OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES

9 Months Ended

Sep. 30, 2022

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 Pandemic

COVID was declared a pandemic by the World Health Organization on March 11, 2020.  Since March 2020, jurisdictions within and outside the U.S. have imposed economic and social restrictions on the population, in general, and non-essential businesses to slow the spread of COVID. These restrictions, in combination with the public’s response to them, have disrupted supply chains and effectively suspended or curtailed economic activity for many industries across the U.S. and the world. Industries within the Company’s market footprint have been impacted by these supply chain disruptions as well as the corresponding inflationary pressures driven by them in combination with on-going governmental stimulus programs.

The future potential financial impact of the COVID pandemic is still unknown at this time. 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)	September 30, 2022		December 31, 2021
Unused warehouse lines of credit	$	739,723	$	565,950
Unused home equity lines of credit		395,240		348,681
Unused loan commitments - other		857,333		828,229
Standby letters of credit		10,373		11,305
FHLB letter of credit		643		643
Total commitments	$	2,003,312	$	1,754,808

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 nine months ended September 30, 2022 and 2021:

	ACLC Rollforward
	Three Months Ended
	2022										2021
	Beginning				Charge-				Ending		Beginning				Charge-				Ending
(in thousands)	Balance		Provision		offs		Recoveries		Balance		Balance		Provision		offs		Recoveries		Balance
Loan Commitments
Unused warehouse lines of credit	$	162	$	28	$	—	$	—	$	190	$	140	$	—	$	—	$	—	$	140
Unused home equity lines of credit		277		20		—		—		297		213		29		—		—		242
Unused loan commitments - other		661		32		—		—		693		581		(26)		—		—		555
Total	$	1,100	$	80	$	—	$	—	$	1,180	$	934	$	3	$	—	$	—	$	937

	ACLC Rollforward
	Nine Months Ended September 30,
	2022										2021
	Beginning				Charge-				Ending		Beginning				Charge-				Ending
(in thousands)	Balance		Provision		offs		Recoveries		Balance		Balance		Provision		offs		Recoveries		Balance
Loan Commitments
Unused warehouse lines of credit	$	154	$	36	$	—	$	—	$	190	$	79	$	61	$	—	$	—	$	140
Unused home equity lines of credit		247		50		—		—		297		173		69		—		—		242
Unused loan commitments - other		651		42		—		—		693		737		(182)		—		—		555
Total	$	1,052	$	128	$	—	$	—	$	1,180	$	989	$	(52)	$	—	$	—	$	937

The Company increased its ACLC during the three and nine months ended September 30, 2022 based primarily on an increase in total unused commitments.