NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (UNAUDITED)
NOTE 1 – BUSINESS DESCRIPTION
Midland States Bancorp, Inc. (the “Company,” “we,” “our,” or “us”) is a diversified financial holding company headquartered in Effingham, Illinois. Our wholly owned banking subsidiary, Midland States Bank (the “Bank”), has branches across Illinois and in Missouri, and provides a full range of commercial and consumer banking products and services, business equipment financing, merchant credit card services, trust and investment management services, and insurance and financial planning services.
Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest charged on loans and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as: fees received in connection with various lending and deposit services; wealth management services; commercial Federal Housing Administration ("FHA") mortgage loan servicing; residential mortgage loan originations, sales and servicing; and, from time to time, gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for credit losses and income tax expense.
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to predominant practices within the banking industry. Management of the Company has made a number of estimates and assumptions related to the reporting of assets and liabilities to prepare the consolidated financial statements in conformity with GAAP. Actual results may differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for annual periods presented herein, have been included. Certain reclassifications of 2022 amounts have been made to conform to the 2023 presentation but do not have an effect on net income or shareholders’ equity.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Assets held for customers in a fiduciary or agency capacity, other than trust cash on deposit with the Bank, are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements.
Accounting Guidance Adopted in 2023
FASB ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures – In March 2022, the FASB issued ASU No. 2022-02, which 1) eliminates the accounting guidance for troubled debt restructurings ("TDRs") by creditors while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty; and 2) requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022 and the amendments should be applied prospectively, although the entity has the option to apply a modified retrospective transition method for the recognition and measurement of TDRs, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company adopted this guidance on January 1, 2023 and elected to apply on a prospective basis. The adoption of this accounting pronouncement did not have an impact on the consolidated financial statements aside from additional and revised disclosures.
Accounting Guidance Issued But Not Yet Adopted
FASB ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting – In March 2020, the FASB issued ASU No. 2020-04, allowing for optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision based on the expectations of when LIBOR would cease being published. In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of LIBOR to June 30, 2023.
In December 2022, to ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the FASB issued ASU No. 2022-06, which defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.
The Company has been monitoring its volume of commercial loans tied to LIBOR. In 2021, the Company began prioritizing SOFR as the preferred alternative reference rate with plans to cease booking LIBOR based commitments after the end of 2021. Loans with a maturity after June 2023 are being reviewed and monitored to ensure there is appropriate fallback language in place when LIBOR is no longer published. Loans with a maturity date before that time should naturally mature and be re-underwritten with the alternative index rate.
The Company believes the adoption of this guidance will not have a material impact on the consolidated financial statements.
NOTE 3 – INVESTMENT SECURITIES
Investment Securities Available for Sale
Investment securities available for sale at March 31, 2023 and December 31, 2022 were as follows:
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| March 31, 2023 |
(dollars in thousands) | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | | | Fair value |
Investment securities available for sale | | | | | | | | | |
U.S. Treasury securities | $ | 56,913 | | | $ | — | | | $ | 4,115 | | | | | $ | 52,798 | |
U.S. government sponsored entities and U.S. agency securities | 57,925 | | | 27 | | | 3,816 | | | | | 54,136 | |
Mortgage-backed securities - agency | 559,278 | | | 475 | | | 70,262 | | | | | 489,491 | |
Mortgage-backed securities - non-agency | 46,300 | | | — | | | 3,786 | | | | | 42,514 | |
State and municipal securities | 72,732 | | | 26 | | | 6,502 | | | | | 66,256 | |
Collateralized loan obligations | 22,695 | | | — | | | — | | | | | 22,695 | |
Corporate securities | 95,219 | | | — | | | 10,824 | | | | | 84,395 | |
Total available for sale securities | $ | 911,062 | | | $ | 528 | | | $ | 99,305 | | | | | $ | 812,285 | |
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| December 31, 2022 |
(dollars in thousands) | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | | | Fair value |
Investment securities available for sale | | | | | | | | | |
U.S. Treasury securities | $ | 86,313 | | | $ | 113 | | | $ | 5,196 | | | | | $ | 81,230 | |
U.S. government sponsored entities and U.S. agency securities | 41,775 | | | 71 | | | 4,337 | | | | | 37,509 | |
Mortgage-backed securities - agency | 522,028 | | | 268 | | | 74,146 | | | | | 448,150 | |
Mortgage-backed securities - non-agency | 24,922 | | | — | | | 4,168 | | | | | 20,754 | |
State and municipal securities | 102,719 | | | 149 | | | 8,232 | | | | | 94,636 | |
Corporate securities | 95,266 | | | — | | | 9,311 | | | | | 85,955 | |
Total available for sale securities | $ | 873,023 | | | $ | 601 | | | $ | 105,390 | | | | | $ | 768,234 | |
The following is a summary of the amortized cost and fair value of the investment securities available for sale, by maturity, at March 31, 2023. Expected maturities may differ from contractual maturities in mortgage-backed securities
because the mortgages underlying the securities may be prepaid without penalties. The maturities of all other investment securities available for sale are based on final contractual maturity.
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(dollars in thousands) | Amortized cost | | Fair value |
Investment securities available for sale | | | |
Within one year | $ | 23,696 | | | $ | 23,664 | |
After one year through five years | 117,660 | | | 110,921 | |
After five years through ten years | 141,115 | | | 125,290 | |
After ten years | 23,013 | | | 20,405 | |
Mortgage-backed securities | 605,578 | | | 532,005 | |
Total available for sale securities | $ | 911,062 | | | $ | 812,285 | |
Proceeds and gross realized gains and losses on sales of investment securities available for sale for the three months ended March 31, 2023 and 2022 are summarized as follows:
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| Three Months Ended March 31, | | |
(dollars in thousands) | 2023 | | 2022 | | | | | | |
Investment securities available for sale | | | | | | | | | |
Proceeds from sales | $ | 84,493 | | | $ | — | | | | | | | |
Gross realized gains on sales | 338 | | | — | | | | | | | |
Gross realized losses on sales | (986) | | | — | | | | | | | |
Unrealized losses and fair values for investment securities available for sale as of March 31, 2023 and December 31, 2022, for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:
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| March 31, 2023 |
| Less than 12 Months | | 12 Months or more | | Total |
(dollars in thousands) | Fair value | | Unrealized loss | | Fair value | | Unrealized loss | | Fair value | | Unrealized loss |
Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury securities | $ | 975 | | | $ | 2 | | | $ | 51,823 | | | $ | 4,113 | | | $ | 52,798 | | | $ | 4,115 | |
U.S. government sponsored entities and U.S. agency securities | 19,902 | | | 38 | | | 24,207 | | | 3,778 | | | 44,109 | | | 3,816 | |
Mortgage-backed securities - agency | 107,933 | | | 4,163 | | | 331,581 | | | 66,099 | | | 439,514 | | | 70,262 | |
Mortgage-backed securities - non-agency | — | | | — | | | 20,604 | | | 3,786 | | | 20,604 | | | 3,786 | |
State and municipal securities | 7,700 | | | 78 | | | 51,423 | | | 6,424 | | | 59,123 | | | 6,502 | |
Corporate securities | 9,999 | | | 501 | | | 74,396 | | | 10,323 | | | 84,395 | | | 10,824 | |
Total available for sale securities | $ | 146,509 | | | $ | 4,782 | | | $ | 554,034 | | | $ | 94,523 | | | $ | 700,543 | | | $ | 99,305 | |
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| December 31, 2022 |
| Less than 12 Months | | 12 Months or more | | Total |
(dollars in thousands) | Fair value | | Unrealized loss | | Fair value | | Unrealized loss | | Fair value | | Unrealized loss |
Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury securities | $ | 1,839 | | | $ | 24 | | | $ | 59,865 | | | $ | 5,172 | | | $ | 61,704 | | | $ | 5,196 | |
U.S. government sponsored entities and U.S. agency securities | 10,288 | | | 40 | | | 23,453 | | | 4,297 | | | 33,741 | | | 4,337 | |
Mortgage-backed securities - agency | 152,657 | | | 9,736 | | | 273,353 | | | 64,410 | | | 426,010 | | | 74,146 | |
Mortgage-backed securities - non-agency | 1,924 | | | 270 | | | 18,830 | | | 3,898 | | | 20,754 | | | 4,168 | |
State and municipal securities | 35,603 | | | 1,662 | | | 41,538 | | | 6,570 | | | 77,141 | | | 8,232 | |
Corporate securities | 39,595 | | | 3,400 | | | 46,360 | | | 5,911 | | | 85,955 | | | 9,311 | |
Total available for sale securities | $ | 241,906 | | | $ | 15,132 | | | $ | 463,399 | | | $ | 90,258 | | | $ | 705,305 | | | $ | 105,390 | |
At March 31, 2023, 329 investment securities available for sale had unrealized losses with aggregate depreciation of 12.42% from their amortized cost basis. For all of the above investment securities, the unrealized losses were generally due to changes in interest rates, and unrealized losses were considered to be temporary as the fair value is expected to recover as the securities approach their respective maturity dates. The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The Company does not intend to sell and it is likely that the Company will not be required to sell the securities prior to their anticipated recovery.
NOTE 4 – LOANS
The following table presents total loans outstanding by portfolio class, as of March 31, 2023 and December 31, 2022:
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(dollars in thousands) | March 31, 2023 | | December 31, 2022 |
Commercial: | | | |
Commercial | $ | 823,847 | | | $ | 786,877 | |
Commercial other | 756,553 | | | 727,697 | |
Commercial real estate: | | | |
Commercial real estate non-owner occupied | 1,636,316 | | | 1,591,399 | |
Commercial real estate owner occupied | 460,133 | | | 496,786 | |
Multi-family | 281,559 | | | 277,889 | |
Farmland | 70,150 | | | 67,085 | |
Construction and land development | 326,836 | | | 320,882 | |
Total commercial loans | 4,355,394 | | | 4,268,615 | |
Residential real estate: | | | |
Residential first lien | 309,637 | | | 304,243 | |
Other residential | 60,273 | | | 61,851 | |
Consumer: | | | |
Consumer | 112,882 | | | 105,880 | |
Consumer other | 1,006,056 | | | 1,074,134 | |
Lease financing | 510,029 | | | 491,744 | |
Total loans | $ | 6,354,271 | | | $ | 6,306,467 | |
Total loans include net deferred loan costs of $5.7 million and $4.4 million at March 31, 2023 and December 31, 2022, respectively, and unearned discounts of $67.2 million and $62.6 million within the lease financing portfolio at March 31, 2023 and December 31, 2022, respectively.
At March 31, 2023, the Company had residential real estate loans held for sale totaling $2.7 million, compared to $1.3 million at December 31, 2022. The Company sold commercial real estate, residential real estate and consumer loans with proceeds totaling $6.3 million and $103.1 million during the three months ended March 31, 2023 and 2022, respectively.
Classifications of Loan Portfolio
The Company monitors and assesses the credit risk of its loan portfolio using the classes set forth below. These classes also represent the segments by which the Company monitors the performance of its loan portfolio and estimates its allowance for credit losses on loans.
Commercial—Loans to varying types of businesses, including municipalities, school districts and nonprofit organizations, for the purpose of supporting working capital, operational needs and term financing of equipment. Repayment of such loans is generally provided through operating cash flows of the business. Commercial loans are predominately secured by equipment, inventory, accounts receivable, and other sources of repayment. Commercial FHA warehouse lines of $10.3 million and $25.0 million as of March 31, 2023 and December 31, 2022, respectively, were included in this classification.
Commercial real estate—Loans secured by real estate occupied by the borrower for ongoing operations, including loans to borrowers engaged in agricultural production, and non-owner occupied real estate leased to one or more tenants, including commercial office, industrial, special purpose, retail and multi-family residential real estate loans.
Construction and land development—Secured loans for the construction of business and residential properties. Real estate construction loans often convert to a real estate commercial loan at the completion of the construction period. Secured development loans are made to borrowers for the purpose of infrastructure improvements to vacant land to create finished marketable residential and commercial lots/land. Most land development loans are originated with the intention that the loans will be paid through the sale of developed lots/land by the developers within twelve months of the completion date. Interest reserves may be established on real estate construction loans.
Residential real estate—Loans secured by residential properties that generally do not qualify for secondary market sale; however, the risk to return and/or overall relationship are considered acceptable to the Company. This category also includes loans whereby consumers utilize equity in their personal residence, generally through a second mortgage, as collateral to secure the loan.
Consumer—Loans to consumers primarily for the purpose of home improvements or acquiring automobiles, recreational vehicles and boats. Consumer loans consist of relatively small amounts that are spread across many individual borrowers.
Lease financing—Our equipment leasing business provides financing leases to varying types of businesses, nationwide, for purchases of business equipment and software. The financing is secured by a first priority interest in the financed assets and generally requires monthly payments.
Commercial, commercial real estate, and construction and land development loans are collectively referred to as the Company’s commercial loan portfolio, while residential real estate, consumer loans and lease financing receivables are collectively referred to as the Company’s other loan portfolio.
We have extended loans to certain of our directors, executive officers, principal shareholders and their affiliates. These loans were made in the ordinary course of business upon substantially the same terms, including collateralization and interest rates prevailing at the time. The aggregate loans outstanding to the Company's directors, executive officers, principal shareholders and their affiliates totaled $19.5 million and $19.8 million at March 31, 2023 and December 31, 2022, respectively. The new loans, other additions, repayments and other reductions for the three months ended March 31, 2023 and 2022, are summarized as follows:
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| Three Months Ended March 31, | | |
(dollars in thousands) | 2023 | | 2022 | | | | |
Beginning balance | $ | 19,776 | | | $ | 13,869 | | | | | |
New loans and other additions | — | | | 9,805 | | | | | |
Repayments and other reductions | (257) | | | (300) | | | | | |
Ending balance | $ | 19,519 | | | $ | 23,374 | | | | | |
The following table represents, by loan portfolio segment, a summary of changes in the allowance for credit losses on loans for the three months ended March 31, 2023 and 2022:
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| | Commercial Loan Portfolio | | Other Loan Portfolio | | |
(dollars in thousands) | | Commercial | | Commercial real estate | | Construction and land development | | Residential real estate | | Consumer | | Lease financing | | Total |
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Changes in allowance for credit losses on loans for the three months ended March 31, 2023: |
Balance, beginning of period | | $ | 14,639 | | | $ | 29,290 | | | $ | 2,435 | | | $ | 4,301 | | | $ | 3,599 | | | $ | 6,787 | | | $ | 61,051 | |
Provision for credit losses on loans | | 1,998 | | | (330) | | | 7 | | | 63 | | | 700 | | | 697 | | | 3,135 | |
Charge-offs | | (969) | | | (746) | | | — | | | (31) | | | (263) | | | (390) | | | (2,399) | |
Recoveries | | 94 | | | 2 | | | — | | | 17 | | | 93 | | | 74 | | | 280 | |
Balance, end of period | | $ | 15,762 | | | $ | 28,216 | | | $ | 2,442 | | | $ | 4,350 | | | $ | 4,129 | | | $ | 7,168 | | | $ | 62,067 | |
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Changes in allowance for credit losses on loans for the three months ended March 31, 2022: |
Balance, beginning of period | | $ | 14,375 | | | $ | 22,993 | | | $ | 972 | | | $ | 2,695 | | | $ | 2,558 | | | $ | 7,469 | | | $ | 51,062 | |
Provision for credit losses on loans | | 389 | | | 3,444 | | | (156) | | | 584 | | | 257 | | | (386) | | | 4,132 | |
Charge-offs | | (2,154) | | | (227) | | | (6) | | | (104) | | | (305) | | | (206) | | | (3,002) | |
Recoveries | | 11 | | | 67 | | | 6 | | | 113 | | | 162 | | | 387 | | | 746 | |
Balance, end of period | | $ | 12,621 | | | $ | 26,277 | | | $ | 816 | | | $ | 3,288 | | | $ | 2,672 | | | $ | 7,264 | | | $ | 52,938 | |
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The Company utilizes a combination of models which measure probability of default and loss given default methodology in determining expected future credit losses.
The probability of default is the risk that the borrower will be unable or unwilling to repay its debt in full or on time. The risk of default is derived by analyzing the obligor’s capacity to repay the debt in accordance with contractual terms. Probability of default is generally associated with financial characteristics such as inadequate cash flow to service debt, declining revenues or operating margins, high leverage, declining or marginal liquidity, and the inability to successfully implement a business plan. In addition to these quantifiable factors, the borrower’s willingness to repay also must be evaluated.
The probability of default is forecasted, for most commercial and retail loans, using a regression model that determines the likelihood of default within the twelve month time horizon. The regression model uses forward-looking economic forecasts including variables such as gross domestic product, housing price index, and real disposable income to predict default rates. The forecasting method for the equipment financing portfolio assumes a rolling twelve-month average of the through-the-cycle default rate, to predict default rates for the twelve month time horizon.
The loss given default component is the percentage of defaulted loan balance that is ultimately charged off. As a method for estimating the allowance, a form of migration analysis is used that combines the estimated probability of loans experiencing default events and the losses ultimately associated with the loans experiencing those defaults. Multiplying one by the other gives the Company its loss rate, which is then applied to the loan portfolio balance to determine expected future losses.
Within the model, the loss given default approach produces segmented loss given default estimates using a loss curve methodology, which is based on historical net losses from charge-off and recovery information. The main principle of a loss curve model is that the loss follows a steady timing schedule based on how long the defaulted loan has been on the books.
The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look-back period includes January 2012 through the current period on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data.
Historical data is evaluated in multiple components of the expected credit loss, including the reasonable and supportable forecast and the post-reversion period of each loan segment. The historical experience is used to infer probability of default and loss given default in the reasonable and supportable forecast period. In the post-reversion period, long-term average loss rates are segmented by loan pool.
Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible.
The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of borrower and concentrations, historical or expected credit loss patterns, and reasonable and supportable forecast periods.
Within the probability of default segmentation, credit metrics are identified to further segment the financial assets. The Company utilizes risk ratings for the commercial portfolios and days past due for the consumer and the lease financing portfolios.
The Company has defined five transitioning risk states for each asset pool within the expected credit loss model. The below table illustrates the transition matrix:
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Risk state | | Commercial loans risk rating | | Consumer loans and equipment finance loans and leases days past due |
1 | | 0-5 | | 0-14 |
2 | | 6 | | 15-29 |
3 | | 7 | | 30-59 |
4 | | 8 | | 60-89 |
Default | | 9+ and nonaccrual | | 90+ and nonaccrual |
Expected Credit Losses
In calculating expected credit losses, the Company individually evaluates loans on nonaccrual status with a balance greater than $500,000, loans past due 90 days or more and still accruing interest, and loans that do not share risk characteristics with other loans in the pool. The following table presents amortized cost basis of individually evaluated loans on nonaccrual status as of March 31, 2023 and December 31, 2022:
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| March 31, 2023 | | December 31, 2022 |
(dollars in thousands) | Nonaccrual with allowance | | Nonaccrual with no allowance | | Total nonaccrual | | Nonaccrual with allowance | | Nonaccrual with no allowance | | Total nonaccrual |
Commercial: | | | | | | | | | | | |
Commercial | $ | 1,838 | | | $ | 969 | | | $ | 2,807 | | | $ | 1,910 | | | $ | 1,111 | | | $ | 3,021 | |
Commercial other | 2,820 | | | — | | | 2,820 | | | 3,169 | | | — | | | 3,169 | |
Commercial real estate: | | | | | | | | | | | |
Commercial real estate non-owner occupied | 11,780 | | | 9,968 | | | 21,748 | | | 1,345 | | | 11,899 | | | 13,244 | |
Commercial real estate owner occupied | 6,410 | | | — | | | 6,410 | | | 7,118 | | | — | | | 7,118 | |
Multi-family | 141 | | | 8,148 | | | 8,289 | | | 154 | | | 8,949 | | | 9,103 | |
Farmland | 25 | | | — | | | 25 | | | 25 | | | — | | | 25 | |
Construction and land development | 200 | | | — | | | 200 | | | 202 | | | — | | | 202 | |
Total commercial loans | 23,214 | | | 19,085 | | | 42,299 | | | 13,923 | | | 21,959 | | | 35,882 | |
Residential real estate: | | | | | | | | | | | |
Residential first lien | 3,140 | | | 570 | | | 3,710 | | | 2,925 | | | 572 | | | 3,497 | |
Other residential | 786 | | | — | | | 786 | | | 871 | | | — | | | 871 | |
Consumer: | | | | | | | | | | | |
Consumer | 119 | | | — | | | 119 | | | 120 | | | — | | | 120 | |
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Lease financing | 2,155 | | | — | | | 2,155 | | | 1,606 | | | — | | | 1,606 | |
Total loans | $ | 29,414 | | | $ | 19,655 | | | $ | 49,069 | | | $ | 19,445 | | | $ | 22,531 | | | $ | 41,976 | |
There was no interest income recognized on nonaccrual loans during the three months ended March 31, 2023 and 2022 while the loans were in nonaccrual status. Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $0.8 million for both the three months ended March 31, 2023 and 2022.
Collateral Dependent Financial Assets
A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral’s value increases and the loan may become collateral dependent.
The table below presents the value of individually evaluated, collateral dependent loans by loan class, for borrowers experiencing financial difficulty, as of March 31, 2023 and December 31, 2022:
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| Type of Collateral | | |
(dollars in thousands) | Real Estate | | Blanket Lien | | Equipment | | | | Total |
March 31, 2023 | | | | | | | | | |
Commercial: | | | | | | | | | |
Commercial | $ | — | | | $ | 969 | | | $ | — | | | | | $ | 969 | |
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Commercial real estate: | | | | | | | | | |
Non-owner occupied | 21,577 | | | — | | | — | | | | | 21,577 | |
Owner occupied | 3,752 | | | — | | | — | | | | | 3,752 | |
Multi-family | 8,150 | | | — | | | — | | | | | 8,150 | |
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| | | | | | | | | |
Lease financing | — | | | — | | | 101 | | | | | 101 | |
Total collateral dependent loans | $ | 33,479 | | | $ | 969 | | | $ | 101 | | | | | $ | 34,549 | |
| | | | | | | | | |
December 31, 2022 | | | | | | | | | |
Commercial: | | | | | | | | | |
Commercial | $ | — | | | $ | 1,604 | | | $ | — | | | | | $ | 1,604 | |
| | | | | | | | | |
Commercial real estate: | | | | | | | | | |
Non-owner occupied | 13,033 | | | — | | | — | | | | | 13,033 | |
Owner occupied | 3,874 | | | — | | | — | | | | | 3,874 | |
Multi-family | 8,950 | | | — | | | — | | | | | 8,950 | |
| | | | | | | | | |
Residential real estate | | | | | | | | | |
Residential first lien | 220 | | | — | | | — | | | | | 220 | |
| | | | | | | | | |
Total collateral dependent loans | $ | 26,077 | | | $ | 1,604 | | | $ | — | | | | | $ | 27,681 | |
The aging status of the recorded investment in loans by portfolio as of March 31, 2023 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accruing loans | | | | | | | | |
(dollars in thousands) | 30-59 days past due | | 60-89 days past due | | Past due 90 days or more | | Total past due | | Nonaccrual | | Current | | Total |
Commercial: | | | | | | | | | | | | | |
Commercial | $ | 360 | | | $ | 89 | | | $ | 44 | | | $ | 493 | | | $ | 2,807 | | | $ | 820,547 | | | $ | 823,847 | |
Commercial other | 8,214 | | | 3,102 | | | 732 | | | 12,048 | | | 2,820 | | | 741,685 | | | 756,553 | |
Commercial real estate: | | | | | | | | | | | | | |
Commercial real estate non-owner occupied | 4,105 | | | 113 | | | — | | | 4,218 | | | 21,748 | | | 1,610,350 | | | 1,636,316 | |
Commercial real estate owner occupied | 121 | | | — | | | — | | | 121 | | | 6,410 | | | 453,602 | | | 460,133 | |
Multi-family | 141 | | | — | | | — | | | 141 | | | 8,289 | | | 273,129 | | | 281,559 | |
Farmland | 104 | | | — | | | — | | | 104 | | | 25 | | | 70,021 | | | 70,150 | |
Construction and land development | 199 | | | — | | | — | | | 199 | | | 200 | | | 326,437 | | | 326,836 | |
Total commercial loans | 13,244 | | | 3,304 | | | 776 | | | 17,324 | | | 42,299 | | | 4,295,771 | | | 4,355,394 | |
Residential real estate: | | | | | | | | | | | | | |
Residential first lien | 35 | | | 123 | | | — | | | 158 | | | 3,710 | | | 305,769 | | | 309,637 | |
Other residential | 78 | | | — | | | — | | | 78 | | | 786 | | | 59,409 | | | 60,273 | |
Consumer: | | | | | | | | | | | | | |
Consumer | 224 | | | 32 | | | — | | | 256 | | | 119 | | | 112,507 | | | 112,882 | |
Consumer other | 4,823 | | | 3,187 | | | 766 | | | 8,776 | | | — | | | 997,280 | | | 1,006,056 | |
Lease financing | 4,552 | | | 1,293 | | | 102 | | | 5,947 | | | 2,155 | | | 501,927 | | | 510,029 | |
Total loans | $ | 22,956 | | | $ | 7,939 | | | $ | 1,644 | | | $ | 32,539 | | | $ | 49,069 | | | $ | 6,272,663 | | | $ | 6,354,271 | |
The aging status of the recorded investment in loans by portfolio as of December 31, 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accruing loans | | | | | | | | |
(dollars in thousands) | 30-59 days past due | | 60-89 days past due | | Past due 90 days or more | | Total past due | | Nonaccrual | | Current | | Total |
Commercial: | | | | | | | | | | | | | |
Commercial | $ | 7 | | | $ | 112 | | | $ | — | | | $ | 119 | | | $ | 3,021 | | | $ | 783,737 | | | $ | 786,877 | |
Commercial other | 6,035 | | | 2,365 | | | — | | | 8,400 | | | 3,169 | | | 716,128 | | | 727,697 | |
Commercial real estate: | | | | | | | | | | | | | |
Commercial real estate non-owner occupied | 1,008 | | | 999 | | | — | | | 2,007 | | | 13,244 | | | 1,576,148 | | | 1,591,399 | |
Commercial real estate owner occupied | 73 | | | — | | | — | | | 73 | | | 7,118 | | | 489,595 | | | 496,786 | |
Multi-family | — | | | — | | | — | | | — | | | 9,103 | | | 268,786 | | | 277,889 | |
Farmland | — | | | — | | | — | | | — | | | 25 | | | 67,060 | | | 67,085 | |
Construction and land development | — | | | 6,000 | | | — | | | 6,000 | | | 202 | | | 314,680 | | | 320,882 | |
Total commercial loans | 7,123 | | | 9,476 | | | — | | | 16,599 | | | 35,882 | | | 4,216,134 | | | 4,268,615 | |
Residential real estate: | | | | | | | | | | | | | |
Residential first lien | 82 | | | 456 | | | 428 | | | 966 | | | 3,497 | | | 299,780 | | | 304,243 | |
Other residential | 188 | | | 13 | | | — | | | 201 | | | 871 | | | 60,779 | | | 61,851 | |
Consumer: | | | | | | | | | | | | | |
Consumer | 139 | | | 18 | | | 12 | | | 169 | | | 120 | | | 105,591 | | | 105,880 | |
Consumer other | 5,381 | | | 3,559 | | | 733 | | | 9,673 | | | — | | | 1,064,461 | | | 1,074,134 | |
Lease financing | 4,415 | | | 1,522 | | | — | | | 5,937 | | | 1,606 | | | 484,201 | | | 491,744 | |
Total loans | $ | 17,328 | | | $ | 15,044 | | | $ | 1,173 | | | $ | 33,545 | | | $ | 41,976 | | | $ | 6,230,946 | | | $ | 6,306,467 | |
Loan Restructurings
On January 1, 2023, the Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2023, which eliminates the recognition and measurement of a troubled debt restructuring ("TDR"). Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulties that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are for modifications which have a direct impact on cash flows.
The Company may offer various types of concessions when modifying a loan. Commercial and industrial loans modified in a loan restructuring often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested.
Loans modified in a loan restructuring for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for loans that have been modified in a loan restructuring is measured based on the probability of default and loss given default model, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.
Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further loss. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.
In some cases, the Company will modify a loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession such as an interest rate reduction or principal forgiveness, may be granted. During the three months ended March 31, 2023 the Company restructured two loans for borrowers experiencing financial difficulties with principal balances totaling $0.1 million. One of the restructured loans was provided a term extension with the other receiving an interest rate reduction and a term extension.
Credit Quality Monitoring
The Company maintains loan policies and credit underwriting standards as part of the process of managing credit risk. These standards include making loans generally within the Company’s four main regions, which include eastern, northern and southern Illinois and the St. Louis metropolitan area. In addition, our specialty finance division does nationwide bridge lending for FHA and HUD developments and originates loans for multifamily, assisted and senior living and multi-use properties. Our equipment leasing business provides financing to business customers across the country.
The Company has a loan approval process involving underwriting and individual and group loan approval authorities to consider credit quality and loss exposure at loan origination. The loans in the Company’s commercial loan portfolio are risk rated at origination based on the grading system set forth below. All loan authority is based on the aggregate credit to a borrower and its related entities.
The Company’s consumer loan portfolio is primarily comprised of both secured and unsecured loans that are relatively small and are evaluated at origination on a centralized basis against standardized underwriting criteria. The ongoing measurement of credit quality of the consumer loan portfolio is largely done on an exception basis. If payments are made on schedule, as agreed, then no further monitoring is performed. However, if delinquency occurs, the delinquent loans are turned over to the Company’s Consumer Collections Group for resolution. Credit quality for the entire consumer loan portfolio is measured by the periodic delinquency rate, nonaccrual amounts and actual losses incurred.
Loans in the commercial loan portfolio tend to be larger and more complex than those in the other loan portfolio, and therefore, are subject to more intensive monitoring. All loans in the commercial loan portfolio have an assigned relationship manager, and most borrowers provide periodic financial and operating information that allows the relationship managers to stay abreast of credit quality during the life of the loans. The risk ratings of loans in the commercial loan portfolio are reassessed at least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly.
The Company maintains a centralized independent loan review function that monitors the approval process and ongoing asset quality of the loan portfolio, including the accuracy of loan grades. The Company also maintains an independent appraisal review function that participates in the review of all appraisals obtained by the Company.
Credit Quality Indicators
The Company uses a ten grade risk rating system to monitor the ongoing credit quality of its commercial loan portfolio. These loan grades rank the credit quality of a borrower by measuring liquidity, debt capacity, and coverage and payment behavior as shown in the borrower’s financial statements. The risk grades also measure the quality of the borrower’s management and the repayment support offered by any guarantors.
The Company considers all loans with Risk Grades 1 - 6 as acceptable credit risks and structures and manages such relationships accordingly. Periodic financial and operating data combined with regular loan officer interactions are deemed adequate to monitor borrower performance. Loans with Risk Grades of 7 are considered "watch credits" categorized as special mention and the frequency of loan officer contact and receipt of financial data is increased to stay abreast of borrower performance. Loans with Risk Grades of 8 - 10 are considered problematic and require special care. Risk Grade 8 is categorized as substandard, 9 as substandard - nonaccrual and 10 as doubtful. Further, loans with Risk Grades of 7 - 10 are managed regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive and senior management of the Company, which includes highly structured reporting of financial and operating data, intensive loan officer intervention and strategies to exit, as well as potential management by the Company's Special Assets Group. Loans not graded in the commercial loan portfolio are monitored by aging status and payment activity.
The following tables present the recorded investment of the commercial loan portfolio by risk category as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2023 |
| | | Term Loans Amortized Cost Basis by Origination Year | | | |
(dollars in thousands) | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving loans | | Total |
Commercial | Commercial | Acceptable credit quality | $ | 92,019 | | | $ | 138,413 | | | $ | 101,512 | | | $ | 56,991 | | | $ | 19,195 | | | $ | 50,975 | | | $ | 338,272 | | | $ | 797,377 | |
| | Special mention | — | | | 3,975 | | | 2,024 | | | — | | | 6,956 | | | 3,160 | | | 124 | | | 16,239 | |
| | Substandard | — | | | — | | | — | | | — | | | 203 | | | 5,329 | | | 1,892 | | | 7,424 | |
| | Substandard – nonaccrual | — | | | — | | | 340 | | | 43 | | | 91 | | | 282 | | | 2,051 | | | 2,807 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Subtotal | 92,019 | | | 142,388 | | | 103,876 | | | 57,034 | | | 26,445 | | | 59,746 | | | 342,339 | | | 823,847 | |
| | | | | | | | | | | | | | | | | |
| Commercial other | Acceptable credit quality | 120,499 | | | 253,610 | | | 138,294 | | | 93,257 | | | 54,541 | | | 11,681 | | | 76,477 | | | 748,359 | |
| | Special mention | — | | | 150 | | | — | | | 716 | | | 2,278 | | | 410 | | | 480 | | | 4,034 | |
| | Substandard | 41 | | | 250 | | | — | | | — | | | — | | | 77 | | | 818 | | | 1,186 | |
| | Substandard – nonaccrual | 51 | | | 330 | | | 1,167 | | | 444 | | | 520 | | | 308 | | | — | | | 2,820 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | 154 | | | — | | | — | | | — | | | — | | | — | | | 154 | |
| | Subtotal | 120,591 | | | 254,494 | | | 139,461 | | | 94,417 | | | 57,339 | | | 12,476 | | | 77,775 | | | 756,553 | |
| | | | | | | | | | | | | | | | | |
Commercial real estate | Non-owner occupied | Acceptable credit quality | 31,008 | | | 679,676 | | | 411,690 | | | 160,098 | | | 86,550 | | | 159,214 | | | 6,083 | | | 1,534,319 | |
| | Special mention | — | | | — | | | 184 | | | 472 | | | 165 | | | 6,910 | | | — | | | 7,731 | |
| | Substandard | — | | | 1,886 | | | — | | | — | | | 35,495 | | | 35,137 | | | — | | | 72,518 | |
| | Substandard – nonaccrual | — | | | — | | | 685 | | | 999 | | | 7,573 | | | 12,491 | | | — | | | 21,748 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Subtotal | 31,008 | | | 681,562 | | | 412,559 | | | 161,569 | | | 129,783 | | | 213,752 | | | 6,083 | | | 1,636,316 | |
| | | | | | | | | | | | | | | | | |
| Owner occupied | Acceptable credit quality | 15,780 | | | 118,881 | | | 112,201 | | | 63,048 | | | 23,955 | | | 99,056 | | | 1,882 | | | 434,803 | |
| | Special mention | — | | | — | | | 1,124 | | | — | | | 86 | | | 11,753 | | | 19 | | | 12,982 | |
| | Substandard | — | | | 34 | | | 270 | | | 76 | | | 1,888 | | | 3,670 | | | — | | | 5,938 | |
| | Substandard – nonaccrual | — | | | 210 | | | 4,043 | | | 210 | | | 144 | | | 1,499 | | | 304 | | | 6,410 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Subtotal | 15,780 | | | 119,125 | | | 117,638 | | | 63,334 | | | 26,073 | | | 115,978 | | | 2,205 | | | 460,133 | |
| | | | | | | | | | | | | | | | | |
| Multi-family | Acceptable credit quality | 487 | | | 164,103 | | | 26,420 | | | 29,279 | | | 10,380 | | | 23,441 | | | 799 | | | 254,909 | |
| | Special mention | — | | | — | | | — | | | — | | | — | | | 14,695 | | | | | 14,695 | |
| | Substandard | — | | | — | | | — | | | — | | | — | | | 3,666 | | | — | | | 3,666 | |
| | Substandard – nonaccrual | — | | | — | | | 904 | | | — | | | 109 | | | 7,276 | | | — | | | 8,289 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Subtotal | 487 | | | 164,103 | | | 27,324 | | | 29,279 | | | 10,489 | | | 49,078 | | | 799 | | | 281,559 | |
| | | | | | | | | | | | | | | | | |
| Farmland | Acceptable credit quality | 6,557 | | | 7,396 | | | 15,614 | | | 13,152 | | | 3,972 | | | 21,271 | | | 1,381 | | | 69,343 | |
| | Special mention | — | | | — | | | — | | | — | | | — | | | 102 | | | — | | | 102 | |
| | Substandard | — | | | — | | | 14 | | | — | | | 22 | | | 445 | | | 199 | | | 680 | |
| | Substandard – nonaccrual | — | | | — | | | — | | | — | | | — | | | 25 | | | — | | | 25 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Subtotal | 6,557 | | | 7,396 | | | 15,628 | | | 13,152 | | | 3,994 | | | 21,843 | | | 1,580 | | | 70,150 | |
| | | | | | | | | | | | | | | | | |
Construction and land development | | Acceptable credit quality | 5,904 | | | 177,393 | | | 91,453 | | | 1,430 | | | 674 | | | 1,256 | | | 37,712 | | | 315,822 | |
| | Special mention | — | | | — | | | — | | | — | | | — | | | 210 | | | — | | | 210 | |
| | Substandard | — | | | — | | | 6,000 | | | — | | | — | | | 2,407 | | | — | | | 8,407 | |
| | Substandard – nonaccrual | — | | | — | | | — | | | — | | | 200 | | | — | | | — | | | 200 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | 1,946 | | | 216 | | | 7 | | | — | | | 28 | | | — | | | 2,197 | |
| | Subtotal | 5,904 | | | 179,339 | | | 97,669 | | | 1,437 | | | 874 | | | 3,901 | | | 37,712 | | | 326,836 | |
| | | | | | | | | | | | | | | | | |
Total | | Acceptable credit quality | 272,254 | | | 1,539,472 | | | 897,184 | | | 417,255 | | | 199,267 | | | 366,894 | | | 462,606 | | | 4,154,932 | |
| | Special mention | — | | | 4,125 | | | 3,332 | | | 1,188 | | | 9,485 | | | 37,240 | | | 623 | | | 55,993 | |
| | Substandard | 41 | | | 2,170 | | | 6,284 | | | 76 | | | 37,608 | | | 50,731 | | | 2,909 | | | 99,819 | |
| | Substandard – nonaccrual | 51 | | | 540 | | | 7,139 | | | 1,696 | | | 8,637 | | | 21,881 | | | 2,355 | | | 42,299 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | 2,100 | | | 216 | | | 7 | | | — | | | 28 | | | — | | | 2,351 | |
Total commercial loans | | $ | 272,346 | | | $ | 1,548,407 | | | $ | 914,155 | | | $ | 420,222 | | | $ | 254,997 | | | $ | 476,774 | | | $ | 468,493 | | | $ | 4,355,394 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| | | Term Loans Amortized Cost Basis by Origination Year | | | | |
(dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving loans | | Total |
Commercial | Commercial | Acceptable credit quality | $ | 111,087 | | | $ | 102,966 | | | $ | 61,751 | | | $ | 28,063 | | | $ | 12,547 | | | $ | 45,168 | | | $ | 404,100 | | | $ | 765,682 | |
| | Special mention | 3,559 | | | 2,106 | | | — | | | 227 | | | 551 | | | 3,154 | | | 159 | | | 9,756 | |
| | Substandard | — | | | — | | | — | | | 206 | | | 1,722 | | | 3,915 | | | 2,575 | | | 8,418 | |
| | Substandard – nonaccrual | — | | | 340 | | | — | | | 132 | | | 83 | | | 246 | | | 2,220 | | | 3,021 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Subtotal | 114,646 | | | 105,412 | | | 61,751 | | | 28,628 | | | 14,903 | | | 52,483 | | | 409,054 | | | 786,877 | |
| | | | | | | | | | | | | | | | | |
| Commercial other | Acceptable credit quality | 283,465 | | | 153,788 | | | 105,980 | | | 64,218 | | | 15,459 | | | 163 | | | 96,509 | | | 719,582 | |
| | Special mention | — | | | — | | | 754 | | | 2,331 | | | 455 | | | — | | | 55 | | | 3,595 | |
| | Substandard | 250 | | | — | | | — | | | 12 | | | 80 | | | — | | | 848 | | | 1,190 | |
| | Substandard – nonaccrual | 524 | | | 1,247 | | | 444 | | | 463 | | | 491 | | | — | | | — | | | 3,169 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | 161 | | | — | | | — | | | — | | | — | | | — | | | — | | | 161 | |
| | Subtotal | 284,400 | | | 155,035 | | | 107,178 | | | 67,024 | | | 16,485 | | | 163 | | | 97,412 | | | 727,697 | |
| | | | | | | | | | | | | | | | | |
Commercial real estate | Non-owner occupied | Acceptable credit quality | 679,040 | | | 403,952 | | | 145,235 | | | 72,504 | | | 18,249 | | | 160,992 | | | 4,833 | | | 1,484,805 | |
| | Special mention | 1,407 | | | 186 | | | 477 | | | 10,633 | | | 195 | | | 8,452 | | | — | | | 21,350 | |
| | Substandard | 569 | | | — | | | 7,458 | | | 32,731 | | | 1,587 | | | 29,655 | | | — | | | 72,000 | |
| | Substandard – nonaccrual | — | | | 701 | | | — | | | 48 | | | 10,246 | | | 2,249 | | | — | | | 13,244 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Subtotal | 681,016 | | | 404,839 | | | 153,170 | | | 115,916 | | | 30,277 | | | 201,348 | | | 4,833 | | | 1,591,399 | |
| | | | | | | | | | | | | | | | | |
| Owner occupied | Acceptable credit quality | 120,141 | | | 122,321 | | | 64,720 | | | 31,916 | | | 29,454 | | | 88,928 | | | 4,305 | | | 461,785 | |
| | Special mention | — | | | 1,161 | | | — | | | 7,917 | | | — | | | 12,161 | | | 22 | | | 21,261 | |
| | Substandard | 141 | | | 272 | | | 79 | | | 1,984 | | | — | | | 3,771 | | | 375 | | | 6,622 | |
| | Substandard – nonaccrual | 155 | | | 4,165 | | | 225 | | | 146 | | | 333 | | | 1,790 | | | 304 | | | 7,118 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Subtotal | 120,437 | | | 127,919 | | | 65,024 | | | 41,963 | | | 29,787 | | | 106,650 | | | 5,006 | | | 496,786 | |
| | | | | | | | | | | | | | | | | |
| Multi-family | Acceptable credit quality | 163,647 | | | 31,605 | | | 29,458 | | | 208 | | | 24,490 | | | 14,574 | | | 1,101 | | | 265,083 | |
| | Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Substandard | — | | | — | | | — | | | — | | | — | | | 3,703 | | | — | | | 3,703 | |
| | Substandard – nonaccrual | — | | | 927 | | | — | | | 113 | | | — | | | 8,063 | | | — | | | 9,103 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Subtotal | 163,647 | | | 32,532 | | | 29,458 | | | 321 | | | 24,490 | | | 26,340 | | | 1,101 | | | 277,889 | |
| | | | | | | | | | | | | | | | | |
| Farmland | Acceptable credit quality | 8,659 | | | 16,138 | | | 13,467 | | | 4,117 | | | 3,129 | | | 19,102 | | | 1,593 | | | 66,205 | |
| | Special mention | — | | | — | | | — | | | — | | | — | | | 159 | | | — | | | 159 | |
| | Substandard | — | | | 14 | | | — | | | 23 | | | 113 | | | 347 | | | 199 | | | 696 | |
| | Substandard – nonaccrual | — | | | — | | | — | | | — | | | — | | | 25 | | | — | | | 25 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Subtotal | 8,659 | | | 16,152 | | | 13,467 | | | 4,140 | | | 3,242 | | | 19,633 | | | 1,792 | | | 67,085 | |
| | | | | | | | | | | | | | | | | |
Construction and land development | | Acceptable credit quality | 171,243 | | | 79,747 | | | 10,676 | | | 8,388 | | | 98 | | | 1,420 | | | 37,997 | | | 309,569 | |
| | Special mention | — | | | — | | | — | | | — | | | — | | | 210 | | | — | | | 210 | |
| | Substandard | — | | | 6,000 | | | — | | | — | | | 2,415 | | | — | | | — | | | 8,415 | |
| | Substandard – nonaccrual | — | | | — | | | — | | | 202 | | | — | | | — | | | — | | | 202 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | 2,112 | | | 337 | | | 8 | | | — | | | — | | | 29 | | | — | | | 2,486 | |
| | Subtotal | 173,355 | | | 86,084 | | | 10,684 | | | 8,590 | | | 2,513 | | | 1,659 | | | 37,997 | | | 320,882 | |
| | | | | | | | | | | | | | | | | |
Total | | Acceptable credit quality | 1,537,282 | | | 910,517 | | | 431,287 | | | 209,414 | | | 103,426 | | | 330,347 | | | 550,438 | | | 4,072,711 | |
| | Special mention | 4,966 | | | 3,453 | | | 1,231 | | | 21,108 | | | 1,201 | | | 24,136 | | | 236 | | | 56,331 | |
| | Substandard | 960 | | | 6,286 | | | 7,537 | | | 34,956 | | | 5,917 | | | 41,391 | | | 3,997 | | | 101,044 | |
| | Substandard – nonaccrual | 679 | | | 7,380 | | | 669 | | | 1,104 | | | 11,153 | | | 12,373 | | | 2,524 | | | 35,882 | |
| | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Not graded | 2,273 | | | 337 | | | 8 | | | — | | | — | | | 29 | | | — | | | 2,647 | |
Total commercial loans | $ | 1,546,160 | | | $ | 927,973 | | | $ | 440,732 | | | $ | 266,582 | | | $ | 121,697 | | | $ | 408,276 | | | $ | 557,195 | | | $ | 4,268,615 | |
The following table presents the gross charge-offs by class of loan and year of origination on the commercial loan portfolio for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Term Loans by Origination Year | | | |
(dollars in thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans | | Total |
Commercial | Commercial | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 9 | | | $ | 11 | | | $ | — | | | $ | 20 | |
| Commercial Other | — | | | 559 | | | 64 | | | — | | | — | | | 326 | | | — | | | 949 | |
Commercial Real Estate | Non-owner occupied | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Owner occupied | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Multi-family | — | | | — | | | — | | | — | | | — | | | 746 | | | — | | | 746 | |
| Farmland | — | | | — | | | — | | | — | | | — | | | | | — | | | — | |
Construction and land development | — | | | — | | | — | | | — | | | — | | | | | — | | | — | |
Total gross commercial charge-offs | $ | — | | | $ | 559 | | | $ | 64 | | | $ | — | | | $ | 9 | | | $ | 1,083 | | | $ | — | | | $ | 1,715 | |
The Company evaluates the credit quality of its other loan portfolios, which includes residential real estate, consumer and lease financing loans, based primarily on the aging status of the loan and payment activity. Accordingly, loans on nonaccrual status, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings are considered to be nonperforming for purposes of credit quality evaluation. The following tables present the recorded investment of our other loan portfolio based on the credit risk profile of loans that are performing and loans that are nonperforming as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2023 |
| | | Term Loans Amortized Cost Basis by Origination Year | | | | |
(dollars in thousands) | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans | | Total |
Residential real estate | Residential first lien | Performing | $ | 10,844 | | | $ | 75,904 | | | $ | 38,573 | | | $ | 31,100 | | | $ | 20,688 | | | $ | 128,742 | | | $ | 76 | | | $ | 305,927 | |
| | Nonperforming | — | | | 50 | | | — | | | — | | | 259 | | | 3,401 | | | — | | | 3,710 | |
| | Subtotal | 10,844 | | | 75,954 | | | 38,573 | | | 31,100 | | | 20,947 | | | 132,143 | | | 76 | | | 309,637 | |
| | | | | | | | | | | | | | | | | |
| Other residential | Performing | 817 | | | 1,306 | | | 480 | | | 513 | | | 1,008 | | | 2,687 | | | 52,676 | | | 59,487 | |
| | Nonperforming | — | | | — | | | — | | | — | | | — | | | 197 | | | 589 | | | 786 | |
| | Subtotal | 817 | | | 1,306 | | | 480 | | | 513 | | | 1,008 | | | 2,884 | | | 53,265 | | | 60,273 | |
| | | | | | | | | | | | | | | | | |
Consumer | Consumer | Performing | 14,924 | | | 29,952 | | | 38,164 | | | 8,240 | | | 3,113 | | | 15,646 | | | 2,724 | | | 112,763 | |
| | Nonperforming | — | | | 12 | | | 3 | | | 7 | | | — | | | 95 | | | 2 | | | 119 | |
| | Subtotal | 14,924 | | | 29,964 | | | 38,167 | | | 8,247 | | | 3,113 | | | 15,741 | | | 2,726 | | | 112,882 | |
| | | | | | | | | | | | | | | | | |
| Consumer other | Performing | 153,241 | | | 511,526 | | | 215,786 | | | 79,778 | | | 30,437 | | | 10,716 | | | 3,806 | | | 1,005,290 | |
| | Nonperforming | 766 | | | — | | | — | | | — | | | — | | | — | | | — | | | 766 | |
| | Subtotal | 154,007 | | | 511,526 | | | 215,786 | | | 79,778 | | | 30,437 | | | 10,716 | | | 3,806 | | | 1,006,056 | |
| | | | | | | | | | | | | | | | | |
Leases financing | | Performing | 65,650 | | | 198,441 | | | 101,715 | | | 75,448 | | | 48,465 | | | 18,053 | | | — | | | 507,772 | |
| | Nonperforming | — | | | 679 | | | 224 | | | 563 | | | 637 | | | 154 | | | — | | | 2,257 | |
| | Subtotal | 65,650 | | | 199,120 | | | 101,939 | | | 76,011 | | | 49,102 | | | 18,207 | | | — | | | 510,029 | |
| | | | | | | | | | | | | | | | | |
Total | | Performing | 245,476 | | | 817,129 | | | 394,718 | | | 195,079 | | | 103,711 | | | 175,844 | | | 59,282 | | | 1,991,239 | |
| | Nonperforming | 766 | | | 741 | | | 227 | | | 570 | | | 896 | | | 3,847 | | | 591 | | | 7,638 | |
Total other loans | $ | 246,242 | | | $ | 817,870 | | | $ | 394,945 | | | $ | 195,649 | | | $ | 104,607 | | | $ | 179,691 | | | $ | 59,873 | | | $ | 1,998,877 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| | | Term Loans Amortized Cost Basis by Origination Year | | | | |
(dollars in thousands) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving loans | | Total |
Residential real estate | Residential first lien | Performing | $ | 75,449 | | | $ | 38,774 | | | $ | 31,566 | | | $ | 20,780 | | | $ | 21,691 | | | $ | 109,067 | | | $ | 336 | | | $ | 297,663 | |
| | Nonperforming | 101 | | | — | | | 104 | | | 414 | | | 987 | | | 4,974 | | | — | | | 6,580 | |
| | Subtotal | 75,550 | | | 38,774 | | | 31,670 | | | 21,194 | | | 22,678 | | | 114,041 | | | 336 | | | 304,243 | |
| | | | | | | | | | | | | | | | | |
| Other residential | Performing | 1,722 | | | 496 | | | 534 | | | 1,060 | | | 1,496 | | | 1,515 | | | 53,159 | | | 59,982 | |
| | Nonperforming | 17 | | | — | | | — | | | 7 | | | 18 | | | 208 | | | 1,619 | | | 1,869 | |
| | Subtotal | 1,739 | | | 496 | | | 534 | | | 1,067 | | | 1,514 | | | 1,723 | | | 54,778 | | | 61,851 | |
| | | | | | | | | | | | | | | | | |
Consumer | Consumer | Performing | 32,561 | | | 40,374 | | | 9,411 | | | 3,476 | | | 2,768 | | | 14,756 | | | 2,346 | | | 105,692 | |
| | Nonperforming | 33 | | | 50 | | | 7 | | | 1 | | | 13 | | | 79 | | | 5 | | | 188 | |
| | Subtotal | 32,594 | | | 40,424 | | | 9,418 | | | 3,477 | | | 2,781 | | | 14,835 | | | 2,351 | | | 105,880 | |
| | | | | | | | | | | | | | | | | |
| Consumer other | Performing | 669,015 | | | 260,360 | | | 92,148 | | | 34,501 | | | 6,637 | | | 5,430 | | | 5,310 | | | 1,073,401 | |
| | Nonperforming | 733 | | | — | | | — | | | — | | | — | | | — | | | — | | | 733 | |
| | Subtotal | 669,748 | | | 260,360 | | | 92,148 | | | 34,501 | | | 6,637 | | | 5,430 | | | 5,310 | | | 1,074,134 | |
| | | | | | | | | | | | | | | | | |
Leases financing | | Performing | 215,084 | | | 110,294 | | | 84,458 | | | 54,684 | | | 21,767 | | | 3,088 | | | — | | | 489,375 | |
| | Nonperforming | — | | | 522 | | | 736 | | | 818 | | | 254 | | | 39 | | | — | | | 2,369 | |
| | Subtotal | 215,084 | | | 110,816 | | | 85,194 | | | 55,502 | | | 22,021 | | | 3,127 | | | — | | | 491,744 | |
| | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | | | | |
| | Performing | 993,831 | | | 450,298 | | | 218,117 | | | 114,501 | | | 54,359 | | | 133,856 | | | 61,151 | | | 2,026,113 | |
| | Nonperforming | 884 | | | 572 | | | 847 | | | 1,240 | | | 1,272 | | | 5,300 | | | 1,624 | | | 11,739 | |
Total other loans | $ | 994,715 | | | $ | 450,870 | | | $ | 218,964 | | | $ | 115,741 | | | $ | 55,631 | | | $ | 139,156 | | | $ | 62,775 | | | $ | 2,037,852 | |
The following table presents the gross charge-offs by class of loan and year of origination on the other loan portfolio for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Term Loans by Origination Year | | | |
(dollars in thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans | | Total |
Residential real estate | Residential first lien | $ | — | | | $ | — | | | $ | 9 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 9 | |
| Other residential | — | | | — | | | — | | | — | | | — | | | 9 | | | 13 | | | 22 | |
Consumer | Consumer | — | | | 1 | | | 5 | | | — | | | 5 | | | 20 | | | — | | | 31 | |
| Consumer other | — | | | 53 | | | 32 | | | 14 | | | 31 | | | 102 | | | — | | | 232 | |
Lease financing | | — | | | 57 | | | 192 | | | 83 | | | 22 | | | 36 | | | — | | | 390 | |
Total gross other charge-offs | | $ | — | | | $ | 111 | | | $ | 238 | | | $ | 97 | | | $ | 58 | | | $ | 167 | | | $ | 13 | | | $ | 684 | |
NOTE 5 – PREMISES, EQUIPMENT AND LEASES
A summary of premises and equipment at March 31, 2023 and December 31, 2022 is as follows:
| | | | | | | | | | | |
(dollars in thousands) | 2023 | | 2022 |
Land | $ | 16,004 | | | $ | 16,004 | |
Buildings and improvements | 74,201 | | | 71,837 | |
Furniture and equipment | 34,473 | | | 34,081 | |
Lease right-of-use assets | 7,710 | | | 7,001 | |
Total | 132,388 | | | 128,923 | |
Accumulated depreciation | (51,806) | | | (50,630) | |
Premises and equipment, net | $ | 80,582 | | | $ | 78,293 | |
Depreciation expense for the three months ended March 31, 2023 and 2022 was $1.2 million and $1.3 million, respectively.
The Company has entered into operating leases, primarily for banking offices and operating facilities, which have remaining lease terms of 2 months to 15 years, some of which may include options to extend the lease terms for up to an additional 10 years. The options to extend are included if they are reasonably certain to be exercised. The Company had operating lease right-of-use assets of $7.7 million and $7.0 million as of March 31, 2023 and December 31, 2022, respectively, included in premises and equipment on our consolidated balance sheets. The operating lease liabilities of the Company were $9.6 million and $8.9 million as of March 31, 2023 and December 31, 2022, respectively, and are included in accrued interest payable and other liabilities on our consolidated balance sheets.
Information related to operating leases for the three months ended March 31, 2023 and 2022 was as follows: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(dollars in thousands) | 2023 | | 2022 | | | | |
Operating lease cost | $ | 484 | | | $ | 508 | | | | | |
Operating cash flows from leases | 590 | | | 606 | | | | | |
Right-of-use assets obtained in exchange for lease obligations | 1,130 | | | 121 | | | | | |
| | | | | | | |
Weighted average remaining lease term | 8.10 years | | 7.43 years | | | | |
Weighted average discount rate | 3.26 | % | | 2.87 | % | | | | |
The projected minimum rental payments under the terms of the leases as of March 31, 2023 were as follows:
| | | | | |
(dollars in thousands) | Amount |
Year ending December 31: | |
2023 remaining | $ | 1,469 | |
2024 | 1,972 | |
2025 | 1,069 | |
2026 | 939 | |
2027 | 838 | |
Thereafter | 4,676 | |
Total future minimum lease payments | 10,963 | |
Less imputed interest | (1,407) | |
Total operating lease liabilities | $ | 9,556 | |
NOTE 6 – LOAN SERVICING RIGHTS
A summary of loan servicing rights at March 31, 2023 and December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
(dollars in thousands) | Serviced Loans | | Carrying Value | | Serviced Loans | | Carrying Value |
| | | | | | | |
SBA | $ | 43,787 | | | $ | 599 | | | $ | 46,081 | | | $ | 656 | |
Residential | 247,426 | | | 518 | | | 255,298 | | | 549 | |
Commercial FHA held for sale | 2,201,277 | | | 20,745 | | | 2,255,617 | | | 20,745 | |
Total | $ | 2,492,490 | | | $ | 21,862 | | | $ | 2,556,996 | | | $ | 21,950 | |
Commercial FHA Mortgage Loan Servicing
During the third quarter of 2022, the Company committed to a plan to sell our commercial FHA servicing portfolio and, therefore, transferred $24.0 million to commercial FHA servicing rights held for sale. Servicing rights held for sale are recorded at the lower of their carrying value or fair value less estimated costs to sell. At March 31, 2023 and December 31, 2022, the $20.7 million carrying amount of the asset reflected its estimated fair value less estimated selling costs. Fair value was based on a letter of intent to purchase from an interested buyer.
Changes in our commercial FHA loan servicing rights for the three months ended March 31, 2022 are summarized as follows:
| | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
(dollars in thousands) | | | 2022 | | | | | | |
Loan servicing rights: | | | | | | | | | |
Balance, beginning of period | | | $ | 27,386 | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Amortization | | | (660) | | | | | | | |
Refinancing fee received from third party | | | (221) | | | | | | | |
Permanent impairment | | | (394) | | | | | | | |
Balance, end of period | | | $ | 26,111 | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Fair value: | | | | | | | | | |
At beginning of period | | | $ | 28,368 | | | | | | | |
At end of period | | | 27,941 | | | | | | | |
NOTE 7 – DERIVATIVE INSTRUMENTS
As part of the Company’s overall management of interest rate sensitivity, the Company utilizes derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility, including interest rate lock commitments, forward commitments to sell mortgage-backed securities, cash flow hedges and interest rate swap contracts.
Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities
The Company issues interest rate lock commitments on originated fixed-rate commercial and residential real estate loans to be sold. The interest rate lock commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities. The fair value of the interest rate lock commitments and forward contracts to sell mortgage-backed securities are included in other assets or other liabilities in the consolidated balance sheets. Changes in the fair value of derivative financial instruments are recognized in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.
The following table summarizes the interest rate lock commitments and forward commitments to sell mortgage-backed securities held by the Company, their notional amount and estimated fair values at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional amount | | Fair value gain |
(dollars in thousands) | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
Derivative instruments (included in other assets): | | | | | | | |
Interest rate lock commitments | $ | 4,601 | | | $ | 2,078 | | | $ | 114 | | | $ | 49 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional amount | | Fair value loss |
(dollars in thousands) | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
Derivative instruments (included in other liabilities): | | | | | | | |
Interest rate lock commitments | $ | 4,419 | | | $ | 4,419 | | | $ | 15 | | | $ | 15 | |
Forward commitments to sell mortgage-backed securities | 9,357 | | | 6,669 | | | 14 | | | — | |
Total | $ | 13,776 | | | $ | 11,088 | | | $ | 29 | | | $ | 15 | |
During both the three months ended March 31, 2023 and 2022, the Company recognized net gains of $0.1 million on derivative instruments in residential mortgage banking revenue in the consolidated statements of income.
Cash Flow Hedges
In the first quarter of 2022, the Company entered into interest rate swap agreements, which qualify as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. The following table summarizes the Company's receive-fixed, pay-variable interest rate swaps on certain pools of loans indexed to prime at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | |
(dollars in thousands) | March 31, 2023 | | December 31, 2022 | | |
Notional Amount | $ | 200,000 | | | $ | 200,000 | | | |
Fair value loss included in other liabilities | (7,793) | | | (9,999) | | | |
Tax effected amount included in accumulated other comprehensive (loss) income | (5,689) | | | (7,300) | | | |
Average remaining life | 3.12 | | 3.37 | | |
Weighted average pay rate | 7.80 | % | | 7.23 | % | | |
Weighted average receive rate | 5.48 | % | | 5.48 | % | | |
Interest Rate Swap Contracts Not Designated as Hedges
The Company entered into interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by contracts simultaneously purchased by the Company from other financial dealer institutions with mirror-image terms. Because of the mirror-image terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in the fair value subsequent to initial recognition have a minimal effect on earnings. These derivative contracts do not qualify for hedge accounting.
The notional amounts of the customer derivative instruments and the offsetting counterparty derivative instruments were $7.3 million and $7.4 million at March 31, 2023 and December 31, 2022, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $0.3 million at both March 31, 2023 and December 31, 2022, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.
NOTE 8 – DEPOSITS
The following table summarizes the classification of deposits as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
(dollars in thousands) | March 31, 2023 | | December 31, 2022 |
Noninterest-bearing demand | $ | 1,215,758 | | | $ | 1,362,158 | |
Interest-bearing: | | | |
Checking | 2,502,827 | | | 2,494,073 | |
Money market | 1,263,813 | | | 1,184,101 | |
Savings | 636,832 | | | 661,932 | |
Time | 805,971 | | | 662,388 | |
Total deposits | $ | 6,425,201 | | | $ | 6,364,652 | |
NOTE 9 – SHORT-TERM BORROWINGS
The following table presents the distribution of short-term borrowings and related weighted average interest rates as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
| Repurchase agreements |
(dollars in thousands) | As of and for the Three Months Ended March 31, 2023 | | As of and for the Year Ended December 31,2022 |
Outstanding at period-end | $ | 31,173 | | | $ | 42,311 | |
Average amount outstanding | 38,655 | | | 58,688 | |
Maximum amount outstanding at any month end | 43,718 | | | 76,807 | |
Weighted average interest rate: | | | |
During period | 0.26 | % | | 0.18 | % |
End of period | 0.25 | % | | 0.26 | % |
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction, which represents the amount of the Bank’s obligation. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Investment securities with a carrying amount of $33.9 million and $46.1 million at March 31, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase.
The Company had available lines of credit of $207.7 million and $12.2 million at March 31, 2023 and December 31, 2022, respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreement with respect to a pool of commercial real estate loans and investment securities totaling $250.3 million and $14.3 million at March 31, 2023 and December 31, 2022, respectively. There were no outstanding borrowings under these lines at March 31, 2023 and 2022.
At March 31, 2023, the Company had available federal funds lines of credit totaling $394.0 million. These lines of credit were unused at March 31, 2023.
NOTE 10 – FHLB ADVANCES AND OTHER BORROWINGS
The following table summarizes our FHLB advances and other borrowings as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
(dollars in thousands) | March 31, 2023 | | December 31, 2022 |
| | | |
| | | |
FHLB advances – fixed rate, fixed term at rates averaging 4.18% at March 31, 2023 - maturing through February 2028 | $ | 55,000 | | | $ | — | |
FHLB advances – putable fixed rate at rates averaging 2.70% and 2.35% at March 31, 2023 and December 31, 2022, respectively – maturing through February 2028 with call provisions through February 2024 | 160,000 | | | 110,000 | |
FHLB advances –SOFR floater at rates averaging 6.45% and 5.92% at March 31, 2023 and December 31, 2022, respectively – maturing in October 2023 | 100,000 | | | 100,000 | |
FHLB advances – Short term fixed rate at rates averaging 4.86% and 4.31% at March 31, 2023 and December 31, 2022, respectively– maturing in April 2023 | 167,000 | | | 250,000 | |
Total FHLB advances and other borrowings | $ | 482,000 | | | $ | 460,000 | |
The Company’s advances from the FHLB are collateralized by a blanket collateral agreement of qualifying mortgage and home equity line of credit loans and certain commercial real estate loans totaling approximately $2.88 billion and $2.90 billion at March 31, 2023 and December 31, 2022, respectively.
NOTE 11 – SUBORDINATED DEBT
The following table summarizes the Company’s subordinated debt at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Subordinated debt |
| Fixed to Float | | Fixed | | |
(dollars in thousands) | Issued September 2019 | | Issued September 2019 | | Issued June 2015 | | Total |
At March 31, 2023 | | | | | | | |
Outstanding amount | $ | 72,750 | | | $ | 27,250 | | | $ | 550 | | | $ | 100,550 | |
Carrying amount | 72,364 | | | 26,937 | | | 548 | | | 99,849 | |
Current rate | 5.00 | % | | 5.50 | % | | 6.50 | % | | |
At December 31, 2022 | | | | | | | |
Outstanding amount | $ | 72,750 | | | $ | 27,250 | | | $ | 550 | | | $ | 100,550 | |
Carrying amount | 72,300 | | | 26,925 | | | 547 | | | 99,772 | |
Current rate | 5.00 | % | | 5.50 | % | | 6.50 | % | | |
Maturity date | 9/30/2029 | | 9/30/2034 | | 6/18/2025 | | |
Optional redemption date | 9/30/2024 | | 9/30/2029 | | N/A | | |
Fixed to variable conversion date | 9/30/2024 | | 9/30/2029 | | N/A | | |
Variable rate | 3-month SOFR plus 3.61% | | 3-month SOFR plus 4.05% | | N/A | | |
Interest payment terms | Semiannually | | Semiannually | | Semiannually | | |
The value of subordinated debentures have been reduced by the debt issuance costs, which are being amortized on a straight line basis through the earlier of the redemption option or maturity date. All of the subordinated debentures above may be included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.
NOTE 12 – EARNINGS PER COMMON SHARE
Earnings per common share is calculated utilizing the two-class method. Basic earnings per common share is calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards. The diluted earnings per common share computation for the three months ended March 31, 2023 and 2022 excluded antidilutive stock options of 265,831 and 15,597, respectively, because the exercise prices of these stock options exceeded the average market
prices of the Company’s common shares for those respective periods. Presented below are the calculations for basic and diluted earnings per common share for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(dollars in thousands, except per share data) | 2023 | | 2022 | | | | | | |
Net income | $ | 21,772 | | | $ | 20,749 | | | | | | | |
Preferred dividends declared | (2,228) | | | — | | | | | | | |
| | | | | | | | | |
Net income available to common shareholders | 19,544 | | | 20,749 | | | | | | | |
Common shareholder dividends | (6,669) | | | (6,389) | | | | | | | |
Unvested restricted stock award dividends | (80) | | | (75) | | | | | | | |
Undistributed earnings to unvested restricted stock awards | (151) | | | (163) | | | | | | | |
Undistributed earnings to common shareholders | $ | 12,644 | | | $ | 14,122 | | | | | | | |
Basic | | | | | | | | | |
Distributed earnings to common shareholders | $ | 6,669 | | | $ | 6,389 | | | | | | | |
Undistributed earnings to common shareholders | 12,644 | | | 14,122 | | | | | | | |
Total common shareholders earnings, basic | $ | 19,313 | | | $ | 20,511 | | | | | | | |
Diluted | | | | | | | | | |
Distributed earnings to common shareholders | $ | 6,669 | | | $ | 6,389 | | | | | | | |
Undistributed earnings to common shareholders | 12,644 | | | 14,122 | | | | | | | |
Total common shareholders earnings | 19,313 | | | 20,511 | | | | | | | |
Add back: | | | | | | | | | |
Undistributed earnings reallocated from unvested restricted stock awards | — | | | — | | | | | | | |
Total common shareholders earnings, diluted | $ | 19,313 | | | $ | 20,511 | | | | | | | |
Weighted average common shares outstanding, basic | 22,478,808 | | | 22,274,884 | | | | | | | |
Options | 23,162 | | | 75,423 | | | | | | | |
Weighted average common shares outstanding, diluted | 22,501,970 | | | 22,350,307 | | | | | | | |
Basic earnings per common share | $ | 0.86 | | | $ | 0.92 | | | | | | | |
Diluted earnings per common share | 0.86 | | | 0.92 | | | | | | | |
NOTE 13 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
•Level 1: Unadjusted quoted prices for identical assets or liabilities traded in active markets.
•Level 2: Significant other observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.
•Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Investment securities. The fair value of investment securities available for sale are determined by quoted market prices, if available (Level 1). For investment securities available for sale where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For investment securities available for sale where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Securities classified as Level 3 are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. There were no transfers between Levels 1, 2 or 3 during the
three months ended March 31, 2023 or December 31, 2022 for assets measured at fair value on a recurring basis. The fair value of equity securities is determined using quoted prices or market prices for similar securities (Level 2).
Loans held for sale. The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).
Derivative instruments. The fair value of derivative instruments are determined based on derivative valuation models using observable market data as of the measurement date (Level 2).
Loan servicing rights. In accordance with GAAP, the Company records impairment charges on loan servicing rights on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions (Level 3).
Mortgage servicing rights held for sale. Mortgage servicing rights held for sale consist of commercial FHA mortgage servicing rights that management has committed to a plan to sell and has the ability to sell them to a buyer in their present condition. Mortgage servicing rights held for sale are carried at the lower of their carrying value or fair value less estimated costs to sell (Level 2).
Nonperforming loans. Nonperforming loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and restructured loans are considered nonperforming and are reviewed individually for the amount of impairment, if any. Most of our loans are collateral dependent and, accordingly, we measure nonperforming loans based on the estimated fair value of such collateral. In cases where the Company has an agreed upon selling price for the collateral, the fair value is set at the selling price (Level 1). The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral (Level 2). When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable (Level 3). The nonperforming loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, cash flows discounted at the effective loan rate, and management’s judgment.
Other Real Estate Owned. OREO is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost basis. After foreclosure, OREO is held for sale and is carried at the lower of cost or fair value less estimated costs of disposal. Fair value for OREO is based on an appraisal performed upon foreclosure. Property is evaluated regularly to ensure the recorded amount is supported by its fair value less estimated costs to dispose. After the initial foreclosure appraisal, fair value is generally determined by an annual appraisal unless known events warrant adjustments to the recorded value.
Assets held for sale. Assets held for sale represent the fair value of the banking facilities that are expected to be sold. The fair value of the assets held for sale was based on estimated market prices from independently prepared current appraisals (Level 2).
Assets and liabilities measured and recorded at fair value, including financial assets for which the Company has elected the fair value option, on a recurring and nonrecurring basis at March 31, 2023 and December 31, 2022, are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
(dollars in thousands) | Carrying amount | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets and liabilities measured at fair value on a recurring basis: | | | | | | | |
Assets | | | | | | | |
Investment securities available for sale: | | | | | | | |
U.S. Treasury securities | $ | 52,798 | | | $ | 52,798 | | | $ | — | | | $ | — | |
U.S. government sponsored entities and U.S. agency securities | 54,136 | | | — | | | 54,136 | | | — | |
Mortgage-backed securities - agency | 489,491 | | | — | | | 489,491 | | | — | |
Mortgage-backed securities - non-agency | 42,514 | | | — | | | 42,514 | | | — | |
State and municipal securities | 66,256 | | | — | | | 66,256 | | | — | |
Collateralized loan obligations | 22,694 | | | — | | | 22,694 | | | — | |
Corporate securities | 84,396 | | | — | | | 84,396 | | | — | |
Equity securities | 8,720 | | | 8,720 | | | — | | | — | |
Loans held for sale | 2,747 | | | — | | | 2,747 | | | — | |
Derivative assets | 451 | | | — | | | 451 | | | — | |
| | | | | | | |
Total | $ | 824,203 | | | $ | 61,518 | | | $ | 762,685 | | | $ | — | |
Liabilities | | | | | | | |
Derivative liabilities | $ | 8,159 | | | $ | — | | | $ | 8,159 | | | $ | — | |
| | | | | | | |
Total | $ | 8,159 | | | $ | — | | | $ | 8,159 | | | $ | — | |
| | | | | | | |
Assets measured at fair value on a non-recurring basis: | | | | | | | |
Loan servicing rights | $ | 1,117 | | | $ | — | | | $ | — | | | $ | 1,117 | |
Commercial FHA loan servicing rights held for sale | 20,745 | | | — | | | 20,745 | | | — | |
Nonperforming loans | 50,713 | | | 10,159 | | | 31,979 | | | 8,575 | |
Other real estate owned | 6,729 | | | — | | | 6,729 | | | — | |
Assets held for sale | 178 | | | — | | | 178 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
(dollars in thousands) | Carrying amount | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets and liabilities measured at fair value on a recurring basis: | | | | | | | |
Assets | | | | | | | |
Investment securities available for sale: | | | | | | | |
U.S. Treasury securities | $ | 81,230 | | | $ | 81,230 | | | $ | — | | | $ | — | |
U.S. government sponsored entities and U.S. agency securities | 37,509 | | | — | | | 37,509 | | | — | |
Mortgage-backed securities - agency | 448,150 | | | — | | | 448,150 | | | — | |
Mortgage-backed securities - non-agency | 20,754 | | | — | | | 20,754 | | | — | |
State and municipal securities | 94,636 | | | — | | | 94,636 | | | — | |
Corporate securities | 85,955 | | | — | | | 85,955 | | | — | |
Equity securities | 8,626 | | | 8,626 | | | — | | | — | |
Loans held for sale | 1,286 | | | — | | | 1,286 | | | — | |
Derivative assets | 481 | | | — | | | 481 | | | — | |
| | | | | | | |
Total | $ | 778,627 | | | $ | 89,856 | | | $ | 688,771 | | | $ | — | |
Liabilities | | | | | | | |
Derivative liabilities | $ | 10,446 | | | $ | — | | | $ | 10,446 | | | $ | — | |
| | | | | | | |
Total | $ | 10,446 | | | $ | — | | | $ | 10,446 | | | $ | — | |
| | | | | | | |
Assets measured at fair value on a non-recurring basis: | | | | | | | |
Loan servicing rights | $ | 1,205 | | | $ | — | | | $ | — | | | $ | 1,205 | |
Mortgage servicing rights held for sale | 20,745 | | | — | | | 20,745 | | | — | |
Nonperforming loans | 49,423 | | | 5,478 | | | 34,406 | | | 9,539 | |
Other real estate owned | 6,729 | | | — | | | 6,729 | | | — | |
Assets held for sale | 356 | | | — | | | 356 | | | — | |
There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2023. The following table provides a reconciliation of activity for Level 3 assets for the three months ended March 31, 2022:
| | | | | | | | | | | |
| | | | | |
(dollars in thousands) | | | | | | | For the three months ended March 31, 2022 |
Balance, beginning of period | | | | | | | $ | 935 | |
| | | | | | | |
Total realized in earnings (1) | | | | | | | 4 | |
Total unrealized in other comprehensive income (2) | | | | | | | — | |
Net settlements (principal and interest) | | | | | | | (4) | |
Balance, end of period | | | | | | | $ | 935 | |
(1)Amounts included in interest income from investment securities taxable in the consolidated statements of income.
(2)Represents change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period.
The following table presents losses recognized on assets measured on a nonrecurring basis for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(dollars in thousands) | 2023 | | 2022 | | | | | | |
Commercial mortgage servicing rights | $ | — | | | $ | 394 | | | | | | | |
| | | | | | | | | |
Nonperforming loans | 1,103 | | | 1,930 | | | | | | | |
Other real estate owned | — | | | 337 | | | | | | | |
| | | | | | | | | |
Total losses on assets measured on a nonrecurring basis | $ | 1,103 | | | $ | 2,661 | | | | | | | |
The following tables present quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured on a nonrecurring basis at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Fair value | | Valuation technique | | Unobservable input / assumptions | | Range (weighted average)(1) |
March 31, 2023 | | | | | | | | |
Loan servicing rights: | | | | | | | | |
SBA servicing rights | | $ | 816 | | | Discounted cash flow | | Prepayment speed | | 15.00% - 16.54% (15.67%) |
| | | | | | Discount rate | | No range (13.75%) |
| | | | | | | | |
Residential servicing rights | | 2,786 | | | Discounted cash flow | | Prepayment speed | | 6.96% -26.28% (7.50%) |
| | | | | | Discount rate | | 9.50% - 12.00% (10.63%) |
| | | | | | | | |
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| | | | | | | | |
December 31, 2022 | | | | | | | | |
Loan servicing rights: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
SBA servicing rights | | 876 | | | Discounted cash flow | | Prepayment speed | | 14.49% - 15.44% (15.00%) |
| | | | | | Discount rate | | No range (13.00%) |
| | | | | | | | |
Residential servicing rights | | 2,770 | | | Discounted cash flow | | Prepayment speed | | 7.56% - 26.28% (7.92%) |
| | | | | | Discount rate | | 9.00% - 11.50% (10.13%) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1)Unobservable inputs were weighted by the relative fair value of the instruments.
ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.
The Company has elected the fair value option for newly originated commercial and residential loans held for sale. These loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option
to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.
The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
(dollars in thousands) | Aggregate fair value | | Difference | | Contractual principal | | Aggregate fair value | | Difference | | Contractual principal |
| | | | | | | | | | | |
Residential loans held for sale | $ | 2,747 | | | $ | 140 | | | $ | 2,607 | | | $ | 1,286 | | | $ | 42 | | | $ | 1,244 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The following table presents the amount of gains (losses) from fair value changes included in income before income taxes for financial assets carried at fair value for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(dollars in thousands) | 2023 | | 2022 | | | | | | |
Commercial loans held for sale | $ | — | | | $ | 18 | | | | | | | |
Residential loans held for sale | 99 | | | (381) | | | | | | | |
Total loans held for sale | $ | 99 | | | $ | (363) | | | | | | | |
The carrying values and estimated fair value of certain financial instruments not carried at fair value at March 31, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
(dollars in thousands) | Carrying amount | | Fair value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | | | |
Cash and due from banks | $ | 136,116 | | | $ | 136,116 | | | $ | 136,116 | | | $ | — | | | $ | — | |
Federal funds sold | 2,194 | | | 2,194 | | | 2,194 | | | — | | | — | |
| | | | | | | | | |
Loans, net | 6,292,204 | | | 6,297,002 | | | — | | | — | | | 6,297,002 | |
Accrued interest receivable | 20,534 | | | 20,534 | | | — | | | 20,534 | | | — | |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Deposits | $ | 6,425,201 | | | $ | 6,365,577 | | | $ | — | | | $ | 6,365,577 | | | $ | — | |
Short-term borrowings | 31,173 | | | 31,173 | | | — | | | 31,173 | | | — | |
FHLB and other borrowings | 482,000 | | | 481,298 | | | — | | | 481,298 | | | — | |
Subordinated debt | 99,849 | | | 84,403 | | | — | | | 84,403 | | | — | |
Trust preferred debentures | 50,135 | | | 51,050 | | | — | | | 51,050 | | | — | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
(dollars in thousands) | Carrying amount | | Fair value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | | | |
Cash and due from banks | $ | 143,035 | | | $ | 143,035 | | | $ | 143,035 | | | $ | — | | | $ | — | |
Federal funds sold | 7,286 | | | 7,286 | | | 7,286 | | | — | | | — | |
| | | | | | | | | |
Loans, net | 6,245,416 | | | 6,121,026 | | | — | | | — | | | 6,121,026 | |
Accrued interest receivable | 20,313 | | | 20,313 | | | — | | | 20,313 | | | — | |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Deposits | $ | 6,364,652 | | | $ | 6,344,534 | | | $ | — | | | $ | 6,344,534 | | | $ | — | |
Short-term borrowings | 42,311 | | | 42,311 | | | — | | | 42,311 | | | — | |
FHLB and other borrowings | 460,000 | | | 457,998 | | | — | | | 457,998 | | | — | |
Subordinated debt | 99,772 | | | 95,301 | | | — | | | 95,301 | | | — | |
Trust preferred debentures | 49,975 | | | 54,668 | | | — | | | 54,668 | | | — | |
| | | | | | | | | |
The methods utilized to measure fair value of financial instruments at March 31, 2023 and December 31, 2022 represent an approximation of exit price; however, an actual exit price may differ.
NOTE 14 – COMMITMENTS, CONTINGENCIES AND CREDIT RISK
In the normal course of business, there are outstanding various contingent liabilities such as claims and legal actions, which are not reflected in the consolidated financial statements. No material losses are anticipated as a result of these actions or claims.
We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank used the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The commitments are principally tied to variable rates. Loan commitments as of March 31, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | |
(dollars in thousands) | March 31, 2023 | | December 31, 2022 |
Commitments to extend credit | $ | 1,264,040 | | | $ | 1,276,263 | |
Financial guarantees – standby letters of credit | 17,762 | | | 23,748 | |
The Company establishes a mortgage repurchase liability to reflect management’s estimate of losses on loans for which the Company could have a repurchase obligation based on the volume of loans sold in 2023 and years prior, borrower default expectations, historical investor repurchase demand and appeals success rates, and estimated loss severity. Loans repurchased from investors are initially recorded at fair value, which becomes the Company’s new accounting basis. Any difference between the loan’s fair value and the outstanding principal amount is charged or credited to the mortgage repurchase liability, as appropriate. Subsequent to repurchase, such loans are carried in loans receivable. There were no losses as a result of make-whole requests and loan repurchases for the three months ended March 31, 2023 and 2022. The liability for unresolved repurchase demands totaled $0.2 million at March 31, 2023 and December 31, 2022.
NOTE 15 – SEGMENT INFORMATION
Our business segments are defined as Banking, Wealth Management, and Other. The reportable business segments are consistent with the internal reporting and evaluation of the principle lines of business of the Company. The Banking segment provides a wide range of financial products and services to consumers and businesses, including commercial, commercial real estate, mortgage and other consumer loan products; commercial equipment financing; mortgage loan sales and servicing; letters of credit; various types of deposit products, including checking, savings and time deposit accounts; merchant services; and corporate treasury management services. The Wealth Management segment consists of trust and fiduciary services, brokerage and retirement planning services. The Other segment includes the operating results of the parent company, our captive insurance business unit, and the elimination of intercompany transactions.
Selected business segment financial information for the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Banking | | Wealth Management | | | | Other | | Total |
Three Months Ended March 31, 2023 | | | | | | | | | |
Net interest income (expense) | $ | 62,608 | | | $ | — | | | | | $ | (2,104) | | | $ | 60,504 | |
Provision for credit losses | 3,135 | | | — | | | | | — | | | 3,135 | |
Noninterest income | 9,621 | | | 6,411 | | | | | (253) | | | 15,779 | |
Noninterest expense | 39,847 | | | 4,841 | | | | | (206) | | | 44,482 | |
Income (loss) before income taxes (benefit) | 29,247 | | | 1,570 | | | | | (2,151) | | | 28,666 | |
Income taxes (benefit) | 7,206 | | | 439 | | | | | (751) | | | 6,894 | |
Net income (loss) | $ | 22,041 | | | $ | 1,131 | | | | | $ | (1,400) | | | $ | 21,772 | |
Total assets | $ | 7,918,339 | | | $ | 29,828 | | | | | $ | (17,993) | | | $ | 7,930,174 | |
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Three Months Ended March 31, 2022 | | | | | | | | | |
Net interest income (expense) | $ | 59,353 | | | $ | — | | | | | $ | (2,526) | | | $ | 56,827 | |
Provision for credit losses | 4,167 | | | — | | | | | — | | | 4,167 | |
Noninterest income | 8,406 | | | 7,139 | | | | | 68 | | | 15,613 | |
Noninterest expense | 36,247 | | | 4,675 | | | | | (38) | | | 40,884 | |
Income (loss) before income taxes (benefit) | 27,345 | | | 2,464 | | | | | (2,420) | | | 27,389 | |
Income taxes (benefit) | 6,715 | | | 690 | | | | | (765) | | | 6,640 | |
Net income (loss) | $ | 20,630 | | | $ | 1,774 | | | | | $ | (1,655) | | | $ | 20,749 | |
Total assets | $ | 7,355,117 | | | $ | 29,828 | | | | | $ | (46,230) | | | $ | 7,338,715 | |
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NOTE 16 – REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income in the consolidated statements of income. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2023 and 2022.
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| Three Months Ended March 31, | | |
(dollars in thousands) | 2023 | | 2022 | | | | | | |
Noninterest income - in-scope of Topic 606 | | | | | | | | | |
Wealth management revenue: | | | | | | | | | |
Trust management/administration fees | $ | 5,636 | | | $ | 5,982 | | | | | | | |
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Investment brokerage fees | 431 | | | 598 | | | | | | | |
Other | 344 | | | 559 | | | | | | | |
Service charges on deposit accounts: | | | | | | | | | |
Nonsufficient fund fees | 1,698 | | | 1,332 | | | | | | | |
Other | 870 | | | 736 | | | | | | | |
Interchange revenues | 3,412 | | | 3,280 | | | | | | | |
Other income: | | | | | | | | | |
Merchant services revenue | 358 | | | 356 | | | | | | | |
Other | 630 | | | 768 | | | | | | | |
Noninterest income - out-of-scope of Topic 606 | 2,400 | | | 2,002 | | | | | | | |
Total noninterest income | $ | 15,779 | | | $ | 15,613 | | | | | | | |
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investment securities. In addition, certain noninterest income streams such as commercial FHA revenue, residential mortgage banking revenue and gain on sales of investment securities, net, are also not in scope of Topic 606. Topic 606 is applicable to noninterest income streams such as wealth management revenue, service charges on deposit accounts, interchange revenue, gain on sales of other real estate owned, and certain other noninterest income streams. The noninterest income streams considered in-scope by Topic 606 are discussed below.
Wealth Management Revenue
Wealth management revenue is primarily comprised of fees earned from the management and administration of trusts and other customer assets. Previously, the Company also earned investment advisory fees through its SEC registered investment advisory subsidiary. The Company’s performance obligation in both of these instances is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and contractually determined fee schedules. Payment is generally received a few days after month end through a direct charge to each customer’s account. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Fees generated from transactions executed by the Company’s third party broker dealer are remitted to the Company on a monthly basis for that month’s transactional activity.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of fees received under depository agreements with customers to provide access to deposited funds, serve as custodian of deposited funds, and when applicable, pay interest on deposits. These service charges primarily include non-sufficient fund fees and other account related service charges. Non-sufficient fund fees are earned when a depositor presents an item for payment in excess of available funds, and the Company, at its discretion, provides the necessary funds to complete the transaction. The Company generates other account related service charge revenue by providing depositors proper safeguard and remittance of funds as well as by delivering optional services for depositors, such as check imaging or treasury management, that are performed upon the depositor’s request. The Company’s performance obligation for the proper safeguard and remittance of funds, monthly account analysis and any other monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is typically received immediately or in the following month through a direct charge to a customer’s account.
Interchange Revenue
Interchange revenue includes debit / credit card income and ATM user fees. Card income is primarily comprised of interchange fees earned for standing ready to authorize and providing settlement on card transactions processed through the MasterCard interchange network. The levels and structure of interchange rates are set by MasterCard and can vary based on cardholder purchase volumes. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with completion of the Company’s performance obligation, the transaction processing services provided to the cardholder. Payment is typically received immediately or in the following month. ATM fees are primarily generated when a Company cardholder withdraws funds from a non-Company ATM or a non-Company cardholder withdraws funds from a Company ATM. The Company satisfies its performance obligation for each transaction at the point in time when the ATM withdrawal is processed.
Other Noninterest Income
The other noninterest income revenue streams within the scope of Topic 606 consist of merchant services revenue, safe deposit box rentals, wire transfer fees, paper statement fees, check printing commissions, gain on sales of other real estate owned, and other noninterest related fees. Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts. Account management fees are considered earned at the time the merchant’s transactions are processed or other services are performed. Fees related to the other components of other noninterest income within the scope of Topic 606 are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at the point in time the customer uses the selected service to execute a transaction.