OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES

6 Months Ended

Jun. 30, 2020

OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES

OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES

9. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES

COVID-19 Pandemic

COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. Since March 2020, to slow the spread of COVID-19, jurisdictions within the U.S. have imposed economic and social restrictions on the population in general and non-essential businesses in particular. These restrictions in combination with the public’s response to them effectively suspended or curtailed economic activity for many industries across the U.S., with industries in the Company’s market footprint impacted.

The potential financial impact of the COVID-19 pandemic is unknown at this time; however, this pandemic and the public’s response to it could cause the Company to experience a material adverse impact on its business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, MSRs, deferred tax assets, or counterparty risk derivatives.

Commitments to Extend Credit

The Company, in the normal course of business, is party to financial instruments with off balance sheet risk. These financial instruments primarily include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the potential future obligations of the Company pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Company’s credit policies. Collateral from the client may be required based on the Company’s credit evaluation of the client and may include business assets of commercial clients, as well as personal property and real estate of individual clients or guarantors.

The Company also extends binding commitments to clients and prospective clients. Such commitments assure a borrower of financing for a specified period of time at a specified rate. The risk to the Company under such loan commitments is limited by the terms of the contracts. For example, the Company may not be obligated to advance funds if the client’s financial condition deteriorates or if the client fails to meet specific covenants.

An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’s client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client. Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding.

The following table presents the Company’s commitments, exclusive of Mortgage Banking loan commitments, for each period ended:

(in thousands)	June 30, 2020		December 31, 2019
Unused warehouse lines of credit	$	174,220	$	436,541
Unused home equity lines of credit		362,177		363,195
Unused loan commitments - other		803,204		757,657
Standby letters of credit		10,791		11,252
FHLB letter of credit		643		2,485
Total commitments	$	1,351,035	$	1,571,130

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third-party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material.

The following tables present a rollforward of the ACLC for the three and six months ended June 30, 2020:

	ACLC Rollforward
	Three Months Ended June 30, 2020
	Beginning		ASC 326				Charge-				Ending
(in thousands)	Balance		Adoption		Provision		offs		Recoveries		Balance
Loan Commitments
Unused warehouse lines of credit	$	55	$	—	$	3	$	—	$	—	$	58
Unused home equity lines of credit		112		—		12		—		—		124
Unused loan commitments - other		391		—		63		—		—		454
Total	$	558	$	—	$	78	$	—	$	—	$	636

The Company increased its ACLC during the three months ended June 30, 2020 based on higher loss expectations on expected usage of unused commitments. Current and forecasted economic concerns driven by the COVID-19 pandemic drove the Company’s higher loss expectations.

	ACLC Rollforward
	Six Months Ended June 30, 2020
	Beginning		ASC 326				Charge-				Ending
(in thousands)	Balance		Adoption		Provision		offs		Recoveries		Balance
Loan Commitments
Unused warehouse lines of credit	$	—	$	55	$	3	$	—	$	—	$	58
Unused home equity lines of credit		—		89		35		—		—		124
Unused loan commitments - other		—		312		142		—		—		454
Total	$	—	$	456	$	180	$	—	$	—	$	636

The Company increased its ACLC during the six months ended June 30, 2020 based on higher loss expectations on expected usage of unused commitments. Current and forecasted economic concerns driven by the COVID-19 pandemic drove the Company’s higher loss expectations.