||||
Residential Non Owner Occupied | 2,706 | 33 | 33 | 3,136 | 104 | 104 | ||||||||||||||||||
Total Residential Real Estate | 6,894 | 70 | 70 | 6,835 | 203 | 203 | ||||||||||||||||||
Construction | - | - | - | - | - | - | ||||||||||||||||||
Multi-Family | 2,084 | 9 | 9 | 2,534 | 28 | 28 | ||||||||||||||||||
CRE Owner Occupied | 12,127 | 24 | 22 | 9,613 | 70 | 70 | ||||||||||||||||||
CRE Non Owner Occupied | 3,484 | 32 | 31 | 3,845 | 105 | 98 | ||||||||||||||||||
Agriculture Land | 13,547 | 148 | 44 | 8,719 | 335 | 126 | ||||||||||||||||||
Other CRE | 1,590 | 27 | 22 | 1,637 | 50 | 42 | ||||||||||||||||||
Total Commercial Real Estate | 30,748 | 231 | 119 | 23,814 | 560 | �� | 336 | |||||||||||||||||
Commercial Working Capital | 7,033 | 38 | 38 | 5,115 | 86 | 90 | ||||||||||||||||||
Commercial Other | 5,926 | 31 | 27 | 5,126 | 82 | 60 | ||||||||||||||||||
Total Commercial | 12,959 | 69 | 65 | 10,241 | 168 | 150 | ||||||||||||||||||
Home Equity and Improvement | 1,206 | 11 | 10 | 1,228 | 32 | 31 | ||||||||||||||||||
Consumer Finance | 54 | 1 | 1 | 62 | 3 | 4 | ||||||||||||||||||
Total Impaired Loans | $ | 53,945 | $ | 391 | $ | 274 | $ | 44,714 | $ | 994 | $ | 752 |
The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands):
Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | |||||||||||||||||||||||
Average Balance | Interest Income Recognized | Cash Basis Income Recognized | Average Balance | Interest Income Recognized | Cash Basis Income Recognized | |||||||||||||||||||
Residential Owner Occupied | $ | 3,876 | $ | 34 | $ | 33 | $ | 3,892 | $ | 109 | $ | 106 | ||||||||||||
Residential Non Owner Occupied | 2,935 | 29 | 29 | 3,234 | 95 | 94 | ||||||||||||||||||
Total Residential Real Estate | 6,811 | 63 | 62 | 7,126 | 204 | 200 | ||||||||||||||||||
Construction | - | - | - | - | - | - | ||||||||||||||||||
Multi-Family | 3,607 | 14 | 14 | 4,087 | 68 | 68 | ||||||||||||||||||
CRE Owner Occupied | 7,171 | 30 | 30 | 7,810 | 134 | 115 | ||||||||||||||||||
CRE Non Owner Occupied | 6,341 | 73 | 73 | 5,220 | 178 | 175 | ||||||||||||||||||
Agriculture Land | 1,851 | 16 | 2 | 2,427 | 66 | 16 | ||||||||||||||||||
Other CRE | 1,570 | 13 | 13 | 1,556 | 31 | 31 | ||||||||||||||||||
Total Commercial Real Estate | 16,933 | 132 | 118 | 17,013 | 409 | 337 | ||||||||||||||||||
Commercial Working Capital | 2,259 | 26 | 11 | 1,769 | 56 | 33 | ||||||||||||||||||
Commercial Other | 2,198 | 8 | 7 | 2,742 | 36 | 34 | ||||||||||||||||||
Total Commercial | 4,457 | 34 | 18 | 4,511 | 92 | 67 | ||||||||||||||||||
Home Equity and Improvement | 1,446 | 12 | 12 | 1,631 | 40 | 40 | ||||||||||||||||||
Consumer Finance | 65 | 1 | 1 | 69 | 3 | 3 | ||||||||||||||||||
Total Impaired Loans | $ | 33,319 | $ | 256 | $ | 225 | $ | 34,437 | $ | 816 | $ | 715 |
The following table presents loans individually evaluated for impairment by class of loans (In Thousands):
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Unpaid Principal Balance* | Recorded Investment | Allowance for Loan Losses Allocated | Unpaid Principal Balance* | Recorded Investment | Allowance for Loan Losses Allocated | |||||||||||||||||||
With no allowance recorded: | ||||||||||||||||||||||||
Residential Owner Occupied | $ | 2,400 | $ | 2,416 | $ | - | $ | 1,912 | $ | 1,765 | $ | - | ||||||||||||
Residential Non Owner Occupied | 1,755 | 1,748 | - | 1,691 | 1,683 | - | ||||||||||||||||||
Total 1-4 Family Residential Real Estate | 4,155 | 4,164 | - | 3,603 | 3,448 | - | ||||||||||||||||||
Multi-Family Residential Real Estate | 2,012 | 2,020 | - | 3,578 | 3,430 | - | ||||||||||||||||||
CRE Owner Occupied | 10,461 | 9,993 | - | 2,652 | 2,353 | - | ||||||||||||||||||
CRE Non Owner Occupied | 3,397 | 3,171 | - | 4,372 | 4,240 | - | ||||||||||||||||||
Agriculture Land | 13,068 | 13,315 | - | 1,695 | 1,722 | - | ||||||||||||||||||
Other CRE | 1,011 | 804 | - | 1,225 | 1,115 | - | ||||||||||||||||||
Total Commercial Real Estate | 27,937 | 27,283 | - | 9,944 | 9,430 | - | ||||||||||||||||||
Construction | - | - | - | - | - | - | ||||||||||||||||||
Commercial Working Capital | 8,066 | 7,998 | - | 838 | 786 | - | ||||||||||||||||||
Commercial Other | 7,594 | 5,522 | - | 1,179 | 967 | - | ||||||||||||||||||
Total Commercial | 15,660 | 13,520 | - | 2,017 | 1,753 | - | ||||||||||||||||||
Home Equity and Home Improvement | 332 | 609 | - | 631 | 585 | - | ||||||||||||||||||
Consumer Finance | 43 | 43 | - | 55 | 55 | $ | - | |||||||||||||||||
Total loans with no allowance recorded | $ | 50,139 | $ | 47,639 | $ | - | $ | 19,828 | $ | 8,701 | ||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Residential Owner Occupied | $ | 1,887 | $ | 1,866 | $ | 140 | $ | 2,348 | $ | 2,319 | $ | 157 | ||||||||||||
Residential Non Owner Occupied | 955 | 945 | 25 | 1,137 | 1,131 | 45 | ||||||||||||||||||
Total 1-4 Family Residential Real Estate | 2,842 | 2,811 | 165 | 3,485 | 3,450 | 202 | ||||||||||||||||||
Multi-Family Residential Real Estate | 49 | 49 | 3 | 53 | 53 | 4 | ||||||||||||||||||
CRE Owner Occupied | 2,432 | 1,973 | 51 | 2,362 | 1,894 | 102 | ||||||||||||||||||
CRE Non Owner Occupied | 292 | 294 | 15 | 1,618 | 1,479 | 108 | ||||||||||||||||||
Agriculture Land | 108 | 110 | 2 | 45 | 45 | 3 | ||||||||||||||||||
Other CRE | 927 | 727 | 41 | 1,144 | 722 | 42 | ||||||||||||||||||
Total Commercial Real Estate | 3,759 | 3,104 | 109 | 5,169 | 4,140 | 255 | ||||||||||||||||||
Construction | - | - | - | - | - | - | ||||||||||||||||||
Commercial Working Capital | 163 | 163 | 21 | 230 | 231 | 24 | ||||||||||||||||||
Commercial Other | 333 | 336 | 35 | 167 | 170 | 11 | ||||||||||||||||||
Total Commercial | 496 | 499 | 56 | 397 | 401 | 35 | ||||||||||||||||||
Home Equity and Home Improvement | 593 | 590 | 281 | 688 | 684 | 313 | ||||||||||||||||||
Consumer Finance | 8 | 8 | - | 4 | 4 | - | ||||||||||||||||||
Total loans with an allowance recorded | $ | 7,747 | $ | 7,061 | $ | 614 | $ | 9,796 | $ | 8,732 | $ | 809 |
Commercial deferral expirations Balance July $ 100,769 August 187,225 September 130,295 October 241,539 November 70,477 December 9,327 Total 739,632 * Presented gross of charge offs
The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Each TDR is uniquely designed to meet the specific needs of the borrower. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions and converting revolving credit lines to term loans. Additional collateral or an additional guarantor is often requested when granting a concession. Commercial mortgage loans modified in a TDR often involve temporary interest-only payments, re-amortization of remaining debt in order to lower payments and sometimes reducing the interest rate lower than the current market rate. Residential mortgage loans modified in a TDR are comprised of loans where monthly payments are lowered, either through interest rate reductions or principal only payments for a period of time, to accommodate the borrowers’ financial needs, interest is capitalized into principal, or the term and amortization are extended. Home equity modifications are made infrequently and usually involve providing an interest rate that is lower than the borrower would be able to obtain due to credit issues. All retail loans where the borrower is in bankruptcy are classified as TDRs regardless of whether or not a concession is made.
The following table presents the current balance of the aggregate amounts of non-performing assets, comprised of non-performing loans and real estate owned on the dates indicated:
September 30, 2017 | December 31, 2016 | |||||||
(In Thousands) | ||||||||
Non-accrual loans | $ | 29,152 | $ | 14,348 | ||||
Loans over 90 days past due and still accruing | - | - | ||||||
Total non-performing loans | 29,152 | 14,348 | ||||||
Real estate and other assets held for sale | 532 | 455 | ||||||
Total non-performing assets | $ | 29,684 | $ | 14,803 | ||||
Troubled debt restructuring, still accruing | $ | 13,044 | $ | 10,544 |
The following table presents the aging of the recorded investment in past due and non- accrual loans as of September 30, 2017 by class of loans (In Thousands):
Current | 30-59 days | 60-89 days | 90+ days | Total Past Due | Total Non- Accrual | |||||||||||||||||||
Residential Owner Occupied | $ | 171,835 | $ | 1,105 | $ | 21 | $ | 1,281 | $ | 2,407 | $ | 2,797 | ||||||||||||
Residential Non Owner Occupied | 96,055 | 638 | 93 | 495 | 1,226 | 572 | ||||||||||||||||||
Total 1-4 Family Residential Real Estate | 267,890 | 1,743 | 114 | 1,776 | 3,633 | 3,369 | ||||||||||||||||||
Multi-Family Residential Real Estate | 212,402 | - | - | - | - | - | ||||||||||||||||||
CRE Owner Occupied | 395,228 | 62 | 143 | 1,107 | 1,312 | 10,745 | ||||||||||||||||||
CRE Non Owner Occupied | 402,153 | 350 | - | 544 | 894 | 2,516 | ||||||||||||||||||
Agriculture Land | 135,673 | 103 | - | 294 | 397 | 3,288 | ||||||||||||||||||
Other Commercial Real Estate | 61,427 | 207 | - | - | 207 | 545 | ||||||||||||||||||
Total Commercial Real Estate | 994,481 | 722 | 143 | 1,945 | 2,810 | 17,094 | ||||||||||||||||||
Construction | 129,333 | - | - | - | - | - | ||||||||||||||||||
Commercial Working Capital | 227,422 | 1,522 | 539 | 75 | 2,136 | 4,067 | ||||||||||||||||||
Commercial Other | 281,773 | - | 379 | 354 | 733 | 4,004 | ||||||||||||||||||
Total Commercial | 509,195 | 1,522 | 918 | 429 | 2,869 | 8,071 | ||||||||||||||||||
Home Equity/Home Improvement | 131,141 | 1,347 | 158 | 115 | 1,620 | 546 | ||||||||||||||||||
Consumer Finance | 28,762 | 164 | 52 | 40 | 256 | 58 | ||||||||||||||||||
Total Loans | $ | 2,273,204 | $ | 5,498 | $ | 1,385 | $ | 4,305 | $ | 11,188 | $ | 29,138 | ||||||||||||
Loans acquired with deteriorated credit quality (included in the totals above) | $ | 3,698 | $ | 33 | $ | - | $ | 134 | $ | 167 | $ | 1,925 | ||||||||||||
Loans acquired in current year (included in totals above) | $ | 228,225 | $ | 2,911 | $ | 625 | $ | 701 | $ | 4,237 | $ | 4,855 |
The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2016 by class of loans (In Thousands):
Current | 30-59 days | 60-89 days | 90+ days | Total Past Due | Total Non- Accrual | |||||||||||||||||||
Residential Owner Occupied | $ | 139,015 | $ | 56 | $ | 842 | $ | 544 | $ | 1,442 | $ | 1,931 | ||||||||||||
Residential Non Owner Occupied | 66,811 | 166 | 308 | 63 | 537 | 992 | ||||||||||||||||||
Total 1-4 Family Residential Real Estate | 205,826 | 222 | 1,150 | 607 | 1,979 | 2,923 | ||||||||||||||||||
Multi-Family Residential Real Estate | 197,197 | - | - | - | - | 2,637 | ||||||||||||||||||
CRE Owner Occupied | 340,233 | 79 | - | 1,396 | 1,475 | 3,098 | ||||||||||||||||||
CRE Non Owner Occupied | 338,724 | 81 | 16 | 426 | 523 | 1,808 | ||||||||||||||||||
Agriculture Land | 102,397 | - | - | - | - | 755 | ||||||||||||||||||
Other Commercial Real Estate | 62,415 | - | - | 249 | 249 | 1,292 | ||||||||||||||||||
Total Commercial Real Estate | 843,769 | 160 | 16 | 2,071 | 2,247 | 6,953 | ||||||||||||||||||
Construction | 89,244 | - | - | - | - | - | ||||||||||||||||||
Commercial Working Capital | 202,786 | - | 10 | 38 | 48 | 435 | ||||||||||||||||||
Commercial Other | 267,189 | 23 | - | 365 | 388 | 577 | ||||||||||||||||||
Total Commercial | 469,975 | 23 | 10 | 403 | 436 | 1,012 | ||||||||||||||||||
Home Equity and Home Improvement | 117,458 | 1,125 | 176 | 254 | 1,555 | 730 | ||||||||||||||||||
Consumer Finance | 16,452 | 85 | 69 | 78 | 232 | 91 | ||||||||||||||||||
Total Loans | $ | 1,939,921 | $ | 1,615 | $ | 1,421 | $ | 3,413 | $ | 6,449 | $ | 14,346 |
Troubled Debt Restructurings
As of September 30, 2017 and December 31, 2016, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of $22.6 million and $16.8 million, respectively. The Company allocated $602,000 and $809,000 of specific reserves to those loans at September 30, 2017 and December 31, 2016, and had committed to lend additional amounts totaling up to $55,000 and $20,000 at September 30, 2017 and December 31, 2016, respectively.
The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Each TDR is uniquely designed to meet the specific needs of the borrower. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral or an additional guarantor is often requested when granting a concession. Commercial mortgage loans modified in a TDR often involve temporary interest-only payments, re-amortization of remaining debt in order to lower payments, and sometimes reducing the interest rate lower than the current market rate. Residential mortgage loans modified in a TDR are comprised of loans where monthly payments are lowered, either through interest rate reductions or principal only payments for a period of time, to accommodate the borrowers’ financial needs, interest is capitalized into principal, or the term and amortization are extended. Home equity modifications are made infrequently and usually involve providing an interest rate that is lower than the borrower would be able to obtain due to credit issues. All retail loans where the borrower is in bankruptcy are classified as TDRs regardless of whether or not a concession is made.
Of the loans modified in a TDR, as of September 30, 2017 $9.6
Of the loans modified in a TDR as of June 30, 2020, $7.9 million were on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate.
The following tables present loans by class modified as TDRs that occurred during the three and six month periods ending June 30, 2020, and June 30, 2019:
The following tables present loans by class modified as TDRs that occurred during the three month periods and nine month periods ending September 30, 2017 and September 30, 2016:
Loans Modified as a TDR for the Three Months Ended September 30, 2017 ($ in thousands) | Loans Modified as a TDR for the Nine Months Ended September 30, 2017 ($ in thousands) | |||||||||||||||
Troubled Debt Restructurings | Number of Loans | Recorded Investment (as of period end) | Number of Loans | Recorded Investment (as of period end) | ||||||||||||
1-4 Family Owner Occupied | 10 | $ | 420 | 18 | $ | 923 | ||||||||||
1-4 Family Non Owner Occupied | 0 | - | 3 | 104 | ||||||||||||
Multi Family | 0 | - | 0 | - | ||||||||||||
CRE Owner Occupied | 0 | - | 1 | 116 | ||||||||||||
CRE Non Owner Occupied | 0 | - | 0 | - | ||||||||||||
Agriculture Land | 3 | 280 | 5 | 1,731 | ||||||||||||
Other CRE | 0 | - | 2 | 165 | ||||||||||||
Commercial Working Capital | 2 | 345 | 7 | 2,396 | ||||||||||||
Commercial Other | 1 | 47 | 5 | 3,511 | ||||||||||||
Home Equity and Improvement | 2 | 72 | 4 | 150 | ||||||||||||
Consumer Finance | 1 | 7 | 3 | 10 | ||||||||||||
Total | 19 | $ | 1,171 | 48 | $ | 9,106 |
The loans described above decreased the ALLL by $5,000 in the three month period ending September 30, 2017 and decreased the ALLL by $29,000 in the nine month period ending September 30, 2017.
Loans Modified as a TDR for the Three Months Ended September 30, 2016 ($ in thousands) | Loans Modified as a TDR for the Nine Months Ended September 30, 2016 ($ in thousands) | |||||||||||||||
Troubled Debt Restructurings | Number of Loans | Recorded Investment (as of period end) | Number of Loans | Recorded Investment (as of period end) | ||||||||||||
1-4 Family Owner Occupied | 5 | $ | 86 | 10 | $ | 208 | ||||||||||
1-4 Family Non Owner Occupied | 1 | 8 | 3 | 128 | ||||||||||||
Multi Family | 0 | - | 1 | 54 | ||||||||||||
CRE Owner Occupied | 0 | - | 0 | - | ||||||||||||
CRE Non Owner Occupied | 2 | 215 | 4 | 870 | ||||||||||||
Agriculture Land | 1 | 46 | 1 | 46 | ||||||||||||
Other CRE | 0 | - | 0 | - | ||||||||||||
Commercial Working Capital | 0 | - | 1 | 226 | ||||||||||||
Commercial Other | 0 | - | 1 | 590 | ||||||||||||
Home Equity and Improvement | 4 | 52 | 8 | 340 | ||||||||||||
Consumer Finance | 1 | 13 | 2 | 16 | ||||||||||||
Total | 14 | $ | 420 | 31 | $ | 2,478 |
Loans Modified as a TDR for the Three Months Ended June 30, 2020 ($ in thousands) Loans Modified as a TDR for the Six Months Ended June 30, 2020 ($ in thousands) Troubled Debt Restructurings Number of Loans Recorded Investment (as of period end) Number of Loans Recorded Investment (as of period end) Real Estate: Residential 3 $ 231 5 $ 609 Commercial 3 6,783 4 6,876 Construction — — — — Other Loans: Commercial — — 5 156 Home equity and improvement — — 1 26 Consumer finance — — — — Total 6 $ 7,014 15 $ 7,667 The loans described above increased the ALLL by $31,000 in the three month period ending September 30, 2016 and decreased the ALLL by $9,000 in the nine month period ending September 30, 2016.
The loans described above increased the allowance for credit losses (“ACL”) by $3,000 and $32,000 in the three and six month periods ending June 30, 2020.
Of the 2017 modifications, 12 were made TDRs due to the fact that the borrower is in bankruptcy, 5 were made TDR due to terming out lines of credit, 11 were made TDR due to advancing or renewing money to a watch list credit, 7 loans were placed under a forbearance agreement, and 13 were made a TDR because the current debt was refinanced due to maturity or for payment relief.
The following tables present loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three and nine month periods ended September 30, 2017 and September 30, 2016:
Three Months Ended September 30, 2017 ($ in thousands) | Nine Months Ended September 30, 2017 ($ in thousands) | |||||||||||||||
Troubled Debt Restructurings That Subsequently Defaulted | Number of Loans | Recorded Investment (as of period end) | Number of Loans | Recorded Investment (as of period end) | ||||||||||||
1-4 Family Owner Occupied | 0 | $ | - | 0 | $ | - | ||||||||||
1-4 Family Non Owner Occupied | 0 | - | 0 | - | ||||||||||||
CRE Owner Occupied | 0 | - | 0 | - | ||||||||||||
CRE Non Owner Occupied | 0 | - | 0 | - | ||||||||||||
Agriculture Land | 0 | - | 0 | - | ||||||||||||
Other CRE | 0 | - | 0 | - | ||||||||||||
Commercial Working Capital or Other | 0 | - | 1 | 225 | ||||||||||||
Commercial Other | 0 | - | 0 | - | ||||||||||||
Home Equity and Improvement | 0 | - | 0 | - | ||||||||||||
Consumer Finance | 0 | - | 0 | - | ||||||||||||
Total | 0 | $ | - | 1 | $ | 225 |
The TDRs that subsequently defaulted described above had no effect on the allowance for loan losses for the three and nine month periods ended September 30, 2017.
Three Months Ended September 30, 2016 ($ in thousands) | Nine Months Ended September 30, 2016 ($ in thousands) | |||||||||||||||
Troubled Debt Restructurings That Subsequently Defaulted | Number of Loans | Recorded Investment (as of period end) | Number of Loans | Recorded Investment (as of period end) | ||||||||||||
1-4 Family Owner Occupied | 1 | $ | 190 | 1 | $ | 190 | ||||||||||
1-4 Family Non Owner Occupied | 0 | - | 0 | - | ||||||||||||
CRE Owner Occupied | 0 | - | 0 | - | ||||||||||||
CRE Non Owner Occupied | 0 | - | 1 | 11 | ||||||||||||
Agriculture Land | 0 | - | 0 | - | ||||||||||||
Other CRE | 0 | - | 0 | - | ||||||||||||
Commercial Working Capital or Other | 0 | - | 0 | - | ||||||||||||
Commercial Other | 0 | - | 0 | - | ||||||||||||
Home Equity and Improvement | 0 | - | 0 | - | ||||||||||||
Consumer Finance | 0 | - | 0 | - | ||||||||||||
Total | 1 | $ | 190 | 2 | $ | 201 |
Loans Modified as a TDR for the Three Months Ended June 30, 2019 ($ in thousands) Loans Modified as a TDR for the Six Months Ended June 30, 2019 ($ in thousands) Troubled Debt Restructurings Number of Loans Recorded Investment (as of period end) Number of Loans Recorded Investment (as of period end) Real Estate: Residential 4 $ 434 7 $ 907 Commercial — — — — Construction 1 46 1 46 Other Loans: Commercial — — 1 13 Home equity and improvement 1 26 2 26 Consumer finance 1 1 2 1 Total 7 $ 507 13 $ 993 The TDRs that subsequently defaulted described above had no effect on the allowance for loan losses for the three and nine month periods ended September 30, 2016.
The loans described above increased the ACL by $27,000 and $21,000 in the three and six month periods ending June 30, 2019.
The following tables present loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three and six month periods ended June 30, 2020, and June 30, 2019:
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.
Credit Quality Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans, such as commercial and commercial real estate loans and certain homogenous mortgage, home equity and consumer loans. This analysis is performed on a quarterly basis. First Defiance uses the following definitions for risk ratings:
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 paying capacity of the obligor or of the collateral pledged, if any. Loans so classified 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.
Not Graded.Loans classified as not graded are generally smaller balance residential real estate, home equity and consumer installment loans which are originated primarily by using an automated underwriting system. These loans are monitored based on their delinquency status and are evaluated individually only if they are seriously delinquent.
Three Months Ended June 30, 2020 Six Months Ended June 30, 2020 ($ in thousands) ($ in thousands) Troubled Debt Restructurings That Subsequently Defaulted Number of Loans Recorded Investment (as of period end) Number of Loans Recorded Investment (as of period end) Real Estate: Residential 3 $ 168 6 $ 436 Commercial 1 22 2 194 Construction — — — — Other Loans: Commercial 1 118 2 250 Home equity and improvement 2 180 3 326 Consumer finance 1 21 1 21 Total 8 $ 509 14 $ 1,227 Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of September 30, 2017,
The TDRs that subsequently defaulted described above increased the ACL by $30,000 and $45,000 for the three month and six month period ended June 30, 2020.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.
|
| Three Months Ended June 30, 2019 |
|
| Six Months Ended June 30, 2019 |
| ||||||||||
|
| ($ in thousands) |
|
| ($ in thousands) |
| ||||||||||
Troubled Debt Restructurings That Subsequently Defaulted |
| Number of Loans |
|
| Recorded Investment (as of period end) |
|
| Number of Loans |
|
| Recorded Investment (as of period end) |
| ||||
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
| 2 |
|
| $ | 113 |
|
|
| 3 |
|
| $ | 189 |
|
Commercial |
|
| — |
|
|
| — |
|
|
| 3 |
|
|
| 2,311 |
|
Construction |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Home equity and improvement |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 61 |
|
Consumer finance |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 2 |
|
| $ | 113 |
|
|
| 7 |
|
| $ | 2,561 |
|
The TDRs that subsequently defaulted described above increased the ACL by $5,000 and $4,000 for the three and six month periods ended June 30, 2019.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.
Credit Quality Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans, such as commercial and commercial real estate loans and certain homogenous mortgage, home equity and consumer loans. This analysis is performed on a quarterly basis. Premier uses the following definitions for risk ratings:
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 paying capacity of the obligor or of the collateral pledged, if any. Loans so classified 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.
Not Graded. Loans classified as not graded are generally smaller balance residential real estate, home equity and consumer installment loans which are originated primarily by using an automated underwriting system. These loans are monitored based on their delinquency status and are evaluated individually only if they are seriously delinquent.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of June 30, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):
Class | Pass | Special Mention | Substandard | Doubtful | Not Graded | Total | ||||||||||||||||||
1-4 Family Owner Occupied | $ | 7,792 | $ | 211 | $ | 2,557 | $ | - | $ | 163,681 | $ | 174,241 | ||||||||||||
1-4 Family Non Owner Occupied | 87,087 | 2,138 | 3,236 | - | 4,821 | 97,282 | ||||||||||||||||||
Total 1-4 Family Real Estate | 94,879 | 2,349 | 5,793 | - | 168,502 | 271,523 | ||||||||||||||||||
Multi-Family Residential Real Estate | 208,997 | 968 | 2,325 | - | 112 | 212,402 | ||||||||||||||||||
CRE Owner Occupied | 373,218 | 10,835 | 12,287 | - | 201 | 396,541 | ||||||||||||||||||
CRE Non Owner Occupied | 393,425 | 4,149 | 5,473 | - | - | 403,047 | ||||||||||||||||||
Agriculture Land | 118,739 | 2,563 | 14,769 | - | - | 136,071 | ||||||||||||||||||
Other CRE | 58,668 | 221 | 1,851 | - | 892 | 61,632 | ||||||||||||||||||
Total Commercial Real Estate | 944,050 | 17,768 | 34,380 | - | 1,093 | 997,291 | ||||||||||||||||||
Construction | 103,565 | 1,178 | - | - | 24,590 | 129,333 | ||||||||||||||||||
Commercial Working Capital | 212,733 | 8,442 | 8,383 | - | - | 229,558 | ||||||||||||||||||
Commercial Other | 270,813 | 5,279 | 6,414 | - | - | 282,506 | ||||||||||||||||||
Total Commercial | 483,546 | 13,721 | 14,797 | - | - | 512,064 | ||||||||||||||||||
Home Equity and Home Improvement | - | - | 588 | - | 132,173 | 132,761 | ||||||||||||||||||
Consumer Finance | - | - | 127 | - | 28,891 | 29,018 | ||||||||||||||||||
Total Loans | $ | 1,835,037 | $ | 35,984 | $ | 58,010 | $ | - | $ | 355,361 | $ | 2,284,392 | ||||||||||||
Loans acquired with deteriorated credit quality (included in the totals above) | $ | 46 | $ | 1,333 | $ | 2,482 | - | $ | 4 | $ | 3,865 | |||||||||||||
Loans acquired in current year (included in totals above) | $ | 168,826 | $ | 4,742 | $ | 14,553 | - | $ | 44,341 | $ | 232,462 |
Class |
| Unclassified |
|
| Special Mention |
|
| Substandard |
|
| Doubtful |
|
| Total classified |
|
| Total |
| ||||||
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
| 1,206,062 |
|
|
| 304 |
|
|
| 6,124 |
|
|
| — |
|
|
| 6,124 |
|
|
| 1,212,490 |
|
Commercial |
|
| 2,191,433 |
|
|
| 21,436 |
|
|
| 18,733 |
|
|
| — |
|
|
| 18,733 |
|
|
| 2,231,602 |
|
Construction |
|
| 287,174 |
|
|
| 65 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 287,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 1,193,020 |
|
|
| 23,979 |
|
|
| 6,581 |
|
|
| — |
|
|
| 6,581 |
|
|
| 1,223,580 |
|
Home equity and improvement |
|
| 284,188 |
|
|
| — |
|
|
| 735 |
|
|
| — |
|
|
| 735 |
|
|
| 284,923 |
|
Consumer finance |
|
| 136,449 |
|
|
| — |
|
|
| 316 |
|
|
| — |
|
|
| 316 |
|
|
| 136,765 |
|
PCD |
|
| 21,817 |
|
|
| 13,985 |
|
|
| 44,837 |
|
|
| — |
|
|
| 44,837 |
|
|
| 80,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
| $ | 5,320,143 |
|
| $ | 59,769 |
|
| $ | 77,326 |
|
| $ | — |
|
| $ | 77,326 |
|
| $ | 5,457,238 |
|
As of December 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):
Class | Pass | Special Mention | Substandard | Doubtful | Not Graded | Total | ||||||||||||||||||
Residential Owner Occupied | $ | 5,980 | $ | 402 | $ | 1,824 | $ | - | $ | 132,250 | $ | 140,456 | ||||||||||||
Residential Non Owner Occupied | 58,041 | 1,394 | 3,480 | - | 4,434 | 67,349 | ||||||||||||||||||
Total 1-4 Family Real Estate | 64,021 | 1,796 | 5,304 | - | 136,684 | 207,805 | ||||||||||||||||||
Multi-Family Residential Real Estate | 192,369 | 862 | 3,852 | - | 114 | 197,197 | ||||||||||||||||||
CRE Owner Occupied | 316,335 | 20,559 | 4,430 | - | 384 | 341,708 | ||||||||||||||||||
CRE Non Owner Occupied | 332,196 | 1,617 | 5,435 | - | - | 339,248 | ||||||||||||||||||
Agriculture Land | 98,039 | 2,355 | 2,002 | - | - | 102,396 | ||||||||||||||||||
Other CRE | 59,561 | 60 | 2,297 | - | 746 | 62,664 | ||||||||||||||||||
Total Commercial Real Estate | 806,131 | 24,591 | 14,164 | - | 1,130 | 846,016 | ||||||||||||||||||
Construction | 67,751 | 706 | - | - | 20,787 | 89,244 | ||||||||||||||||||
Commercial Working Capital | 193,043 | 8,301 | 1,490 | - | - | 202,834 | ||||||||||||||||||
Commercial Other | 262,076 | 3,749 | 1,752 | - | - | 267,577 | ||||||||||||||||||
Total Commercial | 455,119 | 12,050 | 3,242 | - | - | 470,411 | ||||||||||||||||||
Home Equity and Home Improvement | - | - | 696 | - | 118,317 | 119,013 | ||||||||||||||||||
Consumer Finance | - | - | 90 | - | 16,594 | 16,684 | ||||||||||||||||||
Total Loans | $ | 1,585,391 | $ | 40,005 | $ | 27,348 | $ | - | $ | 293,626 | $ | 1,946,370 |
The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding balance of those loans is as follows (In Thousands):
September 30, 2017 | ||||
1-4 Family Residential Real Estate | $ | 1,496 | ||
Commercial Real Estate Loans | 2,963 | |||
Commercial | 414 | |||
Consumer | 2 | |||
Total Outstanding Balance | $ | 4,875 | ||
Recorded Investment, net of allowance of $0 | $ | 3,865 | ||
Accretable yield, or income expected to be collected, is as follows: | ||||
2017 | ||||
Balance at January 1 | $ | - | ||
New Loans Purchased | 1,018 | |||
Accretion of Income | (163 | ) | ||
Reclassifications from Non-accretable | - | |||
Charge-off of Accretable Yield | (8 | ) | ||
Balance at September 30 | $ | 847 |
For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three or nine months ended September 30, 2017. No allowances for loan losses were reversed during the same period.
Contractually required payments receivable of loans purchased with evidence of credit deterioration during the period ended September 30, 2017 using information as of the date of acquisition are included in the table below. There were no such loans purchased during the year ended December 31, 2016. (In Thousands)
1-4 Family Residential Real Estate | $ | 1,720 | ||
Commercial Real Estate | 4,724 | |||
Commercial | 785 | |||
Consumer | 4 | |||
Total | $ | 7,233 |
Cash Flows Expected to be Collected at Acquisition $ 5,721
Fair Value of Acquired Loans at Acquisition $ 4,703
Foreclosure Proceedings
Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $18,000 as of September 30, 2017.
Net revenues from the sales and servicing of mortgage loans consisted of the following
As of December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In Thousands) | ||||||||||||||||
Gain from sale of mortgage loans | $ | 1,200 | $ | 1,683 | $ | 3,577 | $ | 4,103 | ||||||||
Mortgage loans servicing revenue (expense): | ||||||||||||||||
Mortgage loans servicing revenue | 911 | 885 | 2,769 | 2,638 | ||||||||||||
Amortization of mortgage servicing rights | (386 | ) | (536 | ) | (1,101 | ) | (1,281 | ) | ||||||||
Mortgage servicing rights valuation adjustments | (27 | ) | 7 | 21 | (118 | ) | ||||||||||
498 | 356 | 1,689 | 1,239 | |||||||||||||
Net revenue from sale and servicing of mortgage loans | $ | 1,698 | $ | 2,039 | $ | 5,266 | $ | 5,342 |
The unpaid principal balance of residential mortgage loans serviced for third parties was $1.38 billion at September 30, 2017 and $1.37 billion at December 31, 2016.
Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three and nine months ended September 30, 2017 and 2016:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In Thousands) | ||||||||||||||||
Mortgage servicing assets: | ||||||||||||||||
Balance at beginning of period | $ | 10,154 | $ | 9,906 | $ | 10,117 | $ | 9,893 | ||||||||
Loans sold, servicing retained | 426 | 701 | 1,178 | 1,459 | ||||||||||||
Amortization | (386 | ) | (536 | ) | (1,101 | ) | (1,281 | ) | ||||||||
Carrying value before valuation allowance at end of period | 10,194 | 10,071 | 10,194 | 10,071 | ||||||||||||
Valuation allowance: | ||||||||||||||||
Balance at beginning of period | (474 | ) | (770 | ) | (522 | ) | (645 | ) | ||||||||
Impairment recovery (charges) | (27 | ) | 7 | 21 | (118 | ) | ||||||||||
Balance at end of period | (501 | ) | (763 | ) | (501 | ) | (763 | ) | ||||||||
Net carrying value of MSRs at end of period | $ | 9,693 | $ | 9,308 | $ | 9,693 | $ | 9,308 | ||||||||
Fair value of MSRs at end of period | $ | 9,750 | $ | 9,493 | $ | 9,750 | $ | 9,493 |
Amortization of mortgage servicing rights is computed based on payments and payoffs of the related mortgage loans serviced. Estimates of future amortization expense are not easily estimable.
The Company has established an accrual for secondary market buy-back activity. A liability of $45,000 and $79,000 was accrued at September 30, 2017 and December 31, 2016, respectively. Expense (credit) recognized related to the accrual was ($34,000) and ($131,000) in the nine months ended September 30, 2017 and 2016, respectively. The reversals are mainly due to no actual losses being recorded in the in the first nine months of 2017 and 2016, respectively.
Class |
| Unclassified |
|
| Special Mention |
|
| Substandard |
|
| Doubtful |
|
| Total classified |
|
| Total |
| ||||||
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
| 322,250 |
|
|
| 415 |
|
|
| 3,479 |
|
|
| — |
|
|
| 3,479 |
|
|
| 326,144 |
|
Commercial |
|
| 1,462,065 |
|
|
| 27,197 |
|
|
| 23,097 |
|
|
| — |
|
|
| 23,097 |
|
|
| 1,512,359 |
|
Construction |
|
| 205,076 |
|
|
| 1,645 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 206,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 548,012 |
|
|
| 24,162 |
|
|
| 7,737 |
|
|
| — |
|
|
| 7,737 |
|
|
| 579,911 |
|
Home equity and improvement |
|
| 123,407 |
|
|
| — |
|
|
| 315 |
|
|
| — |
|
|
| 315 |
|
|
| 123,722 |
|
Consumer finance |
|
| 37,816 |
|
|
| — |
|
|
| 20 |
|
|
| — |
|
|
| 20 |
|
|
| 37,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
| $ | 2,698,626 |
|
| $ | 53,419 |
|
| $ | 34,648 |
|
| $ | — |
|
| $ | 34,648 |
|
| $ | 2,786,693 |
|
A summary of deposit balances is as follows:
September 30, 2017 | December 31, 2016 | |||||||
(In Thousands) | ||||||||
Non-interest-bearing checking accounts | $ | 519,911 | $ | 487,663 | ||||
Interest-bearing checking and money market accounts | 989,514 | 816,665 | ||||||
Savings deposits | 296,230 | 243,369 | ||||||
Retail certificates of deposit less than $250,000 | 504,277 | 400,080 | ||||||
Retail certificates of deposit greater than $250,000 | 50,743 | 33,851 | ||||||
$ | 2,360,675 | $ | 1,981,628 |
The table below presents the amortized cost basis of loans by credit quality indicator and class of loans based on the most recent analysis performed ($ in thousands):
| Term of loans by origination |
| |||||||||||||||||||||||||||||
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Prior |
|
| Revolving Loans |
|
| Total |
| ||||||||
As of June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ | 83,735 |
|
| $ | 184,881 |
|
| $ | 180,901 |
|
| $ | 171,796 |
|
| $ | 173,300 |
|
| $ | 408,215 |
|
| $ | 3,234 |
|
| $ | 1,206,062 |
|
Special Mention |
| — |
|
|
| 40 |
|
|
| 56 |
|
|
| — |
|
|
| 121 |
|
|
| 87 |
|
|
| — |
|
|
| 304 |
|
Substandard |
| — |
|
|
| 195 |
|
|
| 622 |
|
|
| 311 |
|
|
| 224 |
|
|
| 4,763 |
|
|
| 9 |
|
|
| 6,124 |
|
Doubtful |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total | $ | 83,735 |
|
| $ | 185,116 |
|
| $ | 181,579 |
|
| $ | 172,107 |
|
| $ | 173,645 |
|
| $ | 413,065 |
|
| $ | 3,243 |
|
| $ | 1,212,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ | 266,383 |
|
| $ | 442,274 |
|
| $ | 360,246 |
|
| $ | 375,059 |
|
| $ | 229,020 |
|
| $ | 505,233 |
|
| $ | 13,218 |
|
| $ | 2,191,433 |
|
Special Mention |
| — |
|
|
| 5,330 |
|
|
| 997 |
|
|
| 2,325 |
|
|
| 30 |
|
|
| 12,032 |
|
|
| 722 |
|
|
| 21,436 |
|
Substandard |
| — |
|
|
| 284 |
|
|
| 1,605 |
|
|
| 1,231 |
|
|
| 1,283 |
|
|
| 11,655 |
|
|
| 2,675 |
|
|
| 18,733 |
|
Doubtful |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total | $ | 266,383 |
|
| $ | 447,888 |
|
| $ | 362,848 |
|
| $ | 378,615 |
|
| $ | 230,333 |
|
| $ | 528,920 |
|
| $ | 16,615 |
|
| $ | 2,231,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ | 15,730 |
|
| $ | 134,260 |
|
| $ | 87,891 |
|
| $ | 39,552 |
|
| $ | 9,736 |
|
| $ | 5 |
|
| $ | - |
|
| $ | 287,174 |
|
Special Mention |
| 65 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 65 |
|
Substandard |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Doubtful |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total | $ | 15,795 |
|
| $ | 134,260 |
|
| $ | 87,891 |
|
| $ | 39,552 |
|
| $ | 9,736 |
|
| $ | 5 |
|
| $ | - |
|
| $ | 287,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ | 518,471 |
|
| $ | 181,028 |
|
| $ | 95,494 |
|
| $ | 56,402 |
|
| $ | 29,621 |
|
| $ | 37,348 |
|
| $ | 274,656 |
|
| $ | 1,193,020 |
|
Special Mention |
| 25 |
|
|
| 713 |
|
|
| 2,413 |
|
|
| 2,355 |
|
|
| 48 |
|
|
| 4,182 |
|
|
| 14,243 |
|
|
| 23,979 |
|
Substandard |
| 226 |
|
|
| 81 |
|
|
| 610 |
|
|
| 204 |
|
|
| 280 |
|
|
| 197 |
|
|
| 4,983 |
|
|
| 6,581 |
|
Doubtful |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total | $ | 518,722 |
|
| $ | 181,822 |
|
| $ | 98,517 |
|
| $ | 58,961 |
|
| $ | 29,949 |
|
| $ | 41,727 |
|
| $ | 293,882 |
|
| $ | 1,223,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and Improvement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ | 3,573 |
|
| $ | 9,532 |
|
| $ | 5,512 |
|
| $ | 9,502 |
|
| $ | 9,052 |
|
| $ | 34,250 |
|
| $ | 212,767 |
|
| $ | 284,188 |
|
Special Mention |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Substandard |
| — |
|
|
| — |
|
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| 291 |
|
|
| 432 |
|
|
| 735 |
|
Doubtful |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total | $ | 3,573 |
|
| $ | 9,532 |
|
| $ | 5,524 |
|
| $ | 9,502 |
|
| $ | 9,052 |
|
| $ | 34,541 |
|
| $ | 213,199 |
|
| $ | 284,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Finance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ | 28,102 |
|
| $ | 48,520 |
|
| $ | 26,920 |
|
| $ | 14,943 |
|
| $ | 7,131 |
|
| $ | 4,578 |
|
| $ | 6,255 |
|
| $ | 136,449 |
|
Special Mention |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Substandard |
| — |
|
|
| 224 |
|
|
| 55 |
|
|
| 12 |
|
|
| 25 |
|
|
| — |
|
|
| — |
|
|
| 316 |
|
Doubtful |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total | $ | 28,102 |
|
| $ | 48,744 |
|
| $ | 26,975 |
|
| $ | 14,955 |
|
| $ | 7,156 |
|
| $ | 4,578 |
|
| $ | 6,255 |
|
| $ | 136,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCD: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ | - |
|
| $ | 259 |
|
| $ | 984 |
|
| $ | 2,482 |
|
| $ | 1,077 |
|
| $ | 16,207 |
|
| $ | 808 |
|
| $ | 21,817 |
|
Special Mention |
| — |
|
|
| — |
|
|
| 2,162 |
|
|
| 4,225 |
|
|
| 1,389 |
|
|
| 4,123 |
|
|
| 2,086 |
|
|
| 13,985 |
|
Substandard |
| — |
|
|
| 65 |
|
|
| 66 |
|
|
| 18,114 |
|
|
| 1,704 |
|
|
| 10,716 |
|
|
| 14,172 |
|
|
| 44,837 |
|
Doubtful |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total | $ | - |
|
| $ | 324 |
|
| $ | 3,212 |
|
| $ | 24,821 |
|
| $ | 4,170 |
|
| $ | 31,046 |
|
| $ | 17,066 |
|
| $ | 80,639 |
|
First Defiance’s debt, FHLB advances and junior subordinated debentures owed to unconsolidated subsidiary trusts are comprised of the following:
September 30, 2017 | December 31, 2016 | |||||||
(In Thousands) | ||||||||
FHLB Advances: | ||||||||
Single maturity fixed rate advances | $ | 92,000 | $ | 92,000 | ||||
Putable advances | 5,000 | 5,000 | ||||||
Amortizable mortgage advances | 7,583 | 6,943 | ||||||
Fair value adjustment on acquired balances | (28 | ) | - | |||||
Total | $ | 104,555 | $ | 103,943 | ||||
Junior subordinated debentures owed to unconsolidated subsidiary trusts | $ | 36,083 | $ | 36,083 | ||||
Notes payable | $ | 6,500 | $ | - |
The putable advance can be put back to the Company at the option of the FHLB on a quarterly basis. A $5.0 million putable advance with a weighted average rate of 2.35% was not yet callable by the FHLB at September 30, 2017. The call date for this advance is December 12, 2017 and the maturity date is March 12, 2018. Putable advances are callable at the option of the FHLB on a quarterly basis.
In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (Trust Affiliate II) that issued $15 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with this transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to Trust Affiliate II. The Company formed Trust Affiliate II for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.5%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was 2.83% as of September 30, 2017 and 2.46% as of December 31, 2016.
The Trust Preferred Securities issued by Trust Affiliate II are subject to mandatory redemption, in whole or part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on June 15, 2037, but can be redeemed at the Company’s option at any time now.
Allowance for Credit Losses (ACL)
The Company has adopted ASU 2016-13 (Topic 326 – Credit Losses) to calculate the ACL, which requires a projection of credit loss over the contract lifetime of the credit adjusted for prepayment tendencies. This valuation account is deducted from the loans amortized cost basis to present the net amount expected to be collected on the loan. The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans.
The credit loss estimation process involves procedures that consider the unique characteristics of the Company’s portfolio segments. These segments are further disaggregated into the loan pools for monitoring. When computing allowance levels, a model of risk characteristics, such as loss history and delinquency status, along with current conditions and a supportable forecast is used to determine credit loss assumptions.
The Company is generally utilizing two methodologies to analyze loan pools, discounted cash flows (“DCF”) and probability of default/loss given default (“PD/LGD”).
A default can be triggered by one of several different asset quality factors including past due status, non-accrual status or if the loan has had a charge-off. The PD/LGD utilizes charge off data from the Federal Financial Institutions Examination Council to construct a default rate. The Company estimates losses over an approximate one-year forecast period using Moody’s baseline economic forecasts, and then reverts to longer term historical loss experience over a three-year period. This default rate is further segmented based on the risk of the credit assigning a higher default rate to riskier credits.
The DCF methodology was selected as the most appropriate for loan segments with longer average lives and regular payment structures. The DCF model has two key components, the loss driver analysis combined with a cash flow analysis. The contractual cash flow is adjusted for PD/LGD and prepayment speed to establish a reserve level. The prepayment studies are updated quarterly by a third-party for each applicable pool.
The remaining life method was selected for the consumer loan segment since the pool contains loans with many different structures and payment streams and collateral. The weighted average remaining life uses an average annual charge-off rate applied to the contractual term, further adjusted for estimated prepayments to determine the unadjusted historical charge-off rate for the remaining balance of assets.
The Company also sponsored an affiliated trust, First Defiance Statutory Trust I (Trust Affiliate I), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was 2.71% and 2.34% on September 30, 2017 and December 31, 2016 respectively.
The Trust Preferred Securities issued by Trust Affiliate I are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on December 15, 2035, but can be redeemed at the Company’s option at any time now.
The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.
Interest on both issues of Trust Preferred Securities may be deferred for a period of up to five years at the option of the issuer.
On December 29, 2016, First Defiance entered into a loan agreement with First Tennessee Bank for a $20 million line of credit. The rate on the line of credit is at three-month LIBOR plus 1.95%. As of September 30, 2017 and December 31, 2016, the rate payable was 3.28% and 2.91% respectively. The outstanding balance at September 30, 2017 was $6.5 million, is included in notes payable and is due at maturity.
Portfolio Segments |
| Loan Pool |
|
| Loss Drivers | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | 1-4 Family nonowner occupied | DCF | National unemployment | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1-4 Family owner occupied | DCF | National unemployment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | Commercial real estate nonowner occupied | DCF | National unemployment | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate owner occupied | DCF | National unemployment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Multi Family | DCF | National unemployment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Agriculture Land | DCF | National unemployment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other commercial real estate | DCF | National unemployment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction secured by real estate | Construction | PD/LGD | Call report loss history | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial working capital | PD/LGD | Call report loss history | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Agriculture production | PD/LGD | Call report loss history | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other commercial | PD/LGD | Call report loss history | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home equity and |
|
|
| PD/LGD |
| Call report loss history | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer finance |
|
|
|
|
According to the accounting standard an entity may make an accounting policy election not to measure an allowance for credit losses for accrued interest receivable if the entity writes off the applicable accrued interest receivable balance in a timely manner. The Company has made the accounting policy election not to measure an allowance for credit losses for accrued interest receivables for all loan segments. Current policy dictates that a loan will be placed on nonaccrual status, with the current accrued interest receivable balance being written off, upon the loan being 90 days delinquent or when the loan is deemed to be collateral dependent and the collateral analysis shows less than 1.2 times discounted collateral coverage based on a current assessment of the value of the collateral.
In addition to the ASC Topic 326 requires the Company to establish a liability for anticipated credit losses for unfunded commitments. To accomplish this, the company must first establishes a loss expectation for extended (funded) commitments. This loss expectation, expressed as a ratio to the amortized cost basis, is then applied to the portion of unfunded commitments not considered unilaterally cancelable, and considered by the company’s management as likely to fund over the life of the instrument. At June 30, 2020, the Company had $1.4 billion in unfunded commitments and set aside $6.8 million in anticipated credit losses. This reserve is recorded in other liabilities as opposed to the ACL.
The determination of ACL is complex and the Company makes decisions on the effects of matters that are inherently uncertain. Evaluations of the loan portfolio and individual credits require certain estimates, assumptions and judgements as to the facts and circumstances related to particular situations or credits. There may be significant changes in the ACL in future periods determined by prevailing factors at that point in time along with future forecasts.
Purchased Loans
As a result of the Merger, the Company acquired $2.3 billion in loans. Par value of purchased loans follows (in thousands):
|
| 2020 |
|
| |
Par value of acquired loans at acquisition |
| $ | 2,314,588 |
|
|
Credit discount |
|
| 34,610 |
|
|
Non-credit discount/(premium) at acquisition |
|
| (8,497 | ) |
|
Purchase price of loans at acquisition |
| $ | 2,340,701 |
|
|
Under ASU Topic 326, when loans are purchased with evidence of more than insignificant deterioration of credit, they are accounted for as purchase credit deteriorated (“PCD”). PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement. On January 31, 2020, the Company acquired PCD loans with a fair value of $79.1 million, credit discount $7.7 million and a noncredit discount of $4.1 million. The outstanding balance at June 30, 2020 and related allowance on these loans is as follows (in thousands):
|
| Loan Balance |
|
| ACL Balance |
| ||
|
| (In Thousands) |
| |||||
Real Estate: |
|
|
|
|
|
|
|
|
Residential |
| $ | 16,679 |
|
| $ | 1,247 |
|
Commercial |
|
| 34,175 |
|
|
| 3,955 |
|
Construction |
|
| 953 |
|
|
| 8 |
|
|
|
| 51,807 |
|
|
| 5,210 |
|
Other Loans: |
|
|
|
|
|
|
|
|
Commercial |
|
| 22,234 |
|
|
| 1,781 |
|
Home equity and improvement |
|
| 5,587 |
|
|
| 250 |
|
Consumer finance |
|
| 1,011 |
|
|
| 56 |
|
|
|
| 28,832 |
|
|
| 2,087 |
|
Total |
| $ | 80,639 |
|
| $ | 7,297 |
|
At June 30, 2020 the Company had $2.0 million in loans that had previously been accounted for as purchase credit impaired.
Foreclosure Proceedings
Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $6.7 million as of June 30, 2020, and $981,000 as of December 31, 2019. The increase is primarily a result of the Merger.
9. |
|
Net revenues from the sales and servicing of mortgage loans consisted of the following:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
| (In Thousands) |
| |||||||||||||
Gain from sale of mortgage loans |
| $ | 11,530 |
|
| $ | 1,775 |
|
| $ | 16,432 |
|
| $ | 3,076 |
|
Mortgage loans servicing revenue (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans servicing revenue |
|
| 1,888 |
|
|
| 943 |
|
|
| 3,482 |
|
|
| 1,882 |
|
Amortization of mortgage servicing rights |
|
| (2,181 | ) |
|
| (391 | ) |
|
| (3,344 | ) |
|
| (677 | ) |
Mortgage servicing rights valuation adjustments |
|
| (1,369 | ) |
|
| (190 | ) |
|
| (5,854 | ) |
|
| (303 | ) |
|
|
| (1,662 | ) |
|
| 362 |
|
|
| (5,716 | ) |
|
| 902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from sale and servicing of mortgage loans |
| $ | 9,868 |
|
| $ | 2,137 |
|
| $ | 10,716 |
|
| $ | 3,978 |
|
The unpaid principal balance of residential mortgage loans serviced for third parties was $3.0 billion at June 30, 2020, and $1.46 billion at December 31, 2019.
Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three and six months ended June 30, 2020 and 2019:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
| (In Thousands) |
| |||||||||||||
Mortgage servicing assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
| $ | 20,761 |
|
| $ | 10,411 |
|
| $ | 10,801 |
|
| $ | 10,419 |
|
Loans sold, servicing retained |
|
| 2,454 |
|
|
| 438 |
|
|
| 3,830 |
|
|
| 716 |
|
Mortgage servicing rights acquired |
|
| — |
|
|
| — |
|
|
| 9,747 |
|
|
| — |
|
Amortization |
|
| (2,181 | ) |
|
| (391 | ) |
|
| (3,344 | ) |
|
| (677 | ) |
Carrying value before valuation allowance at end of period |
|
| 21,034 |
|
|
| 10,458 |
|
|
| 21,034 |
|
|
| 10,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
| (5,019 | ) |
|
| (413 | ) |
|
| (534 | ) |
|
| (300 | ) |
Impairment recovery (charges) |
|
| (1,369 | ) |
|
| (190 | ) |
|
| (5,854 | ) |
|
| (303 | ) |
Balance at end of period |
|
| (6,388 | ) |
|
| (603 | ) |
|
| (6,388 | ) |
|
| (603 | ) |
Net carrying value of MSRs at end of period |
| $ | 14,646 |
|
| $ | 9,855 |
|
| $ | 14,646 |
|
| $ | 9,855 |
|
Fair value of MSRs at end of period |
| $ | 14,646 |
|
| $ | 9,925 |
|
| $ | 14,646 |
|
| $ | 9,925 |
|
Amortization of mortgage servicing rights is computed based on payments and payoffs of the related mortgage loans serviced. Estimates of future amortization expense are not easily estimable.
The Company has established an accrual for secondary market buy-back activity. A liability of $43,000 was accrued at both June 30, 2020, and December 31, 2019, respectively. There was 0 expense or credit recognized related to the accrual in the three and six months ended June 30, 2020 or 2019.
10. | Leases |
Due to the Merger with UCFC, on January 31, 2020, the Company performed a valuation on UCFC’s leases to determine an initial right of use asset (ROU asset) and lease liability. The Company recorded an initial ROU asset of $5.0 million and a lease liability of $5.1 million for these leases.
The Company’s lease agreements have maturity dates ranging from December 2020 to September 2044, some of which include options for multiple five and ten year extensions. The weighted average remaining life of the lease term for these leases was 15.11 years as of June 30, 2020 and 17.07 years as of December 31, 2019. The weighted average discount rate for leases was 2.57% as of June 30, 2020 and 3.17% as of December 31, 2019.
The total operating lease costs were $592,000 and $1.1 million for the three and six months ended June 30, 2020, and $233,000 and $475,000 for the three and six months ended June 30, 2019, respectively. The right-of-use asset, included in other assets, was $18.2 million and $8.9 million at June 30, 2020 and December 31, 2019, respectively. The lease liabilities, included in other liabilities, were $18.8 million and $9.5 million as of June 30, 2020 and December 31, 2019, respectively.
Undiscounted cash flows included in lease liabilities have expected contractual payments as follows:
(in thousands) |
| June 30, 2020 |
| |
2020 |
| $ | 1,274 |
|
2021 |
|
| 2,298 |
|
2022 |
|
| 1,944 |
|
2023 |
|
| 1,539 |
|
2024 |
|
| 1,311 |
|
Thereafter |
|
| 14,911 |
|
Total undiscounted minimum lease payments |
| $ | 23,277 |
|
Present value adjustment |
|
| (4,471 | ) |
Total lease liabilities |
| $ | 18,806 |
|
11. | Deposits |
A summary of deposit balances is as follows:
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||
|
| (In Thousands) |
| |||||
Non-interest-bearing checking accounts |
| $ | 1,454,842 |
|
| $ | 630,359 |
|
Interest-bearing checking and money market accounts |
|
| 2,361,486 |
|
|
| 1,198,012 |
|
Savings deposits |
|
| 671,650 |
|
|
| 303,166 |
|
Retail certificates of deposit less than $250,000 |
|
| 1,078,758 |
|
|
| 631,253 |
|
Retail certificates of deposit greater than $250,000 |
|
| 193,107 |
|
|
| 107,535 |
|
|
| $ | 5,759,843 |
|
| $ | 2,870,325 |
|
12. | Borrowings |
Premier’s FHLB advances, Paycheck Protection Program Lending Facility (PPPLF) advances and junior subordinated debentures owed to unconsolidated subsidiary trusts are comprised of the following:
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||
|
| (In Thousands) |
| |||||
FHLB Advances: |
|
|
|
|
|
|
|
|
Single maturity fixed rate advances |
| $ | 35,000 |
|
| $ | 83,999 |
|
Amortizable mortgage advances |
|
| — |
|
|
| 1,085 |
|
Overnight advances |
|
| 100,000 |
|
|
| — |
|
Fair value adjustment on acquired balances |
|
| — |
|
|
| (21 | ) |
Total |
| $ | 135,000 |
|
| $ | 85,063 |
|
PPPLF advances |
| $ | 4,327 |
|
| $ | — |
|
Junior subordinated debentures owed to unconsolidated subsidiary trusts |
| $ | 36,083 |
|
| $ | 36,083 |
|
|
|
|
|
|
|
|
|
|
The FHLB advances outstanding at June 30, 2020, have maturities of $100.0 million in 2020, $5.0 million in 2021 and $10.0 million maturing in each of 2022, 2023 and 2024.
The PPPLF advances are term funding provided by the Federal Reserve for depository institutions that can be accessed by depository institutions that originate loans to small businesses under the Paycheck Protection Program which the Company is a participant in. The $4.3 million advance balance at June 30, 2020 matures in 2022 and carries an interest rate of 0.35%.
In March 2007, the Company sponsored an affiliated trust, Premier Statutory Trust II (“Trust Affiliate II”) that issued $15 million of Guaranteed Capital Trust Securities (“Trust Preferred Securities”). In connection with this transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to Trust Affiliate II. The Company formed Trust Affiliate II for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not considered the primary beneficiary of Trust Affiliate II (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.5%. The coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was 1.81% as of June 30, 2020, and 3.39% as of December 31, 2019.
The Trust Preferred Securities issued by Trust Affiliate II are subject to mandatory redemption, in whole or part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on June 15, 2037, but can be redeemed at the Company’s option at any time now.
The Company also sponsored an affiliated trust, Premier Statutory Trust I (“Trust Affiliate I”), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of Trust Affiliate I (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was 1.69% and 3.27% on June 30, 2020 and December 31, 2019, respectively.
The Trust Preferred Securities issued by Trust Affiliate I are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on December 15, 2035, but can be redeemed at the Company’s option at any time now.
The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.
Interest on both issues of Trust Preferred Securities may be deferred for a period of up to five years at the option of the issuer.
Repurchase Agreements. We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agent.
The balance of repurchase agreements was $6.9 million and $3.0 million at June 30, 2020 and December 31, 2019, respectively. All of the repurchase agreements were overnight and continuous as of June 30, 2020 and December 31, 2019. The repurchase agreements were collateralized by investment securities having a market value of $34.0 million and $5.8 million at June 30, 2020 and December 31, 2019, respectively.
13. | Commitments, Guarantees and |
Loan commitments are made to accommodate the financial needs of Premier’s customers commitments that result in market risk. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. They primarily are issued to facilitate customers’ trade transactions.
Both arrangements have credit risk, essentially the same as that involved in extending loans to customers, and are subject to the Company’s normal credit policies. Collateral (e.g., securities, receivables, inventory and equipment) is obtained based on management’s credit assessment of the customer.
The Company’s maximum obligation to extend credit for loan commitments (unfunded loans and unused lines of credit) and standby letters of credit outstanding as of the periods stated below were as follows (In Thousands):
|
|
|
|
|
|
|
|
|
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Commitments to make loans |
| $ | 391,586 |
|
| $ | 178,811 |
|
Unused lines of credit |
|
| 1,155,367 |
|
|
| 433,109 |
|
Standby letters of credit |
|
| 16,873 |
|
|
| 14,215 |
|
Total |
| $ | 1,563,826 |
|
| $ | 626,135 |
|
Commitments to make loans are generally made for periods of 60 days or less.
14. | Income Taxes |
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the state of Indiana. The Company is no longer subject to examination by taxing authorities for years before 2015. The Company currently operates primarily in the states of Ohio, and Michigan, Pennsylvania and West Virginia which tax financial institutions based on their equity rather than their income.
For further information on taxes refer to the discussion on CECL in Note 8. Loans and the Merger information in Note 18. Business Combinations.
15. | Derivative Financial Instruments |
At June 30, 2020, the Company had approximately $210.2 million of interest rate lock commitments and $299.0 million of forward sales of mortgage backed securities. These commitments are considered derivatives. The Company had $17.0 million of interest rate lock commitments and $34.4 million of forward commitments at December 31, 2019.
The fair value of these mortgage banking derivatives are reflected by a derivative asset recorded in other assets and a derivative liability recorded in other liabilities in the Consolidated Statements of Financial Condition. The table below provides data about the carrying values of these derivative instruments:
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||
|
| Assets |
|
| (Liabilities) |
|
|
|
|
|
| Assets |
|
| (Liabilities) |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| Derivative |
|
|
|
|
|
|
|
|
|
| Derivative |
| ||
|
| Carrying |
|
| Carrying |
|
| Net Carrying |
|
| Carrying |
|
| Carrying |
|
| Net Carrying |
| ||||||
|
| Value |
|
| Value |
|
| Value |
|
| Value |
|
| Value |
|
| Value |
| ||||||
|
| (In Thousands) |
| |||||||||||||||||||||
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Banking Derivatives |
| $ | 7,167 |
|
| $ | — |
|
| $ | 7,167 |
|
| $ | 883 |
|
| $ | (9 | ) |
| $ | 892 |
|
Interest Rate Swaps
The Company maintains an interest rate protection program for commercial loan customers that was acquired in the Merger. Under this program, the Company provides a customer with a fixed rate loan while creating a variable rate asset for the Company by the customer entering into an interest rate swap with terms
that match the loan. The Company offsets its risk exposure by entering into an offsetting interest rate swap with an unaffiliated institution. The Company had interest rate swaps associated with commercial loans with a notional value of $88.7 million and fair value of $2.4 million in other assets and $2.7 million in other liabilities at June 30, 2020. The difference in fair value of $283,000 between the asset and liability represents a credit valuation adjustment that flows through noninterest income. For the three and six months ended June 30, 2020, $32,000 and $197,000 of this figure flowed through noninterest income. The remainder was part of the Merger consideration. The Company had 0 interest rate swaps outstanding at December 31, 2019.
Equity Linked Time Deposit
The Company also acquired time deposits in its acquisition of UCFC that have written and purchased option derivatives to facilitate an equity linked time deposit product. The time deposit provides the purchaser a guaranteed return of principal at maturity plus a potential equity return (a written option), while the Bank receives a known stream of funds based on the equity return (a purchase option). The written and purchased options are mirror derivative instruments which are carried at fair value on the consolidated statement of financial condition. At June 30, 2020, the balance of the equity linked time deposits was $8.6 million and the written and purchased options each had a fair value of $81,000.
16. | Other Comprehensive Income |
The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the table below. Reclassification adjustments related to securities available for sale are included in gains on sale or call of securities in the accompanying consolidated condensed statements of income.
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. First Federal had approximately $21.5 million and $14.1 million of interest rate lock commitments at September 30, 2017 and December 31, 2016, respectively. There were $30.8 million and $22.5 million of forward commitments for the future delivery of residential mortgage loans at September 30, 2017 and December 31, 2016, respectively.
The fair value of these mortgage banking derivatives are reflected by a derivative asset recorded in other assets in the Consolidated Statements of Condition. The table below provides data about the carrying values of these derivative instruments:
September30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Assets | (Liabilities) | Assets | (Liabilities) | |||||||||||||||||||||
Derivative | Derivative | |||||||||||||||||||||||
Carrying | Carrying | Net Carrying | Carrying | Carrying | Net Carrying | |||||||||||||||||||
Value | Value | Value | Value | Value | Value | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||||||||||
Mortgage Banking Derivatives | $ | 821 | $ | - | $ | 821 | $ | 491 | $ | - | $ | 491 |
|
| Before Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net of Tax Amount |
| |||
|
| (In Thousands) |
| |||||||||
Three months ended June 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale and transferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain/loss during the period |
| $ | 3,160 |
|
| $ | (665 | ) |
| $ | 2,495 |
|
Reclassification adjustment for net losses included in net income |
|
| 2 |
|
|
| (1 | ) |
|
| 1 |
|
Defined benefit postretirement medical plan: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for deferred tax on defined benefit postretirement medical plan |
|
| — |
|
|
| — |
|
|
| — |
|
Total other comprehensive gain |
| $ | 3,162 |
|
| $ | (666 | ) |
| $ | 2,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain/loss during the period |
| $ | 12,618 |
|
| $ | (2,650 | ) |
| $ | 9,968 |
|
Reclassification adjustment for net losses included in net income |
|
| 2 |
|
|
| (1 | ) |
|
| 1 |
|
Defined benefit postretirement medical plan: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for deferred tax on defined benefit postretirement medical plan |
|
| — |
|
|
| — |
|
|
| — |
|
Total other comprehensive gain |
| $ | 12,620 |
|
| $ | (2,651 | ) |
| $ | 9,969 |
|
The table below provides data about the amount of gains and losses recognized in income on derivative instruments not designated as hedging instruments:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In Thousands) | ||||||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||
Mortgage Banking Derivatives – Gain (Loss) | $ | 47 | $ | (193 | ) | $ | 330 | $ | 237 |
The above amounts are included in mortgage banking income with gain on sale of mortgage loans.
The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the table below. Reclassification adjustments related to securities available for sale are included in gains on sale or call of securities in the accompanying consolidated condensed statements of income.
Before Tax Amount | Tax Expense (Benefit) | Net of Tax Amount | ||||||||||
(In Thousands) | ||||||||||||
Three months ended September 30, 2017: | ||||||||||||
Securities available for sale: | ||||||||||||
Change in net unrealized gain/loss during the period | $ | (777 | ) | $ | 272 | $ | (505 | ) | ||||
Reclassification adjustment for net gains included in net income | (158 | ) | 55 | (103 | ) | |||||||
Total other comprehensive loss | $ | (935 | ) | $ | 327 | $ | (608 | ) | ||||
Nine months ended September 30, 2017: | ||||||||||||
Securities available for sale: | ||||||||||||
Change in net unrealized gain/loss during the period | $ | 3,383 | $ | (1,183 | ) | $ | 2,200 | |||||
Reclassification adjustment for net gains included in net income | (425 | ) | 148 | (277 | ) | |||||||
Total other comprehensive income | $ | 2,958 | $ | (1,035 | ) | $ | 1,923 |
Before Tax Amount | Tax Expense (Benefit) | Net of Tax Amount | ||||||||||
(In Thousands) | ||||||||||||
Three months ended September 30, 2016: | ||||||||||||
Securities available for sale and transferred securities: | ||||||||||||
Change in net unrealized gain (loss) during the period | $ | 69 | $ | (24 | ) | $ | 45 | |||||
Reclassification adjustment for net gains included in net income | (151 | ) | 53 | (98 | ) | |||||||
Total other comprehensive income (loss) | $ | (82 | ) | $ | 29 | $ | (53 | ) | ||||
Nine months ended September 30, 2016: | ||||||||||||
Securities available for sale and transferred securities: | ||||||||||||
Change in net unrealized gain (loss) during the period | $ | 2,579 | $ | (903 | ) | $ | 1,676 | |||||
Reclassification adjustment for net gains included in net income | (509 | ) | 178 | (331 | ) | |||||||
Total other comprehensive income (loss) | $ | 2,070 | $ | (725 | ) | $ | 1,345 |
|
| Before Tax Amount |
|
| Tax Expense (Benefit) |
|
| Net of Tax Amount |
| |||
|
| (In Thousands) |
| |||||||||
Three months ended June 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain/loss during the period |
| $ | 3,289 |
|
| $ | (691 | ) |
| $ | 2,598 |
|
Reclassification adjustment for net gains included in net income |
|
| — |
|
|
| — |
|
|
| — |
|
Defined benefit postretirement medical plan: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for deferred tax on defined benefit |
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement medical plan |
|
| — |
|
|
| — |
|
|
| — |
|
Total other comprehensive loss |
| $ | 3,289 |
|
| $ | (691 | ) |
| $ | 2,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain/loss during the period |
| $ | 7,892 |
|
| $ | (1,659 | ) |
| $ | 6,233 |
|
Reclassification adjustment for net gains included in net income |
|
| — |
|
|
| — |
|
|
| — |
|
Defined benefit postretirement medical plan: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for deferred tax on defined benefit |
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement medical plan |
|
| — |
|
|
| 82 |
|
|
| 82 |
|
Total other comprehensive loss |
| $ | 7,892 |
|
| $ | (1,577 | ) |
| $ | 6,315 |
|
Activity in accumulated other comprehensive income (loss), net of tax, was as follows:
Accumulated | ||||||||||||
Securities | Post- | Other | ||||||||||
Available | retirement | Comprehensive | ||||||||||
For Sale | Benefit | Income | ||||||||||
(In Thousands) | ||||||||||||
Balance January 1, 2017 | $ | 504 | $ | (289 | ) | $ | 215 | |||||
Other comprehensive income before reclassifications | 2,200 | - | 2,200 | |||||||||
Amounts reclassified from accumulated other comprehensive income | (277 | ) | - | (277 | ) | |||||||
Net other comprehensive income during period | 1,923 | - | 1,923 | |||||||||
Balance September 30, 2017 | $ | 2,427 | $ | (289 | ) | $ | 2,138 | |||||
Balance January 1, 2016 | $ | 4,042 | $ | (420 | ) | $ | 3,622 | |||||
Other comprehensive income (loss) before reclassifications | 1,676 | - | 1,676 | |||||||||
Amounts reclassified from accumulated other comprehensive income | (331 | ) | - | (331 | ) | |||||||
Net other comprehensive income during period | 1,345 | - | 1,345 | |||||||||
Balance September 30, 2016 | $ | 5,387 | $ | (420 | ) | $ | 4,967 |
The Company makes certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.
The Company is a limited partner in each LIHTC Partnership. A separate unrelated third party is the general partner. Each limited partnership is managed by the general partner, who exercises full control over the affairs of the limited partnership. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to consent to certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement or is negligent in performing its duties.
|
| Securities Available For Sale |
|
| Post- retirement Benefit |
|
| Accumulated Other Comprehensive Income (Loss) |
| |||
|
| (In Thousands) |
| |||||||||
Balance January 1, 2020 |
| $ | 4,839 |
|
| $ | (244 | ) |
| $ | 4,595 |
|
Other comprehensive income before reclassifications |
|
| 9,968 |
|
|
| — |
|
|
| 9,968 |
|
Amounts reclassified from accumulated other comprehensive income |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income during period |
|
| 9,969 |
|
|
| — |
|
|
| 9,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2020 |
| $ | 14,808 |
|
| $ | (244 | ) |
| $ | 14,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2019 |
| $ | (2,057 | ) |
| $ | (91 | ) |
| $ | (2,148 | ) |
Other comprehensive income (loss) before reclassifications |
|
| 6,233 |
|
|
| — |
|
|
| 6,233 |
|
Amounts reclassified from accumulated other comprehensive income |
|
| — |
|
|
| 82 |
|
|
| 82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income during period |
|
| 6,233 |
|
|
| 82 |
|
|
| 6,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2019 |
| $ | 4,176 |
|
| $ | (9 | ) |
| $ | 4,167 |
|
The general partner of each limited partnership has both the power to direct the activities which most significantly affect the performance of each partnership and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC partnership. In January of 2014, the FASB issued ASU 2014-01“Accounting for Investments in Qualified Affordable Housing Projects.” The pronouncement permitted reporting entities to make an accounting policy election to account for these investments using the proportional amortization method if certain conditions exist. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and will recognize the net investment performance in the income statement as a component of income tax expense (benefit). The Company utilized the proportional amortization method for all of its instruments. As of September 30, 2017 and December 31, 2016 the Company had $9.3 million and $6.8 million in qualified investments recorded in other assets and $6.7 million and $4.3 million in unfunded commitments recorded in other liabilities, respectively.
Unfunded Commitments
As of September 30, 2017, the expected payments for unfunded affordable housing commitments were as follows:
(dollars in thousands) | Amount | |||
2017 | $ | 1,318 | ||
2018 | 1,977 | |||
2019 | 1,372 | |||
2020 | 429 | |||
2021 | 393 | |||
Thereafter | 1,178 | |||
Total Unfunded Commitments | $ | 6,667 |
The following table presents tax credits and other tax benefits recognized and amortization expense related to affordable housing for the three and nine months ended September 30, 2017 and 2016.
Three Months Ended September 30, | ||||||||
(dollars in thousands) | 2017 | 2016 | ||||||
Proportional Amortization Method | ||||||||
Tax credits and other tax benefits recognized | $ | 218 | $ | 170 | ||||
Amortization expense in federal income taxes | 173 | 130 |
Nine Months Ended September 30, | ||||||||
(dollars in thousands) | 2017 | 2016 | ||||||
Proportional Amortization Method | ||||||||
Tax credits and other tax benefits recognized | $ | 640 | $ | 484 | ||||
Amortization expense in federal income taxes | 502 | 368 |
There were no impairment losses of LIHTC investments for the three and nine months ended September 30, 2017 and 2016.
17.
Effective February 24, 2017,Business Combinations
Effective January 31, 2020, the Company merged with UCFC and its subsidiaries, pursuant to the Merger Agreement. Pursuant to the Merger Agreement, UCFC was merged with and into Premier. Immediately following the Merger, Home Savings was merged with and into the Bank, with the Bank surviving the Merger. In addition, UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC and United American Financial
Services, Inc., each merged with the Company’s wholly-owned insurance subsidiary, First Insurance Group of the Midwest, Inc., with First Insurance Group of the Midwest, Inc. surviving the Merger. UCFC’s consolidated assets and equity (unaudited) as of January 31, 2020 totaled $2.8 billion and $324.5 million, respectively. The Company accounted for the transaction under the acquisition method of accounting, which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition. The fair value estimates included in these financial statements are based on preliminary valuations.
On June 19, 2020, the Company changed its name from First Defiance Financial Corp. to Premier Financial Corp. and the Bank changed its name from First Federal Bank of the Midwest to Premier Bank.
In accordance with ASC 805, the Company expensed approximately $2.1 million and $13.6 million of direct acquisition costs during the three and six months ended June 30, 2020, respectively. The Company recorded $217.9 million of goodwill and $33.0 million of intangible assets in 2020 as a result of the combination. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the 2 entities. The Merger was consistent with the Company’s strategy to enhance and expand its presence in northern Ohio. The Merger offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded market area. The intangible assets are related to core deposits, which are being amortized over 10 years on an accelerated basis, and customer relationships, which are being amortized over 10 years on a straight-line basis. For tax purposes, goodwill is non-deductible but will be evaluated annually for impairment. The following table summarizes the fair value of the total consideration transferred as part of the Company acquired Commercial Bancshares, Inc. (“Commercial Bancshares”) and its subsidiary, The Commercial Savings Bank (“CSB”), pursuant to an Agreement and Plan of Merger (“merger agreement”), dated August 23, 2016. The acquisition was accomplished by the merger of Commercial Bancshares into First Defiance, immediately followed by the merger of CSB into First Defiance’s banking subsidiary, First Federal. CSB operated 7 full-service banking offices in northwest and north central, Ohio and 1 commercial loan production office in central Ohio. Commercial Bancshares’ consolidated assets and equity (unaudited) as of February 24, 2017 totaled $348.4 million and $37.5 million, respectively. The Company accounted for the transaction under the acquisition method of accounting which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition. The fair value estimates included in these financial statements are based on preliminary valuations. The Company does not expect material variances from these estimates and expects that final valuation estimates will be completed during the year ending December 31, 2017.
In accordance with ASC 805, the Company expensed approximately $3.7 million of direct acquisition costs, of which $2.8 million was to settle employment and benefit agreements and for personnel expenses related to operating the new Commercial Bancshares locations. The Company recorded $28.7 million of goodwill and $4.9 million of intangible assets. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. The acquisition was consistent with the Company’s strategy to enhance and expand its presence in northwestern and north central Ohio. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded market area. The intangible assets are related to core deposits and are being amortized over 10 years on an accelerated basis. For tax purposes, goodwill totaling $28.7 million is non-deductible but will be evaluated annually for impairment. The following table summarizes the fair value of the total consideration transferred as part of the Commercial Bancshares acquisition as well as the fair value of identifiable assets and liabilities assumed as of the effective date of the transaction.
February 24, 2017 | ||||
(In Thousands) | ||||
Cash Consideration | $ | 12,340 | ||
Equity – Dollar Value of Issued Shares | 56,532 | |||
Fair Value of Total Consideration Transferred | 68,872 | |||
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed: | ||||
Cash and Cash Equivalents | 35,411 | |||
Federal Funds Sold | 2,769 | |||
Securities | 4,338 | |||
Loans | 285,448 | |||
FHLB Stock of Cincinnati and Other Stock | 2,194 | |||
Office Properties and Equipment | 5,455 | |||
Intangible Assets | 4,900 | |||
Bank-Owned Life Insurance | 8,168 | |||
Accrued Interest Receivable and Other Assets | 3,606 | |||
Deposits – Non-Interest Bearing | (56,061 | ) | ||
Deposits – Interest Bearing | (251,931 | ) | ||
Advances from FHLB | (1,403 | ) | ||
Accrued Interest Payable and Other Liabilities | (2,717 | ) | ||
Total Identifiable Net Assets | 40,177 | |||
Goodwill | $ | 28,695 |
Under the terms of the merger agreement, Commercial Bancshares common shareholders had the opportunity to elect to receive 1.1808 shares of common stock of the Company or cash in the amount of $51.00 for each share of Commercial Bancshares common stock, subject to adjustment as provided for in the merger agreement. Total consideration for Commercial Bancshares common shares outstanding was paid 80% in Company stock and 20% in cash. The Company issued 1,139,502 shares of its common stock and paid $12.3 million in cash to the former shareholders of Commercial Bancshares.
January 31, 2020 (In Thousands) Cash Consideration $ 132 Fair Value of Options Exchanged $ 461 Equity - Dollar Value of Issued Shares 526,850 Fair Value of Total Consideration Transferred 527,443 Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed: Cash and Cash Equivalents 52,580 Securities available for sale 262,753 Net loans, including loans held for sale and allowance 2,340,701 FHLB Stock 12,753 Office Properties and Equipment 20,253 Intangible Assets 33,014 Bank Owned Life Insurance 65,934 Mortgage Servicing Rights 9,747 Accrued Interest Receivable and Other Assets 35,423 Deposits - Non-Interest Bearing (430,921 ) Deposits - Interest Bearing (1,651,669 ) Advances from FHLB (381,000 ) Accrued Interest Payable and Other Liabilities (60,004 ) Total Identifiable Net Assets 309,564 Goodwill $ 217,879 The following table presents unaudited pro forma information as if the acquisition had occurred on January 1, 2016 after giving effect to certain adjustments. The unaudited pro forma information for the nine months ended September 30, 2017 and September 30, 2016
As a result of the Merger and in accordance with the Merger Agreement, each share of UCFC common stock issued and outstanding immediately prior to the effective time was converted into 0.3715 share of Premier common stock. No fractional shares of Premier common stock were issued in the Merger, and UCFC’s shareholders became entitled to receive cash in lieu of fractional shares. The Company issued 17,926,174 Premier common shares and paid approximately $132,000 to UCFC shareholders as a result of the Merger. The fair value of Premier common shares issued as part of the consideration paid for the UCFC common shares was determined based on the closing price of the Company’s common shares on the effective date of the Merger.
The following table presents unaudited pro forma information as if the acquisition had occurred on January 1, 2019, after giving effect to certain adjustments. The unaudited pro forma information for the six months ended June 30, 2020 and June 30, 2019 includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.
|
| Six Months Ended June 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (In Thousands) |
| |||||
Net interest income |
| $ | 107,684 |
|
| $ | 107,525 |
|
Provision for credit losses |
|
| 22,265 |
|
|
| 504 |
|
Non-interest income |
|
| 40,296 |
|
|
| 33,863 |
|
Non-interest expense |
|
| 75,568 |
|
|
| 85,518 |
|
Income before income taxes |
|
| 50,147 |
|
|
| 55,366 |
|
Income tax expense |
|
| 10,478 |
|
|
| 10,102 |
|
Net income |
| $ | 39,669 |
|
| $ | 45,264 |
|
Diluted earnings per share |
| $ | 1.06 |
|
| $ | 1.19 |
|
|
|
|
|
|
|
|
|
|
The above pro forma financial information related to 2020 excludes non-recurring merger costs that totaled $13.6 million on a pre-tax basis. The above pro forma financial information excludes the $25.9 million pre-tax provision expense recognized for the six months ended June 30, 2020, under CECL for acquired non-PCD loans as CECL was not effective as of the assumed transaction date of January 1, 2019.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
This quarterly report may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 B of the Securities Exchange Act of 1934, as amended. Those statements may include, but are not limited to, all statements regarding intent, beliefs, expectations, projections, forecasts and plans of Premier Financial Corp. (“Premier” or the “Company”) and its management, and specifically include statements regarding: changes in economic conditions; the nature, extent and timing of governmental actions and reforms; future movements of interest rates; the ability to benefit from a changing interest rate environment; the production levels of mortgage loan generation; the ability to continue to grow loans and deposits; the ability to sustain credit quality ratios at current or improved levels; continued strength in the market area for Premier; the ability to sell real estate owned properties; and the ability to grow in existing and adjacent markets. These forward-looking statements involve numerous risks and uncertainties, including: impacts from the novel coronavirus (COVID-19) pandemic on our business, operations, customers and capital position; higher default rates on loans made to our customers related to COVID-19 and its impact on our customers’ operations and financial condition; the impact of COVID-19 on local, national and global economic conditions; unexpected changes in interest rates or disruptions in the mortgage market related to COVID-19 or responses to the health crisis; the effects of various governmental responses to the COVID-19 pandemic; those inherent in general and local banking, insurance and mortgage conditions; competitive factors specific to markets in which Premier and its subsidiaries operate; future interest rate levels; legislative and regulatory decisions or capital market conditions; and other risks and uncertainties detailed from time to time in our Securities and Exchange Commission (“SEC”) filings, including our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. One or more of these factors have affected or could in the future affect Premier’s business and financial results in future periods and could cause actual results to differ materially from plans and projections. Therefore, there can be no assurances that the forward-looking statements included in this quarterly report will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by Premier or any other persons, that our objectives and plans will be achieved. All forward-looking statements made in this quarterly report are based on information presently available to the management of Premier and speak only as of the date on which they are made. We assume no obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.
Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures. The Company believes these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying performance and trends of the Company. The Company monitors the non-GAAP financial measures and the Company’s management believes they are helpful to investors because they provide an additional tool to use in evaluating the Company’s financial and business trends and operating results. In addition, the Company’s management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analysis and for budgeting and planning purposes. Fully taxable-equivalent (“FTE”) is an adjustment to net interest income to reflect tax-exempt income on an equivalent before-tax basis.
Non-GAAP financial measures have inherent limitations, which are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To mitigate these limitations, the Company has practices in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure
that our performance is properly reflected to facilitate consistent period-to-period comparisons. The Company’s method of calculating these non-GAAP measures may differ from methods used by other companies. Although the Company believes the non-GAAP financial measures disclosed in this report enhance investors' understanding of our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for those financial measures prepared in accordance with GAAP.
The following tables present a reconciliation of non-GAAP measures to their respective GAAP measures for the three and six month periods ended June 30, 2020 and 2019.
Non-GAAP Financial Measures – Net Interest Income on an FTE basis, Net Interest Margin and Efficiency Ratio
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| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
| (In Thousands) |
| |||||||||||||
Net interest income (GAAP) |
| $ | 54,304 |
|
| $ | 28,989 |
|
| $ | 99,767 |
|
| $ | 57,259 |
|
Add: FTE adjustment |
|
| 256 |
|
|
| 249 |
|
|
| 507 |
|
|
| 496 |
|
Net interest income on a FTE basis (1) |
| $ | 54,560 |
|
| $ | 29,238 |
|
| $ | 100,274 |
|
| $ | 57,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income-less securities gains/losses (2) |
|
| 23,017 |
|
|
| 10,486 |
|
|
| 37,016 |
|
|
| 21,299 |
|
Non-interest expense (3) |
|
| 37,984 |
|
|
| 24,235 |
|
|
| 80,293 |
|
|
| 49,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets (4) |
|
| 6,247,037 |
|
|
| 2,912,278 |
|
|
| 5,559,542 |
|
|
| 2,892,695 |
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|
|
|
|
|
|
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|
|
|
|
Ratios: |
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Net interest margin (1) / (4) |
|
| 3.51 | % |
|
| 4.03 | % |
|
| 3.63 | % |
|
| 4.03 | % |
Efficiency ratio (3) / (1) + (2) |
|
| 48.96 | % |
|
| 61.01 | % |
|
| 58.48 | % |
|
| 62.11 | % |
Critical Accounting Policies
The Company has established various accounting policies which govern the application of GAAP in the preparation of its financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements included in the 2019 Form 10-K and in Footnote 2 of this document. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. Those policies which are identified and discussed in detail in the 2019 Form 10-K and in Footnote 2 of this document include the Allowance for Credit Losses, Goodwill, and the Valuation of Mortgage Servicing Rights.
General
Premier is a financial holding company that conducts business through its wholly owned subsidiaries, Premier Bank (the “Bank”), First Insurance Group of the Midwest, Inc. (“First Insurance”), Premier Risk Management Inc. (“Premier Risk Management”), HSB Capital, LLC (HSB Capital”), and HSB Insurance, Inc. (“HSB Insurance”).
On January 31, 2020, Premier completed its previously announced acquisition of United Community Financial Corp., an Ohio corporation (“UCFC”), pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 9, 2019, by and between Premier and UCFC. At the effective time of the
merger (the “Merger”), UCFC merged with and into Premier, with Premier surviving the Merger. Simultaneously with the completion of the Merger, Premier converted from a unitary thrift holding company to a bank holding company, making an election to be a financial holding company.
Immediately following the Merger, the Bank acquired UCFC’s wholly-owned bank subsidiary, Home Savings Bank. Immediately prior to the merger of the banks, the Bank converted from a federal thrift into an Ohio state-chartered bank. In addition, immediately following the merger of the banks, UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC and United American Financial Services, Inc., each merged into First Insurance, with First Insurance surviving the mergers. The Company acquired two additional subsidiaries in the Merger, HSB Capital and HSB Insurance.
The Bank is an Ohio state chartered bank headquartered in Youngstown, Ohio. It conducts operations through 78 banking center offices, 12 loan offices and 2 wealth offices in Ohio, Michigan, Indiana, Pennsylvania and West Virginia.
The Bank provides a broad range of financial services including checking accounts, savings accounts, certificates of deposit, real estate mortgage loans, commercial loans, consumer loans, home equity loans and trust and wealth management services through its extensive branch network.
HSB Capital was formed as an Ohio limited-liability company by UCFC during 2016 for the purpose of providing mezzanine funding for customers of Home Savings. Mezzanine loans are offered by HSB Capital to customers in the Company’s market area and are expected to be repaid from the cash flow from operations of the business.
First Insurance is a wholly-owned subsidiary of the Company. First Insurance is an insurance agency that conducts business throughout the Company’s markets. First Insurance offers property and casualty insurance, life insurance and group health insurance.
Premier Risk Management is a wholly-owned insurance company subsidiary of the Company to insure the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. Premier Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer.
HSB Insurance was formed on June 1, 2017, as a Delaware-based captive insurance company that insures against certain risks that are unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible; by pooling resources with several other insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. HSB Insurance is subject to regulations of the State of Delaware and undergoes periodic examinations by the Delaware Division of Insurance.
Regulation – The Company is subject to regulation, examination and oversight by the Federal Reserve Board (“Federal Reserve”) and the SEC. The Bank is subject to regulation, examination and oversight by the Federal Deposit Insurance Corporation (FDIC) and the Division of Financial Institutions of the Ohio Department of Commerce (ODFI). In addition, the Bank is subject to regulations of the Consumer Financial Protection Bureau (the “CFPB”) which was established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and has broad powers to adopt and enforce consumer protection regulations. The Company and the Bank must file periodic reports with the Federal Reserve, and examinations are conducted periodically by the Federal Reserve, the FDIC and the ODFI to determine whether the Company
and the Bank are in compliance with various regulatory requirements and are operating in a safe and sound manner.
The Company is also subject to various Ohio laws which restrict takeover bids, tender offers and control-share acquisitions involving public companies which have significant ties to Ohio.
Economic Growth, Regulatory Relief and Consumer Protection Act
On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was signed into law. The Regulatory Relief Act was designed to provide regulatory relief for banking organizations, particularly for all but the very largest, those with assets in excess of $250 billion. Bank holding companies with assets of less than $100 billion are no longer subject to enhanced prudential standards, and those with assets between $100 billion and $250 billion will be relieved of those requirements in 18 months, unless the Federal Reserve Board takes action to maintain those standards. Certain regulatory requirements applied only to banks with assets in excess of $50 billion and so did not apply to the Bank even before the enactment of the Regulatory Relief Act.
The Regulatory Relief Act also provides that the banking regulators must adopt regulations implementing the provision that banking organizations with assets of less than $10 billion are permitted to satisfy capital standards and be considered “well capitalized” under the prompt corrective action framework if their leverage ratios of tangible assets to average consolidated assets is between 8% and 10%, unless the bank’s federal banking agency determines that the organization’s risk profile warrants a more stringent leverage ratio. The Federal Reserve Board and the FDIC have proposed for comment the leverage ratio framework for any banking organization with total consolidated assets of less than $10 billion, limited amounts of certain types of assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9%. The community bank leverage ratio would be calculated as the ratio of tangible equity capital divided by average total consolidated assets. Tangible equity capital would be defined as total bank equity capital or total holding company equity capital, as applicable, prior to including minority interests, and excluding accumulated other comprehensive income, deferred tax assets arising from net operating loss and tax credit carry forwards, goodwill and other intangible assets (other than mortgage servicing assets). Average total assets would be calculated in a manner similar to the current tier 1 leverage ratio denominator in that amounts deducted from the community bank leverage ratio numerator would also be excluded from the community bank leverage ratio denominator.
The Federal Reserve Board and the FDIC also adopted a rule providing banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of new current expected credit loss methodology accounting under GAAP.
The Regulatory Relief Act also relieves bank holding companies and banks with assets of less than $100 billion in assets from certain record-keeping, reporting and disclosure requirements.
Holding Company Regulation – The Company is a financial holding company and is subject to the Federal Reserve regulations, examination, supervision and reporting requirements. Federal law generally prohibits a bank holding company from controlling any other institution without prior approval of the Federal Reserve, or from acquiring or retaining more than 5% of the voting shares of a bank or holding company thereof, which is not a subsidiary.
Regulatory Capital Requirements and Prompt Corrective Action – The federal banking regulators have adopted risk-based capital guidelines for financial institutions and their holding companies, designed to absorb losses. The guidelines provide a systematic analytical framework, which makes regulatory capital
requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.
In July 2013, the federal banking regulators issued final new capital rules applicable to smaller banking organizations which also implement certain provisions of the Dodd-Frank Act. The new minimum capital requirements became effective on January 1, 2015, and a new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016, through January 1, 2019.
The rules include (a) a minimum common equity Tier 1 (“CET1”) capital ratio of 4.5%, (b) a minimum Tier 1 capital ratio of 6.0%, (c) a minimum total capital ratio of 8.0%, and (d) a minimum leverage ratio of 4%.
Common equity for the CET1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.
Tier 1 capital includes common equity as defined for the CET1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.
Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the ACL, subject to new eligibility criteria, less applicable deductions.
The deductions from CET1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).
Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5% composed of CET1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer was fully phased in effective January 1, 2019 at 2.5%.
The federal banking agencies have established a system of “prompt corrective action” to resolve certain problems of undercapitalized banks. This system is based on five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a bank's capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after it becomes "critically undercapitalized" unless the bank's
primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be significantly affected depending on a bank's capital category. For example, a bank that is not "well capitalized" generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized depository institution must guarantee, in part, specific aspects of the bank's capital plan for the plan to be acceptable.
In order to be “well-capitalized,” a financial institution must have a CET1 capital ratio of 6.5%, a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital of at least 8% and a leverage ratio of at least 5%, and the institution must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. As of June 30, 2020, the Bank met the ratio requirements in effect to be deemed "well-capitalized."
Deposit Insurance - The FDIC maintains the Deposit Insurance Fund (“DIF’), which insures the deposit accounts of the Bank to the maximum amount provided by law. The general insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith and credit of the United States government.
The FDIC assesses deposit insurance premiums on each insured institution quarterly based on risk characteristics of the institution. The FDIC may also impose a special assessment in an emergency situation.
Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (“DRR”), which is the ratio of the DIF to insured deposits of the total industry. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. The FDIC’s rules reduced assessment rates on all banks but imposed a surcharge on banks with assets of $10 billion or more until the DRR reaches 1.35% and provide assessment credits to banks with assets of less than $10 billion for the portion of their assessments that contribute to the increase of the DRR to 1.35%. The DRR reached 1.36% at June 30, 2019. The credits will be applied when the reserve ratio is at least 1.38%. The rules also changed the method to determine risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than less risky banks.
As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, federally-insured institutions. It also may prohibit any federally-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC.
Business Strategy – The Company’s primary objective is to be a high-performing community-focused financial institution, well regarded in its market areas. The Company accomplishes this through emphasis on local decision making and empowering its employees with tools and knowledge to serve its customers’ needs. The Company believes this strategy results in greater customer loyalty and profitability through core relationships. The Company is focused on diversification of revenue sources and increased market penetration in areas where the growth potential exists for a balance between acquisition and organic growth. The primary elements of the Company’s business strategy are commercial banking, consumer banking, including the origination and sale of single-family residential loans, enhancement of fee income, wealth management and insurance sales, each united by a strong customer service culture throughout the organization.
Commercial and Commercial Real Estate Lending - Commercial and commercial real estate lending have been an ongoing focus and a major component of the Company’s success. The Company provides primarily commercial real estate and commercial business loans with an emphasis on owner-occupied commercial real estate and commercial business lending, including a focus on the deposit balances that accompany these relationships. The Company’s client base tends to be small to middle market customers with annual gross revenues generally between $1 million and $50 million. The Company’s focus is also on securing multiple guarantors in addition to collateral where possible. These customers require the Company to have a high degree of knowledge and understanding of their business in order to provide them with solutions to meet their financial needs. The Company believes this personal service model differentiates it from its competitors, particularly the larger regional institutions. The Company offers a wide variety of products to support commercial clients including remote deposit capture and other cash management services. The Company also believes that the small business customer is a strong market for it. The Company participates in many of the Small Business Administration (“SBA”) lending programs and implemented a program targeting the small business customer. In addition, the Company has been a participant in the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Maintaining a diversified portfolio with an emphasis on monitoring industry concentrations and reacting to changes in the credit characteristics of industries is an ongoing focus.
Consumer Banking – The Company offers customers a full range of deposit and investment products including demand, checking, money market, certificates of deposits, Certificate of Deposit Account Registry Service and savings accounts. The Company offers a full range of investment products through the wealth management department and a wide variety of consumer loan products, including residential mortgage loans, home equity loans, and installment loans. The Company also offers online banking services, which include mobile banking, People Pay, online bill pay, and online account opening as well as the MoneyPass ATM Network offering access to our customers to over 32,000 ATMs nationwide without a surcharge fee.
Fee Income Development - Generation of fee income and the diversification of revenue sources are accomplished through the mortgage banking operation, First Insurance and the wealth management department as the Company seeks to reduce reliance on retail transaction fee income.
Deposit Growth – The Company’s focus has been to grow core deposits with an emphasis on total relationship banking with both our retail and commercial customers. The Company has initiated a pricing strategy that considers the whole relationship of the customer. The Company will continue to focus on increasing its market share in the communities it serves by providing quality products with extraordinary customer service, business development strategies and branch expansion. The Company will look to grow its footprint in areas believed to further complement its overall market share and complement its strategy of being a high-performing community bank.
Asset Quality - Maintaining a strong credit culture is of the utmost importance. The Company has maintained a strong credit approval and review process that has allowed the Company to maintain a credit quality standard that balances the return with the risks of industry concentrations and loan types. The Company is primarily a collateral lender with an emphasis on cash flow performance, while obtaining additional support from personal guarantees and secondary sources of repayment. The Company has directed its attention to loan types and markets that it knows well and in which it has historically been successful. The Company strives to have loan relationships that are well diversified in both size and industry, and monitors the overall trends in the portfolio to maintain its industry and loan type concentration targets. The Company maintains a problem loan remediation process that focuses on detection and resolution. The Company maintains a strong process of internal control that subjects the loan portfolio to periodic internal reviews as well as independent third-party loan review.
Expansion Opportunities – The Company believes it is well positioned to take advantage of acquisitions or other business expansion opportunities in its market areas. The Company believes it has a track record of successfully accomplishing both acquisitions and de novo branching in its market area. This track record puts the Company in a solid position to enter or expand its business. The Company will continue to be disciplined as well as opportunistic in its approach to future acquisitions and de novo branching with a focus on its primary geographic market area, which it knows well, and has been competing in for a long period of time, as well as surrounding market areas.
Investments – The Company invests in U.S. Treasury and federal government agency obligations, obligations of municipal and other political subdivisions, mortgage-backed securities which are issued by federal agencies, corporate bonds and collateralized mortgage obligations (“CMOs”). Management determines the appropriate classification of all such securities at the time of purchase in accordance with FASB ASC Topic 320, Investments –Debt and Equity Securities.
The Company’s securities portfolio is classified as either “available-for-sale” or “held-to-maturity.” Securities classified as available-for-sale may be sold prior to maturity due to changes in interest rates, prepayment risks, and availability of alternative investments, or to meet the Company’s liquidity needs. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the security to maturity.
Lending - In order to properly assess the collateral dependent loans included in its loan portfolio, the Company has established policies regarding the monitoring of the collateral underlying such loans. The Company requires an appraisal that is less than one year old for all new collateral dependent real estate loans, and all renewed collateral dependent real estate loans where significant new money is extended. The appraisal process is handled by the Company’s Credit Department, which selects the appraiser and orders the appraisal. The Company’s loan policy prohibits the account officer from talking or communicating with the appraiser to ensure that the appraiser is not influenced by the account officer in any way in making their determination of value.
The Company generally does not require updated appraisals for performing loans unless significant new money is requested by the borrower.
When a collateral dependent loan is downgraded to classified status, the Company reviews the most current appraisal on file and, if necessary, based on its assessment of the appraisal, such as age, market, etc., the Company will discount this amount to a more appropriate current value based on inputs from lenders and realtors. This amount may then be discounted further by estimation of the carrying and selling costs. In most instances, if the appraisal is more than twelve to fifteen months old, a new appraisal may be required. Finally, the Company assesses whether there is any collateral short fall, taking into consideration guarantor support and liquidity, and determines if a charge off is necessary.
When a collateral dependent loan moves to non-performing status, the Company generally gets a new third party appraisal and charges the loan down appropriately based upon the new appraisal and an estimate of costs to liquidate the collateral. All properties that are moved into the Other Real Estate Owned (“OREO”) category are supported by current appraisals, and the OREO is carried at the lower of cost or fair value, which is determined based on appraised value less an estimate of the liquidation costs.
The Company does not adjust any appraisals upward without written documentation of this valuation change from the appraiser. When setting reserves and charge-offs on classified loans, appraisal values may be discounted downward based upon the Company’s experience with liquidating similar properties.
All loans over 90 days past due and/or on non-accrual are classified as non-performing loans. Non-performing status automatically occurs in the month in which the 90 day delinquency occurs.
Any partially charged-off collateral dependent loans are considered non-performing, and as such, would need to show an extended period of time with satisfactory payment performance as well as cash flow coverage capability supported by current financial statements before the Company will consider an upgrade to performing status. The Company may consider moving the loan to accruing status after approximately six months of satisfactory payment performance.
For loans where the Company determines that an updated appraisal is not necessary, other means are used to verify the value of the real estate, such as recent sales of similar properties on which the Company had loans as well as calls to appraisers, brokers, realtors and investors. The Company monitors and tracks its loan to value quarterly to determine accuracy and any necessary charge-offs. Based on these results, changes may occur in the processes used.
Loan modifications constitute a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. For loans that are considered TDRs, the Company either computes the present value of expected future cash flows discounted at the original loan’s effective interest rate or it may measure impairment based on the fair value of the collateral. For those loans measured for impairment utilizing the present value of future cash flows method, any discount is carried as a reserve in the ACL. For those loans measured for impairment utilizing the fair value of the collateral, any shortfall is charged off.
Earnings - The profitability of the Company is primarily dependent on its net interest income and non-interest income. Net interest income is the difference between interest income on interest-earning assets, principally loans and securities, and interest expense on interest-bearing deposits, Federal Home Loan Bank of Cincinnati (“FHLB”) advances, and other borrowings. The Company’s non-interest income is mainly derived from service fees and other charges, mortgage banking income, and insurance commissions. The Company’s earnings also depend on the provision for credit losses, non-interest expenses (such as employee compensation and benefits, occupancy and equipment expense, deposit insurance premiums, and miscellaneous other expenses) and federal income tax expense.
Changes in Financial Condition
At June 30, 2020, the Company's total assets amounted to $7.0 billion compared to $3.5 billion at December 31, 2019. The increase is primarily attributable to the Merger which added $2.8 billion in identified assets as of January 31, 2020 and the increase in commercial loan balances due to participation in the Paycheck Protection Program (“PPP”) that totaled $334.4 million at the end of the quarter.
Gross loans receivable, excluding loans held for sale, were $5.5 billion at June 30, 2020, compared to $2.8 billion at December 31, 2019. The $2.7 billion increase in gross loans receivable was principally due to $2.2 billion in loans acquired in the Merger along with organic growth of approximately $500 million inclusive of the $334 million in PPP balances.
The investment securities portfolio increased $284.1 million to $567.5 million at June 30, 2020 from $283.4 million at December 31, 2019. The increase is primarily a result of $262.8 million of available for sale securities acquired in the Merger, a $12.6 million increase in the market value of available-for-sale securities and purchases of securities totaling $61.7 million. This was offset by runoff, sales and amortization of $53.0 million during the period.
Deposits increased $2.9 billion from $2.9 billion at December 31, 2019, to $5.8 billion as of June 30, 2020. The increase was mainly due to the deposits acquired in the Merger which added $430.9 million of non-
interest deposits and $1.7 billion of interest-bearing deposits and organic growth of approximately $800 million. The organic increase in deposit balances is being driven by businesses depositing the proceeds of their PPP loans along with customer deposits increasing as it appears that customers are saving more money in the midst of the pandemic and economic slowdown.
Stockholders’ equity increased $514.8 million from $426.2 million at December 31, 2019, to $941.0 million at June 30, 2020. The increase in stockholders’ equity was primarily the result of the Merger, net income of $6.6 million and an increase of $10.0 million in other comprehensive gain. The increase was partially offset by the repurchase of 430,000 shares of common stock totaling $10.1 million and $16.5 million of common stock dividends paid.
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar amount of interest from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in thousands of dollars and rates, and the net interest margin. The table reports interest income from tax-exempt loans and investment on a fully tax-equivalent basis. All average balances are based upon daily balances (dollars in thousands).
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| Rate(2) |
| ||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
| $ | 5,389,805 |
|
| $ | 58,819 |
|
|
| 4.39 | % |
| $ | 2,561,341 |
|
| $ | 32,683 |
|
|
| 5.12 | % |
Securities (3) |
|
| 523,360 |
|
|
| 3,156 |
|
|
| 2.48 |
|
|
| 296,926 |
|
|
| 2,364 |
|
|
| 3.19 |
|
Interest bearing deposits |
|
| 260,586 |
|
|
| 79 |
|
|
| 0.12 |
|
|
| 41,934 |
|
|
| 260 |
|
|
| 2.49 |
|
FHLB stock |
|
| 73,286 |
|
|
| 651 |
|
|
| 3.57 |
|
|
| 12,077 |
|
|
| 183 |
|
|
| 6.08 |
|
Total interest-earning assets |
|
| 6,247,037 |
|
|
| 62,705 |
|
|
| 4.04 |
|
|
| 2,912,278 |
|
|
| 35,490 |
|
|
| 4.89 |
|
Non-interest-earning assets |
|
| 758,746 |
|
|
|
|
|
|
|
|
|
|
| 311,719 |
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 7,005,783 |
|
|
|
|
|
|
|
|
|
| $ | 3,223,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ | 4,144,699 |
|
| $ | 7,435 |
|
|
| 0.72 | % |
| $ | 2,093,751 |
|
| $ | 5,581 |
|
|
| 1.07 | % |
FHLB advances and other |
|
| 420,784 |
|
|
| 516 |
|
|
| 0.49 |
|
|
| 62,466 |
|
|
| 304 |
|
|
| 1.95 |
|
Subordinated debentures |
|
| 36,083 |
|
|
| 179 |
|
|
| 2.00 |
|
|
| 36,083 |
|
|
| 350 |
|
|
| 3.89 |
|
Securities sold under repurchase agreements |
|
| 15,274 |
|
|
| 15 |
|
|
| 0.39 |
|
|
| 4,607 |
|
|
| 17 |
|
|
| 1.48 |
|
Total interest-bearing liabilities |
|
| 4,616,840 |
|
|
| 8,145 |
|
|
| 0.71 |
|
|
| 2,196,907 |
|
|
| 6,252 |
|
|
| 1.14 |
|
Non-interest bearing deposits |
|
| 1,346,287 |
|
|
| — |
|
|
| — |
|
|
| 584,309 |
|
|
| — |
|
|
|
|
|
Total including non-interest bearing demand deposits |
|
| 5,963,127 |
|
|
| 8,145 |
|
|
| 0.55 |
|
|
| 2,781,216 |
|
|
| 6,252 |
|
|
| 0.90 |
|
Other non-interest-bearing liabilities |
|
| 109,863 |
|
|
|
|
|
|
|
|
|
|
| 44,169 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
| 6,072,990 |
|
|
|
|
|
|
|
|
|
|
| 2,825,385 |
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
| 932,793 |
|
|
|
|
|
|
|
|
|
|
| 398,612 |
|
|
|
|
|
|
|
|
|
Total liabilities and stock-Holders’ equity |
| $ | 7,005,783 |
|
|
|
|
|
|
|
|
|
| $ | 3,223,997 |
|
|
|
|
|
|
|
|
|
Net interest income; interest rate spread |
|
|
|
|
| $ | 54,560 |
|
|
| 3.33 | % |
|
|
|
|
| $ | 29,238 |
|
|
| 3.75 | % |
Net interest margin (4) |
|
|
|
|
|
|
|
|
|
| 3.51 | % |
|
|
|
|
|
|
|
|
|
| 4.03 | % |
Average interest-earning assets to average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
| 135 | % |
|
|
|
|
|
|
|
|
|
| 133 | % |
(1) | Interest on certain tax-exempt loans and securities
Results of Operations Three months ended June 30, 2020 and 2019 For the three months ended June 30, 2020, the Company reported net income of $29.1 million compared to $12.2 million for the quarter ended June 30, 2019. On a per share basis, basic and diluted earnings per common share were $0.78 for the three months ended June 30, 2020 and basic and diluted earnings per common share were $0.62 and $0.61, respectively for the three months ended June 30, 2019. The year-to-year results are greatly impacted by the Merger. The results for the second quarter of 2020 also included $2.1 million of acquisition-related charges, which had an after-tax cost of $1.5 million. Net Interest Income The Company’s net interest income is determined by its interest rate spread (i.e. the difference between the yields on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income was $54.3 million for the quarter ended June 30, 2020, up from $29.0 million for the same period in 2019. The tax-equivalent net interest margin was 3.51% for the quarter ended June 30, 2020, a decrease from 4.03% for the same period in 2019. The decrease in margin between the 2020 and 2019 was primarily due to a decrease in the yield on earning assets brought about by a decline in interest rates in the latter half of 2019 and through the first quarter of 2020. The Merger also played a role in the decline in net interest margin. The yield on interest-earning assets was 4.04% for the quarter ended June 30, 2020, down 85 basis points from 4.89% for the same period in 2019. The cost of interest-bearing liabilities between the two periods declined 43 basis points to 0.71% in the second quarter of 2020 from 1.14% in the second quarter of 2019. Interest income increased $25.3 million to $54.3 million for the quarter ended June 30, 2020, from $29.0 million for the quarter ended June 30, 2019. This increase is due to continued solid loan growth, primarily related to growth in PPP loan balances, and the Merger which resulted in average earning asset growth of $3.3 billion year-over-year. Income from loans increased to $58.8 million for the quarter ended June 30, 2020, compared to $32.7 million for the same period in 2019 due to average loan growth of $2.8 billion. The decrease in the loan portfolio yield to 4.39% for the three months ended June 30, 2020 from 5.12% for the same period in 2019, was due mainly to declining rates and the Merger. Interest income from investments increased $792,000 in the second quarter of 2020 to $3.2 million compared to the same period in 2019. The yield decreased 66 basis points to 2.48% for the three months ended June 30, 2020, compared to 3.19% for the same period in 2019. Income from interest bearing deposits decreased to $79,000 in the second quarter of 2020 compared to $260,000 for the same period in 2019 while income from FHLB stock increased to $651,000 in the second quarter of 2020 compared to $183,000 for the same period in 2019. Interest expense increased by $1.9 million to $8.1 million in the second quarter of 2020 compared to $6.3 million for the same period in 2019. This increase was due to growth in deposits along with the Merger. Interest expense related to interest-bearing deposits was $7.4 million in the second quarter of 2020 compared to $5.6 million for the same period in 2019. Interest expense recognized by the Company related to FHLB advances was $516,000 in the second quarter of 2020 compared to $304,000 for the same period in 2019 as a result of increased volume from the Merger. Expenses on subordinated debentures and notes payable were $179,000 and $15,000 respectively in the second quarter of 2020 compared to $350,000 and $17,000 respectively for the same period in 2019. Allowance for Credit Losses (“ACL”) The Company adopted ASU 2016-13, the Current Expected Credit Loss (“CECL”) model on January 1, 2020. Under CECL, a valuation reserve will be established in the ACL and maintained through expense in the provision for credit losses. Upon adoption of CECL, the Company made a one-time adjustment, net of taxes, to retained earnings for $1.9 million. The ACL represents management’s assessment of the estimated credit losses the Company will receive over the life of the loan. ACL requires a projection of credit losses over the contract lifetime of the credit adjusted for prepayment tendencies. Management analyzes the adequacy of the ACL regularly through reviews of the loan portfolio. Consideration is given to economic conditions, changes in interest rates and the effect of such changes on collateral values and borrower’s ability to pay, changes in the composition of the loan portfolio and trends in past due and non-performing loan balances. The ACL is a material estimate that is susceptible to significant fluctuation and is established through a provision for credit losses based on management’s evaluation of the inherent risk in the loan portfolio. In addition to extensive in-house loan monitoring procedures, the Company utilizes an outside party to conduct an independent loan review of commercial loan and commercial real estate loan relationships. The Company’s goal is to have 50% or greater of the portfolio reviewed annually. Management utilizes the results of this outside loan review to assess the effectiveness of its internal loan grading system as well as to assist in the assessment of the overall adequacy of the ACL associated with these types of loans. The ACL is made up of two basic components. The first component of the allowance for credit loss is the specific reserve in which the Company sets aside reserves based on the analysis of individual impaired credits. In establishing specific reserves, the Company analyzes all substandard, doubtful and loss graded loans quarterly and makes judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors. If the loan is impaired and cash flow dependent, then a specific reserve is established for the discount on the net present value of expected future cash flows. If the loan is impaired and collateral dependent, then any shortfall is usually charged off. The Company also considers the impacts of any SBA or Farm Service Agency guarantees. The specific reserve portion of the ACL was $425,000 at June 30, 2020, and $422,000 at December 31, 2019. The second component is a general reserve, which is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the potential losses over the contractual lifetime of the loan adjusted for prepayment tendencies. In addition the future economic environment is incorporated in projection with loss expectations to revert to the long-run historical mean after such time as management can no longer make or obtain a reasonable and supportable forecast. For purposes of the general reserve analysis, the six loan portfolio segments are further segregated into thirteen different loan pools to allocate the ACL. Residential real estate is further segregated into owner occupied and nonowner occupied for ACL. Commercial real estate is split into owner occupied, nonowner occupied, multifamily, agriculture land and other commercial real estate. Commercial credits are comprised of commercial working capital, agriculture production and other commercial credits. The Company utilizes three different methodologies to analyze loan pools. Discounted cash flows (DCF) was selected as the appropriate method for loan segments with longer average lives and regular payment structures. This method is applied to a majority of the Company’s real estate loans. DCF generates cash flow projections at the instrument level where payment expectations are adjusted for prepayment and curtailment to produce an expected cashflow stream. This expected cashflow stream is compared to the net present value of expected cash flows to establish a valuation account for these loans. The probability of default/loss given default methodology was selected as most appropriate for loan segments with average lives of three years or less and/or irregular payment structures. This methodology was used for home equity and commercial portfolios. A loan is considered to default if one of the following is detected:
The default rate is measured on the current life of the loan segment using s weighted average of the four most recent quarters. PD/LGD is determined on a dollar-ratio basis, measuring the ratio of net charged off principal to defaulted principal. The consumer portfolio contains loans with many different payment structures, payment streams and collateral. The remaining life method was deemed most appropriate for these loans. The weighted average remaining life uses an annual charge-off rate over several vintages to estimate credit losses. The average annual charge-off rate is applied to the contractual term adjusted for prepayments. Additionally, CECL requires a reasonable and supportable forecast when establishing the ACL. The Company estimates losses over an approximate one-year forecast period using Moody’s baseline economic forecasts, and then reverts to longer term historical loss experience over a three-year period. The quantitative general allowance increased to $36.2 million at June 30, 2020, from $6.6 million at December 31, 2019. In addition to the quantitative analysis, a qualitative analysis is performed each quarter to provide additional general reserves on the non-impaired loan portfolio for various factors. The overall qualitative factors are based on nine sub-factors. The nine sub-factors have been aggregated into three qualitative factors: economic, environment and risk. ECONOMIC
ENVIRONMENT
|