Commitments and Contingencies

6 Months Ended

Jun. 30, 2021

Commitments and Contingencies Disclosure [Abstract]

Financial Instruments with Off-Balance Sheet Risk

We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements.

Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property.

The contractual amount of unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:


(in thousands)	June 30, 2021		December 31, 2020
Commercial lines of credit	$	282,611	$	287,533
Revolving home equity lines	201,986		189,035
Undisbursed construction loans	73,757		41,033
Personal and other lines of credit	10,185		9,567
Standby letters of credit	3,167		1,964
Total commitments and standby letters of credit	$	571,706	$	529,132

We record an allowance for credit losses on unfunded loan commitments at the balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and expected loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments totaled $1.6 million and $2.8 million as of June 30, 2021 and December 31, 2020, respectively, which is recorded in interest payable and other liabilities in the consolidated statements of condition. We adopted the CECL accounting standard on December 31, 2020. We applied the incurred loss method under previous GAAP in determining the allowance for credit losses on unfunded commitments for the three and six month periods ended June 30, 2020. We recorded reversals of the allowance for credit losses on unfunded commitments totaling $612 thousand and $1.2 million for the three and six month periods ended June 30, 2021, respectively. This compares to provisions for credit losses on unfunded commitments for the three and six month periods ended June 30, 2020 totaling $260 thousand and $362 thousand, respectively. In the current period, we reclassified the provision for credit losses on unfunded commitments from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income.

Leases

We lease premises under long-term non-cancelable operating leases with remaining terms of 1 year to 11 years, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised.

We lease certain equipment under finance leases with initial terms of 3 years to 4 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees.

The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities.


(in thousands)	June 30, 2021		December 31, 2020
Operating leases:
Operating lease right-of-use assets	$	23,506	$	25,612
Operating lease liabilities	$	24,919	$	27,062
Finance leases:
Finance lease right-of-use assets	$	473	$	365
Accumulated amortization	(37)		(307)
Finance lease right-of-use assets, net1	$	436	$	58
Finance lease liabilities2	$	438	$	58
1 Included in premises and equipment in the consolidated statements of condition.
2 Included in borrowings and other obligations in the consolidated statements of condition.

The following table shows supplemental disclosures of noncash investing and financing activities for the period presented.


	Six months ended
(in thousands)	June 30, 2021		June 30, 2020
Right-of-use assets obtained in exchange for operating lease liabilities	$	—	$	14,030
Right-of-use assets obtained in exchange for finance lease liabilities	$	412	$	18

The following table shows components of operating and finance lease cost.


	Three months ended				Six months ended
(in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Operating lease cost	$	1,164	$	1,114	$	2,328	$	2,169
Variable lease cost	—		2		—		3
Total operating lease cost1	$	1,164	$	1,116	$	2,328	$	2,172
Finance lease cost:
Amortization of right-of-use assets2	$	7	$	44	$	34	$	88
Interest on finance lease liabilities3	—		1		—		$	2
Total finance lease cost	7		45		$	34	$	90
Total lease cost	$	1,171	$	1,161	$	2,362	$	2,262
1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income.
2 Included in depreciation and amortization in the consolidated statements of comprehensive income.
3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.

The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of June 30, 2021. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the later of the date we adopted the new lease accounting standards or lease commencement date.


(in thousands)	June 30, 2021
Year	Operating Leases			Finance Leases
2021	$	2,246		$	52
2022	4,424			118
2023	4,004			108
2024	3,300			104
2025	2,876			61
Thereafter	9,867			—
Total minimum lease payments	26,717			443
Amounts representing interest (present value discount)	(1,798)			(5)
Present value of net minimum lease payments (lease liability)	$	24,919		$	438
Weighted average remaining term (in years)	7.5			4.0
Weighted average discount rate	1.79		%	0.66		%

Litigation Matters

Bancorp may be party to legal actions that arise from time to time in the normal course of business. Bancorp's management is not aware of any pending legal proceedings to which either it or the Bank may be a party or has recently been a party that will have a material adverse effect on the financial condition or results of operations of Bancorp or the Bank.

The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). Our proportionate share of the litigation indemnification liability does not change or transfer upon the sale of our Class B Visa shares to member banks. Visa established an escrow account to pay for settlements or judgments in the Covered Litigation. Under the terms of the U.S. retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock

to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us.

In 2012, Visa had reached a $4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. The escrow balance of $894 million as of June 30, 2021, combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.

The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa Class A common stock, as discussed above and in Note 4, Investment Securities. The final conversion rate is subject to change depending on the final settlement payments, and the full effect on member banks is still uncertain. Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve the claims as contemplated by the amended class settlement agreement, and additional lawsuits may arise from individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses to be remote.