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QCRH QCR Holding

Filed: 7 May 21, 2:23pm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to________

Commission file number 0-22208

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

42-1397595

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

(309) 736-3580

(Registrant's telephone number, including area code)

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, $1.00 Par Value

QCRH

The Nasdaq Global 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.

Yes       No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes       No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes       No

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of May 1, 2021, the Registrant had outstanding 15,846,918 shares of common stock, $1.00 par value per share.

1

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page
Number(s)

Part I

    

FINANCIAL INFORMATION

Item 1

    

Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets
As of March 31, 2021 and December 31, 2020

4

Consolidated Statements of Income
For the Three Months Ended March 31, 2021 and 2020

5

Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2021 and 2020

6

Consolidated Statements of Changes in Stockholders' Equity
For the Three Months Ended March 31, 2021 and 2020

7

Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2021 and 2020

8

Notes to Consolidated Financial Statements

10

Note 1. Summary of Significant Accounting Policies

10

Note 2. Investment Securities

20

Note 3. Loans/Leases Receivable

24

Note 4. Derivatives and Hedging Activities

34

Note 5. Income Taxes

36

Note 6. Earnings Per Share

37

Note 7. Fair Value

38

Note 8. Business Segment Information

40

Note 9. Regulatory Capital Requirements

41

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

43

General

43

Impact of COVID-19

43

Executive Overview

46

Strategic Financial Metrics

47

Strategic Developments

48

GAAP to Non-GAAP Reconciliations

49

Net Interest Income - (Tax Equivalent Basis)

52

Critical Accounting Policies

54

Goodwill

54

Allowance for Credit Losses

55

Results of Operations

55

Interest Income

55

Interest Expense

55

Provision for Credit Losses

56

Noninterest Income

57

Noninterest Expense

59

2

Income Taxes

60

Financial Condition

61

Investment Securities

61

Loans/Leases

62

Allowance for Credit Losses on Loans/Leases and OBS Exposures

64

Nonperforming Assets

66

Deposits

67

Borrowings

67

Stockholders' Equity

69

Liquidity and Capital Resources

69

Special Note Concerning Forward-Looking Statements

71

Item 3

    

Quantitative and Qualitative Disclosures About Market Risk

72

Item 4

Controls and Procedures

74

Part II

    

OTHER INFORMATION

75

Item 1

Legal Proceedings

75

Item 1A

Risk Factors

75

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

75

Item 3

Defaults Upon Senior Securities

75

Item 4

Mine Safety Disclosures

75

Item 5

Other Information

75

Item 6

Exhibits

76

Signatures

77

Throughout this Quarterly Report on Form 10-Q, we use certain acronyms and abbreviations, as defined in Note 1 to the Consolidated Financial Statements.

3

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of March 31, 2021 and December 31, 2020

March 31,

December 31,

2021

2020

(dollars in thousands)

Assets

Cash and due from banks

$

78,814

$

61,329

Federal funds sold

 

1,350

 

9,080

Interest-bearing deposits at financial institutions

 

53,706

 

86,596

Securities held to maturity, at amortized cost, net of allowance for credit losses

 

452,952

 

476,165

Securities available for sale, at fair value

 

346,873

 

361,966

Total securities

799,825

 

838,131

Loans receivable held for sale

 

5,664

 

3,758

Loans/leases receivable held for investment

 

4,355,387

 

4,247,371

Gross loans/leases receivable

 

4,361,051

 

4,251,129

Less allowance for credit losses

 

(81,831)

 

(84,376)

Net loans/leases receivable

 

4,279,220

 

4,166,753

 

  

 

  

Bank-owned life insurance

 

61,057

 

60,586

Premises and equipment, net

 

73,162

 

72,693

Restricted investment securities

 

19,724

 

18,103

Other real estate owned, net

 

173

 

20

Goodwill

 

74,066

 

74,066

Intangibles

 

10,873

 

11,381

Derivatives

122,668

222,757

Other assets

 

70,509

 

61,302

Total assets

$

5,645,147

$

5,682,797

 

  

 

  

Liabilities and Stockholders' Equity

 

  

 

  

Liabilities:

 

  

 

  

Deposits:

 

  

 

  

Noninterest-bearing

$

1,269,578

$

1,145,378

Interest-bearing

 

3,362,204

 

3,453,759

Total deposits

 

4,631,782

 

4,599,137

 

  

 

  

Short-term borrowings

 

6,840

 

5,430

Federal Home Loan Bank advances

 

25,000

 

15,000

Subordinated notes

118,731

118,691

Junior subordinated debentures

 

38,030

 

37,993

Derivatives

125,863

229,270

Other liabilities

 

90,182

 

83,483

Total liabilities

 

5,036,428

 

5,089,004

 

  

 

  

 

  

 

  

Stockholders' Equity:

 

  

 

  

Preferred stock, $1 par value; shares authorized 250,000 March 2021 and December 2020 - 0 shares issued or outstanding

 

 

Common stock, $1 par value; shares authorized 20,000,000 March 2021 - 15,843,732 shares issued and outstanding December 2020 - 15,805,711 shares issued and outstanding

 

15,844

 

15,806

Additional paid-in capital

 

276,350

 

275,807

Retained earnings

 

316,900

 

300,804

Accumulated other comprehensive income (loss):

 

 

Securities available for sale

 

4,583

 

9,008

Derivatives

(4,958)

(7,632)

Total stockholders' equity

 

608,719

 

593,793

Total liabilities and stockholders' equity

$

5,645,147

$

5,682,797

See Notes to Consolidated Financial Statements (Unaudited)

4

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended March 31, 2021 and 2020

    

2021

    

2020

(dollars in thousands, except share data)

Interest and dividend income:

Loans/leases, including fees

$

41,333

$

43,159

Securities:

Taxable

 

2,042

 

1,727

Nontaxable

 

3,934

 

3,459

Interest-bearing deposits at financial institutions

 

37

 

361

Restricted investment securities

 

219

 

258

Federal funds sold

 

 

18

Total interest and dividend income

 

47,565

 

48,982

Interest expense:

Deposits

 

3,427

 

9,206

Short-term borrowings

 

1

 

64

Federal Home Loan Bank advances

 

9

 

449

Subordinated notes

1,594

994

Junior subordinated debentures

 

559

 

571

Total interest expense

 

5,590

 

11,284

Net interest income

 

41,975

 

37,698

Provision for credit losses

 

6,713

 

8,367

Net interest income after provision for loan/lease losses

 

35,262

 

29,331

Noninterest income:

Trust department fees

 

2,801

 

2,312

Investment advisory and management fees

 

940

 

1,727

Deposit service fees

 

1,408

 

1,477

Gains on sales of residential real estate loans, net

 

1,337

 

652

Swap fee income

 

13,557

 

6,804

Earnings on bank-owned life insurance

 

471

 

329

Debit card fees

 

975

 

758

Correspondent banking fees

 

314

 

215

Other

 

1,686

 

922

Total noninterest income

 

23,489

 

15,196

Noninterest expense:

Salaries and employee benefits

 

24,847

 

18,519

Occupancy and equipment expense

 

4,108

 

4,032

Professional and data processing fees

 

3,443

 

3,369

Post-acquisition compensation, transition and integration costs

 

 

151

Disposition costs

8

517

FDIC insurance, other insurance and regulatory fees

 

1,065

 

683

Loan/lease expense

 

300

 

228

Net cost of (income from) and gains/losses on operations of other real estate

 

39

 

13

Advertising and marketing

 

627

 

682

Bank service charges

 

523

 

504

Losses on liability extinguishment

 

 

147

Correspondent banking expense

 

200

 

216

Intangibles amortization

 

508

 

549

Goodwill impairment

500

Other

 

1,560

 

1,305

Total noninterest expense

 

37,228

 

31,415

Net income before income taxes

 

21,523

 

13,112

Federal and state income tax expense

 

3,541

 

1,884

Net income

$

17,982

$

11,228

Basic earnings per common share

$

1.14

$

0.71

Diluted earnings per common share

$

1.12

$

0.70

Weighted average common shares outstanding

 

15,803,643

 

15,796,796

Weighted average common and common equivalent shares outstanding

 

16,025,548

 

16,011,456

Cash dividends declared per common share

$

0.06

$

0.06

See Notes to Consolidated Financial Statements (Unaudited)

5

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended March 31, 2021 and 2020

Three Months Ended March 31,

    

    

2021

    

2020

(dollars in thousands)

Net income

$

17,982

$

11,228

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:

Unrealized holding gains (losses) arising during the period before tax

(5,759)

 

2,481

Unrealized gains (losses) on derivatives:

Unrealized holding gains (losses) arising during the period before tax

 

3,153

 

(7,161)

Less reclassification adjustment for caplet amortization before tax

(151)

(110)

 

3,304

 

(7,051)

Other comprehensive loss, before tax

 

(2,455)

 

(4,570)

Tax benefit

 

(704)

 

(879)

Other comprehensive loss, net of tax

 

(1,751)

 

(3,691)

Comprehensive income

$

16,231

$

7,537

See Notes to Consolidated Financial Statements (Unaudited)

6

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three Months Ended March 31, 2021 and 2020

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

    

Stock

    

Capital

    

Earnings

    

(Loss) Income

    

Total

(dollars in thousands)

��

Balance December 31, 2020

$

15,806

$

275,807

$

300,804

$

1,376

$

593,793

Net income

 

 

 

17,982

 

 

17,982

Other comprehensive loss, net of tax

 

 

 

 

(1,751)

 

(1,751)

Impact of adoption of ASU 2016-13

 

 

 

(937)

 

 

(937)

Common cash dividends declared, $0.06 per share

 

 

 

(949)

 

 

(949)

Stock-based compensation expense

 

 

841

 

 

 

841

Issuance of common stock under employee benefit plans

 

38

 

(298)

 

 

 

(260)

Balance, March 31, 2021

$

15,844

$

276,350

$

316,900

$

(375)

$

608,719

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

(dollars in thousands)

Balance December 31, 2019

$

15,828

$

274,785

$

245,836

$

(1,098)

$

535,351

Net income

 

 

 

11,228

 

 

11,228

Other comprehensive income, net of tax

 

 

 

 

(3,691)

 

(3,691)

Common cash dividends declared, $0.06 per share

 

 

 

(942)

 

 

(942)

Repurchase and cancellation of 100,932 shares of common stock

as a result of a share repurchase program

(101)

(1,844)

(1,835)

(3,780)

Stock-based compensation expense

 

 

641

 

 

 

641

Issuance of common stock under employee benefit plans

 

47

 

285

 

 

 

332

Balance, March 31, 2020

$

15,774

$

273,867

$

254,287

$

(4,789)

$

539,139

See Notes to Consolidated Financial Statements (Unaudited)

7

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended March 31, 2021 and 2020

    

2021

    

2020

(dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

 

  

 

  

Net income

$

17,982

$

11,228

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

 

  

 

  

Depreciation

 

1,331

 

1,338

Provision for credit losses

 

6,713

 

8,367

Stock-based compensation expense

 

841

 

641

Deferred compensation expense accrued

 

1,289

 

913

Losses (gains) on other real estate owned, net

 

(1)

 

4

Amortization of premiums on securities, net

 

597

 

159

Caplet amortization

151

110

Mark to market gains on unhedged derivatives, net

(164)

Loans originated for sale

 

(59,785)

 

(34,459)

Proceeds on sales of loans

 

59,216

 

34,790

Gains on sales of residential real estate loans

 

(1,337)

 

(652)

Loss on liability extinguishment, net

147

Gains on sales of premises and equipment

(21)

(8)

Amortization of intangibles

 

508

 

549

Accretion of acquisition fair value adjustments, net

 

(504)

 

(625)

Increase in cash value of bank-owned life insurance

 

(471)

 

(329)

Goodwill impairment

500

Decrease (increase) in other assets

 

(8,243)

 

5,917

Decrease in other liabilities

(6,959)

(21,998)

Net cash provided by operating activities

$

11,143

$

6,592

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Net decrease in federal funds sold

 

7,730

 

5,105

Net decrease (increase) in interest-bearing deposits at financial institutions

 

32,890

 

(54,122)

Proceeds from sales of other real estate owned

 

1

 

827

Activity in securities portfolio:

 

 

Purchases

 

(53,567)

 

(83,987)

Calls, maturities and redemptions

 

48,988

 

3,872

Paydowns

 

19,308

 

9,182

Sales

 

19,540

 

Activity in restricted investment securities:

 

  

 

  

Purchases

 

(1,680)

 

(1,874)

Redemptions

 

59

 

3,917

Net increase in loans/leases originated and held for investment

 

(107,996)

 

(15,596)

Purchase of premises and equipment

 

(1,800)

 

(798)

Proceeds from sales of premises and equipment

21

8

Net cash (used in) investing activities

$

(36,506)

$

(133,466)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Net increase in deposit accounts

 

32,645

 

259,310

Net increase in short-term borrowings

 

1,410

 

29,644

Activity in Federal Home Loan Bank advances:

 

  

 

  

Term advances

 

 

45,000

Net change in short-term and overnight advances

 

10,000

 

(109,300)

Payment of cash dividends on common stock

 

(947)

 

(947)

Proceeds (payment) from issuance of common stock, net

(260)

520

Repurchase and cancellation of shares

(3,780)

Net cash provided by financing activities

$

42,848

$

220,447

Net increase in cash and due from banks

 

17,485

 

93,573

Cash and due from banks, beginning

 

61,329

 

76,254

Cash and due from banks, ending

$

78,814

$

169,827

8

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Three Months Ended March 31, 2021 and 2020

Supplemental disclosure of cash flow information, cash payments for:

 

  

 

  

Interest

$

7,674

$

11,534

Income/franchise taxes

 

35

 

(2,134)

 

  

 

Supplemental schedule of noncash investing activities:

 

  

 

Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net

 

(1,751)

 

(3,691)

Change in retained earnings from adoption of ASU 2016-13

(937)

Transfers of loans to other real estate owned

 

153

 

Due to broker for purchases of securities

2,568

Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities

 

(100,886)

 

110,545

Dividends payable

 

949

 

942

See Notes to Consolidated Financial Statements (Unaudited)

9

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2021

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation:  The interim unaudited Consolidated Financial Statements contained herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2020, included in the Company's Annual Report on Form 10-K filed with the SEC on March 12, 2021. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended March 31, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021, or for any other period.

The acronyms and abbreviations identified below are used throughout this Quarterly Report on Form 10-Q. It may be helpful to refer back to this page as you read this report.

ACL: Allowance for credit losses

Allowance: Allowance for credit losses

GAAP: Generally Accepted Accounting Principles

HTM: Held to maturity

AOCI: Accumulated other comprehensive income (loss)

LIBOR: London Inter-Bank Offered Rate

AFS: Available for sale

LRP: Loan Relief Program

ASC: Accounting Standards Codification

m2: m2 Equipment Finance, LLC

ASU: Accounting Standards Update

MSELF: Main Street Expanded Loan Facility

Bates Companies: Bates Financial Advisors, Inc., Bates

MSNLF: Main Street New Loan Facility

Financial Services, Inc., Bates Securities, Inc. and

NIM: Net interest margin

Bates Financial Group, Inc.

NPA: Nonperforming asset

BOLI: Bank-owned life insurance

NPL: Nonperforming loan

OBS: Off-balance sheet

Caps: Interest rate cap derivatives

OREO: Other real estate owned

CARES Act: Coronavirus Aid, Relief and Economy

OTTI: Other-than-temporary impairment

Security Act

PCAOB: Public Company Accounting Oversight Board

CECL: Current Expected Credit Losses

PCD: Purchased credit deteriorated loan

Community National: Community National Bancorporation

PCI: Purchased credit impaired

COVID-19: Coronavirus Disease 2019

PPP: Paycheck Protection Program

CRBT: Cedar Rapids Bank & Trust Company

Provision: Provision for credit losses

CRE: Commercial real estate

QCBT: Quad City Bank & Trust Company

CSB: Community State Bank

RB&T: Rockford Bank & Trust Company

C&I: Commercial and industrial

ROAA: Return on Average Assets

EPS: Earnings per share

SBA: U.S. Small Business Administration

Exchange Act: Securities Exchange Act of 1934, as

SEC: Securities and Exchange Commission

amended

SFCB: Springfield First Community Bank

FASB: Financial Accounting Standards Board

Springfield Bancshares: Springfield Bancshares, Inc.

FDIC: Federal Deposit Insurance Corporation

TA: Tangible assets

Federal Reserve: Board of Governors of the Federal

TCE: Tangible common equity

Reserve System

TDRs: Troubled debt restructurings

FHLB: Federal Home Loan Bank

TEY: Tax equivalent yield

FRB: Federal Reserve Bank of Chicago

The Company: QCR Holdings, Inc.

10

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries which include the accounts of 4 commercial banks: QCBT, CRBT, CSB and SFCB. All are state-chartered commercial banks and all are members of the Federal Reserve system. The Company engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.

Recent accounting developments: In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326).  Under the standard, assets measured at amortized cost (including loans, leases and HTM securities) will be presented at the net amount expected to be collected.  Rather than the “incurred” model that is currently being utilized, the standard will require the use of a forward-looking approach to recognizing all expected credit losses at the beginning of an asset’s life.  For public companies, ASU 2016-13 became effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

On March 27, 2020, the CARES Act, a stimulus package designed in response to the economic disruption created by COVID-19, was signed into law.  The CARES Act includes provisions that, if elected, temporarily delay the required implementation date of ASU 2016-13.  Section 4014 of the CARES Act stipulates that no insured depository institution, bank holding company, or affiliate will be required to comply with ASU 2016-13, beginning on the date of CARES Act’s enactment and continuing until the earlier of: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December 31, 2020.  The Company elected to defer its implementation of ASU 2016-13 as allowed by the CARES Act.

On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date the national emergency terminates or January 1, 2022.  Based upon guidance from regulators, it was determined the Company could adopt ASU 2016-13 on January 1, 2021, and the Company did adopt on January 1, 2021.  The Company has developed a CECL allowance model which calculates allowances over the life of a loan and is largely driven by portfolio characteristics, risk-grading, economic outlook, and other key methodology assumptions.  Those assumptions are based upon the existing probability of default and loss given the default framework.  The Company utilizes economic and other forecasts over a reasonable and supportable forecast period and then fully reverts back to average historical losses.  

Results for reporting periods beginning after December 31, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP, which includes a change in terminology from “Allowance for estimated losses on loans/leases” to “Allowance for credit losses.” The Company adopted the standard using a modified retrospective approach and recorded an after tax decrease to retained earnings of $937 thousand as of January 1, 2021 due to the adoption of ASU 2016-13. This transition adjustment included an $8.1 million decrease in the allowance related to loans and leases, an established ACL on held to maturity debt securities of $183 thousand and the established ACL on OBS credit exposures of $9.1 million. The company did not record an ACL on available for sale securities upon adoption of ASU 2016-13.

The company elected to not measure an ACL on accrued interest as such accrued interest is written off in a timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest income. The Company elected not to include accrued interest within the presentation and disclosures of the carrying amount of financial assets held at amortized cost. This election is applicable to the various disclosures included within the financial statements and notes included on the following pages of this Form 10-Q.

The Company elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of 2020, which allowed banking institutions to delay the impact of CECL on regulatory capital, because the impact on the capital ratios of the Company and its subsidiary banks was not significant.

11

The following table illustrates the impact of ASU 2016-13  as of January 1, 2021:

As Reported

Pre-

Impact of

Under

ASU 2016-13

ASU 2016-13

Assets:

ASU 2016-13

Adoption

    

Adoption

Allowance for credit losses HTM securities

$

183

$

$

183

Loans*:

C&I

35,421

(35,421)

C&I - revolving

2,982

2,982

C&I - other

29,130

29,130

CRE

42,161

(42,161)

CRE - owner occupied

8,696

8,696

CRE - non owner occupied

11,428

11,428

Construction & Land Development

11,999

11,999

Multi-family

5,836

5,836

Direct financing leases

1,764

(1,764)

1-4 family real estate

5,042

5,042

Residential real estate

3,732

(3,732)

Consumer

1,161

1,298

(137)

Allowance for credit losses on loans

76,274

84,376

(8,102)

Liabilities:

Allowance for credit losses on OBS credit exposures

9,117

9,117

*     Loan segmentation under ASU 2016-13 follows different methodology where that segmentation is collateral driven, causing certain segments to contain commercial and non-commercial borrowers, wheras pre ASU 2016-13 segments were borrower driven.

Further discussion contained in this quarterly report regarding the loan and lease portfolio as well as ACL on HTM securities and OBS exposures is only relevant for the year 2021 and forward. Discission in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 is still applicable for years prior to 2021.

Loans receivable, held for sale: Residential real estate loans which are originated and intended for resale in the secondary market in the foreseeable future are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows.

Loans receivable, held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are reported at amortized cost, net of the ACL. Amortized cost is the amount of unpaid principal adjusted for charge-offs, any discounts or premiums, and any deferred fees and/or costs on originated loans. Accrued interest receivable totaled $19 million at March 31, 2021 and was reported in other assets on the consolidated balance sheet. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.

The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company discloses the ACL (also known as the allowance) by portfolio segment, and credit quality information, nonaccrual status, and past due status by class of financing receivable. A portfolio segment is the level at which the Company develops and documents a systematic methodology to determine its ACL. A class of financing receivable is a further disaggregation of a portfolio segment based on risk characteristics and the Company’s method for monitoring and assessing credit risk. See the following information and Note 3.

The Company’s portfolio segments and class of loans receivable are as follows:

C&I – revolving
C&I – other
CRE – owner occupied
CRE – non-owner occupied

12

Construction and land development
Multi-family
1-4 family real estate
Consumer

The Company’s classes of loans receivable are as follows:

C&I – revolving
C&I – other
CRE – owner occupied
CRE – non-owner occupied
Construction and land development
Multi-family
Direct financing leases
1-4 family real estate
Consumer

Direct financing leases are considered a class of financing receivable within the overall loan/lease portfolio and are included in the C&I other loan segments for ACL. The accounting policies for direct financing leases are disclosed below.

Generally, for all classes of loans receivable, loans are considered past due when contractual payments are delinquent for 31 days or greater.

For all classes of loans receivable, loans will generally be placed on nonaccrual status when the loan has become 90 days past due (unless the loan is well secured and in the process of collection); or if any of the following conditions exist:

It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan;
When full repayment of principal and interest is not expected;
When the loan is graded “doubtful”;
When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future; or
When foreclosure action is initiated.

When a loan is placed on nonaccrual status, income recognition is ceased. Previously recorded but uncollected amounts of interest on nonaccrual loans are reversed at the time the loan is placed on nonaccrual status. Generally, cash collected on nonaccrual loans is applied to principal. Should full collection of principal be expected, cash collected on nonaccrual loans can be recognized as interest income.

For all classes of loans receivable, nonaccrual loans may be restored to accrual status provided the following criteria are met:

The loan is current, and all principal and interest amounts contractually due have been made;
All principal and interest amounts contractually due, including past due payments, are reasonably assured of repayment within a reasonable period; and
There is a period of minimum repayment performance, as follows, by the borrower in accordance with contractual terms:
oSix months of repayment performance for contractual monthly payments, or
oOne year of repayment performance for contractual quarterly or semi-annual payments.

Direct finance leases receivable, held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 25% of the cost of the related equipment), are

13

recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment.

Lease income is recognized on the interest method. Residual value is the estimated fair market value of the equipment on lease at the lease termination. In estimating the equipment’s fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends.

The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts. If the review results in a lower estimate than had been previously established, a determination is made as to whether the decline in estimated residual value is other-than temporary. If the decline in estimated unguaranteed residual value is judged to be other-than-temporary, the accounting for the transaction is revised using the changed estimate. The resulting reduction in the investment is recognized as a loss in the period in which the estimate is changed. An upward adjustment of the estimated residual value is not recorded.

The policies for delinquency and nonaccrual for direct financing leases are materially consistent with those described above for all classes of loan receivables.

TDRs: TDRs exist when the Company, for economic or legal reasons related to the borrower’s/lessee’s financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower/lessee and the Company) to the borrower/lessee that it would not otherwise consider. The Company attempts to maximize its recovery of the balances of the loans/leases through these various concessionary restructurings.

The following criteria, related to granting a concession, together or separately, create a TDR:

A modification of terms of a debt such as one or a combination of:
oThe reduction of the stated interest rate to a rate lower than the current market rate for new debt with similar risk.
oThe extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.
oThe reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
oThe reduction of accrued interest.
A transfer from the borrower/lessee to the Company of receivables from third parties, real estate, other assets, or an equity position in the borrower to fully or partially satisfy a loan.
The issuance or other granting of an equity position to the Company to fully or partially satisfy a debt unless the equity position is granted pursuant to existing terms for converting the debt into an equity position.

Allowance:

Allowance for Credit Losses on Loans and Leases

The ACL on loans is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the 8 portfolio segments at which the allowance will be measured. For all portfolio segments, the allowance is established as losses are estimated to have occurred through a provision that is charged to earnings. Credit losses on loans and leases, for all portfolio segments, are charged against the allowance when management believes the uncollectibility of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company’s methodologies for estimating the allowance for credit losses consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information -- adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions that are expected to exist through the contractual lives of the financial assets and that are reasonable and supportable -- to the identified pools of

14

financial assets with similar risk characteristics for which the historical loss experience was observed. The Company will immediately and fully revert back to average historical losses when it can no longer develop reasonable and supportable forecasts.

A discussion of the risk characteristics and the allowance by each loan portfolio segment follows:

For C&I loans, both revolving lines of credit and other C&I, the Company focuses on small and mid-sized businesses with primary operations as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The Company provides a wide range of C&I loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Approval is generally based on the following factors:

Ability and stability of current management of the borrower;
Stable earnings with positive financial trends;
Sufficient cash flow to support debt repayment;
Earnings projections based on reasonable assumptions;
Financial strength of the industry and business; and
Value and marketability of collateral.

Collateral for C&I loans generally includes accounts receivable, inventory, equipment and real estate. The Company’s lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash.

The Company’s lending policy specifies maximum term limits for C&I loans. For term loans, the maximum term is generally 7 years with average terms ranging from 3 to 5 years. For low-income housing tax credit permanent loans, the maximum term is generally up to 20 years. For lines of credit, the maximum term is generally 365 days.

In addition, the Company often takes personal guarantees or cosigners to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.

CRE is segmented into the following categories generally based on source of repayment: Owner occupied CRE, non-owner occupied CRE and multi-family. CRE loans are also embedded in the following segments: construction and land development and 1-4 family real estate. CRE loans are subject to underwriting standards and processes similar to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for CRE loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (CRE loans on improved property, raw land, land development, and commercial construction). These limits are the same limits established by regulatory authorities.

Multi-family loans provide a source of repayment from rental income.

The Company’s lending policy also includes guidelines for real estate appraisals, including minimum appraisal standards based on certain transactions. In addition, the Company often takes personal guarantees to help assure repayment.

Construction loans include any loans to finance the construction of any new residential property, CRE property or major rehabilitation or expansion of existing commercial structures. Construction lending carries a high degree of risk because of the difficulty of protecting the bank against a myriad of pitfalls. The following factors are evaluated when underwriting these types of loans:

Borrowers/contractors experience and ability is analyzed with the type and size of project being considered.
Financial ability to cover cost overruns.
Reliability and thoroughness of cost projections and reasonable assurance that significant provisions are made for contingencies for soft costs especially interest and operating deficits.
Reliability of the estimate of time to complete the project.

15

The land development portfolio also includes other land loans such as raw land. The raw land component involves considerable risk to the bank and is reserved for the Bank’s most credit worthy borrowers. Land development loans are typically only made to experienced local developers with successful track records.

For all loans the allowance consists of pooled and individually analyzed components. Pooled loan allowances consist of quantitative and qualitative factors and cover loan classes that share similar risk characteristics with other assets in the segmented pool.

Quantitative Factors:

The quantitative factors are based on the probability of default and loss given default derived from historical net charge-off experience, repayment activity and default, remaining life, and current economic conditions as well as economic outlook.

Qualitative Factors:

The Company’s allowance methodology also has a qualitative component, the purpose of which is to provide management with a means to take into consideration changes in current conditions that could potentially have an effect, up or down, on the level of recognized loan losses, that, for whatever reason, fail to show up in the quantitative analysis performed in determining its base loan loss rates.

The Company utilizes the following qualitative factors:

National and local economy
Loan volume and trend
Loan quality
Loan policies and procedures
Management and staff experience
Concentrations
Collateral
Loan review system
Regulatory environment and oversight

The qualitative adjustments are based on the current condition and applied as a percentage adjustment in addition to the calculated historical loss rates. The adjustment amount can be either positive or negative depending whether or not the current condition is better or worse than the historical average. These adjustments reflect the extent to which the Company expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated.

Economic Forecasting:

The Company uses reasonable and supportable forecasts over the contractual term of the financial assets for each entity.  This measurement is based upon relevant past events, historical experience and current conditions to determine the forecasted data which requires significant judgement. When management no longer has sufficient information to make a reasonable and supportable forecast, the data will then immediately revert back to the average historical performance for each entity.

It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as economic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future economic conditions may not be an effective indicator of the quality of the Company’s forecasting process, including the length of the forecast period.

16

Loans are determined to no longer share similar risk characteristics with other assets in the segmented pool when their scheduled payments of principal and interest according to the contractual terms of the loan agreement, have a greater probability of uncollectibility based on current information and events.  Such events include past due status of 90 days or more, non-accrual status or classification of a substandard or doubtful risk rating.  Factors considered by management in determining risk rating and non-accrual status include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered low quality. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Allowances for these low quality loans are measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Some loans that are determined to no longer share risk characteristics with other assets in the segmented pool, may be deemed collateral dependent. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When it is determined that foreclosure is probable, the collateral’s fair value is used to estimate the financial assets expected credit losses for the current reporting period. This fair value is then reduced by the present value of estimated costs to sell. If it is determined that the asset is collateral-dependent but foreclosure is not probable, an institution can elect to apply the practical expedient to use the collateral’s fair value to estimate the asset’s expected credit loss. The Company is choosing to utilize the practical expedient. When using the practical expedient on a collateral dependent loan where repayment is reliant upon the sale of the collateral, the fair value of that collateral will be adjusted for estimated costs to sell.  However if the repayment is dependent on the operations of the company the fair market value less estimated cost to sell cannot be used.  Thus the net present value of the cash-flow will be utilized.

For non-homogenous loans, the Company utilizes the following internal risk rating scale:

1.Highest Quality (Pass) – loans of the highest quality with no credit risk, including those fully secured by subsidiary bank certificates of deposit and U.S. government securities.

2.Superior Quality (Pass) – loans with very strong credit quality. Borrowers have exceptionally strong earnings, liquidity, capital, cash flow coverage, and management ability. Includes loans secured by high quality marketable securities, certificates of deposit from other institutions, and cash value of life insurance. Also includes loans supported by U.S. government, state, or municipal guarantees.

3.Satisfactory Quality (Pass) – loans with satisfactory credit quality. Established borrowers with satisfactory financial condition, including credit quality, earnings, liquidity, capital and cash flow coverage. Management is capable and experienced. Collateral coverage and guarantor support, if applicable, are more than adequate. Includes loans secured by personal assets and business assets, including equipment, accounts receivable, inventory, and real estate.

4.Fair Quality (Pass) – loans with moderate but still acceptable credit quality. The primary repayment source remains adequate; however, management’s ability to maintain consistent profitability is unproven or uncertain. Borrowers exhibit acceptable leverage and liquidity. May include new businesses with inexperienced management or unproven performance records in relation to peers, or borrowers operating in highly cyclical or declining industries.

5.Early Warning (Pass) – loans where the borrowers have generally performed as agreed, however unfavorable financial trends exist or are anticipated. Earnings may be erratic, with marginal cash flow or declining sales. Borrowers reflect leveraged financial condition and/or marginal liquidity. Management may be new and a track record of performance has yet to be developed. Financial information may be incomplete, and reliance on secondary repayment sources may be increasing.

6.Special Mention – loans where the borrowers exhibit credit weaknesses or unfavorable financial trends requiring close monitoring. Weaknesses and adverse trends are more pronounced than Early Warning loans, and if left

17

uncorrected, may jeopardize repayment according to the contractual terms. Currently, no loss of principal or interest is expected. Borrowers in this category have deteriorated to the point that it would be difficult to refinance with another lender. Special Mention should be assigned to borrowers in turnaround situations. This rating is intended as a transitional rating, therefore, it is generally not assigned to a borrower for a period of more than one year.

7.Substandard – loans which are inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if applicable. These loans have a well-defined weakness or weaknesses which jeopardize repayment according to the contractual terms. There is distinct loss potential if the weaknesses are not corrected. Includes loans with insufficient cash flow coverage which are collateral dependent, other real estate owned, and repossessed assets.

8.Doubtful – loans which have all the weaknesses inherent in a Substandard loan, with the added characteristic that existing weaknesses make full principal collection, on the basis of current facts, conditions and values, highly doubtful. The possibility of loss is extremely high, but because of pending factors, recognition of a loss is deferred until a more exact status can be determined. All doubtful loans will be placed on non-accrual, with all payments, including principal and interest, applied to principal reduction.

For term C&I and CRE loans greater than $1,000,000, a loan review is required within 15 months of the most recent credit review. The review is completed in enough detail to, at a minimum, validate the risk rating. Additionally, the review shall include an analysis of debt service requirements, covenant compliance, if applicable, and collateral adequacy. The frequency of the review is generally accelerated for loans with poor risk ratings.

The Company’s Loan Quality area performs a documentation review of a sampling of C&I and CRE loans, the primary purpose of which is to ensure the credit is properly documented and closed in accordance with approval authorities and conditions. A review is also performed by the Company’s Internal Audit Department of a sampling of C&I and CRE loans for proper documentation, according to an approved schedule. Validation of the risk rating is also part of Internal Audit’s review (performed by Internal Loan Review). Additionally, over the past several years, the Company has contracted an independent outside third party to review a sampling of C&I and CRE loans. Validation of the risk rating is part of this review as well.

The Company leases machinery and equipment to C&I customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed. Direct financing leases are included in the C&I – Other segment and allowance is established in the same manner as C&I loans.

Generally, the Company’s residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years or fixed rate mortgages that mature in 15 years, and then retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market. The Company’s lending policy establishes minimum appraisal and other credit guidelines.

The Company provides many types of installment and other consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The Company’s lending policy addresses specific credit guidelines by consumer loan type.

For residential real estate loans, and installment and other consumer loans, these large groups of smaller balance homogenous loans follow the same methodology as commercial loans in terms of evaluation of risk characteristics, other than these may not be risk rated due to homogenous nature.

TDRs follow the same allowance methodology as described above for all loans. Once a loan is classified as a TDR, it will remain a TDR until the loan is paid off, charged off, moved to OREO or restructured into a new note without a concession. TDR status may also be removed if the TDR was restructured in a prior calendar year, is current, accruing interest and shows sustained performance.

18

Allowance for Credit Losses on Off-Balance Sheet Exposures

The Company estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by the Company. Management uses an estimated average utilization rate to determine the exposure of default. The allowance on unfunded commitments is calculated using probability of default and loss given default using the same segmentation and qualitative factors used for loans and leases.  The allowance for OBS exposures is recorded in the Accrued Expenses and Other Liabilities section of the consolidated balance sheet.

Allowance for Credit Losses on Held to Maturity Debt Securities

The Company measures expected credit losses on held to maturity debt securities on a collective basis based on security type. The estimate of expected credit losses considers historical credit information from external sources. The Company’s held to maturity debt securities consist primarily of investment grade obligations of states and political subdivisions.

Allowance for Credit Losses on Available for Sale Debt Securities

ASU 2016-13 modifies the impairment model for available for sale debt securities. Available for sale debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. The decline in fair value of an available for sale debt security due to credit loss results in recording an ACL to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an ACL, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis.

The Company did not record an allowance for credit losses on AFS debt securities upon adoption of ASU 2016-13.

Risks and Uncertainties:

On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic.  Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The Company currently expects that the COVID-19 pandemic will have a significant impact on its business.  In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, arts/entertainment/recreation and retail industries will continue to endure significant economic distress, and could adversely affect their ability and willingness to repay existing indebtedness, and could adversely impact the value of  collateral pledged to the banks.  These developments, together with economic conditions generally, have impacted and are expected to continue to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. The Company believes that losses have been incurred that are not yet known and anticipates that its asset quality and results of operations could be adversely affected in the future, as described in further detail in this report.

In March 2020, the FASB issued ASU 2020-4,  “Reference Rate Reform,” which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Management is currently assessing the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition.

19

NOTE 2– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of March 31, 2021 and December 31, 2020 are summarized as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost*

    

Gains

    

(Losses)

    

Value

    

(dollars in thousands)

March 31, 2021:

 

  

 

  

 

  

 

  

 

Securities HTM:

 

  

 

  

 

  

 

  

 

Municipal securities

$

452,076

$

38,312

$

(91)

$

490,297

Other securities

 

1,050

 

 

 

1,050

$

453,126

$

38,312

$

(91)

$

491,347

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

  

 

  

 

  

U.S. govt. sponsored agency securities

$

14,494

$

352

$

(265)

$

14,581

Residential mortgage-backed and related securities

 

115,230

 

3,742

 

(920)

 

118,052

Municipal securities

 

160,703

 

3,492

 

(1,622)

 

162,573

Asset-backed securities

38,620

1,197

(2)

39,815

Other securities

 

11,679

 

173

 

 

11,852

$

340,726

$

8,956

$

(2,809)

$

346,873

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

(Losses)

Value

(dollars in thousands)

December 31, 2020:

 

  

 

  

 

  

Securities HTM:

 

  

 

  

 

  

Municipal securities

$

475,115

$

45,360

$

(248)

$

520,227

Other securities

 

1,050

 

 

 

1,050

$

476,165

$

45,360

$

(248)

$

521,277

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

  

 

  

 

  

U.S. govt. sponsored agency securities

$

14,936

$

447

$

(47)

$

15,336

Residential mortgage-backed and related securities

 

127,670

 

5,510

 

(338)

 

132,842

Municipal securities

 

147,241

 

5,215

 

(48)

 

152,408

Asset-backed securities

39,663

1,111

(91)

40,683

Other securities

 

20,550

 

147

 

 

20,697

$

350,060

$

12,430

$

(524)

$

361,966

*     HTM securities are shown on the balance sheet at amortized cost, net of allowance for credit losses of $174 thousand as of March 31, 2021.

The Company's HTM municipal securities consist largely of private issues of municipal debt. The large majority of the municipalities are located within the Midwest. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.

The Company's residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in private mortgage-backed securities or pooled trust preferred securities.

20

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2021 and December 31, 2020, are summarized as follows:

Less than 12 Months

12 Months or More

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

(dollars in thousands)

March 31, 2021:

 

  

 

  

 

  

 

  

 

  

 

  

Securities HTM:

 

  

 

  

 

  

 

  

 

  

 

  

Municipal securities

$

$

$

8,019

$

(91)

$

8,019

$

(91)

 

  

 

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

 

  

 

  

 

  

 

  

U.S. govt. sponsored agency securities

$

2,963

$

(265)

$

$

$

2,963

$

(265)

Residential mortgage-backed and related securities

 

35,721

 

(919)

 

157

 

(1)

 

35,878

 

(920)

Municipal securities

 

68,407

 

(1,622)

 

 

 

68,407

 

(1,622)

Asset-backed securities

1,998

(2)

1,998

(2)

$

107,091

$

(2,806)

$

2,155

$

(3)

$

109,246

$

(2,809)

Less than 12 Months

12 Months or More

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

(dollars in thousands)

December 31, 2020:

 

  

 

  

 

  

 

  

 

  

 

  

Securities HTM:

 

  

 

  

 

  

 

  

 

  

 

  

Municipal securities

$

8,407

$

(248)

$

$

$

8,407

$

(248)

Securities AFS:

 

  

 

  

 

  

 

  

 

  

 

  

U.S. govt. sponsored agency securities

$

3,199

$

(47)

$

$

$

3,199

$

(47)

Residential mortgage-backed and related securities

 

37,549

 

(338)

 

 

 

37,549

 

(338)

Municipal securities

 

10,110

 

(48)

 

 

 

10,110

 

(48)

Asset-backed securities

6,884

(52)

9,945

(39)

16,829

(91)

$

57,742

$

(485)

$

9,945

$

(39)

$

67,687

$

(524)

At March 31, 2021, the investment portfolio included 644 securities. Of this number, 101 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.4% of the total amortized cost of the portfolio. Of these 101 securities, there were 8 securities that had an unrealized loss for twelve months or more. Asset-backed securities are comprised of collateralized loan obligations, which are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At March 31, 2021, the Company only owned collateralized loan obligations that were AAA rated. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.  

On January 1, 2021, the Company adopted ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment (“OTTI”) model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities. The following table presents the activity in the allowance for credit losses for held to maturity securities by major security type for the three months ended March 31, 2021.

Three Months Ended March 31, 2021

    

    

Municipal securities

    

Other securities

    

Total

 

(dollars in thousands)

Allowance for credit losses:

Beginning balance

$

$

$

Impact of adopting ASU 2016-13

182

1

183

Provision for credit loss expense

(9)

(9)

Balance, ending

$

173

$

1

$

174

21

The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant  Accounting Policies” to the consolidated financial statement included in this Form 10-Q, for a discussion of the impact of the adoption of ASU 2016-13.

There were proceeds of $19.5 million from sales of securities, that resulted in 0 gains or losses, for the three months ended March 31, 2021. There were 0 sales of securities for the three months ended March 31, 2020.

The amortized cost and fair value of securities as of March 31, 2021 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the residential mortgages underlying the securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.

    

Amortized Cost

    

Fair Value

(dollars in thousands)

Securities HTM:

 

  

 

  

Due in one year or less

$

3,592

$

3,611

Due after one year through five years

 

32,784

 

33,424

Due after five years

 

416,750

 

454,312

$

453,126

$

491,347

Securities AFS:

 

  

 

  

Due in one year or less

$

2,152

$

2,182

Due after one year through five years

 

12,888

 

13,175

Due after five years

 

171,836

 

173,649

186,876

189,006

Residential mortgage-backed and related securities

115,230

118,052

Asset-backed securities

 

38,620

 

39,815

$

340,726

$

346,873

Portions of the U.S. government sponsored agency securities, municipal securities and other securities contain call options, which, at the discretion of the issuer, terminate the security at par and at predetermined dates prior to the stated maturity. These callable securities are summarized as follows:

    

Amortized Cost

    

Fair Value

(dollars in thousands)

Securities HTM:

 

  

 

  

Municipal securities

$

246,515

$

255,969

 

  

 

  

Securities AFS:

 

  

 

  

Municipal securities

154,432

156,016

Other securities

 

11,679

 

11,852

$

166,111

$

167,868

As of March 31, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $117.6 million and revenue bonds issued by 192 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $535.3 million. The Company also held investments in general obligation bonds in 21 states, including 8 states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 26 states, including 13 states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $116.7 million and revenue bonds issued by 191 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $555.9 million. The Company also held investments in general obligation bonds in 21 states, including 8 states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 26 states, including 12 states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of March 31, 2021 and as of December 31, 2020, the Company held revenue bonds of 2 issuers, located in Ohio, of which the aggregate book or market value

22

exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investments and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The Company's municipal securities are owned by the 4 charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of March 31, 2021, all were within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.

As of March 31, 2021, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.

23

NOTE 3 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of March 31, 2021 and December 31, 2020 is presented as follows:

    

2021

(dollars in thousands)

C&I:

C&I - revolving

$

168,842

C&I - other *

1,616,144

1,784,986

 

  

CRE - owner occupied

 

461,272

CRE - non-owner occupied

 

610,582

Construction and land development

 

607,798

Multi-family

396,272

Direct financing leases**

 

60,134

1-4 family real estate***

368,927

Consumer

 

71,080

 

4,361,051

Allowance for credit losses

 

(81,831)

$

4,279,220

** Direct financing leases:

 

  

Net minimum lease payments to be received

$

66,182

Estimated unguaranteed residual values of leased assets

 

239

Unearned lease/residual income

 

(6,287)

 

60,134

Plus deferred lease origination costs, net of fees

 

905

 

61,039

Less allowance for credit losses

 

(2,192)

$

58,847

    

2020

C&I loans*

$

1,726,723

CRE loans

 

  

Owner-occupied CRE

 

496,471

Commercial construction, land development, and other land

 

541,455

Other non owner-occupied CRE

 

1,069,703

 

2,107,629

Direct financing leases **

 

66,016

Residential real estate loans ***

 

252,121

Installment and other consumer loans

 

91,302

 

4,243,791

Plus deferred loan/lease origination costs, net of fees

 

7,338

 

4,251,129

Less allowance

 

(84,376)

$

4,166,753

** Direct financing leases:

 

  

Net minimum lease payments to be received

$

72,940

Estimated unguaranteed residual values of leased assets

 

239

Unearned lease/residual income

 

(7,163)

 

66,016

Plus deferred lease origination costs, net of fees

 

1,072

 

67,088

Less allowance

 

(1,764)

$

65,324

*     Includes equipment financing agreements outstanding at m2, totaling $189.3  million and $171.5 million as of March 31, 2021 and December 31, 2020, respectively and PPP loans totaling $243.9  million and $273.1  million as of March 31, 2021 and December 31, 2020, respectively

**   Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with management's expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal.

*** Includes residential real estate loans held for sale totaling $5.7 million and $3.8 million as of March 31, 2021 and December 31, 2020, respectively.

24

Changes in accretable yield for acquired loans were as follows:

Three months ended March 31, 2021

    

PCI

    

Performing

    

Loans

Loans

Total

    

(dollars in thousands)

Balance at the beginning of the period

$

$

(3,139)

$

(3,139)

Accretion recognized

 

 

609

 

609

Balance at the end of the period

$

$

(2,530)

$

(2,530)

Three months ended March 31, 2020

    

PCI

    

Performing

    

Loans

Loans

Total

    

(dollars in thousands)

Balance at the beginning of the period

$

(57)

$

(6,378)

$

(6,435)

Reclassification of nonaccretable discount to accretable

(30)

(30)

Accretion recognized

 

28

 

653

 

681

Balance at the end of the period

$

(59)

$

(5,725)

$

(5,784)

The aging of the loan/lease portfolio by classes of loans/leases as of March 31, 2021 and December 31, 2020 is presented as follows:

As of March 31, 2021

 

Accruing Past

 

30-59 Days

60-89 Days

Due 90 Days or

Nonaccrual

 

Classes of Loans/Leases

    

Current

    

Past Due

    

Past Due

    

More

    

Loans/Leases

    

Total

 

(dollars in thousands)

C& I:

C&I - revolving

$

168,809

$

33

$

$

$

$

168,842

C&I - other

1,607,456

3,048

425

5,215

1,616,144

CRE - owner occupied

 

460,965

 

307

 

 

 

 

461,272

CRE - non-owner occupied

 

606,073

 

 

 

 

4,509

 

610,582

Construction and land development

607,721

77

607,798

Multi-family

 

396,122

 

 

 

 

150

 

396,272

Direct financing leases

 

59,482

 

194

 

138

 

 

320

 

60,134

1-4 family real estate

 

364,114

 

1,366

 

 

 

3,447

 

368,927

Consumer

 

70,856

 

79

 

 

 

145

 

71,080

$

4,341,598

$

5,027

$

563

$

$

13,863

$

4,361,051

 

  

 

  

 

  

 

  

 

  

 

  

As a percentage of total loan/lease portfolio

 

99.55

%  

 

0.12

%  

 

0.01

%  

 

%  

 

0.32

%  

 

100.00

%

As of December 31, 2020

 

Accruing Past

 

30-59 Days

60-89 Days

Due 90 Days or

Nonaccrual

 

Classes of Loans/Leases

    

Current

    

Past Due

    

Past Due

    

More

    

Loans/Leases

    

Total

 

(dollars in thousands)

C&I

$

1,720,058

$

1,535

$

323

$

$

4,807

$

1,726,723

CRE

 

  

 

  

 

  

 

  

 

 

  

Owner-occupied CRE

 

496,459

 

 

 

 

12

 

496,471

Commercial construction, land development, and other land

 

541,455

 

 

 

 

 

541,455

Other non-owner occupied CRE

 

1,062,215

 

 

 

 

7,488

 

1,069,703

Direct financing leases

 

64,918

 

501

 

191

 

 

406

 

66,016

Residential real estate

 

249,364

 

1,512

 

223

 

 

1,022

 

252,121

Installment and other consumer

 

91,047

 

43

 

4

 

3

 

205

 

91,302

$

4,225,516

$

3,591

$

741

$

3

$

13,940

$

4,243,791

As a percentage of total loan/lease portfolio

 

99.57

%  

 

0.08

%  

 

0.02

%  

 

0.00

%  

 

0.33

%  

 

100.00

%

25

NPLs by classes of loans/leases as of March 31, 2021 and December 31, 2020 are presented as follows:

As of March 31, 2021

Accruing Past

Nonaccrual

Nonaccrual

Due 90 Days or

Loans/Leases

Loans/Leases

Percentage of

Classes of Loans/Leases

    

More

    

with an ACL*

    

without an ACL*

    

Total NPLs

    

Total NPLs

 

 

(dollars in thousands)

C&I:

 

C&I - revolving

$

$

$

$

 

-

%

C&I - other

4,998

217

5,215

37.61

CRE - owner occupied

 

 

 

 

 

-

CRE - non-owner occupied

 

 

3,715

 

794

 

4,509

 

32.53

Construction and land development

77

77

0.56

Multi-family

 

 

150

 

 

150

 

1.08

Direct financing leases

 

 

193

 

127

 

320

 

2.31

1-4 family real estate

 

 

3,423

 

24

 

3,447

 

24.86

Consumer

 

 

145

 

 

145

 

1.05

$

$

12,701

$

1,162

$

13,863

 

100.00

%

The Company did not recognize any interest income on nonaccrual loans during the quarter ended March 31, 2021.

As of December 31, 2020

 

Accruing Past

 

Due 90 Days or

Nonaccrual

Percentage of

 

Classes of Loans/Leases

    

More

    

Loans/Leases *

    

Accruing TDRs

    

Total NPLs

    

Total NPLs

 

 

(dollars in thousands)

C&I

$

$

4,807

$

606

$

5,413

 

36.87

%

CRE

 

  

 

  

 

  

 

  

 

  

Owner-occupied CRE

 

 

12

 

 

12

 

0.08

%

Commercial construction, land development, and other land

 

 

 

 

 

-

%

Other non-owner occupied CRE

 

 

7,488

 

 

7,488

 

50.99

%

Direct financing leases

 

 

406

 

135

 

541

 

3.68

%

Residential real estate

 

 

1,022

 

 

1,022

 

6.96

%

Installment and other consumer

 

3

 

205

 

 

208

 

1.42

%

$

3

$

13,940

$

741

$

14,684

100.00

%

**   Nonaccrual loans/leases included $984 thousand of TDRs, including $836 thousand in CRE loans, $100 thousand in direct financing leases, $48 thousand in installment loans.

26

Changes in the ACL-loans/leases by portfolio segment for the three months ended March 31, 2021 and 2020, respectively, are presented as follows:

Three Months Ended March 31, 2021

CRE

CRE

Construction

Direct

Residential

1-4

C&I -

C&I -

Owner

Non-Owner

and Land

Multi-

Financing

Real

Family

    

C&I

Revolving

Other

    

CRE

Occupied

Occupied

Development

Family

    

Leases

    

Estate

Real Estate

    

Consumer

Total

 

(dollars in thousands)

Balance, beginning

$

35,421

$

$

$

42,161

$

$

$

$

$

1,764

$

3,732

$

$

1,298

$

84,376

Adoption of ASU 2016-13

(35,421)

2,982

29,130

(42,161)

8,696

11,428

11,999

5,836

(1,764)

(3,732)

5,042

(137)

(8,102)

Provision

 

 

565

 

4,549

 

 

451

 

(286)

 

328

 

442

 

 

 

161

 

(217)

 

5,993

Charge-offs

 

 

 

(668)

 

 

 

 

 

 

 

 

(44)

 

(1)

 

(713)

Recoveries

 

 

 

156

 

 

 

13

 

 

 

 

 

6

 

102

 

277

Balance, ending

$

$

3,547

$

33,167

$

$

9,147

$

11,155

$

12,327

$

6,278

$

$

$

5,165

$

1,045

$

81,831

*   Included within the C&I – Other column are leases with adoption impact of $685 thousand, provision of $135 thousand ,charge-offs of $198 thousand and recoveries of $76 thousand. ACL on leases was $2.2 million as of March 31, 2021.

Three Months Ended March 31, 2020

Direct Financing

Residential Real

Installment and

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

(dollars in thousands)

Balance, beginning

$

16,072

$

15,379

$

1,464

$

1,948

$

1,138

$

36,001

Provision

 

3,697

 

3,816

 

394

 

336

 

124

 

8,367

Charge-offs

 

(1,639)

 

 

(600)

 

 

(96)

 

(2,335)

Recoveries

 

21

 

74

 

45

 

29

 

31

 

200

Balance, ending

$

18,151

$

19,269

$

1,303

$

2,313

$

1,197

$

42,233

The composition of the ACL-loans/leases by portfolio segment based on evaluation method are as follows:

As of March 31, 2021

Amortized Cost of Loans Receivable

Allowance for Credit Losses

Individually

Collectively

Individually

Collectively

Evaluated for

Evaluated for

Evaluated for

Evaluated for

    

Credit Losses

    

Credit Losses

Total

Credit Losses

    

Credit Losses

Total

(dollars in thousands)

C&I :

C&I - Revolving

$

2,987

$

165,855

$

168,842

$

450

$

3,097

$

3,547

C&I - Other*

 

41,690

 

1,634,588

 

1,676,278

 

4,397

 

28,770

 

33,167

 

44,677

 

1,800,443

 

1,845,120

 

4,847

 

31,867

 

36,714

CRE - owner occupied

 

5,487

 

455,785

 

461,272

 

287

 

8,860

 

9,147

CRE - non-owner occupied

 

23,309

 

587,273

 

610,582

 

1,843

 

9,312

 

11,155

Construction and Land Development

 

10,554

 

597,244

 

607,798

 

11

 

12,316

 

12,327

Multi-family

150

396,122

396,272

13

6,265

6,278

1-4 family real wstate

 

5,305

 

363,622

 

368,927

 

651

 

4,514

 

5,165

Consumer

 

300

 

70,780

 

71,080

 

36

 

1,009

 

1,045

$

89,782

$

4,271,269

$

4,361,051

$

7,688

$

74,143

$

81,831

*   Included within the C&I – Other category are leases individually evaluated of $320 thousand with a related allowance for credit losses of $59 thousand and leases collectively evaluated of $59.8 million with a related allowance for credit losses of $2.1 million.

27

Information for impaired loans/leases prior to adoption of ASU 2016-13 on January 1, 2021, is presented in the tables below.  The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease.  The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended March 31, 2020 are presented as follows:

Interest Income

Average

Recognized for

Recorded

Unpaid Principal

Related

Recorded

Interest Income

Cash Payments

Classes of Loans/Leases

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Received

 

(dollars in thousands)

Impaired Loans/Leases with No Specific Allowance Recorded:

 

  

 

  

 

  

 

  

 

  

 

  

C&I

$

2,260

$

2,332

$

$

1,895

$

12

$

12

CRE

 

  

 

  

 

 

 

 

  

Owner-occupied CRE

 

99

 

115

 

 

102

 

 

Commercial construction, land development, and other land

 

 

 

 

 

 

Other non-owner occupied CRE

 

1,054

 

1,054

 

 

662

 

7

 

7

Direct financing leases

 

1,515

 

1,515

 

 

1,440

 

6

 

6

Residential real estate

 

423

 

407

 

 

399

 

 

Installment and other consumer

 

538

 

538

 

 

507

 

 

$

5,889

$

5,961

$

$

5,005

$

25

$

25

 

  

 

  

 

  

 

  

 

  

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

  

 

  

 

  

 

  

 

  

 

  

C&I

$

86

$

86

$

86

$

43

$

$

CRE

 

 

 

 

 

 

Owner-occupied CRE

 

 

 

 

 

 

Commercial construction, land development, and other land

 

 

 

 

 

 

Other non-owner occupied CRE

 

6,528

 

6,528

 

1,228

 

4,698

 

 

Direct financing leases

 

59

 

59

 

20

 

61

 

 

Residential real estate

 

180

 

180

 

15

 

180

 

 

Installment and other consumer

 

77

 

77

 

78

 

79

 

 

$

6,930

$

6,930

$

1,427

$

5,061

$

$

 

  

 

  

 

  

 

  

 

  

 

  

Total Impaired Loans/Leases:

 

  

 

  

 

  

 

  

 

  

 

  

C&I

$

2,346

$

2,418

$

86

$

1,938

$

12

$

12

CRE

 

  

 

  

 

  

 

  

 

  

 

  

Owner-occupied CRE

 

99

 

115

 

 

102

 

 

Commercial construction, land development, and other land

 

 

 

 

 

 

Other non-owner occupied CRE

 

7,582

 

7,582

 

1,228

 

5,360

 

7

 

7

Direct financing leases

 

1,574

 

1,574

 

20

 

1,501

 

6

 

6

Residential real estate

 

603

 

587

 

15

 

579

 

 

Installment and other consumer

 

615

 

615

 

78

 

586

 

 

$

12,819

$

12,891

$

1,427

$

10,066

$

25

$

25

28

Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2020 are presented as

follows:

December 31, 2020

Recorded

Unpaid Principal

Related

Classes of Loans/Leases

    

Investment

    

Balance

    

Allowance

    

(dollars in thousands)

 

  

 

  

 

  

 

Impaired Loans/Leases with No Specific Allowance Recorded:

 

  

 

  

 

  

 

C&I

$

1,607

$

1,647

$

CRE

 

  

 

 

Owner-occupied CRE

 

34

 

50

 

Commercial construction, land development, and other land

 

 

 

Other non-owner occupied CRE

 

684

 

686

 

Direct financing leases

 

1,642

 

1,642

 

Residential real estate

 

469

 

614

 

Installment and other consumer

 

476

 

476

 

$

4,912

$

5,115

$

 

  

 

  

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

  

 

  

 

  

C&I

$

239

$

239

$

170

CRE

 

 

  

 

Owner-occupied CRE

 

 

 

Commercial construction, land development, and other land

 

 

 

Other non-owner occupied CRE

 

2,867

 

2,867

 

125

Direct financing leases

 

383

 

383

 

270

Residential real estate

 

180

 

180

 

15

Installment and other consumer

 

80

 

80

 

80

$

3,749

$

3,749

$

660

 

  

 

  

 

  

Total Impaired Loans/Leases:

 

  

 

  

 

  

C&I

$

1,846

$

1,886

$

170

CRE

 

  

 

  

 

  

Owner-occupied CRE

 

34

 

50

 

Commercial construction, land development, and other land

 

 

 

Other non-owner occupied CRE

 

3,551

 

3,553

 

125

Direct financing leases

 

2,025

 

2,025

 

270

Residential real estate

 

649

 

794

 

15

Installment and other consumer

 

556

 

556

 

80

$

8,661

$

8,864

$

660

Impaired loans/leases prior to adoption of ASU 2016-13 and those individually evaluated under ASU 2016-13 for which no allowance has been provided have adequate collateral, based on management’s current estimates.

29

The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses:

As of March 31, 2021

Non

Commercial

Owner-Occupied

Owner Occupied

    

Assets

    

Real Estate

Real Estate

Securities

Equipment

Other

Total

(dollars in thousands)

C & I:

C&I - Revolving

$

2,513

$

$

$

$

474

$

$

2,987

C&I - Other*

 

1,030

 

 

2,630

 

6,235

 

31,783

 

12

 

41,690

 

3,543

 

 

2,630

 

6,235

 

32,257

 

12

 

44,677

CRE - owner occupied

 

 

 

5,487

 

 

 

 

5,487

CRE - non-owner occupied

 

 

23,309

 

 

 

 

 

23,309

Construction and Land Development

 

 

10,477

 

77

 

 

 

 

10,554

Multi-family

150

150

1-4 Family Real Estate

 

 

2,719

 

2,586

 

 

 

 

5,305

Consumer

 

 

 

298

 

 

 

2

 

300

$

3,543

$

36,655

$

11,078

$

6,235

$

32,257

$

14

$

89,782

*   Included within the C&I – Other category are leases individually evaluated of $320 thousand with primary collateral of equipment.

For commercial loans, certain construction and land development loans, all multifamily loans and certain 1-4 family residential loans, the Company’s credit quality indicator consists of internally assigned risk ratings.  Each such loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.w

For certain C&I loans (including equipment financing agreements and direct financing leases), certain construction and land development, certain 1-4 family real estate loans, and all consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Prior to adoption of ASU 2016-13, this included C&I equipment financing agreements, direct financing leases, residential real estate loans, and installment and other consumer loans.  Delinquency status is updated daily by the Company’s loan system.

30

The following tables show the credit quality indicator of loans by class of receivable and year of origination as of March 31, 2021:

As of March 31, 2021

Term Loans

 

Amortized Cost Basis by Origination Year

 

Revolving