Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section discusses the consolidated financial condition and results of operations of Emclaire Financial Corp and its wholly owned subsidiaries for the three months ended March 31, 2020, compared to the same periods in 2019 and should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC and with the accompanying consolidated financial statements and notes presented in this Form 10-Q.
This Form 10-Q, including the financial statements and related notes, contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” or words or phrases of similar meaning. We caution that the forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performances or achievements could differ materially from those contemplated, expressed or implied by the forward looking statements. Therefore, we caution you not to place undue reliance on our forward looking information and statements. Except as required by applicable law or regulation, we will not update the forward looking statements to reflect actual results or changes in factors affecting the forward looking statements.
COVID-19 UPDATE
The outbreak of the novel coronavirus (COVID-19) has adversely impacted certain industries in which the Corporation's clients operate and may have impaired their ability to fulfill their outstanding obligations. The Corporation's business is dependent upon the willingness and ability of our employees and clients to conduct banking and other financial transactions. The spread of COVID-19 has caused severe disruptions in the U.S. economy at large, and for small businesses in particular, which could further disrupt operations. If the global response to contain COVID-19 escalates or is unsuccessful, the Corporation could experience a more material adverse effect on it's financial condition, results of operations, cash flows and capital levels. The outbreak may result in a decrease in the Corporation's clients' businesses, a decrease in consumer confidence and a possible disruption in the services provided by vendors. Continued disruptions to the operations of the Corporation's clients could result in increased risk of delinquencies, defaults, foreclosures and losses on loans, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of the Corporation's growth strategy. The Corporation relies upon third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide these services, it could negatively impact the ability to serve our clients. Furthermore, the continued disruptions due to the outbreak could negatively impact the ability of employees and clients to engage in banking and other financial transactions in the geographic areas in which the Corporation operates and could create widespread business continuity issues. The Corporation also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a more substantial COVID-19 outbreak in local market areas. Although the Corporation has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will continue to be effective.
The Corporation has responded to the circumstances surrounding the pandemic to support the safety and well-being of the employees, customers and shareholders by enacting the following measures:
• The Annual Shareholder Meeting was held virtually.
• Operational areas within the Bank have been segregated and employees directed to work from home or alternate locations, where possible, to mitigate possible spread of illness to an entire department.
• Branch lobby hours have been temporarily suspended to the public for walk-in transactions. Appointments can be made as necessary to complete paperwork or complex transactions. Drive-thru services remain open where available, and the use of ATMs and on-line banking is encouraged.
• Loan modifications, including extensions and deferrals, have been made available to customers who were not 30 days past due as of December 31, 2019.
• Customers were assisted with applications for resources available through the PPP, administered by the SBA. These government guaranteed, forgivable loans were created as part of the CARES Act.
The duration and full impact of this economic disruption is unknown at this time, and continued deterioration of the economic environment could adversely impact the Corporation's financial condition. While the full impact of the COVID-19 pandemic cannot be predicted or measured, there will be a definite impact on net income. It is anticipated that provision for loan loss expense will remain elevated in expectation of a deterioration in a portion of the loan portfolio. As a result of the significant decline in interest rates, the Corporation has and will continue to experience a decline in net income and resulting net interest margin, however, there will be a benefit from the fees arising from the PPP loan program. Also, it is expected that noninterest income will be reduced as customers may use fewer fee-based services due to COVID-19 mitigation efforts such as stay-at-home orders. The Corporation will continue to closely monitor situations arising from the pandemic and adjust operations accordingly.
CHANGES IN FINANCIAL CONDITION
Total assets increased $28.9 million, or 3.2%, to $944.2 million at March 31, 2020 from $915.3 million at December 31, 2019. The increase in assets was driven primarily by a $39.4 million increase in net loans receivable, partially offset by decreases in securities and cash and cash equivalents of $5.7 million and $4.9 million, respectively. Total liabilities increased $27.3 million, or 3.3%, to $856.7 million at March 31, 2020 from $829.4 million at December 31, 2019 due to an increase in borrowed funds of $32.0 million, partially offset by a decrease in customer deposits of $4.4 million.
Stockholders’ equity increased $1.7 million, or 2.0%, to $87.5 million at
March 31, 2020 from $85.9 million at
December 31, 2019 primarily due to a $1.2 million increase in accumulated other comprehensive income and a $378,000 increase in retained earnings as a result of $1.2 million of net income available to common stockholders, partially offset by $812,000 of common dividends paid. The Corporation remains well capitalized and is positioned for continued growth with total stockholders’ equity at 9.3% of total assets. Book value per common share was $30.77 at
March 31, 2020, compared to $30.14 at
December 31, 2019.
At March 31, 2020, the Bank was considered “well-capitalized” with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 8.10%, 11.84%, 11.84% and 12.99%, respectively. The Bank was also considered “well-capitalized” at December 31, 2019 with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 8.17%, 12.62%, 12.62% and 13.74%, respectively.
RESULTS OF OPERATIONS
Comparison of Results for the Three Months Ended March 31, 2020 and 2019
General. Net income available to common stockholders decreased $892,000, or 42.8%, to $1.2 million for the three months ended March 31, 2020 from $2.1 million for the same period in 2019. This decrease resulted from decreases in net interest income and noninterest income of $530,000 and $32,000, respectively, and an increase of $612,000 in the provision for loan losses, partially offset by decreases in noninterest expense and the provision for income taxes of $69,000 and $213,000, respectively.
Net interest income. Tax equivalent net interest income decreased $535,000, or 7.4%, to $6.7 million for the three months ended March 31, 2020 from $7.3 million for the three months ended March 31, 2019. This increase was attributed to an increase in interest expense of $441,000 and a decrease in tax equivalent interest income of $94,000.
Interest income. Tax equivalent interest income decreased $94,000, or 1.0%, to $8.9 million for the three months ended March 31, 2020 from $9.0 million for the same period in 2019. This decrease was attributed to a $249,000 decrease in interest earned on loans, partially offset by increases in interest on securities and interest-earning deposits with banks and dividends on federal bank stocks of $128,000, $19,000 and $8,000, respectively.
Tax equivalent interest earned on loans receivable decreased $249,000, or 3.0%, to $8.0 million for the three months ended March 31, 2020 compared to $8.3 million for the same period in 2019. This decrease resulted from a 25 basis point decrease in the average yield on loans to 4.47% for the three months ended March 31, 2020, versus 4.72% for the same period in 2019. The average yield was impacted by the 150 basis point decline in the Wall Street Journal Prime Rate in March 2020 which resulted in the immediate decrease in interest rates on adjustable rate loans linked to that index. Accretion of purchase accounting adjustments on acquired loans accounted for approximately 1 basis point of the yield decrease. This unfavorable yield variance accounted for a $390,000 decrease in interest income. Partially offsetting this unfavorable variance, average loans increased $12.3 million, or 1.7%, accounting for a $141,000 increase in interest income.
Tax equivalent interest earned on securities increased $128,000, or 20.2%, to $761,000 for the three months ended March 31, 2020 compared to $633,000 for the same period in 2019. The average balance of securities increased $18.1 million, or 18.6%, accounting for a $119,000 increase in interest income. Additionally, the average yield on securities increased by 1 basis point to 2.65% for the three months ended March 31, 2020 versus 2.64% for the same period in 2019. This favorable yield variance accounted for a $9,000 increase in interest income.
Interest earned on deposits with banks increased $19,000, or 40.4%, to $66,000 for the three months ended March 31, 2020 compared to $47,000 for the same period in 2019. This increase resulted from a $4.3 million, or 34.0%, increase in average cash balances, accounting for a $17,000 increase in interest income. Additionally, the average yield on these balances increased 6 basis points to 1.58% for the three months ended March 31, 2020, versus 1.52% for the same period in 2019, accounting for a $2,000 increase in interest income.
Dividends on federal bank stocks increased $8,000, or 8.0%, to $108,000 for the three months ended March 31, 2020 from $100,000 for the same period in 2019. This increase was primarily due to a $395,000, or 6.6%, increase in the average balance of federal bank stocks, accounting for a $7,000 increase in interest income. Additionally, an increase of 4 basis points in the average yield to 6.78% for the three months ended March 31, 2020, versus 6.74% for the same period in 2019, accounted for a $1,000 increase in interest income.
Interest expense. Interest expense increased $441,000, or 24.9%, to $2.2 million for the three months ended March 31, 2020 from $1.8 million for the same period in 2019. This increase in interest expense can be attributed to an increase in interest incurred on deposits of $469,000, partially offset by a decrease in interest incurred on borrowed funds of $28,000.
Interest expense incurred on deposits increased $469,000, or 31.9%, to $1.9 million for the three months ended March 31, 2020 compared to $1.5 million for the same period in 2019. The average cost of interest-bearing deposits increased 25 basis points to 1.23% for the three months ended March 31, 2020, versus 0.98% for the same period in 2019, accounting for a $406,000 increase in interest expense. This temporary increase in cost was driven primarily due to money market and CD specials offered in 2019 and will gradually decline as the special rates expire or the accounts mature. Additionally, the average balance of interest-bearing deposits increased $25.1 million, or 4.1%, to $632.9 million for the three months ended March 31, 2020, compared to $607.7 million for the same period in 2019 causing a $63,000 increase in interest expense.
Interest expense incurred on borrowed funds decreased $28,000, or 9.3%, to $273,000 for the three months ended March 31, 2020, compared to $301,000 for the same period in the prior year. The decrease was primarily the result of a 39 basis point decrease in the average cost of borrowed funds to 2.33% for the three months ended March 31, 2020 compared to 2.72% for the same period in 2019 causing a $40,000 decrease in interest expense. Partially offsetting this reduction, the average balance of borrowed funds increased $2.3 million, or 5.1%, to $47.1 million for the three months ended March 31, 2020, compared to $44.8 million for the same period in 2019 causing a $12,000 increase in interest expense.
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average loan balances include nonaccrual loans and exclude the allowance for loan losses and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis. The information is based on average daily balances during the periods presented.
(Dollar amounts in thousands)
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
|
Average Balance
|
|
Interest
|
|
Yield/ Rate
|
|
Average Balance
|
|
Interest
|
|
Yield/ Rate
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, taxable
|
|
$
|
701,694
|
|
|
$
|
7,818
|
|
|
|
4.48
|
%
|
|
$
|
689,527
|
|
|
$
|
8,072
|
|
|
|
4.75
|
%
|
Loans, tax exempt
|
|
|
19,953
|
|
|
|
194
|
|
|
|
3.91
|
%
|
|
|
19,852
|
|
|
|
189
|
|
|
|
3.87
|
%
|
Total loans receivable
|
|
|
721,647
|
|
|
|
8,012
|
|
|
|
4.47
|
%
|
|
|
709,379
|
|
|
|
8,261
|
|
|
|
4.72
|
%
|
Securities, taxable
|
|
|
101,015
|
|
|
|
664
|
|
|
|
2.64
|
%
|
|
|
75,454
|
|
|
|
492
|
|
|
|
2.64
|
%
|
Securities, tax exempt
|
|
|
14,361
|
|
|
|
97
|
|
|
|
2.72
|
%
|
|
|
21,791
|
|
|
|
141
|
|
|
|
2.62
|
%
|
Total securities
|
|
|
115,376
|
|
|
|
761
|
|
|
|
2.65
|
%
|
|
|
97,245
|
|
|
|
633
|
|
|
|
2.64
|
%
|
Interest-earning deposits with banks
|
|
|
16,838
|
|
|
|
66
|
|
|
|
1.58
|
%
|
|
|
12,564
|
|
|
|
47
|
|
|
|
1.52
|
%
|
Federal bank stocks
|
|
|
6,410
|
|
|
|
108
|
|
|
|
6.78
|
%
|
|
|
6,015
|
|
|
|
100
|
|
|
|
6.74
|
%
|
Total interest-earning cash equivalents
|
|
|
23,248
|
|
|
|
174
|
|
|
|
3.01
|
%
|
|
|
18,579
|
|
|
|
147
|
|
|
|
3.21
|
%
|
Total interest-earning assets
|
|
|
860,271
|
|
|
|
8,947
|
|
|
|
4.18
|
%
|
|
|
825,203
|
|
|
|
9,041
|
|
|
|
4.44
|
%
|
Cash and due from banks
|
|
|
3,493
|
|
|
|
|
|
|
|
|
|
|
|
3,258
|
|
|
|
|
|
|
|
|
|
Other noninterest-earning assets
|
|
|
62,306
|
|
|
|
|
|
|
|
|
|
|
|
62,964
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
926,070
|
|
|
|
|
|
|
|
|
|
|
$
|
891,425
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
417,514
|
|
|
$
|
779
|
|
|
|
0.75
|
%
|
|
$
|
387,720
|
|
|
$
|
528
|
|
|
|
0.55
|
%
|
Time deposits
|
|
|
215,336
|
|
|
|
1,161
|
|
|
|
2.17
|
%
|
|
|
220,006
|
|
|
|
943
|
|
|
|
1.74
|
%
|
Total interest-bearing deposits
|
|
|
632,850
|
|
|
|
1,940
|
|
|
|
1.23
|
%
|
|
|
607,726
|
|
|
|
1,471
|
|
|
|
0.98
|
%
|
Borrowed funds, short-term
|
|
|
10,712
|
|
|
|
64
|
|
|
|
2.40
|
%
|
|
|
12,587
|
|
|
|
96
|
|
|
|
3.08
|
%
|
Borrowed funds, long-term
|
|
|
36,414
|
|
|
|
209
|
|
|
|
2.31
|
%
|
|
|
32,250
|
|
|
|
205
|
|
|
|
2.58
|
%
|
Total borrowed funds
|
|
|
47,126
|
|
|
|
273
|
|
|
|
2.33
|
%
|
|
|
44,837
|
|
|
|
301
|
|
|
|
2.72
|
%
|
Total interest-bearing liabilities
|
|
|
679,976
|
|
|
|
2,213
|
|
|
|
1.31
|
%
|
|
|
652,563
|
|
|
|
1,772
|
|
|
|
1.10
|
%
|
Noninterest-bearing demand deposits
|
|
|
144,532
|
|
|
|
—
|
|
|
|
—
|
|
|
|
144,496
|
|
|
|
—
|
|
|
|
—
|
|
Funding and cost of funds
|
|
|
824,508
|
|
|
|
2,213
|
|
|
|
1.08
|
%
|
|
|
797,059
|
|
|
|
1,772
|
|
|
|
0.90
|
%
|
Other noninterest-bearing liabilities
|
|
|
14,177
|
|
|
|
|
|
|
|
|
|
|
|
13,745
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
838,685
|
|
|
|
|
|
|
|
|
|
|
|
810,804
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
87,385
|
|
|
|
|
|
|
|
|
|
|
|
80,621
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
926,070
|
|
|
|
|
|
|
|
|
|
|
$
|
891,425
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
6,734
|
|
|
|
|
|
|
|
|
|
|
$
|
7,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)
|
|
|
|
|
|
|
|
|
|
|
2.87
|
%
|
|
|
|
|
|
|
|
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (net interest income as a percentage of average interest-earning assets)
|
|
|
|
|
|
|
|
|
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation’s interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate), rate (change in rate multiplied by prior year volume) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.
(Dollar amounts in thousands)
|
|
Three Months Ended March 31,
|
|
|
2020 versus 2019
|
|
|
Increase (Decrease) due to
|
|
|
Volume
|
|
Rate
|
|
Total
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
141
|
|
|
$
|
(390
|
)
|
|
$
|
(249
|
)
|
Securities
|
|
|
119
|
|
|
|
9
|
|
|
|
128
|
|
Interest-earning deposits with banks
|
|
|
17
|
|
|
|
2
|
|
|
|
19
|
|
Federal bank stocks
|
|
|
7
|
|
|
|
1
|
|
|
|
8
|
|
Total interest-earning assets
|
|
|
284
|
|
|
|
(378
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
63
|
|
|
|
406
|
|
|
|
469
|
|
Borrowed funds, short-term
|
|
|
(13
|
)
|
|
|
(19
|
)
|
|
|
(32
|
)
|
Borrowed funds, long-term
|
|
|
25
|
|
|
|
(21
|
)
|
|
|
4
|
|
Total interest-bearing liabilities
|
|
|
75
|
|
|
|
366
|
|
|
|
441
|
|
Net interest income
|
|
$
|
209
|
|
|
$
|
(744
|
)
|
|
$
|
(535
|
)
|
Provision for loan losses. The Corporation records provisions for loan losses to maintain a level of total allowance for loan losses that management believes, to the best of its knowledge, covers all probable incurred losses estimable at each reporting date. Management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio.
Information pertaining to the allowance for loan losses and nonperforming assets for the three month periods ended March 31, 2020 and 2019 is as follows:
(Dollar amounts in thousands)
|
|
As of or for the three months ended
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
Balance at the beginning of the period
|
|
$
|
6,556
|
|
|
$
|
6,508
|
|
Provision for loan losses
|
|
|
792
|
|
|
|
180
|
|
Charge-offs
|
|
|
(138
|
)
|
|
|
(129
|
)
|
Recoveries
|
|
|
10
|
|
|
|
80
|
|
Balance at the end of the period
|
|
$
|
7,220
|
|
|
$
|
6,639
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans
|
|
$
|
3,066
|
|
|
$
|
3,687
|
|
Nonperforming assets
|
|
|
3,404
|
|
|
|
4,507
|
|
Nonperforming loans to total loans
|
|
|
0.41
|
%
|
|
|
0.52
|
%
|
Nonperforming assets to total assets
|
|
|
0.36
|
%
|
|
|
0.51
|
%
|
Allowance for loan losses to total loans
|
|
|
0.97
|
%
|
|
|
0.94
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
235.49
|
%
|
|
|
180.07
|
%
|
Nonperforming loans increased $159,000, or 5.5% to $3.1 million at March 31, 2020 from $2.9 million at December 31, 2019. This was primarily due to a general increase in loans 90+ days past due and still accruing,
As of March 31, 2020, the Corporation’s classified and criticized assets amounted to $16.2 million, or 1.7% of total assets, with $10.8 million classified as substandard and $5.4 million identified as special mention. This compares to classified and criticized assets of $17.0 million, or 1.9% of total assets, with $11.5 million classified as substandard and $5.6 million identified as special mention at December 31, 2019. This $865,000 decrease was primarily related to the upgrade of a $187,000 commercial relationship from substandard to pass, the upgrade of a $120,000 commercial relationship from special mention to pass, and the payoff of two commercial real estate loans totaling $179,000.
The provision for loan losses increased $612,000 to $792,000 for the three months ended March 31, 2020 from $180,000 for the same period in 2019. The increase in the provision for loan losses was primarily due to a $39.4 million increase in loan portfolio balances and the addition of a new specific pandemic qualitative factor to the allowance for loan losses calculation. This new pandemic factor, set at 2 basis points, added approximately $125,000 to the provision expense for the period ended March 31, 2020. Significant uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs, but some deterioration is expected. The Corporation will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.
Noninterest income. Noninterest income decreased $32,000, or 3.0%, to $1.0 million for the three months ended March 31, 2020, compared to $1.1 million for the same period in 2019 due to a $104,000 decrease in fees and service charges, partially offset by a $74,000 increase in gains on the sale of securities. The decrease in fees and service charges was primarily due to a decline in overdraft charges.
Noninterest expense. Noninterest expense decreased $69,000, or 1.2%, to $5.5 million for the three months ended March 31, 2020 from $5.6 million for the same period in 2019. The decrease was primarily attributable to decreases in premises and equipment expense and FDIC insurance expense of $92,000 and $33,000, respectively, partially offset by an increase in other noninterest expense of $65,000.
Provision for income taxes. The provision for income taxes decreased $213,000, or 46.7%, to $243,000 for the three months ended March 31, 2020 compared to $456,000 for the same period in the prior year as a result of the decrease in net income before provision for income taxes.
LIQUIDITY
The Corporation’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, Federal Reserve and other correspondent banks, and amortization and prepayments of outstanding loans and sold or maturing securities. During the three months ended March 31, 2020, the Corporation used its sources of funds primarily to fund the production of new loans. As of March 31, 2020, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $130.4 million, and standby letters of credit totaling $444,000, net of collateral maintained by the Bank.
At March 31, 2020, time deposits amounted to $212.3 million, or 27.1% of the Corporation’s total consolidated deposits, including approximately $67.3 million of which are scheduled to mature within the next year. Management of the Corporation believes (i) it has adequate resources to fund all of its commitments, (ii) all of its commitments will be funded as required by related maturity dates and (iii) based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities if necessary.
Aside from liquidity available from customer deposits or through sales and maturities of securities, the Corporation and the Bank have alternative sources of funds. These sources include a line of credit for the Corporation with a correspondent bank, the Bank's line of credit and term borrowing capacity from the FHLB and the Federal Reserve’s discount window and, to a more limited extent, through the sale of loans. At March 31, 2020, the Corporation had borrowed funds of $60.6 million consisting of $45.0 million of long-term FHLB advances, $12.3 million of overnight FHLB advances, a $1.3 million long-term advance with a correspondent bank and $2.1 million outstanding on a line of credit with a correspondent bank. At March 31, 2020, the Corporation’s borrowing capacity with the FHLB, net of funds borrowed and irrevocable standby letters of credit issue to secure certain deposit accounts, was $226.6 million.
Management is not aware of any conditions, including any regulatory recommendations or requirements, which would adversely impact its liquidity or its ability to meet funding needs in the ordinary course of business.
RECENT REGULATORY DEVELOPMENTS
The final rules implementing the Basel Committee on Banking Supervision’s (BCBS) capital guidelines for U.S. banks were approved by the FRB and FDIC. Under the final rules, minimum requirements increased for both the quantity and quality of capital. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0% and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer comprised of common equity Tier 1 capital was also established above the regulatory minimum capital requirements. This capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revised the definition and calculation of Tier 1 capital, Total Capital and risk-weighted assets. The phase-in period for the final rules became effective on January 1, 2015 with full compliance with all of the final rules’ requirements phased in over a multi-year schedule which was fully phased-in on January 1, 2019.
At March 31, 2020, the Bank exceeded all minimum capital requirements under these capital guidelines.
CRITICAL ACCOUNTING POLICIES
The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily though the use of internal cash flow modeling techniques.
The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019. These policies, along with the disclosures presented in the other financial statement notes provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management has identified the following as critical accounting policies.
Allowance for loan losses. The Corporation considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. Among the many factors affecting the allowance for loan losses, some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact the Corporation’s financial condition or earnings in future periods.
Other-than-temporary impairment. Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.
Goodwill and intangible assets. Goodwill represents the excess cost over fair value of assets acquired in a business combination. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values. Goodwill is subject to ongoing periodic impairment tests based on the fair value of the reporting unit compared to its carrying amount, including goodwill. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. At November 30, 2019, the required annual impairment test of goodwill was performed and no impairment existed as of the valuation date. Although the annual review of goodwill revealed no impairment consideration, based on current economic conditions related to COVID-19, management performed an interim assessment as of March 31, 2020. Management concluded that goodwill was not impaired at this date. While it is impossible to know the future impact of the evolving economic conditions, the impact could be material. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk based capital ratios.