Commitments and Contingencies

6 Months Ended

Jun. 30, 2020

Commitments and Contingencies Disclosure [Abstract]

Adoption of Topic 326

As disclosed in Note 2, Topic 326 requires the measurement of expected lifetime credit losses for unfunded commitments that are considered off-balance sheet credit exposures. The Corporation adopted the provisions of Topic 326 effective January 1, 2020 using the modified retrospective method. Therefore, the prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. As a result of adopting Topic 326, the Corporation recognized an increase in the ACL on unfunded commitments of $1.5 million on January 1, 2020.

Accounting Policy Updates

Effective January 1, 2020, the Corporation has modified its accounting policy for the ACL on unfunded commitments. The updated policy is detailed below.

The ACL on unfunded commitments is management’s estimate of expected credit losses over the expected contractual term (or life) in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. Unfunded commitments for home equity lines of credit and commercial demand loans are considered unconditionally cancellable for regulatory capital purposes and, therefore, are excluded from the calculation to estimate the ACL on unfunded commitments. For each portfolio, estimated loss rates and funding factors are applied to the corresponding balance of unfunded commitments. For each portfolio, the estimated loss rates applied to unfunded commitments are the same quantitative and qualitative loss rates applied to the corresponding on-balance sheet amounts in determining the ACL on loans. The estimated funding factor applied to unfunded commitments represents the likelihood that the funding will occur and is based upon the Corporation’s average historical utilization rate for each portfolio.

The ACL on unfunded commitments is included in other liabilities in the Unaudited Consolidated Balance Sheets. The ACL on unfunded commitments is adjusted through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income.

Financial Instruments with Off-Balance Sheet Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

Financial Instruments Whose Contract Amounts Represent Credit Risk (Unfunded Commitments)

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. Each borrower’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower.

Standby Letters of Credit

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support the financing needs of the Bank’s commercial customers. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most standby letters of credit extend for one year. The maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered totaled $10.1 million and $13.7 million, respectively, as of June 30, 2020 and December 31, 2019. At June 30, 2020 and December 31, 2019, there were no liabilities to beneficiaries resulting from standby letters of credit. Fee income on standby letters of credit was insignificant for the three and six months ended June 30, 2020 and 2019.

A substantial portion of the standby letters of credit were supported by pledged collateral. The collateral obtained is determined based on management’s credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required.

Financial Instruments Whose Notional Amounts Exceed the Amount of Credit Risk

Mortgage Loan Commitments

Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with these rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Both interest rate lock commitments and forward sale commitments are derivative financial instruments.

Loan Related Derivative Contracts

The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms.

The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk:



(Dollars in thousands)	Jun 30, 2020		Dec 31, 2019
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans		$457,035		$471,338
Home equity lines	311,474		295,687
Other loans	100,549		88,613
Standby letters of credit	10,101		13,710
Financial instruments whose notional amounts exceed the amounts of credit risk:
Mortgage loan commitments:
Interest rate lock commitments	203,522		51,439
Forward sale commitments	291,690		94,829
Loan related derivative contracts:
Interest rate swaps with customers	958,628		813,458
Mirror swaps with counterparties	958,628		813,458
Risk participation-in agreements	93,146		72,866
Interest rate risk management contracts:
Interest rate swaps	60,000		60,000

See Note 9 for additional disclosure pertaining to derivative financial instruments.

The ACL on unfunded commitments amounted to $2.2 million at June 30, 2020, compared to $293 thousand at December 31, 2019.

The activity in the ACL on unfunded commitments for the three months ended June 30, 2020 is presented below:



(Dollars in thousands)	Commercial									Consumer
	CRE			C&I		Total Commercial		Residential Real Estate		Home Equity		Other		Total Consumer		Total
Beginning Balance		$1,132			$847		$1,979		$42		$—		$18		$18		$2,039
Provision	(245		)	360		115		—		—		1		1		116
Ending Balance		$887			$1,207		$2,094		$42		$—		$19		$19		$2,155

The activity in the ACL on unfunded commitments for the six months ended June 30, 2020 is presented below:



(Dollars in thousands)	Commercial									Consumer
	CRE			C&I		Total Commercial		Residential Real Estate		Home Equity		Other		Total Consumer		Total
Beginning Balance		$136			$144		$280		$6		$—		$7		$7		$293
Adoption of Topic 326 (1)	817			626		1,443		34		—		6		6		1,483
Provision	(66		)	437		371		2		—		6		6		379
Ending Balance		$887			$1,207		$2,094		$42		$—		$19		$19		$2,155


(1)	Adoption of the CECL accounting standard effective January 1, 2020.

Other Contingencies

Litigation

The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated balance sheets or statements of income of the Corporation.