Item 1 – Financial Statements (Unaudited)
EAGLE BANCORP, INC.
Consolidated Balance Sheets (Unaudited)
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Assets
|
|
|
|
|
Cash and due from banks
|
$
|
7,559
|
|
|
$
|
7,539
|
|
|
Federal funds sold
|
30,830
|
|
|
38,987
|
|
|
Interest bearing deposits with banks and other short-term investments
|
818,719
|
|
|
195,447
|
|
|
Investment securities available for sale, at fair value (amortized cost of $956,803 and $839,192 and allowance for credit losses of $156 and $0 as of September 30, 2020 and December 31, 2019, respectively).
|
977,570
|
|
|
843,363
|
|
|
Federal Reserve and Federal Home Loan Bank stock
|
40,061
|
|
|
35,194
|
|
|
Loans held for sale
|
79,084
|
|
|
56,707
|
|
|
Loans
|
7,880,255
|
|
|
7,545,748
|
|
|
Less allowance for credit losses
|
(110,215)
|
|
|
(73,658)
|
|
|
Loans, net
|
7,770,040
|
|
|
7,472,090
|
|
|
Premises and equipment, net
|
12,204
|
|
|
14,622
|
|
|
Operating lease right-of-use assets
|
27,180
|
|
|
27,372
|
|
|
Deferred income taxes
|
36,363
|
|
|
29,804
|
|
|
Bank owned life insurance
|
76,326
|
|
|
75,724
|
|
|
Intangible assets, net
|
105,165
|
|
|
104,739
|
|
|
Other real estate owned
|
4,987
|
|
|
1,487
|
|
|
Other assets
|
120,206
|
|
|
85,644
|
|
|
Total Assets
|
$
|
10,106,294
|
|
|
$
|
8,988,719
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
Liabilities
|
|
|
|
|
Deposits:
|
|
|
|
|
Noninterest bearing demand
|
$
|
2,384,108
|
|
|
$
|
2,064,367
|
|
|
Interest bearing transaction
|
823,607
|
|
|
863,856
|
|
|
Savings and money market
|
3,956,553
|
|
|
3,013,129
|
|
|
Time, $100,000 or more
|
553,949
|
|
|
663,987
|
|
|
Other time
|
460,568
|
|
|
619,052
|
|
|
Total deposits
|
8,178,785
|
|
|
7,224,391
|
|
|
Customer repurchase agreements
|
24,293
|
|
|
30,980
|
|
|
Other short-term borrowings
|
300,000
|
|
|
250,000
|
|
|
Long-term borrowings
|
267,980
|
|
|
217,687
|
|
|
Operating lease liabilities
|
30,457
|
|
|
29,959
|
|
|
Reserve for unfunded commitments
|
5,092
|
|
|
—
|
|
Other liabilities
|
76,285
|
|
|
45,021
|
|
|
Total Liabilities
|
8,882,892
|
|
|
7,798,038
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
Common stock, par value $0.01 per share; shares authorized 100,000,000, shares issued and outstanding 32,228,636 and 33,241,496, respectively
|
320
|
|
|
331
|
|
|
Additional paid in capital
|
442,592
|
|
|
482,286
|
|
|
Retained earnings
|
766,219
|
|
|
705,105
|
|
|
Accumulated other comprehensive income
|
14,271
|
|
|
2,959
|
|
|
Total Shareholders’ Equity
|
1,223,402
|
|
|
1,190,681
|
|
|
Total Liabilities and Shareholders’ Equity
|
$
|
10,106,294
|
|
|
$
|
8,988,719
|
|
See notes to consolidated financial statements.
EAGLE BANCORP, INC.
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Interest Income
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
$
|
89,296
|
|
|
$
|
102,297
|
|
|
$
|
278,979
|
|
|
$
|
302,007
|
|
|
Interest and dividends on investment securities
|
4,141
|
|
|
4,904
|
|
|
14,139
|
|
|
15,740
|
|
|
Interest on balances with other banks and short-term investments
|
384
|
|
|
1,762
|
|
|
2,104
|
|
|
4,533
|
|
|
Interest on federal funds sold
|
12
|
|
|
71
|
|
|
84
|
|
|
167
|
|
|
Total interest income
|
93,833
|
|
|
109,034
|
|
|
295,306
|
|
|
322,447
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
Interest on deposits
|
10,995
|
|
|
24,576
|
|
|
44,055
|
|
|
67,937
|
|
|
Interest on customer repurchase agreements
|
84
|
|
|
82
|
|
|
257
|
|
|
255
|
|
|
Interest on short-term borrowings
|
505
|
|
|
408
|
|
|
1,363
|
|
|
1,983
|
|
|
Interest on long-term borrowings
|
3,211
|
|
|
2,979
|
|
|
9,486
|
|
|
8,937
|
|
|
Total interest expense
|
14,795
|
|
|
28,045
|
|
|
55,161
|
|
|
79,112
|
|
|
Net Interest Income
|
79,038
|
|
|
80,989
|
|
|
240,145
|
|
|
243,335
|
|
|
Provision for Credit Losses
|
6,607
|
|
|
3,186
|
|
|
40,654
|
|
|
10,146
|
|
|
Provision for Unfunded Commitments
|
(2,078)
|
|
|
—
|
|
|
974
|
|
|
—
|
|
|
Net Interest Income After Provision For Credit Losses
|
74,509
|
|
|
77,803
|
|
|
198,517
|
|
|
233,189
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
Service charges on deposits
|
1,061
|
|
|
1,494
|
|
|
3,428
|
|
|
4,794
|
|
|
Gain on sale of loans
|
12,226
|
|
|
2,563
|
|
|
16,249
|
|
|
5,874
|
|
|
Gain on sale of investment securities
|
115
|
|
|
153
|
|
|
1,650
|
|
|
1,628
|
|
|
Increase in the cash surrender value of bank owned life insurance
|
413
|
|
|
431
|
|
|
1,655
|
|
|
1,285
|
|
|
Other income
|
4,029
|
|
|
1,673
|
|
|
12,827
|
|
|
5,384
|
|
|
Total noninterest income
|
17,844
|
|
|
6,314
|
|
|
35,809
|
|
|
18,965
|
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
19,388
|
|
|
19,095
|
|
|
54,289
|
|
|
60,482
|
|
|
Premises and equipment expenses
|
5,125
|
|
|
3,503
|
|
|
12,414
|
|
|
11,007
|
|
|
Marketing and advertising
|
928
|
|
|
1,210
|
|
|
3,117
|
|
|
3,626
|
|
|
Data processing
|
2,700
|
|
|
2,183
|
|
|
7,955
|
|
|
7,161
|
|
|
Legal, accounting and professional fees
|
3,097
|
|
|
3,625
|
|
|
14,064
|
|
|
8,074
|
|
|
FDIC insurance
|
2,152
|
|
|
85
|
|
|
5,556
|
|
|
2,327
|
|
|
Other expenses
|
3,525
|
|
|
3,772
|
|
|
11,759
|
|
|
12,459
|
|
|
Total noninterest expense
|
36,915
|
|
|
33,473
|
|
|
109,154
|
|
|
105,136
|
|
|
Income Before Income Tax Expense
|
55,438
|
|
|
50,644
|
|
|
125,172
|
|
|
147,018
|
|
|
Income Tax Expense
|
14,092
|
|
|
14,149
|
|
|
31,847
|
|
|
39,531
|
|
|
Net Income
|
$
|
41,346
|
|
|
$
|
36,495
|
|
|
$
|
93,325
|
|
|
$
|
107,487
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.28
|
|
|
$
|
1.07
|
|
|
$
|
2.88
|
|
|
$
|
3.12
|
|
|
Diluted
|
$
|
1.28
|
|
|
$
|
1.07
|
|
|
$
|
2.88
|
|
|
$
|
3.12
|
|
See notes to consolidated financial statements.
EAGLE BANCORP, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net Income
|
$
|
41,346
|
|
|
$
|
36,495
|
|
|
$
|
93,325
|
|
|
$
|
107,487
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on securities available for sale
|
(624)
|
|
|
1,174
|
|
|
13,354
|
|
|
13,140
|
|
|
Reclassification adjustment for net gains included in net income
|
(86)
|
|
|
(110)
|
|
|
(1,231)
|
|
|
(1,190)
|
|
|
Total unrealized (loss) gain on investment securities
|
(710)
|
|
|
1,064
|
|
|
12,123
|
|
|
11,950
|
|
|
Unrealized gain (loss) on derivatives
|
24
|
|
|
11
|
|
|
(1,324)
|
|
|
(1,664)
|
|
|
Reclassification adjustment for amounts included in net income
|
289
|
|
|
(205)
|
|
|
513
|
|
|
(1,374)
|
|
|
Total unrealized gain (loss) on derivatives
|
313
|
|
|
(194)
|
|
|
(811)
|
|
|
(3,038)
|
|
|
Other comprehensive (loss) income
|
(397)
|
|
|
870
|
|
|
11,312
|
|
|
8,912
|
|
|
Comprehensive Income
|
$
|
40,949
|
|
|
$
|
37,365
|
|
|
$
|
104,637
|
|
|
$
|
116,399
|
|
See notes to consolidated financial statements.
EAGLE BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(dollars in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
Common
|
|
Additional Paid
|
|
Retained
|
|
Comprehensive
|
|
Shareholders'
|
|
|
Shares
|
|
Amount
|
|
in Capital
|
|
Earnings
|
|
Income
|
|
Equity
|
|
Balance July 1, 2020
|
32,224,756
|
|
|
$
|
320
|
|
|
$
|
440,934
|
|
|
$
|
731,973
|
|
|
$
|
14,668
|
|
|
$
|
1,187,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
—
|
|
—
|
|
—
|
|
41,346
|
|
|
—
|
|
41,346
|
|
|
Other comprehensive loss, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
(397)
|
|
|
(397)
|
|
|
Stock-based compensation expense
|
—
|
|
—
|
|
1,452
|
|
|
—
|
|
—
|
|
1,452
|
|
|
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes
|
(3,297)
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Issuance of common stock related to employee stock purchase plan
|
7,177
|
|
|
—
|
|
206
|
|
|
—
|
|
—
|
|
206
|
|
|
Cash dividends declared ($0.22 per share)
|
—
|
|
—
|
|
—
|
|
(7,100)
|
|
|
—
|
|
(7,100)
|
|
|
Balance September 30, 2020
|
32,228,636
|
|
|
$
|
320
|
|
|
$
|
442,592
|
|
|
$
|
766,219
|
|
|
$
|
14,271
|
|
|
$
|
1,223,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2019
|
34,539,853
|
|
|
$
|
343
|
|
|
$
|
532,585
|
|
|
$
|
647,887
|
|
|
$
|
3,767
|
|
|
$
|
1,184,582
|
|
|
Net Income
|
—
|
|
—
|
|
—
|
|
36,495
|
|
|
—
|
|
36,495
|
|
|
Other comprehensive income, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
870
|
|
|
870
|
|
|
Stock-based compensation expense
|
—
|
|
—
|
|
3,147
|
|
|
—
|
|
—
|
|
3,147
|
|
|
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes
|
(1,251)
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Issuance of common stock related to employee stock purchase plan
|
4,120
|
|
|
—
|
|
213
|
|
|
—
|
|
—
|
|
213
|
|
|
Cash dividends declared ($0.22 per share)
|
—
|
|
—
|
|
|
|
(7,327)
|
|
|
—
|
|
(7,327)
|
|
|
Common stock repurchased
|
(822,200)
|
|
|
$
|
(7)
|
|
|
$
|
(33,379)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(33,386)
|
|
|
Balance September 30, 2019
|
33,720,522
|
|
|
$
|
336
|
|
|
$
|
502,566
|
|
|
$
|
677,055
|
|
|
$
|
4,637
|
|
|
$
|
1,184,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
Common
|
|
Additional Paid
|
|
Retained
|
|
Comprehensive
|
|
Shareholders'
|
|
|
Shares
|
|
Amount
|
|
in Capital
|
|
Earnings
|
|
Income
|
|
Equity
|
|
Balance January 1, 2020
|
33,241,496
|
|
|
$
|
331
|
|
|
$
|
482,286
|
|
|
$
|
705,105
|
|
|
$
|
2,959
|
|
|
$
|
1,190,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment due to the adoption of ASC 326, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,931)
|
|
|
—
|
|
|
(10,931)
|
|
|
Net Income
|
—
|
|
|
—
|
|
|
—
|
|
|
93,325
|
|
|
—
|
|
|
93,325
|
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,312
|
|
|
11,312
|
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
3,874
|
|
|
—
|
|
|
—
|
|
|
3,874
|
|
|
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes
|
(28,218)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Vesting of performance based stock awards, net of shares withheld for payroll taxes
|
4,126
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Time based stock awards granted
|
176,252
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of common stock related to employee stock purchase plan
|
17,821
|
|
|
—
|
|
|
589
|
|
|
—
|
|
|
—
|
|
|
589
|
|
|
Cash dividends declared ($0.66 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(21,280)
|
|
|
—
|
|
|
(21,280)
|
|
|
Common stock repurchased
|
(1,182,841)
|
|
|
(11)
|
|
|
(44,157)
|
|
|
—
|
|
|
—
|
|
|
(44,168)
|
|
|
Balance September 30, 2020
|
32,228,636
|
|
|
$
|
320
|
|
|
$
|
442,592
|
|
|
$
|
766,219
|
|
|
$
|
14,271
|
|
|
$
|
1,223,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2019
|
34,387,919
|
|
|
$
|
342
|
|
|
$
|
528,380
|
|
|
$
|
584,494
|
|
|
$
|
(4,275)
|
|
|
$
|
1,108,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
—
|
|
|
—
|
|
|
—
|
|
|
107,487
|
|
|
—
|
|
|
$
|
107,487
|
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,912
|
|
|
$
|
8,912
|
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
6,648
|
|
|
—
|
|
|
—
|
|
|
$
|
6,648
|
|
|
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes
|
26,784
|
|
|
—
|
|
|
332
|
|
|
—
|
|
|
—
|
|
|
$
|
332
|
|
|
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes
|
(13,995)
|
|
|
1
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
Vesting of performance based stock awards, net of shares withheld for payroll taxes
|
17,655
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
Time based stock awards granted
|
112,636
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
Issuance of common stock related to employee stock purchase plan
|
11,723
|
|
|
—
|
|
|
585
|
|
|
—
|
|
|
—
|
|
|
$
|
585
|
|
|
Cash dividends declared ($0.44 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,926)
|
|
|
—
|
|
|
$
|
(14,926)
|
|
|
Common stock repurchased
|
(822,200)
|
|
|
$
|
(7)
|
|
|
$
|
(33,378)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(33,385)
|
|
|
Balance September 30, 2019
|
33,720,522
|
|
|
$
|
336
|
|
|
$
|
502,566
|
|
|
$
|
677,055
|
|
|
$
|
4,637
|
|
|
$
|
1,184,594
|
|
See notes to consolidated financial statements.
EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
Net Income
|
$
|
93,325
|
|
|
$
|
107,487
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Provision for credit losses
|
40,654
|
|
|
10,146
|
|
|
Provision for unfunded commitments
|
974
|
|
|
—
|
|
|
Depreciation and amortization
|
3,515
|
|
|
5,653
|
|
|
Amortization of operating lease right-of-use assets
|
5,276
|
|
|
3,022
|
|
|
Gains on sale of loans
|
(16,249)
|
|
|
(5,874)
|
|
|
Gains on sale of GNMA loans
|
(2,443)
|
|
|
—
|
|
|
Securities premium amortization (discount accretion), net
|
5,345
|
|
|
3,966
|
|
|
Origination of loans held for sale
|
(862,171)
|
|
|
(437,525)
|
|
|
Proceeds from sale of loans held for sale
|
856,043
|
|
|
410,454
|
|
|
Net increase in cash surrender value of BOLI
|
(1,655)
|
|
|
(1,285)
|
|
|
Deferred income tax (benefit) expense
|
(6,559)
|
|
|
3,305
|
|
|
Net gain on sale of other real estate owned
|
(1,180)
|
|
|
—
|
|
|
Net gain on sale of investment securities
|
(1,650)
|
|
|
(1,628)
|
|
|
Stock-based compensation expense
|
3,874
|
|
|
6,648
|
|
|
Net tax benefits from stock compensation
|
99
|
|
|
10
|
|
|
(Increase) decrease in other assets
|
(45,493)
|
|
|
7,274
|
|
|
Increase (decrease) in other liabilities
|
35,880
|
|
|
(19,314)
|
|
|
Net cash provided by operating activities
|
107,585
|
|
|
92,339
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
Purchases of available-for-sale investment securities
|
(465,119)
|
|
|
(130,693)
|
|
|
Proceeds from maturities of available-for-sale securities
|
208,264
|
|
|
129,879
|
|
|
Proceeds from sale/call of available-for-sale securities
|
130,265
|
|
|
82,982
|
|
|
Purchases of Federal Reserve and Federal Home Loan Bank stock
|
(9,116)
|
|
|
(90,219)
|
|
|
Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock
|
4,250
|
|
|
85,000
|
|
|
Net increase in loans
|
(343,665)
|
|
|
(574,177)
|
|
|
Increase (decrease) in premises and equipment
|
(445)
|
|
|
(2,171)
|
|
|
Net cash used in investing activities
|
(475,566)
|
|
|
(499,399)
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
Increase in deposits
|
954,394
|
|
|
428,228
|
|
|
Decrease in customer repurchase agreements
|
(6,687)
|
|
|
(116)
|
|
|
Increase in short-term borrowings
|
50,000
|
|
|
100,000
|
|
|
Increase in long-term borrowings
|
50,293
|
|
|
—
|
|
|
Proceeds from exercise of equity compensation plans
|
—
|
|
|
332
|
|
|
Proceeds from employee stock purchase plan
|
564
|
|
|
585
|
|
|
Common stock repurchased
|
(44,168)
|
|
|
(33,385)
|
|
|
Cash dividends paid
|
(21,280)
|
|
|
(14,926)
|
|
|
Net cash provided by financing activities
|
983,116
|
|
|
480,718
|
|
|
Net Increase In Cash and Cash Equivalents
|
615,135
|
|
|
73,658
|
|
|
Cash and Cash Equivalents at Beginning of Period
|
241,973
|
|
|
321,864
|
|
|
Cash and Cash Equivalents at End of Period
|
$
|
857,108
|
|
|
$
|
395,522
|
|
|
Supplemental Cash Flows Information:
|
|
|
|
|
Interest paid
|
$
|
59,011
|
|
|
$
|
81,834
|
|
|
Income taxes paid
|
$
|
29,850
|
|
|
$
|
43,250
|
|
|
Non-Cash Investing Activities
|
|
|
|
|
Initial recognition of operating lease right-of-use assets
|
$
|
998
|
|
|
$
|
29,574
|
|
|
Transfers from loans to other real estate owned
|
$
|
3,500
|
|
|
$
|
93
|
|
See notes to consolidated financial statements.
EAGLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. and its subsidiaries (the “Company”). Active subsidiaries include: EagleBank (the “Bank”), Eagle Insurance Services, LLC, Bethesda Leasing, LLC, and Landroval Municipal Finance, Inc., with all significant intercompany transactions eliminated.
The Consolidated Financial Statements of the Company included herein are unaudited. The Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals that in the opinion of management, are necessary to present fairly the results for the periods presented. The amounts as of and for the year ended December 31, 2019 were derived from audited Consolidated Financial Statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In addition to the “Critical Accounting Policies” impacted by the new Current Expected Credit Loss (“CECL”) standard described below, the Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The Company believes that the disclosures are adequate to make the information presented not misleading. Certain reclassifications have been made to amounts previously reported to conform to the current period presentation.
Nature of Operations
The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination and sale of residential mortgage loans, the origination of small business loans, and the origination, securitization and sale of multifamily Federal Housing Administration (“FHA”) loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration (“SBA”), is typically sold to third party investors in a transaction apart from the loan’s origination. The Bank offers its products and services through twenty banking offices, five lending centers and various electronic capabilities, including remote deposit services and digital banking services. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance. Bethesda Leasing, a subsidiary of the Bank, holds title to repossessed real estate.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change.
Risks and Uncertainties
The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material adverse impact to the Company’s employees and operations to date, COVID-19 could still potentially create widespread business continuity or credit issues for the Company depending on how much longer the pandemic lasts. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other follow-up stimulus legislative and regulatory relief efforts have had and are expected to continue to have a material impact on the Company’s operations.
The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to control and manage COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.
Financial position and results of operations
The Company’s fee income has been and could be further reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, the Company is unable to project the full extent of the materiality of such an impact, but recognizes the breadth of the economic impact is likely to impact its fee income in future periods.
The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time the Company is unable to project the full extent of the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.
Capital and liquidity
While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses.
The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, and rates for short term funding have recently been very low. If funding costs were to become elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers of the Company’s customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.
Asset valuation
Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
COVID-19 could cause a further and sustained decline in the Company’s stock price. As of June 30, 2020, the Company performed a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount. As of June 30, 2020, a triggering event was deemed to have occurred as a result of COVID-19 and, accordingly, a step one assessment was performed by comparing the fair value of the reporting unit with its carrying amount (including goodwill). Determining the fair value of a reporting unit under the goodwill impairment test is subjective and often involves the use of significant estimates and assumptions. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparable factors. Based on the results of the assessment of all reporting units, the Company concluded that no impairment existed as of June 30, 2020. The Company determined that there were no triggering events and an impairment analysis was not performed as of September 30, 2020. An impairment analysis will next be performed during the fourth quarter as part of our regularly scheduled annual impairment testing. Future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.
Business Continuity Plan
The Company has implemented a remote working strategy for many of its employees. The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. We have established general guidelines for returning to the workplace that include having employees maintain safe distances, staggered work schedules to limit the number of employees in a single location, more frequent cleaning of our facilities and other practices encouraging a safe working environment during this challenging time, including required COVID-19 training programs. The Company does not currently face any material resource constraint through the implementation of its business continuity plans.
Lending operations and accommodations to borrowers
In response to the COVID-19 pandemic and consistent with regulatory guidance, we have also implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications. At September 30, 2020, the Company had no accruing loans 90 days or more past due. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. As of September 30, 2020, we had ongoing temporary modifications on approximately 321 loans representing approximately $851 million (approximately 10.8% of total loans) in outstanding balances, as compared to 708 loans representing approximately $1.6 billion (approximately 20% of total loans) at June 30, 2020. Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term loan modifications as troubled debt restructurings ("TDRs"). Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.
The Company actively participates in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”). The PPP loans originated by the Bank generally have a two-year term and earn interest at 1% plus fees. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2020, PPP loans totaled $456.1 million to just over 1,400 businesses. The Company understands that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charges to earnings.
Credit
The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for credit losses (“ACL”) and record additional provision for credit losses. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.
Allowance for Credit Losses
On January 1, 2020, we adopted ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which replaced the incurred loss methodology for determining our provision for credit losses and ACL with an expected loss methodology that is referred to as the current expected credit loss model. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable and held-to-maturity (“HTM”) debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-2 "Leases (Topic 842)" ("ASU 2016-2"). In addition, ASU 2016-13 made changes to the accounting for available-for-sale (“AFS”) debt securities. One such change is to require credit-related impairments to be recognized as an allowance for credit losses rather than as a write-down of the securities amortized cost basis when management does not intend to sell or believes that it is not more than likely that they will be required to sell the securities prior to recovery of the securities amortized cost basis. We adopted ASU 2016-13 using the modified retrospective method. Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company does not own HTM investment debt securities.
The following table presents a breakdown of the provision for credit losses included in our Consolidated Statements of Income for the applicable periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
(dollars in thousands)
|
|
September 30, 2020
|
|
September 30, 2020
|
|
Provision for credit losses- loans
|
|
$
|
6,589
|
|
|
$
|
40,498
|
|
|
Provision for credit losses- AFS debt securities
|
|
18
|
|
|
156
|
|
|
Total provision for credit losses
|
|
$
|
6,607
|
|
|
$
|
40,654
|
|
Loans
Loans held for investment are stated at the amount of unpaid principal reduced by deferred income (net of costs). Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable.
A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. The most common change in terms provided by the Company is an extension of an interest-only term. As of September 30, 2020, all performing TDRs were categorized as interest-only modifications. Refer to the subsection above "Lending operations and accommodations to borrowers" for a discussion on the impact of the CARES Act on TDRs.
A loan is considered past due when a contractually due payment has not been received by the contractual due date. We place a loan on non-accrual status when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed as a reduction of current period interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.
Allowance for Credit Losses- Loans
The allowance for credit losses is an estimate of the expected credit losses in the loans held for investment and available-for-sale debt securities portfolios.
ASU 2016-13 replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged- off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term, as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors.
The allowance for credit losses is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Reserves on loans that do not share risk characteristics are evaluated on an individual basis (nonaccrual, TDR). Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. For purposes of determining the pool-basis reserve, the remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated by call report codes. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in reserve for unfunded commitments on the Consolidated Balance Sheets. For periods beyond which we are able to develop reasonable and supportable forecasts, we revert to the historical loss rate on a straight line basis over a twelve month period. See further detail regarding our forecasting methodology in the “Discounted Cash Flow Method” section below.
Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management's judgment, should be charged off. Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses.
A summary of our primary portfolio segments is as follows:
Commercial. The commercial loan portfolio is comprised of lines of credit and term loans for working capital, equipment, and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, and acquisitions; and are generally secured by accounts receivable, inventory, equipment and other assets of our clients’ businesses.
Income producing – commercial real estate. Income producing commercial real estate loans are comprised of permanent and bridge financing provided to professional real estate owners/managers of commercial and residential real estate projects and properties who have a demonstrated record of past success with similar properties. Collateral properties include apartment buildings, office buildings, hotels, mixed-use buildings, retail, data centers, warehouse, and shopping centers. The primary source of repayment on these loans is generally expected to come from lease or operation of the real property collateral. Income producing commercial real estate loans are impacted by fluctuation in collateral values, as well as rental demand and rates.
Owner occupied – commercial real estate. The owner occupied commercial real estate portfolio is comprised of permanent financing provided to operating companies and their related entities for the purchase or refinance of real property wherein their business operates. Collateral properties include industrial property, office buildings, religious facilities, mixed-use property, health care and educational facilities.
Real Estate Mortgage – Residential. Real estate mortgage residential loans are comprised of consumer mortgages for the purpose of purchasing or refinancing first lien real estate loans secured by primary-residence, second-home, and rental residential real property.
Construction – commercial and residential. The construction commercial and residential loan portfolio is comprised of loans made to builders and developers of commercial and residential property, for both renovation, new construction, and development projects. Collateral properties include apartment buildings, mixed use property, residential condominiums, single and 1-4 residential property, and office buildings. The primary source of repayment on these loans is expected to come from the sale, permanent financing, or lease of the real property collateral. Construction loans are impacted by fluctuations in collateral values and the ability of the borrower or ultimate purchaser to obtain permanent financing.
Construction – commerical and industrial ("C&I") (owner occupied). The construction C&I (owner occupied) portfolio comprises loans to operating companies and their related entities for new construction or renovation of the real or leased property in which they operate. Generally these loans contain provisions for conversion to an owner occupied commercial real estate or to a commercial loan after completion of construction. Collateral properties include industrial, healthcare, religious facilities, restaurants, and office buildings.
Home Equity. The home equity portfolio is comprised of consumer lines of credit and loans secured by subordinate liens on residential real property.
Other Consumer. The other consumer portfolio is comprised of consumer purpose loans not secured by real property, including personal lines of credit and loans, overdraft lines, and vehicle loans. This category also includes other loan items such as overdrawn deposit accounts as well as loans and loan payments in process.
We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on non-accrual depending on the circumstances of the individual loans.
Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on non-accrual.
The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to management committees, Director’s Loan Committee, the Audit Committee, and the Board of Directors. The committees' reports to the Board are part of the Board's review on a quarterly basis of our consolidated financial statements.
When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral- dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be in a trouble debt restructuring or the extension or renewal options are included in the borrower contract.
We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status.
Discounted Cash Flow Method
The Company uses the discounted cash flow (“DCF”) method to estimate expected credit losses for the commercial, income producing – commercial real estate, owner occupied – commercial real estate, real estate mortgage - residential, construction – commercial and residential, construction – C&I (owner occupied), home equity, and other consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, probability of default, and loss given default. The modeling of expected prepayment speeds is based on historical internal data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts regional unemployment as a loss driver. COVID-19 has negatively impacted unemployment projections, which inform our CECL economic forecast and increased our loss reserve as of September 30, 2020.
For all DCF models, management has determined that eight quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over twelve months on a straight-line basis. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level Net Present Value ("NPV"). An ACL is established for the difference between the instrument’s NPV and amortized cost basis.
Collateral Dependent Financial Assets
Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
A loan that has been modified or renewed is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. Refer to the subsection above "Lending operations and accommodations to borrowers" for a discussion on the impact of the CARES Act on TDRs.
Allowance for Credit Losses - Available-for-Sale Debt Securities
Although ASU No. 2016-13 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. One notable change from the legacy OTTI model is when evaluating whether credit loss exists, an entity may no longer consider the length of time fair value has been less than amortized cost. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a non-credit-related impairment. The majority of available-for-sale debt securities as of September 30, 2020 and December 31, 2019 were issued by US agencies. However, as of September 30, 2020, the Company determined that part of the unrealized loss positions in AFS corporate and municipal securities could be the result of credit losses, and therefore, an allowance for credit losses of $156 thousand was recorded. See Note 3 Investment Securities for more information.
We have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in accrued interest and other assets in the Consolidated Balance Sheets. Available-for-sale debt securities are placed on non- accrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records a reserve for unfunded commitments (“RUC”) on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company’s consolidated Statement of Income. The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company’s Consolidated Balance Sheets.
These statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Other New Authoritative Accounting Guidance
Accounting Standards Adopted in 2020
In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the Agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Agencies confirmed with the staff of the Financial Accounting Standards Board (“FASB”) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance has had, and is expected to continue to have, a material impact on the Company’s financial statements; however, the full extent of such impact cannot be quantified at this time. See Note 5 to the Consolidated Financial Statements for further detail.
ASU 2016-13, “Measurement of Credit Losses on Financial Instruments (Topic 326).” Under the CECL standard and based on the January 1, 2020 effective date, the Company made an initial adjustment to the allowance for credit losses of $10.6 million along with $4.1 million to the reserve for unfunded commitments. In accordance with adoption of CECL, the initial January 1, 2020 cumulative-effect adjustment was to retained earnings (net of taxes) under the modified retrospective approach. Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Refer to the “Allowance for Credit Losses- Loans” section above for additional detail.
ASU 2020-2 "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)" ("ASU 2020-2") incorporates SEC SAB 119 (updated from SAB 102) into the Accounting Standards Codification (the "Codification") by aligning SEC recommended policies and procedures with ASC 326. ASU 2020-2 was effective on January 1, 2020 and had no significant impact on our documentation requirements, financial statement or disclosures.
ASU 2020-3 "Codification Improvements to Financial Instruments" ("ASU 2020-3") revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-3 was effective immediately upon its release in March 2020 and did not have a material impact on our consolidated financial statements.
Accounting Standards Pending Adoption
ASU 2019-12 "Income Taxes (Topic 740)" ("ASU 2019-12") simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance. ASU 2019-12 will be effective for us on January 1, 2021 and is not expected to have a material impact on our consolidated financial statements.
ASU 2020-4, "Reference Rate Reform (Topic 848)" ("ASU 2020-4") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-4 also provides numerous optional expedients for derivative accounting. ASU 2020-4 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-4 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements.
Note 2. Cash and Due from Banks
Regulation D of the Federal Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. During the first nine months of 2020, the Bank maintained balances at the Federal Reserve sufficient to meet reserve requirements, as well as significant excess reserves, on which interest is paid.
Additionally, the Bank maintains interest bearing balances with the Federal Home Loan Bank of Atlanta and noninterest bearing balances with domestic correspondent banks as compensation for services they provide to the Bank.
Note 3. Investment Securities Available-for-Sale
Amortized cost and estimated fair value of securities available-for-sale are summarized as follows:
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Gross
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Gross
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Allowance
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Estimated
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September 30, 2020
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Amortized
|
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Unrealized
|
|
Unrealized
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for Credit
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Fair
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(dollars in thousands)
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Cost
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Gains
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|
Losses
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Losses
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Value
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U.S. agency securities
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$
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130,313
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|
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$
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1,638
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|
|
$
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(665)
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|
|
$
|
—
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|
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$
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131,286
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Residential mortgage backed securities
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|
702,655
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|
|
14,578
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(590)
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|
|
—
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|
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716,643
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Municipal bonds
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90,292
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|
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4,551
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(114)
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(16)
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94,713
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Corporate bonds
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33,345
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1,596
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(71)
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(140)
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34,730
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Other equity investments
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198
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—
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—
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—
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198
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$
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956,803
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$
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22,363
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|
$
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(1,440)
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$
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(156)
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$
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977,570
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Gross
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Gross
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Estimated
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December 31, 2019
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Amortized
|
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Unrealized
|
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Unrealized
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Fair
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(dollars in thousands)
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Cost
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Gains
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Losses
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Value
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U.S. agency securities
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$
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180,228
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|
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$
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621
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$
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(1,055)
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|
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$
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179,794
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Residential mortgage backed securities
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541,490
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|
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4,337
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|
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(1,975)
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|
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543,852
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Municipal bonds
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71,902
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|
|
2,034
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(5)
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73,931
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|
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Corporate bonds
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10,530
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|
|
203
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|
|
—
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|
10,733
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U.S. Treasury
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|
34,844
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11
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|
|
—
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34,855
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Other equity investments
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198
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|
|
—
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|
—
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198
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|
|
|
|
$
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839,192
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|
|
$
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7,206
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|
|
$
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(3,035)
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|
|
$
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843,363
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|
In addition, at September 30, 2020 and December 31, 2019 the Company held $40.1 million and $35.2 million, respectively, in equity securities in a combination of Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stocks, which are required to be held for regulatory purposes and which are not marketable, and therefore are carried at cost.
Accrued interest on available-for-sale securities totaled $3.1 million and $3.2 million at September 30, 2020 and December 31, 2019, respectively, and was included in other assets in the Consolidated Balance Sheets.
Gross unrealized losses and fair value of available-for-sale securities for which an allowance for credit losses has not been recorded, by length of time that individual securities have been in a continuous unrealized loss position are as follows:
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Less than
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12 Months
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|
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|
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12 Months
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or Greater
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Total
|
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|
|
|
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Estimated
|
|
|
|
Estimated
|
|
|
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Estimated
|
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|
|
September 30, 2020
|
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Number of
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Fair
|
|
Unrealized
|
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Fair
|
|
Unrealized
|
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Fair
|
|
Unrealized
|
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(dollars in thousands)
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|
Securities
|
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Value
|
|
Losses
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|
Value
|
|
Losses
|
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Value
|
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Losses
|
|
U. S. agency securities
|
|
25
|
|
|
$
|
20,762
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|
|
$
|
32
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|
|
$
|
43,607
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|
|
$
|
633
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|
|
$
|
64,369
|
|
|
$
|
665
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|
|
Residential mortgage backed securities
|
|
33
|
|
|
139,848
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|
|
549
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|
|
7,334
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|
|
41
|
|
|
147,182
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|
|
590
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|
|
Municipal bonds
|
|
4
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|
|
14,086
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|
|
114
|
|
|
—
|
|
|
—
|
|
|
14,086
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|
|
114
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|
|
Corporate bonds
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|
1
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|
|
2,954
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|
|
71
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|
|
—
|
|
—
|
|
2,954
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|
|
71
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|
|
|
|
63
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|
|
$
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177,650
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|
|
$
|
766
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|
|
$
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50,941
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|
|
$
|
674
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|
|
$
|
228,591
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|
|
$
|
1,440
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|
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Less than
|
|
12 Months
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|
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|
|
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|
|
12 Months
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or Greater
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Total
|
|
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
|
December 31, 2019
|
|
Number of
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
(dollars in thousands)
|
|
Securities
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
U. S. agency securities
|
|
36
|
|
|
$
|
75,159
|
|
|
$
|
439
|
|
|
$
|
51,481
|
|
|
$
|
616
|
|
|
$
|
126,640
|
|
|
$
|
1,055
|
|
|
Residential mortgage backed securities
|
|
111
|
|
|
197,794
|
|
|
1,148
|
|
|
90,742
|
|
|
827
|
|
|
288,536
|
|
|
1,975
|
|
|
Municipal bonds
|
|
1
|
|
|
1,994
|
|
|
5
|
|
|
—
|
|
—
|
|
1,994
|
|
|
5
|
|
|
|
|
148
|
|
|
$
|
274,947
|
|
|
$
|
1,592
|
|
|
$
|
142,223
|
|
|
$
|
1,443
|
|
|
$
|
417,170
|
|
|
$
|
3,035
|
|
The majority of the AFS debt securities in an unrealized loss position as of September 30, 2020, consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss.
As of September 30, 2020, total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. However, as of September 30, 2020, the Company determined that part of the unrealized loss positions in AFS corporate and municipal securities could be the result of credit losses, and therefore, an allowance for credit losses of $156 thousand was recorded. The weighted average duration of debt securities, which comprise 99.9% of total investment securities, is relatively short at 3.1 years. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. The Company does not intend to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.
The amortized cost and estimated fair value of investments available-for-sale at September 30, 2020 and December 31, 2019 by contractual maturity are shown in the table below. Expected maturities for residential mortgage backed securities (“MBS”) will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
(dollars in thousands)
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
|
U. S. agency securities maturing:
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
38,000
|
|
|
$
|
38,111
|
|
|
$
|
96,332
|
|
|
$
|
96,226
|
|
|
After one year through five years
|
|
81,181
|
|
|
82,057
|
|
|
76,121
|
|
|
75,821
|
|
|
Five years through ten years
|
|
11,132
|
|
|
11,224
|
|
|
7,775
|
|
|
7,747
|
|
|
Residential mortgage backed securities
|
|
702,655
|
|
|
716,643
|
|
|
541,490
|
|
|
543,852
|
|
|
Municipal bonds maturing:
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
4,834
|
|
|
4,868
|
|
|
5,897
|
|
|
5,969
|
|
|
After one year through five years
|
|
26,677
|
|
|
27,912
|
|
|
21,416
|
|
|
21,953
|
|
|
Five years through ten years
|
|
56,781
|
|
|
59,771
|
|
|
42,589
|
|
|
44,015
|
|
|
After ten years
|
|
2,000
|
|
|
2,072
|
|
|
2,000
|
|
|
1,994
|
|
|
Corporate bonds maturing:
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
5,214
|
|
|
5,257
|
|
|
502
|
|
|
508
|
|
|
After one year through five years
|
|
21,156
|
|
|
22,124
|
|
|
8,528
|
|
|
8,725
|
|
|
After ten years
|
|
6,975
|
|
|
7,489
|
|
|
1,500
|
|
|
1,500
|
|
|
U.S. treasury
|
|
—
|
|
|
—
|
|
|
34,844
|
|
|
34,855
|
|
|
Other equity investments
|
|
198
|
|
|
198
|
|
|
198
|
|
|
198
|
|
|
Allowance for Credit Losses
|
|
—
|
|
|
(156)
|
|
|
—
|
|
—
|
|
|
|
$
|
956,803
|
|
|
$
|
977,570
|
|
|
$
|
839,192
|
|
|
$
|
843,363
|
|
For the nine months ended September 30, 2020, gross realized gains on sales of investments securities were $1.7 million and there were no gross realized losses on sales of investment securities. For the nine months ended September 30, 2019, gross realized gains on sales of investments securities were $1.6 million, of which $829 thousand was recognized during March 2019 on interest rate swap terminations, and there were no gross realized losses on sales of investment securities.
Proceeds from sales and calls of investment securities for the nine months ended September 30, 2020 were $130.3 million compared to $83.0 million for the same period in 2019.
The carrying value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at September 30, 2020 and December 31, 2019 was $320 million and $378 million, respectively, which is well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of September 30, 2020 and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. agency securities, which exceeded ten percent of shareholders’ equity.
Note 4. Mortgage Banking Derivatives
As part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed securities. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.
Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.
The fair value of the mortgage banking derivatives is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.
During the second quarter of 2020, the Company suspended locking loans for sale on a mandatory basis as a result of elevated origination volumes and market dislocations associated with the current COVID-19 pandemic. In connection with this shift in pipeline strategy from mandatory to best efforts, beginning in the third quarter of 2020, the Company adjusted its accounting treatment of loans sold on a best efforts basis which accelerated revenue recognition associated with the pipeline to when the loans are committed, in accordance with GAAP. The change reflects the timely recognition of non-interest income associated with the gains and fees attributable to the best efforts sale and aligns the accounting treatment of best efforts with the accounting treatment of loans sold on a mandatory basis. Under the adjustment to the accounting for best efforts implemented in the third quarter of 2020, the Company recognized an additional $1.6 million in noninterest income associated with the residential mortgage operations. Had the company utilized the adjusted accounting method for best efforts in prior quarters, non-interest income would have been higher by an immaterial amount.
At September 30, 2020, the Bank had mortgage banking derivative financial instruments totaling $6.0 million. At September 30, 2019 the Bank had mortgage banking derivative financial instruments of $134.3 million notional value. The fair value of these mortgage banking derivative instruments at December 31, 2019 was $280 thousand included in other assets and $66 thousand included in other liabilities.
Included in other noninterest income for the three and nine months ended September 30, 2020 was a net loss of $145 thousand and a net loss of $309 thousand relating to mortgage banking derivative instruments as compared to a net gain of $30 thousand and a net gain of $249 thousand for the three and nine months ended September 30, 2019. The amount included in other noninterest income for the three and nine months ended September 30, 2020 pertaining to its mortgage banking hedging activities was a net realized gain of $34 thousand and a net gain of $27 thousand, respectively, as compared to a net gain of $277 thousand and a net gain of $228 thousand, respectively, for the three and nine months ended September 30, 2019.
Note 5. Loans and Allowance for Credit Losses
The Bank makes loans to customers primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank’s loan portfolio consists of loans to businesses secured by real estate and other business assets.
Loans, net of unamortized net deferred fees, at September 30, 2020 (unaudited) and December 31, 2019 are summarized by type as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
(dollars in thousands)
|
|
Amount
|
|
|
%
|
|
Amount
|
|
%
|
|
Commercial
|
|
$
|
1,524,613
|
|
|
|
19
|
%
|
|
$
|
1,545,906
|
|
|
20
|
%
|
|
PPP loans
|
|
456,115
|
|
|
|
6
|
%
|
|
—
|
|
|
—
|
|
|
Income producing - commercial real estate
|
|
3,724,839
|
|
|
|
47
|
%
|
|
3,702,747
|
|
|
50
|
%
|
|
Owner occupied - commercial real estate
|
|
997,645
|
|
|
|
13
|
%
|
|
985,409
|
|
|
13
|
%
|
|
Real estate mortgage - residential
|
|
82,385
|
|
|
|
1
|
%
|
|
104,221
|
|
|
1
|
%
|
|
Construction - commercial and residential
|
|
879,144
|
|
|
|
11
|
%
|
|
1,035,754
|
|
|
14
|
%
|
|
Construction - C&I (owner occupied)
|
|
140,357
|
|
|
|
2
|
%
|
|
89,490
|
|
|
1
|
%
|
|
Home equity
|
|
72,648
|
|
|
|
1
|
%
|
|
80,061
|
|
|
1
|
%
|
|
Other consumer
|
|
2,509
|
|
|
|
—
|
|
|
2,160
|
|
|
—
|
|
|
Total loans
|
|
7,880,255
|
|
|
|
100
|
%
|
|
7,545,748
|
|
|
100
|
%
|
|
Less: allowance for credit losses
|
|
(110,215)
|
|
|
|
|
|
(73,658)
|
|
|
|
|
Net loans (1)
|
|
$
|
7,770,040
|
|
|
|
|
|
$
|
7,472,090
|
|
|
|
________________________________________
(1)Excludes accrued interest receivable of $43.7 million and $21.3 million at September 30, 2020 and December 31, 2019, respectively, which is recorded in other assets.
Unamortized net deferred fees amounted to $33.0 million and $25.2 million at September 30, 2020 and December 31, 2019, respectively.
As of September 30, 2020 and December 31, 2019, the Bank serviced $94 million and $99 million, respectively, of multifamily FHA loans, SBA loans and other loan participations that are not reflected as loan balances on the Consolidated Balance Sheets.
Loan Origination / Risk Management
The Company’s goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures, evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.
The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing real estate. At September 30, 2020, owner occupied - commercial real estate and construction – C&I (owner occupied) represent approximately 14% of the loan portfolio. At September 30, 2020, non-owner occupied commercial real estate and real estate construction represented approximately 58% of the loan portfolio. The combined owner occupied and commercial real estate and construction loans represent approximately 73% of the loan portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in 79% of all loans being secured by real estate. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan to value of 80% and minimum cash flow debt service coverage of 1.15 to 1.0. Personal guarantees may be required, but may be limited. In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years.
The Company is also an active traditional commercial lender providing loans for a variety of purposes, including working capital, equipment and account receivable financing. This loan category represents approximately 19% of the loan portfolio at September 30, 2020 and was generally variable or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent approximately 1% of the commercial loan category. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit as well as potential recourse to the SBA guarantees. The Company generally sells the guaranteed portion of the loan generating noninterest income from the gains on sale, as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial loans. SBA loans are subject to a maximum loan size established by the SBA as well as internal loan size guidelines.
Approximately 6% of the loan portfolio at September 30, 2020 consists of PPP loans to eligible customers. PPP loans are expected to primarily be repaid via forgiveness provisions (under the CARES Act) from the SBA. These loans are fully guaranteed as to principal and interest by the SBA and ultimately by the full faith and credit of the U.S. Government; as a result, they were approved utilizing different underwriting standards than the Bank's other commercial loans. PPP loans are included in the CECL model but do not carry an allowance for credit loss due to the aforementioned government guarantees.
Approximately 1% of the loan portfolio at September 30, 2020 consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a small portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.
Approximately 1% of the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was 17 months at September 30, 2020. These credits represent first liens on residential property loans originated by the Bank. While the Bank’s general practice is to originate and sell (servicing released) loans made by its Residential Lending department, from time to time certain loan characteristics do not meet the requirements of third party investors and these loans are instead maintained in the Bank’s portfolio until they are resold to another investor at a later date or mature.
Loans are secured primarily by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required.
Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.
Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination.
Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate Loan Committee. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.
Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower’s architect. Each draw request shall also include the borrower’s soft cost breakdown certified by the borrower or their Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition.
Commercial permanent loans are generally secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to 1.0. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.
Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.
The Company’s loan portfolio includes acquisition, development and construction (“ADC”) real estate loans including both investment and owner occupied projects. ADC loans amounted to $1.4 billion at September 30, 2020. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination. ADC loans that provide for the use of interest reserves represent approximately 58% of the outstanding ADC loan portfolio at September 30, 2020. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit including: (1) the feasibility of the project; (2) the experience of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) the borrower equity contribution; and (5) the level of collateral protection. When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate these inherent risks, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1) construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction meetings among senior Company management, which includes monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves.
The following tables detail activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2020 and 2019. PPP loans are excluded from these tables since they do not carry an allowance for credit loss, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. Government. Allocation of a portion of the allowance to one category of loans does not restrict the use of the allowance to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Producing -
|
|
Owner Occupied -
|
|
Real Estate
|
|
Construction -
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Commercial
|
|
Mortgage -
|
|
Commercial and
|
|
Home
|
|
Other
|
|
|
|
(dollars in thousands)
|
|
Commercial
|
|
Real Estate
|
|
Real Estate
|
|
Residential
|
|
Residential
|
|
Equity
|
|
Consumer
|
|
Total
|
|
Three Months Ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
28,078
|
|
|
$
|
51,863
|
|
|
$
|
12,341
|
|
|
$
|
1,550
|
|
|
$
|
13,808
|
|
|
$
|
1,112
|
|
|
$
|
44
|
|
|
$
|
108,796
|
|
|
Loans charged-off
|
|
(187)
|
|
|
(3,750)
|
|
|
(20)
|
|
|
—
|
|
|
(1,179)
|
|
|
(92)
|
|
|
—
|
|
|
(5,228)
|
|
|
Recoveries of loans previously charged-off
|
|
45
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
58
|
|
|
Net loans charged-off
|
|
(142)
|
|
|
(3,750)
|
|
|
(20)
|
|
|
—
|
|
|
(1,179)
|
|
|
(92)
|
|
|
13
|
|
|
(5,170)
|
|
|
Provision for credit losses
|
|
(712)
|
|
|
7,327
|
|
|
769
|
|
|
321
|
|
|
(1,088)
|
|
|
(13)
|
|
|
(15)
|
|
|
6,589
|
|
|
Ending balance
|
|
$
|
27,224
|
|
|
$
|
55,440
|
|
|
$
|
13,090
|
|
|
$
|
1,871
|
|
|
$
|
11,541
|
|
|
$
|
1,007
|
|
|
$
|
42
|
|
|
$
|
110,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period, prior to adoption of ASC 326
|
|
$
|
18,832
|
|
|
$
|
29,265
|
|
|
$
|
5,838
|
|
|
$
|
1,557
|
|
|
$
|
17,485
|
|
|
$
|
656
|
|
|
$
|
25
|
|
|
$
|
73,658
|
|
|
Impact of adopting ASC 326
|
|
892
|
|
|
11,230
|
|
|
4,674
|
|
|
(301)
|
|
|
(6,143)
|
|
|
245
|
|
|
17
|
|
|
10,614
|
|
|
Loans charged-off
|
|
(7,332)
|
|
|
(4,300)
|
|
|
(20)
|
|
|
—
|
|
|
(2,947)
|
|
|
(92)
|
|
|
—
|
|
|
(14,691)
|
|
|
Recoveries of loans previously charged-off
|
|
116
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
136
|
|
|
Net loans (charged-off) recoveries
|
|
(7,216)
|
|
|
(4,300)
|
|
|
(20)
|
|
|
—
|
|
|
(2,947)
|
|
|
(92)
|
|
|
20
|
|
|
(14,555)
|
|
|
Provision for credit losses
|
|
14,716
|
|
|
19,245
|
|
|
2,598
|
|
|
615
|
|
|
3,146
|
|
|
198
|
|
|
(20)
|
|
|
40,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
27,224
|
|
|
$
|
55,440
|
|
|
$
|
13,090
|
|
|
$
|
1,871
|
|
|
$
|
11,541
|
|
|
$
|
1,007
|
|
|
$
|
42
|
|
|
$
|
110,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
9,593
|
|
|
$
|
5,999
|
|
|
$
|
670
|
|
|
$
|
1,148
|
|
|
$
|
204
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
17,617
|
|
|
Collectively evaluated for impairment
|
|
17,631
|
|
|
49,441
|
|
|
12,420
|
|
|
723
|
|
|
11,337
|
|
|
1,007
|
|
|
39
|
|
|
92,598
|
|
|
Ending balance
|
|
$
|
27,224
|
|
|
$
|
55,440
|
|
|
$
|
13,090
|
|
|
$
|
1,871
|
|
|
$
|
11,541
|
|
|
$
|
1,007
|
|
|
$
|
42
|
|
|
$
|
110,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
18,136
|
|
|
$
|
27,010
|
|
|
$
|
5,756
|
|
|
$
|
1,355
|
|
|
$
|
19,006
|
|
|
$
|
581
|
|
|
$
|
242
|
|
|
$
|
72,086
|
|
|
Loans charged-off
|
|
(1,794)
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,794)
|
|
|
Recoveries of loans previously charged-off
|
|
210
|
|
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
17
|
|
|
242
|
|
|
Net loans charged-off
|
|
(1,584)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
17
|
|
|
(1,552)
|
|
|
Provision for credit losses
|
|
1,617
|
|
|
1,517
|
|
|
(158)
|
|
|
(3)
|
|
|
251
|
|
|
(6)
|
|
|
(32)
|
|
|
3,186
|
|
|
Ending balance
|
|
$
|
18,169
|
|
|
$
|
28,527
|
|
|
$
|
5,598
|
|
|
$
|
1,352
|
|
|
$
|
19,272
|
|
|
$
|
575
|
|
|
$
|
227
|
|
|
$
|
73,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
15,857
|
|
|
$
|
28,034
|
|
|
$
|
6,242
|
|
|
$
|
965
|
|
|
$
|
18,175
|
|
|
$
|
599
|
|
|
$
|
72
|
|
|
$
|
69,944
|
|
|
Loans charged-off
|
|
(1,799)
|
|
|
(5,343)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
(7,144)
|
|
|
Recoveries of loans previously charged-off
|
|
377
|
|
|
302
|
|
|
2
|
|
|
3
|
|
|
52
|
|
|
—
|
|
|
38
|
|
|
774
|
|
|
Net loans (charged-off) recoveries
|
|
(1,422)
|
|
|
(5,041)
|
|
|
2
|
|
|
3
|
|
|
52
|
|
|
—
|
|
|
36
|
|
|
(6,370)
|
|
|
Provision for credit losses
|
|
3,734
|
|
|
5,534
|
|
|
(646)
|
|
|
384
|
|
|
1,045
|
|
|
(24)
|
|
|
119
|
|
|
10,146
|
|
|
Ending balance
|
|
$
|
18,169
|
|
|
$
|
28,527
|
|
|
$
|
5,598
|
|
|
$
|
1,352
|
|
|
$
|
19,272
|
|
|
$
|
575
|
|
|
$
|
227
|
|
|
$
|
73,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
8,196
|
|
|
$
|
1,200
|
|
|
$
|
375
|
|
|
$
|
650
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
10,434
|
|
|
Collectively evaluated for impairment
|
|
9,973
|
|
|
27,327
|
|
|
5,223
|
|
|
702
|
|
|
19,272
|
|
|
562
|
|
|
227
|
|
|
63,286
|
|
|
Ending balance
|
|
$
|
18,169
|
|
|
$
|
28,527
|
|
|
$
|
5,598
|
|
|
$
|
1,352
|
|
|
$
|
19,272
|
|
|
$
|
575
|
|
|
$
|
227
|
|
|
$
|
73,720
|
|
During the first quarter of 2020, we adopted ASU 2016-13, which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. Upon adoption, the allowance for credit losses was increased by $14.7 million, which included a $4.1 million increase to the allowance for unfunded commitments, with no impact to the consolidated Statement of Income, as the charges were recorded directly to Retained Earnings (net of taxes). We recorded a $6.6 million and $40.7 million provision for credit losses for the three and nine months ended September 30, 2020, respectively, under CECL. We recorded $5.2 million and $14.6 million in net charge-offs during the three and nine months ended September 30, 2020, respectively, compared to $1.6 million and $6.4 million during the three and nine months ended September 30, 2019, respectively.
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Business/Other Assets
|
|
Real Estate
|
|
Commercial
|
|
$
|
14,075
|
|
|
$
|
2,948
|
|
|
Income producing - commercial real estate
|
|
3,193
|
|
|
26,063
|
|
|
Owner occupied - commercial real estate
|
|
—
|
|
|
14,215
|
|
|
Real estate mortgage - residential
|
|
—
|
|
|
5,335
|
|
|
Construction - commercial and residential
|
|
—
|
|
|
2,274
|
|
|
Home equity
|
|
—
|
|
|
109
|
|
|
Other consumer
|
|
8
|
|
|
—
|
|
|
Total
|
|
$
|
17,276
|
|
|
$
|
50,944
|
|
Credit Quality Indicators
The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality indicators are to use an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment.
The following are the definitions of the Company’s credit quality indicators:
|
|
|
|
|
|
|
|
Pass:
|
Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.
|
|
|
|
|
Watch:
|
Loan paying as agreed with generally acceptable asset quality; however the obligor’s performance has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not sustain any further setbacks. Credit is expected to be strengthened through improved obligor performance and/or additional collateral within a reasonable period of time.
|
|
|
|
|
Special Mention:
|
Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention.
|
|
|
|
|
Classified:
|
Classified (a) Substandard – Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard.
|
|
|
|
|
|
Classified (b) Doubtful – Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.
|
Based on the most recent analysis performed, the risk category of loans by class of loans and year of origination is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 (dollars in thousands)
|
|
Prior
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
Total
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
375,848
|
|
|
124,678
|
|
|
306,487
|
|
|
249,287
|
|
|
193,594
|
|
|
155,505
|
|
|
1,405,399
|
|
|
Watch
|
|
32,430
|
|
|
3,125
|
|
|
32,399
|
|
|
9,478
|
|
|
3,674
|
|
|
—
|
|
|
81,106
|
|
|
Special Mention
|
|
1,302
|
|
|
—
|
|
|
—
|
|
|
451
|
|
|
—
|
|
|
—
|
|
|
1,753
|
|
|
Substandard
|
|
16,915
|
|
|
4,766
|
|
|
2,046
|
|
|
12,421
|
|
|
207
|
|
|
—
|
|
|
36,355
|
|
|
Total
|
|
426,495
|
|
|
132,569
|
|
|
340,932
|
|
|
271,637
|
|
|
197,475
|
|
|
155,505
|
|
|
1,524,613
|
|
|
PPP loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
456,115
|
|
|
456,115
|
|
|
Total
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
456,115
|
|
|
456,115
|
|
|
Income producing - commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
756,002
|
|
|
402,690
|
|
|
421,428
|
|
|
685,804
|
|
|
705,972
|
|
|
377,721
|
|
|
3,349,617
|
|
|
Watch
|
|
150,215
|
|
|
15,480
|
|
|
74,168
|
|
|
53,616
|
|
|
4,640
|
|
|
—
|
|
|
298,119
|
|
|
Special Mention
|
|
203
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,644
|
|
|
—
|
|
|
47,847
|
|
|
Substandard
|
|
13,375
|
|
|
800
|
|
|
4,656
|
|
|
4,883
|
|
|
5,542
|
|
|
—
|
|
|
29,256
|
|
|
Total
|
|
919,795
|
|
|
418,970
|
|
|
500,252
|
|
|
744,303
|
|
|
763,798
|
|
|
377,721
|
|
|
3,724,839
|
|
|
Owner occupied - commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
344,863
|
|
|
105,381
|
|
|
115,144
|
|
|
139,991
|
|
|
74,286
|
|
|
29,169
|
|
|
808,834
|
|
|
Watch
|
|
50,018
|
|
|
2,038
|
|
|
2,645
|
|
|
95,171
|
|
|
24,761
|
|
|
—
|
|
|
174,633
|
|
|
Substandard
|
|
9,584
|
|
|
764
|
|
|
—
|
|
|
355
|
|
|
3,475
|
|
|
—
|
|
|
14,178
|
|
|
Total
|
|
404,465
|
|
|
108,183
|
|
|
117,789
|
|
|
235,517
|
|
|
102,522
|
|
|
29,169
|
|
|
997,645
|
|
|
Real estate mortgage - residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
18,121
|
|
|
3,410
|
|
|
10,377
|
|
|
14,593
|
|
|
23,100
|
|
|
6,837
|
|
|
76,438
|
|
|
Watch
|
|
612
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
612
|
|
|
Substandard
|
|
1,181
|
|
|
4,154
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,335
|
|
|
Total
|
|
19,914
|
|
|
7,564
|
|
|
10,377
|
|
|
14,593
|
|
|
23,100
|
|
|
6,837
|
|
|
82,385
|
|
|
Construction - commercial and residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
32,535
|
|
|
65,703
|
|
|
286,922
|
|
|
314,061
|
|
|
104,335
|
|
|
46,832
|
|
|
850,388
|
|
|
Watch
|
|
853
|
|
|
—
|
|
|
25,629
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,482
|
|
|
Substandard
|
|
—
|
|
|
1,866
|
|
|
408
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,274
|
|
|
Total
|
|
33,388
|
|
|
67,569
|
|
|
312,959
|
|
|
314,061
|
|
|
104,335
|
|
|
46,832
|
|
|
879,144
|
|
|
Construction - C&I (owner occupied)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
11,162
|
|
|
10,577
|
|
|
6,501
|
|
|
29,963
|
|
|
18,761
|
|
|
43,997
|
|
|
120,961
|
|
|
Watch
|
|
787
|
|
|
—
|
|
|
2,121
|
|
|
3,251
|
|
|
13,237
|
|
|
—
|
|
|
19,396
|
|
|
Total
|
|
11,949
|
|
|
10,577
|
|
|
8,622
|
|
|
33,214
|
|
|
31,998
|
|
|
43,997
|
|
|
140,357
|
|
|
Home Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
38,049
|
|
|
4,970
|
|
|
8,274
|
|
|
8,314
|
|
|
4,369
|
|
|
6,918
|
|
|
70,894
|
|
|
Watch
|
|
1,401
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,401
|
|
|
Substandard
|
|
304
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49
|
|
|
—
|
|
|
353
|
|
|
Total
|
|
39,754
|
|
|
4,970
|
|
|
8,274
|
|
|
8,314
|
|
|
4,418
|
|
|
6,918
|
|
|
72,648
|
|
|
Other Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
2,039
|
|
|
169
|
|
|
108
|
|
|
50
|
|
|
100
|
|
|
33
|
|
|
2,499
|
|
|
Substandard
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
Total
|
|
2,049
|
|
|
169
|
|
|
108
|
|
|
50
|
|
|
100
|
|
|
33
|
|
|
2,509
|
|
|
Total Recorded Investment
|
|
$
|
1,857,809
|
|
|
$
|
750,571
|
|
|
$
|
1,299,313
|
|
|
$
|
1,621,689
|
|
|
$
|
1,227,746
|
|
|
$
|
1,123,127
|
|
|
$
|
7,880,255
|
|
The Company’s credit quality indicators are generally updated annually; however, credits rated watch or below are reviewed more frequently. The following table presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(dollars in thousands)
|
|
Pass
|
|
Watch
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Loans
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,470,636
|
|
|
$
|
38,522
|
|
|
$
|
11,460
|
|
|
$
|
25,288
|
|
|
$
|
—
|
|
|
$
|
1,545,906
|
|
|
Income producing - commercial real estate
|
|
3,667,585
|
|
|
16,069
|
|
|
—
|
|
|
19,093
|
|
|
—
|
|
|
3,702,747
|
|
|
Owner occupied - commercial real estate
|
|
925,800
|
|
|
53,146
|
|
|
—
|
|
|
6,463
|
|
|
—
|
|
|
985,409
|
|
|
Real estate mortgage - residential
|
|
98,228
|
|
|
628
|
|
|
—
|
|
|
5,365
|
|
|
—
|
|
|
104,221
|
|
|
Construction - commercial and residential
|
|
1,113,734
|
|
|
—
|
|
|
—
|
|
|
11,510
|
|
|
—
|
|
|
1,125,244
|
|
|
Home equity
|
|
78,626
|
|
|
948
|
|
|
—
|
|
|
487
|
|
|
—
|
|
|
80,061
|
|
|
Other consumer
|
|
2,160
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,160
|
|
|
Total
|
|
$
|
7,356,769
|
|
|
$
|
109,313
|
|
|
$
|
11,460
|
|
|
$
|
68,206
|
|
|
$
|
—
|
|
|
$
|
7,545,748
|
|
Nonaccrual and Past Due Loans
As part of its comprehensive loan review process, the Loan Committee or Credit Review Committee carefully evaluate loans which are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves.
The following table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of September 30, 2020 (unaudited) and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
Loans
|
|
Loans
|
|
|
|
|
|
Total Recorded
|
|
|
|
Current
|
|
30-59 Days
|
|
60-89 Days
|
|
90 Days or
|
|
Total Past
|
|
|
|
Investment in
|
|
(dollars in thousands)
|
|
Loans
|
|
Past Due
|
|
Past Due
|
|
More Past Due
|
|
Due Loans
|
|
Non-Accrual
|
|
Loans
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,494,038
|
|
|
$
|
4,585
|
|
|
$
|
10,154
|
|
|
$
|
—
|
|
|
$
|
14,739
|
|
|
$
|
15,836
|
|
|
$
|
1,524,613
|
|
|
PPP loans
|
|
456,115
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
456,115
|
|
|
Income producing - commercial real estate
|
|
3,696,949
|
|
|
—
|
|
|
7,822
|
|
|
—
|
|
|
7,822
|
|
|
20,068
|
|
|
3,724,839
|
|
|
Owner occupied - commercial real estate
|
|
983,021
|
|
|
—
|
|
|
446
|
|
|
—
|
|
|
446
|
|
|
14,178
|
|
|
997,645
|
|
|
Real estate mortgage - residential
|
|
76,798
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,587
|
|
|
82,385
|
|
|
Construction - commercial and residential
|
|
876,361
|
|
|
—
|
|
|
509
|
|
|
—
|
|
|
509
|
|
|
2,274
|
|
|
879,144
|
|
|
Construction - C&I (owner occupied)
|
|
138,837
|
|
|
1,520
|
|
|
—
|
|
|
—
|
|
|
1,520
|
|
|
—
|
|
|
140,357
|
|
|
Home equity
|
|
71,837
|
|
|
656
|
|
|
46
|
|
|
—
|
|
|
702
|
|
|
109
|
|
|
72,648
|
|
|
Other consumer
|
|
2,492
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
8
|
|
|
2,509
|
|
|
Total
|
|
$
|
7,796,448
|
|
|
$
|
6,770
|
|
|
$
|
18,977
|
|
|
$
|
—
|
|
|
$
|
25,747
|
|
|
$
|
58,060
|
|
|
$
|
7,880,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,527,134
|
|
|
$
|
3,063
|
|
|
$
|
781
|
|
|
$
|
—
|
|
|
$
|
3,844
|
|
|
$
|
14,928
|
|
|
$
|
1,545,906
|
|
|
Income producing - commercial real estate
|
|
3,687,494
|
|
|
—
|
|
|
5,542
|
|
|
—
|
|
|
5,542
|
|
|
9,711
|
|
|
3,702,747
|
|
|
Owner occupied - commercial real estate
|
|
965,938
|
|
|
13,008
|
|
|
—
|
|
|
—
|
|
|
13,008
|
|
|
6,463
|
|
|
985,409
|
|
|
Real estate mortgage – residential
|
|
95,057
|
|
|
3,533
|
|
|
—
|
|
|
—
|
|
|
3,533
|
|
|
5,631
|
|
|
104,221
|
|
|
Construction - commercial and residential
|
|
1,113,735
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,509
|
|
|
1,125,244
|
|
|
Home equity
|
|
79,246
|
|
|
136
|
|
|
192
|
|
|
—
|
|
|
328
|
|
|
487
|
|
|
80,061
|
|
|
Other consumer
|
|
2,151
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
2,160
|
|
|
Total
|
|
$
|
7,470,755
|
|
|
$
|
19,740
|
|
|
$
|
6,524
|
|
|
$
|
—
|
|
|
$
|
26,264
|
|
|
$
|
48,729
|
|
|
$
|
7,545,748
|
|
The following presents the nonaccrual loans as of September 30, 2020 (unaudited) and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
Nonaccrual with
|
|
Nonaccrual with
|
|
Total
|
|
Total
|
|
|
|
No Allowance
|
|
an Allowance
|
|
Nonaccrual
|
|
Nonaccrual
|
|
(dollars in thousands)
|
|
for Credit Loss
|
|
for Credit Loss
|
|
Loans
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
572
|
|
|
15,262
|
|
|
15,834
|
|
|
14,928
|
|
|
PPP loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Income producing - commercial real estate
|
|
6,690
|
|
|
13,379
|
|
|
20,069
|
|
|
9,711
|
|
|
Owner occupied - commercial real estate
|
|
12,627
|
|
|
1,551
|
|
|
14,178
|
|
|
6,463
|
|
|
Real estate mortgage - residential
|
|
1,434
|
|
|
4,154
|
|
|
5,588
|
|
|
5,631
|
|
|
Construction - commercial and residential
|
|
1,866
|
|
|
408
|
|
|
2,274
|
|
|
11,509
|
|
|
Home equity
|
|
109
|
|
|
—
|
|
|
109
|
|
|
487
|
|
|
Other consumer
|
|
5
|
|
|
3
|
|
|
8
|
|
|
—
|
|
|
Total (1)(2)
|
|
$
|
23,303
|
|
|
$
|
34,757
|
|
|
$
|
58,060
|
|
|
$
|
48,729
|
|
________________________________________
(1)Excludes TDRs that were performing under their restructured terms totaling $10.1 at September 30, 2020 and $16.6 million at December 31, 2019.
(2)Gross interest income of $2.6 million and $2.7 million would have been recorded for the nine months ended September 30, 2020 and 2019, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while the interest actually recorded on such loans was $282 thousand and $598 thousand for the nine months ended September 30, 2020 and 2019, respectively. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status.
Pre Adoption of CECL
Loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan was impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Impaired loans, or portions thereof, were charged-off when deemed uncollectible.
The following table presents, by class of loan, information related to impaired loans at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
Recorded
|
|
Recorded
|
|
|
|
|
|
Average Recorded
|
|
Interest Income
|
|
|
|
Contractual
|
|
Investment
|
|
Investment
|
|
Total
|
|
|
|
Investment
|
|
Recognized
|
|
|
|
Principal
|
|
With No
|
|
With
|
|
Recorded
|
|
Related
|
|
Year
|
|
Year
|
|
(dollars in thousands)
|
|
Balance
|
|
Allowance
|
|
Allowance
|
|
Investment
|
|
Allowance
|
|
to Date
|
|
To Date
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
15,814
|
|
|
$
|
11,858
|
|
|
$
|
3,956
|
|
|
$
|
15,814
|
|
|
$
|
5,714
|
|
|
$
|
15,682
|
|
|
$
|
270
|
|
|
Income producing - commercial real estate
|
|
14,093
|
|
|
2,713
|
|
|
11,380
|
|
|
14,093
|
|
|
2,145
|
|
|
18,133
|
|
|
382
|
|
|
Owner occupied - commercial real estate
|
|
7,349
|
|
|
6,388
|
|
|
961
|
|
|
7,349
|
|
|
415
|
|
|
6,107
|
|
|
197
|
|
|
Real estate mortgage - residential
|
|
5,631
|
|
|
3,175
|
|
|
2,456
|
|
|
5,631
|
|
|
650
|
|
|
5,638
|
|
|
—
|
|
|
Construction - commercial and residential
|
|
11,509
|
|
|
11,101
|
|
|
408
|
|
|
11,509
|
|
|
100
|
|
|
8,211
|
|
|
92
|
|
|
Home equity
|
|
487
|
|
|
—
|
|
|
487
|
|
|
487
|
|
|
100
|
|
|
487
|
|
|
—
|
|
|
Other consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
54,883
|
|
|
$
|
35,235
|
|
|
$
|
19,648
|
|
|
$
|
54,883
|
|
|
$
|
9,124
|
|
|
$
|
54,258
|
|
|
$
|
941
|
|
Modifications
A modification of a loan constitutes a TDR when the borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. The most common change in terms provided by the Company is an extension of an interest-only term. As of September 30, 2020, all performing TDRs were categorized as interest-only modifications.
Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.
In response to the COVID-19 pandemic and its economic impact to our customers, we implemented a short-term modification program that complies with the CARES Act and ASC 310-40 to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. This program allows for a deferral of payments for 90 days, which we extended for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. As of September 30, 2020, we granted ongoing temporary modifications on approximately 321 loans representing approximately $851 million (10.8% of total loans) in outstanding exposure. Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the GAAP requirements to treat such short-term loan modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.
The following table presents by class, the recorded investment of loans modified in TDRs held by the Company for the periods ended September 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
|
|
|
|
Income
|
|
Owner
|
|
|
|
|
|
|
|
Number
|
|
|
|
Producing -
|
|
Occupied -
|
|
Construction -
|
|
|
|
|
|
of
|
|
|
|
Commercial
|
|
Commercial
|
|
Commercial
|
|
|
|
(dollars in thousands)
|
|
Contracts
|
|
Commercial
|
|
Real Estate
|
|
Real Estate
|
|
Real Estate
|
|
Total
|
|
Troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured accruing
|
|
7
|
|
|
$
|
1,297
|
|
|
$
|
9,188
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
10,522
|
|
|
Restructured nonaccruing
|
|
4
|
|
|
138
|
|
|
6,342
|
|
|
2,370
|
|
|
—
|
|
|
8,850
|
|
|
Total
|
|
11
|
|
|
$
|
1,435
|
|
|
$
|
15,530
|
|
|
$
|
2,407
|
|
|
$
|
—
|
|
|
$
|
19,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific allowance
|
|
|
|
$
|
227
|
|
|
$
|
629
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured and subsequently defaulted
|
|
|
|
$
|
138
|
|
|
$
|
11,161
|
|
|
$
|
2,370
|
|
|
$
|
—
|
|
|
$
|
13,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
Income
|
|
Owner
|
|
|
|
|
|
|
|
Number
|
|
|
|
Producing -
|
|
Occupied -
|
|
Construction -
|
|
|
|
|
|
of
|
|
|
|
Commercial
|
|
Commercial
|
|
Commercial
|
|
|
|
(dollars in thousands)
|
|
Contracts
|
|
Commercial
|
|
Real Estate
|
|
Real Estate
|
|
Real Estate
|
|
Total
|
|
Troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured accruing
|
|
7
|
|
|
$
|
898
|
|
|
$
|
4,387
|
|
|
$
|
3,283
|
|
|
$
|
—
|
|
|
$
|
8,568
|
|
|
Restructured nonaccruing
|
|
3
|
|
|
1,521
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,521
|
|
|
Total
|
|
10
|
|
|
$
|
2,419
|
|
|
$
|
4,387
|
|
|
$
|
3,283
|
|
|
$
|
—
|
|
|
$
|
10,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific allowance
|
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured and subsequently defaulted
|
|
|
|
$
|
—
|
|
|
$
|
2,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,300
|
|
The Company had eleven TDRs at September 30, 2020 totaling approximately $19.4 million. Seven of these loans totaling approximately $10.5 million are performing under their modified terms. For the first nine months of 2020 and 2019, there were two performing TDR loans each, totaling $6.3 million and $0.9 million, respectively, that defaulted on their modified terms. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on non-accrual status. For the three months ended September 30, 2020, there were no restructured loans where the collateral was sold and the loans paid in full, as compared to the same period in 2019, when there was one restructured loan totaling approximately $309 thousand that was paid off from the sale proceeds of the collateral property. During the three months ended September 30, 2020 and 2019, no loans were re-underwritten and removed from TDR status. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. For both the three months ended September 30, 2020 and 2019, there were no loans modified in a TDR.
Note 6. Leases
A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-2 “Leases” (Topic 842) and has adopted all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branch offices, ATM locations, and corporate office space. Substantially all of our leases are classified as operating leases, and as such, were previously not recognized on the Company’s Consolidated Balance Sheets. With the adoption of Topic 842, operating lease agreements were required to be recognized on the Consolidated Balance Sheets as a right-of-use (“ROU”) asset and a corresponding lease liability.
As of September 30, 2020, the Company had $27.2 million of operating lease ROU assets and $30.5 million of operating lease liabilities on the Company’s Consolidated Balance Sheets. As of December 31, 2019, the Company had $27.4 million of operating lease ROU assets and $30.0 million of operating lease liabilities on the Company’s Consolidated Balance Sheets. The Company elects not to recognize ROU assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Balance Sheets. In accordance with ASC 842 on Leases, a $1.7 million one-time adjustment to rent expense was recorded during the third quarter as our internal review process identified a lease extension that was not originally recorded in the lease balances reflected in the Consolidated Balance Sheets upon implementation of the new lease accounting standard.
Our leases contain terms and conditions of options to extend or terminate the lease which are recognized as part of the ROU assets and lease liabilities when an economic benefit to exercise the option exists and there is a 90% probability that the Company will exercise the option. If these criteria are not met, the options are not included in our ROU assets and lease liabilities.
As of September 30, 2020, our leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or the Company’s ability to incur additional financial obligations. As of September 30, 2020, there were no leases that have been signed but did not yet commence as of the reporting date that create significant rights and obligations for the Company.
The following table presents lease costs and other lease information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
(dollars in thousands)
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
Lease Cost
|
|
|
|
|
|
|
|
Operating Lease Cost (Cost resulting from lease payments)
|
|
$
|
6,253
|
|
|
|
$
|
5,857
|
|
|
|
Variable Lease Cost (Cost excluded from lease payments)
|
|
720
|
|
|
|
815
|
|
|
|
Sublease Income
|
|
(261)
|
|
|
|
(282)
|
|
|
|
Net Lease Cost
|
|
$
|
6,712
|
|
|
|
$
|
6,390
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease - Operating Cash Flows (Fixed Payments)
|
|
$
|
6,648
|
|
|
|
$
|
6,382
|
|
|
|
Right-of-Use Assets - Operating Leases
|
|
$
|
27,180
|
|
|
|
$
|
26,552
|
|
|
|
Weighted Average Lease Term - Operating Leases
|
|
5.27
|
yrs
|
|
5.11
|
yrs
|
|
Weighted Average Discount Rate - Operating Leases
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
Future minimum payments for operating leases with initial or remaining terms of more than one year as of September 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Twelve Months Ended:
|
|
|
|
September 30, 2021
|
|
$
|
8,384
|
|
|
September 30, 2022
|
|
6,592
|
|
|
September 30, 2023
|
|
5,296
|
|
|
September 30, 2024
|
|
4,595
|
|
|
September 30, 2025
|
|
3,847
|
|
|
Thereafter
|
|
5,162
|
|
|
Total Future Minimum Lease Payments
|
|
33,876
|
|
|
Amounts Representing Interest
|
|
(3,419)
|
|
|
Present Value of Net Future Minimum Lease Payments
|
|
$
|
30,457
|
|
Note 7. Other Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.
Cash Flow Hedges of Interest Rate Risk
The Company uses interest rate swap agreements to assist in its interest rate risk management. The Company’s objective in using interest rate derivatives designated as cash flow hedges is to add stability to interest expense and to better manage its exposure to interest rate movements. To accomplish this objective, the Company utilizes interest rate swaps as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on the Bank’s cost of funds. The notional amounts of the interest rate swaps designated as cash flow hedges do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties. The interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from one counterparty in exchange for the Company making fixed payments. The Company’s intent is to hedge its exposure to the variability in potential future interest rate conditions on existing financial instruments.
For derivatives designated as cash flow hedges, changes in the fair value of the derivative are initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions.
As of September 30, 2020 and December 31, 2019, the Company had one designated cash flow hedge notional interest rate swap transaction outstanding amounting to $100 million associated with the Company’s variable rate deposits. The Company recognized $829 thousand in noninterest income during March 2019 due to the termination of two of its interest rate swap transactions as part of the Company’s asset liability strategy as well as declines in market interest rates.
Amounts reported in accumulated other comprehensive income related to designated cash flow hedge derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the next twelve months, the Company estimates (based on existing interest rates) that $842 thousand will be reclassified as an increase in interest expense.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
The Company entered into credit risk participation agreements ("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities.
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815, "Derivatives and Hedging." In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty.
The interest rate derivative agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party’s exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; 3) if the Company fails to maintain its status as a well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
As of September 30, 2020, the aggregate fair value of the derivative contract with credit risk contingent features (i.e., containing collateral posting or termination provisions based on our capital status) that was in a net liability position totaled $5.5 million. The Company has a minimum collateral posting threshold with its derivative counterparty. As of September 30, 2020, the Company was required to post collateral totaling $2.2 million with its derivative counterparty against its obligations under this agreement. If the Company had breached any provisions under the agreement at September 30, 2020, it could have been required to settle its obligations under the agreement at the termination value.
The table below identifies the balance sheet category and fair value of the Company’s designated cash flow hedge derivative instruments and non-designated hedges as of September 30, 2020 (unaudited) and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
Notional
|
|
|
|
Balance Sheet
|
|
Notional
|
|
|
|
Balance Sheet
|
|
Derivatives designated as hedging instruments (dollars in thousands)
|
|
Amount
|
|
Fair Value
|
|
Category
|
|
Amount
|
|
Fair Value
|
|
Category
|
|
Interest rate product
|
|
$
|
100,000
|
|
|
$
|
910
|
|
|
Other Liabilities
|
|
$
|
100,000
|
|
|
$
|
206
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments (dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate product
|
|
$
|
176,851
|
|
|
$
|
4,306
|
|
|
Other Assets
|
|
$
|
56,806
|
|
|
$
|
311
|
|
|
Other Assets
|
|
Mortgage banking derivatives
|
|
409,988
|
|
|
6,015
|
|
|
Other Assets
|
|
49,869
|
|
|
280
|
|
|
Other Assets
|
|
|
|
586,839
|
|
|
10,321
|
|
586,839
|
|
|
10,321
|
|
106,675
|
|
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate product
|
|
$
|
176,851
|
|
|
$
|
4,561
|
|
|
Other Liabilities
|
|
$
|
56,806
|
|
|
$
|
319
|
|
|
Other Liabilities
|
|
Other Contracts
|
|
27,031
|
|
|
136
|
|
|
Other Liabilities
|
|
27,384
|
|
|
86
|
|
|
Other Liabilities
|
|
Mortgage banking derivatives
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other Liabilities
|
|
$
|
49,869
|
|
|
$
|
66
|
|
|
Other Liabilities
|
|
|
|
$
|
203,882
|
|
|
$
|
4,697
|
|
|
Other Liabilities
|
|
$
|
134,059
|
|
|
$
|
471
|
|
|
Other Liabilities
|
The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the three and nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
Location of Gain or (Loss)
|
|
Amount of Gain or (Loss)
|
|
|
|
Amount of Gain (Loss) Recognized in
|
|
Recognized from
|
|
Reclassified from Accumulated OCI
|
|
|
|
OCI on Derivative
|
|
Accumulated Other
|
|
into Income
|
|
Derivatives in Subtopic 815-20 Hedging
|
|
Three Months Ended September 30,
|
|
Comprehensive Income into
|
|
Three Months Ended September 30,
|
|
Relationships (dollars in thousands)
|
|
2020
|
|
2019
|
|
Income
|
|
2020
|
|
2019
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Products
|
|
31
|
|
|
(107)
|
|
|
Interest Expense
|
|
(389)
|
|
|
264
|
|
|
Total
|
|
31
|
|
|
(107)
|
|
|
|
|
(389)
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Recognized from
|
|
|
|
|
|
|
|
Accumulated Other
|
|
Amount of Gain or (Loss)
|
|
|
|
Amount of (Loss) Recognized in
|
|
Comprehensive Income into
|
|
Reclassified from Accumulated OCI
|
|
|
|
OCI on Derivative
|
|
Income
|
|
into Income
|
|
Derivatives in Subtopic 815-20 Hedging
|
|
Nine Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
Relationships (dollars in thousands)
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Products
|
|
(1,517)
|
|
|
(1,974)
|
|
|
Interest Expense
|
|
(755)
|
|
|
1,039
|
|
|
Interest Rate Products
|
|
—
|
|
|
—
|
|
Gain on sale of investment securities
|
|
—
|
|
|
829
|
|
|
Total
|
|
(1,517)
|
|
|
(1,974)
|
|
|
|
|
(755)
|
|
|
1,868
|
|
The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Fair Value and Cash Flow Hedge Accounting on the Statements of Income
|
|
|
|
Location and Amount of Gain or (Loss) Recognized in Income on
|
|
|
|
Fair Value and Cash Flow Hedging Relationships (in 000's)
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2019
|
|
|
|
Interest
|
|
Interest
|
|
Interest
|
|
Gain on sale of
|
|
|
|
Expense
|
|
Expense
|
|
Expense
|
|
investment securities
|
|
Total amounts of income and expense line items presented in the consolidated statement of income in which the effects of fair value or cash flow hedges are recorded
|
|
$
|
389
|
|
|
$
|
264
|
|
|
$
|
755
|
|
|
$
|
1,039
|
|
|
$
|
829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
|
|
|
|
|
|
|
|
|
|
|
|
Interest contracts
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income
|
|
$
|
389
|
|
|
$
|
264
|
|
|
$
|
755
|
|
|
$
|
1,039
|
|
|
$
|
—
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
829
|
|
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component
|
|
$
|
389
|
|
|
$
|
264
|
|
|
$
|
755
|
|
|
$
|
1,039
|
|
|
$
|
829
|
|
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Excluded Component
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Derivatives Not Designated as Hedging Instruments on the Statements of Income
|
|
|
|
|
|
Amount of Income (Loss)
|
|
Amount of Income (Loss)
|
|
|
|
|
|
Recognized in Income on
|
|
Recognized in Income on
|
|
|
|
Location of
|
|
Derivative
|
|
Derivative
|
|
Derivatives Not Designated as Hedging
|
|
(Loss) Recognized in
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
Instruments under Subtopic 815-20
|
|
Income on Derivative
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Interest Rate Products
|
|
Other income / (expense)
|
|
(40)
|
|
|
(7)
|
|
|
(326)
|
|
|
(7)
|
|
|
Mortgage banking derivatives
|
|
Other income / (expense)
|
|
6,015
|
|
|
(380)
|
|
|
6,015
|
|
|
316
|
|
|
Other Contracts
|
|
Other income / (expense)
|
|
(13)
|
|
|
(16)
|
|
|
(77)
|
|
|
(58)
|
|
|
Total
|
|
|
|
5,962
|
|
|
(403)
|
|
|
5,612
|
|
|
251
|
|
Balance Sheet Offsetting: Our designated cash flow hedge interest rate derivatives are eligible for offset in the Consolidated Balance Sheets and are subject to master netting arrangements. Our derivative transactions with counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. The Company generally offsets such financial instruments for financial reporting purposes. The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s cash flow hedge derivatives as of September 30, 2020 (unaudited) and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Gross Amounts Not Offset in the
|
|
|
|
Gross
|
|
Amounts
|
|
Net Amounts of Assets presented in the Balance Sheet
|
|
Balance Sheet
|
|
|
|
Amounts of
|
|
Offset in
|
|
|
|
|
Cash
|
|
|
|
Offsetting of Derivative Assets (dollars in thousands)
|
|
Recognized
|
|
the Balance
|
|
|
Financial
|
|
Collateral
|
|
Net
|
|
|
Assets
|
|
Sheet
|
|
|
Instruments
|
|
Posted
|
|
Amount
|
|
Derivatives
|
|
$
|
4,306
|
|
|
$
|
—
|
|
|
$
|
4,306
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Gross Amounts Not Offset in the
|
|
|
|
Gross
|
|
Amounts
|
|
Net Amounts of Liabilities presented in the Balance Sheet
|
|
Balance Sheet
|
|
|
|
Amounts of
|
|
Offset in
|
|
|
|
|
Cash
|
|
|
|
|
|
Recognized
|
|
the Balance
|
|
|
Financial
|
|
Collateral
|
|
Net
|
|
Offsetting of Derivative Liabilities (dollars in thousands)
|
|
Liabilities
|
|
Sheet
|
|
|
Instruments
|
|
Posted
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
5,216
|
|
|
$
|
—
|
|
|
$
|
5,216
|
|
|
$
|
—
|
|
|
$
|
230
|
|
|
$
|
4,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Gross Amounts Not Offset in the
|
|
|
|
Gross
|
|
Amounts
|
|
Net Amounts of Assets presented in the Balance Sheet
|
|
Balance Sheet
|
|
|
|
Amounts of
|
|
Offset in
|
|
|
|
|
Cash
|
|
|
|
Offsetting of Derivative Assets (dollars in thousands)
|
|
Recognized
|
|
the Balance
|
|
|
Financial
|
|
Collateral
|
|
Net
|
|
|
Assets
|
|
Sheet
|
|
|
Instruments
|
|
Posted
|
|
Amount
|
|
Derivatives
|
|
$
|
311
|
|
|
—
|
|
$
|
311
|
|
|
—
|
|
—
|
|
$
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Gross Amounts Not Offset in the
|
|
|
|
Gross
|
|
Amounts
|
|
Net Amounts of Liabilities presented in the Balance Sheet
|
|
Balance Sheet
|
|
|
|
Amounts of
|
|
Offset in
|
|
|
|
|
Cash
|
|
|
|
|
|
Recognized
|
|
the Balance
|
|
|
Financial
|
|
Collateral
|
|
Net
|
|
Offsetting of Derivative Liabilities (dollars in thousands)
|
|
Liabilities
|
|
Sheet
|
|
|
Instruments
|
|
Posted
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
611
|
|
|
—
|
|
$
|
611
|
|
|
—
|
|
$
|
500
|
|
|
$
|
111
|
|
Note 8. Other Real Estate Owned
The activity within Other Real Estate Owned (“OREO”) for the three and nine months ended September 30, 2020 and 2019 (unaudited) is presented in the table below. There were no residential real estate loans in the process of foreclosure as of September 30, 2020. For the three and nine months ended September 30, 2020 there was one sale of an OREO property, while there were zero sales in the same periods in 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(dollars in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Beginning Balance
|
|
$
|
8,237
|
|
|
$
|
1,394
|
|
|
$
|
1,487
|
|
|
$
|
1,394
|
|
|
Real estate acquired from borrowers
|
|
—
|
|
|
93
|
|
|
6,750
|
|
|
93
|
|
|
Properties sold
|
|
(3,250)
|
|
|
—
|
|
|
(3,250)
|
|
|
—
|
|
|
Ending Balance
|
|
$
|
4,987
|
|
|
$
|
1,487
|
|
|
$
|
4,987
|
|
|
$
|
1,487
|
|
Note 9. Long-Term Borrowings
The following table presents information related to the Company’s long-term borrowings as of September 30, 2020 (unaudited) and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Subordinated Notes, 5.75%
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
|
Subordinated Notes, 5.0%
|
|
150,000
|
|
|
150,000
|
|
|
FHLB Advance, 1.81%
|
|
50,000
|
|
|
—
|
|
|
Less: unamortized debt issuance costs
|
|
(2,020)
|
|
|
(2,313)
|
|
|
Long-term borrowings
|
|
$
|
267,980
|
|
|
$
|
217,687
|
|
On August 5, 2014, the Company completed the sale of $70.0 million of its 5.75% subordinated notes, due September 1, 2024 (the “2024 Notes”). The 2024 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $68.8 million, which includes $1.2 million in deferred financing costs which are being amortized over the life of the 2024 Notes.
On July 26, 2016, the Company completed the sale of $150.0 million of its 5.00% Fixed-to-Floating Rate Subordinated Notes, due August 1, 2026 (the “2026 Notes”). The 2026 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $147.4 million, which includes $2.6 million in deferred financing costs which are being amortized over the life of the 2026 Notes.
On February 26, 2020, the Bank borrowed $50 million dollars under its borrowing arrangement with the Federal Home Loan Bank of Atlanta at a fixed rate of 1.81% with a maturity date of February 26, 2030 as part of the overall asset liability strategy and to support loan growth.
Note 10. Net Income per Common Share
The calculation of net income per common share for the three and nine months ended September 30, 2020 and 2019 (unaudited) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(dollars and shares in thousands, except per share data)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
41,346
|
|
|
$
|
36,495
|
|
|
$
|
93,325
|
|
|
$
|
107,487
|
|
|
Average common shares outstanding
|
|
32,229
|
|
|
34,233
|
|
|
32,434
|
|
|
34,418
|
|
|
Basic net income per common share
|
|
$
|
1.28
|
|
|
$
|
1.07
|
|
|
$
|
2.88
|
|
|
$
|
3.12
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
41,346
|
|
|
$
|
36,495
|
|
|
$
|
93,325
|
|
|
$
|
107,487
|
|
|
Average common shares outstanding
|
|
32,229
|
|
|
34,233
|
|
|
32,434
|
|
|
34,418
|
|
|
Adjustment for common share equivalents
|
|
22
|
|
|
23
|
|
|
24
|
|
|
33
|
|
|
Average common shares outstanding-diluted
|
|
32,251
|
|
|
34,256
|
|
|
32,458
|
|
|
34,451
|
|
|
Diluted net income per common share
|
|
$
|
1.28
|
|
|
$
|
1.07
|
|
|
$
|
2.88
|
|
|
$
|
3.12
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares
|
|
26
|
|
|
2
|
|
|
26
|
|
|
20
|
|
Note 11. Other Comprehensive Income
The following table presents the components of other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Before Tax
|
|
Tax Effect
|
|
Net of Tax
|
|
Three Months Ended September 30, 2020
|
|
|
|
|
|
|
|
Net unrealized loss on securities available-for-sale
|
|
$
|
(840)
|
|
|
$
|
216
|
|
|
$
|
(624)
|
|
|
Less: Reclassification adjustment for net gains included in net income
|
|
(115)
|
|
|
29
|
|
|
(86)
|
|
|
Total unrealized loss
|
|
(955)
|
|
|
245
|
|
|
(710)
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivatives
|
|
31
|
|
|
(7)
|
|
|
24
|
|
|
Less: Reclassification adjustment for loss included in net income
|
|
389
|
|
|
(100)
|
|
|
289
|
|
|
Total unrealized gain
|
|
420
|
|
|
(107)
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
$
|
(535)
|
|
|
$
|
138
|
|
|
$
|
(397)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale
|
|
$
|
1,585
|
|
|
$
|
411
|
|
|
$
|
1,174
|
|
|
Less: Reclassification adjustment for net gains included in net income
|
|
(153)
|
|
|
(43)
|
|
|
(110)
|
|
|
Total unrealized gain
|
|
1,432
|
|
|
368
|
|
|
1,064
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivatives
|
|
24
|
|
|
(13)
|
|
|
11
|
|
|
Less: Reclassification adjustment for gain included in net income
|
|
(285)
|
|
|
(80)
|
|
|
(205)
|
|
|
Total unrealized loss
|
|
(261)
|
|
|
67
|
|
|
(194)
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
$
|
1,171
|
|
|
$
|
301
|
|
|
$
|
870
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale
|
|
$
|
18,402
|
|
|
$
|
(5,048)
|
|
|
$
|
13,354
|
|
|
Less: Reclassification adjustment for net gains included in net income
|
|
(1,650)
|
|
|
419
|
|
|
(1,231)
|
|
|
Total unrealized gain
|
|
16,752
|
|
|
(4,629)
|
|
|
12,123
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on derivatives
|
|
(1,986)
|
|
|
662
|
|
|
(1,324)
|
|
|
Less: Reclassification adjustment for gain included in net income
|
|
688
|
|
|
(175)
|
|
|
513
|
|
|
Total unrealized loss
|
|
(1,298)
|
|
|
487
|
|
|
(811)
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
$
|
15,454
|
|
|
$
|
(4,142)
|
|
|
$
|
11,312
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale
|
|
$
|
17,712
|
|
|
$
|
(4,572)
|
|
|
$
|
13,140
|
|
|
Less: Reclassification adjustment for net gains included in net income
|
|
(1,628)
|
|
|
(438)
|
|
|
(1,190)
|
|
|
Total unrealized gain
|
|
16,084
|
|
|
(5,010)
|
|
|
11,950
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on derivatives
|
|
(2,210)
|
|
|
546
|
|
|
(1,664)
|
|
|
Less: Reclassification adjustment for gain included in net income
|
|
(1,879)
|
|
|
(505)
|
|
|
(1,374)
|
|
|
Total unrealized loss
|
|
(4,089)
|
|
|
41
|
|
|
(3,038)
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
$
|
11,995
|
|
|
$
|
(4,969)
|
|
|
$
|
8,912
|
|
The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
Accumulated Other
|
|
|
|
Available
|
|
|
|
Comprehensive Income
|
|
(dollars in thousands)
|
|
For Sale
|
|
Derivatives
|
|
(Loss)
|
|
Three Months Ended September 30, 2020
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
15,942
|
|
|
$
|
(1,274)
|
|
|
$
|
14,668
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(624)
|
|
|
24
|
|
|
(600)
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
(86)
|
|
|
289
|
|
|
203
|
|
|
Net other comprehensive income (loss) during period
|
|
(710)
|
|
|
313
|
|
|
(397)
|
|
|
Balance at End of Period
|
|
$
|
15,232
|
|
|
$
|
(961)
|
|
|
$
|
14,271
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
Accumulated Other
|
|
|
|
Available
|
|
|
|
Comprehensive Income
|
|
(dollars in thousands)
|
|
For Sale
|
|
Derivatives
|
|
(Loss)
|
|
Three Months Ended September 30, 2019
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
3,842
|
|
|
$
|
(75)
|
|
|
$
|
3,767
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
1,174
|
|
|
11
|
|
|
1,185
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
(110)
|
|
|
(205)
|
|
|
(315)
|
|
|
Net other comprehensive income (loss) during period
|
|
1,064
|
|
|
(194)
|
|
|
870
|
|
|
Balance at End of Period
|
|
$
|
4,906
|
|
|
$
|
(269)
|
|
|
$
|
4,637
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
Accumulated Other
|
|
|
|
Available
|
|
|
|
Comprehensive Income
|
|
(dollars in thousands)
|
|
For Sale
|
|
Derivatives
|
|
(Loss)
|
|
Nine Months Ended September 30, 2020
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
3,109
|
|
|
$
|
(150)
|
|
|
$
|
2,959
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
13,354
|
|
|
(1,324)
|
|
|
12,030
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
(1,231)
|
|
|
513
|
|
|
(718)
|
|
|
Net other comprehensive income (loss) during period
|
|
12,123
|
|
|
(811)
|
|
|
11,312
|
|
|
Balance at End of Period
|
|
$
|
15,232
|
|
|
$
|
(961)
|
|
|
$
|
14,271
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
Accumulated Other
|
|
|
|
Available
|
|
|
|
Comprehensive Income
|
|
(dollars in thousands)
|
|
For Sale
|
|
Derivatives
|
|
(Loss)
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
(7,044)
|
|
|
$
|
2,769
|
|
|
$
|
(4,275)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
13,140
|
|
|
(1,664)
|
|
|
11,476
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
(1,190)
|
|
|
(1,374)
|
|
|
(2,564)
|
|
|
Net other comprehensive income (loss) during period
|
|
11,950
|
|
|
(3,038)
|
|
|
8,912
|
|
|
Balance at End of Period
|
|
$
|
4,906
|
|
|
$
|
(269)
|
|
|
$
|
4,637
|
|
|
|
|
|
|
|
|
|
The following tables present the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from
|
|
|
|
|
|
Accumulated Other
|
|
Affected Line Item in
|
|
Details about Accumulated Other
|
|
Comprehensive (Loss) Income
|
|
the Statement Where
|
|
Comprehensive Income Components
|
|
Three Months Ended September 30,
|
|
Net Income is Presented
|
|
(dollars in thousands)
|
|
2020
|
|
2019
|
|
|
|
Realized gain on sale of investment securities
|
|
$
|
115
|
|
|
$
|
153
|
|
|
Gain on sale of investment securities
|
|
Interest income derivative deposits
|
|
(389)
|
|
|
285
|
|
|
Interest expense on deposits
|
|
Income tax expense
|
|
71
|
|
|
(123)
|
|
|
Income Tax Expense
|
|
Total Reclassifications for the Period
|
|
$
|
(203)
|
|
|
$
|
315
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from
|
|
|
|
|
|
Accumulated Other
|
|
Affected Line Item in
|
|
Details about Accumulated Other
|
|
Comprehensive (Loss) Income
|
|
the Statement Where
|
|
Comprehensive Income Components
|
|
Nine Months Ended September 30,
|
|
Net Income is Presented
|
|
(dollars in thousands)
|
|
2020
|
|
2019
|
|
|
|
Realized gain on sale of investment securities
|
|
$
|
1,650
|
|
|
$
|
1,628
|
|
|
Gain on sale of investment securities
|
|
Realized gain on swap termination
|
|
—
|
|
|
829
|
|
|
Gain on sale of investment securities
|
|
Interest income derivative deposits
|
|
(688)
|
|
|
1,050
|
|
|
Interest expense on deposits
|
|
Income tax expense
|
|
(244)
|
|
|
(943)
|
|
|
Income Tax Expense
|
|
Total Reclassifications for the Period
|
|
$
|
718
|
|
|
$
|
2,564
|
|
|
Net Income
|
Note 12. Fair Value Measurements
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. Government and agency securities actively traded in over-the-counter markets.
Level 2 Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.
Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 (unaudited) and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
Significant
|
|
|
|
|
|
|
|
Other
|
|
Other
|
|
|
|
|
|
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Quoted Prices
|
|
Inputs
|
|
Inputs
|
|
Total
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
(Fair Value)
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
U. S. agency securities
|
|
$
|
—
|
|
|
$
|
131,286
|
|
|
$
|
—
|
|
|
$
|
131,286
|
|
|
Residential mortgage backed securities
|
|
—
|
|
|
716,643
|
|
|
—
|
|
|
716,643
|
|
|
Municipal bonds
|
|
—
|
|
|
94,713
|
|
|
—
|
|
|
94,713
|
|
|
Corporate bonds
|
|
—
|
|
|
33,230
|
|
|
1,500
|
|
|
34,730
|
|
|
Other equity investments
|
|
—
|
|
|
—
|
|
|
198
|
|
|
198
|
|
|
Loans held for sale
|
|
—
|
|
|
79,084
|
|
|
—
|
|
|
79,084
|
|
|
Interest Rate Caps
|
|
—
|
|
|
4,233
|
|
|
—
|
|
|
4,233
|
|
|
Mortgage banking derivatives
|
|
—
|
|
|
—
|
|
|
6,015
|
|
|
6,015
|
|
|
Total assets measured at fair value on a recurring basis as of September 30, 2020
|
|
$
|
—
|
|
|
$
|
1,059,189
|
|
|
$
|
7,713
|
|
|
$
|
1,066,902
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivatives
|
|
$
|
—
|
|
|
$
|
910
|
|
|
$
|
—
|
|
|
$
|
910
|
|
|
Derivative liability
|
|
—
|
|
|
136
|
|
|
—
|
|
|
136
|
|
|
Interest Rate Caps
|
|
—
|
|
|
4,487
|
|
|
—
|
|
|
4,487
|
|
|
Total liabilities measured at fair value on a recurring basis as of September 30, 2020
|
|
$
|
—
|
|
|
$
|
5,533
|
|
|
$
|
—
|
|
|
$
|
5,533
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
U. S. agency securities
|
|
$
|
—
|
|
|
$
|
179,794
|
|
|
$
|
—
|
|
|
$
|
179,794
|
|
|
Residential mortgage backed securities
|
|
—
|
|
|
543,852
|
|
|
—
|
|
|
543,852
|
|
|
Municipal bonds
|
|
—
|
|
|
73,931
|
|
|
—
|
|
|
73,931
|
|
|
Corporate bonds
|
|
—
|
|
|
—
|
|
|
10,733
|
|
|
10,733
|
|
|
U.S. Treasury
|
|
—
|
|
|
34,855
|
|
|
—
|
|
|
34,855
|
|
|
Other equity investments
|
|
—
|
|
|
—
|
|
|
198
|
|
|
198
|
|
|
Loans held for sale
|
|
—
|
|
|
56,707
|
|
|
—
|
|
|
56,707
|
|
|
Interest Rate Caps
|
|
—
|
|
|
317
|
|
|
—
|
|
|
317
|
|
|
Mortgage banking derivatives
|
|
—
|
|
|
—
|
|
|
280
|
|
|
280
|
|
|
Total assets measured at fair value on a recurring basis as of December 31, 2019
|
|
$
|
—
|
|
|
$
|
889,456
|
|
|
$
|
11,211
|
|
|
$
|
900,667
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivatives
|
|
$
|
—
|
|
|
$
|
203
|
|
|
$
|
—
|
|
|
$
|
203
|
|
|
Derivative liability
|
|
—
|
|
|
86
|
|
|
—
|
|
|
86
|
|
|
Interest Rate Caps
|
|
—
|
|
|
312
|
|
|
—
|
|
|
312
|
|
|
Mortgage banking derivatives
|
|
—
|
|
|
—
|
|
|
66
|
|
|
66
|
|
|
Total liabilities measured at fair value on a recurring basis as of December 31, 2019
|
|
$
|
—
|
|
|
$
|
601
|
|
|
$
|
66
|
|
|
$
|
667
|
|
Investment securities available-for-sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. agency debt securities, mortgage backed securities issued by Government Sponsored Entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, the carrying amounts approximate the fair value.
Loans held for sale: The Company has elected to carry loans held for sale at fair value. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Income. Gains and losses on sales of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Income. As such, the Company classifies loans subjected to fair value adjustments as Level 2 valuation.
The following tables summarize the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of September 30, 2020 (unaudited) and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
Principal
|
|
|
|
(dollars in thousands)
|
|
Fair Value
|
|
Balance
|
|
Difference
|
|
Loans held for sale
|
|
$
|
79,084
|
|
|
$
|
77,572
|
|
|
$
|
1,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
Principal
|
|
|
|
(dollars in thousands)
|
|
Fair Value
|
|
Balance
|
|
Difference
|
|
Loans held for sale
|
|
$
|
56,707
|
|
|
$
|
55,834
|
|
|
$
|
873
|
|
There were no residential mortgage loans held for sale that were 90 or more days past due or on nonaccrual status as of September 30, 2020 or December 31, 2019.
Interest rate swap derivatives: These derivative instruments consist of interest rate swap agreements, which are accounted for as cash flow hedges under ASC 815. The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility. Derivative contracts are executed with a Credit Support Annex, which is a bilateral agreement that requires collateral postings when the market value exceeds certain threshold limits. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration.
Credit risk participation agreements: The Company enters into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2.
Interest rate caps: The Company entered into an interest rate cap agreement ("cap") with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the cap's strike rate. The fair value of the cap is calculated by determining the total expected asset or liability exposure of the derivatives. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities. Accordingly, the cap falls within Level 2.
Mortgage banking derivatives for loans settled on a mandatory basis: The Company relied on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a Level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing.
Mortgage banking derivative for loans settled best efforts basis: The significant unobservable input (Level 3) used in the fair value measurement of the Company's interest rate lock commitments is the pull through ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. An increase in the pull through ratio (i.e. higher percentage of loans are estimated to close) will increase the gain or loss. The pull through ratio is largely dependent on the loan processing stage that a loan is currently in. The pull through rate is computed by the Company's secondary marketing consultant using historical data and the ratio is periodically reviewed by the Company for reasonableness.
The following is a reconciliation of activity for assets and liabilities measured at fair value based on Significant Other Unobservable Inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Mortgage Balancing
|
|
|
|
(dollars in thousands)
|
|
Securities
|
|
Derivatives
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2020
|
|
$
|
10,931
|
|
|
$
|
280
|
|
|
$
|
11,211
|
|
|
Realized gain (loss) included in earnings
|
|
—
|
|
|
5,735
|
|
|
5,735
|
|
|
Unrealized gain included in other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Purchases of available-for-sale securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Principal redemption
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Migrated to Level 2 valuation
|
|
$
|
(9,233)
|
|
|
$
|
—
|
|
|
$
|
(9,233)
|
|
|
Ending balance at September 30, 2020
|
|
$
|
1,698
|
|
|
$
|
6,015
|
|
|
$
|
7,713
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2020
|
|
$
|
—
|
|
|
$
|
66
|
|
|
$
|
66
|
|
|
Realized loss included in earnings
|
|
—
|
|
|
(66)
|
|
|
(66)
|
|
|
Principal redemption
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Ending balance at September 30, 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Mortgage Balancing
|
|
|
|
(dollars in thousands)
|
|
Securities
|
|
Derivatives
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2019
|
|
$
|
9,794
|
|
|
$
|
229
|
|
|
$
|
10,023
|
|
|
Realized (loss) gain included in earnings
|
|
(20)
|
|
|
51
|
|
|
31
|
|
|
Unrealized gain included in other comprehensive income
|
|
131
|
|
|
—
|
|
|
131
|
|
|
Purchases of available-for-sale securities
|
|
4,030
|
|
|
—
|
|
|
4,030
|
|
|
Principal redemption
|
|
(3,004)
|
|
|
—
|
|
|
(3,004)
|
|
|
Ending balance at December 31, 2019
|
|
$
|
10,931
|
|
|
$
|
280
|
|
|
$
|
11,211
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2019
|
|
$
|
—
|
|
|
$
|
269
|
|
|
$
|
269
|
|
|
Realized gain included in earnings
|
|
—
|
|
|
(203)
|
|
|
(203)
|
|
|
Principal redemption
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Ending balance at December 31, 2019
|
|
$
|
—
|
|
|
$
|
66
|
|
|
$
|
66
|
|
The other equity and debt securities classified as Level 3 consist of one corporate bond of a local banking company and equity investments in the form of common stock of two local banking companies which are not publicly traded, and for which the carrying amounts approximate fair value.
Form Level 3 assets measured at fair value on a recurring or nonrecurring basis as of September 30, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
(dollars in thousands)
|
|
Valuation Technique
|
|
Description
|
|
Range
|
|
Weighted Average (1)
|
Fair Value
|
|
Weighted Average (1)
|
|
Fair Value
|
|
Mortgage banking derivatives
|
|
Pricing Model
|
|
Pull Through Rate
|
|
69.9% - 81.4%
|
|
78.44
|
%
|
$
|
6,015
|
|
0
|
76.25
|
%
|
76.25
|
$
|
280
|
|
(1) Unobservable inputs for mortgage banking derivatives were weighted by loan amount.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company measures certain assets at fair value on a nonrecurring basis and the following is a general description of the methods used to value such assets.
At September 30, 2020, substantially all of the Company’s individually evaluated loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, individually evaluated loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.
Pre Adoption of CECL: The Company did not record loans at fair value on a recurring basis; however, from time to time, a loan was considered impaired and an allowance for loan loss was established. The Company considered a loan impaired when it was probable that the Company would be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management had determined that nonaccrual loans and loans that had their terms restructured in a TDR met this impaired loan definition. Once a loan was identified as individually impaired, management measures impairment in accordance with ASC Topic 310, “Receivables.” The fair value of impaired loans was estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represented loans for which the fair value of expected repayments or collateral exceeded the recorded investment in such loans.
Other real estate owned: Other real estate owned is initially recorded at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral, which the Company classifies as a Level 3 valuation. Assets measured at fair value on a nonrecurring basis are included in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
Significant
|
|
|
|
|
|
|
|
Other
|
|
Other
|
|
|
|
|
|
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Quoted Prices
|
|
Inputs
|
|
Inputs
|
|
Total
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
(Fair Value)
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
824
|
|
|
$
|
16,307
|
|
|
$
|
17,131
|
|
|
Income producing - commercial real estate
|
|
—
|
|
|
22,220
|
|
|
7,036
|
|
|
29,256
|
|
|
Owner occupied - commercial real estate
|
|
—
|
|
|
11,535
|
|
|
2,680
|
|
|
14,215
|
|
|
Real estate mortgage - residential
|
|
—
|
|
|
1,893
|
|
|
3,442
|
|
|
5,335
|
|
|
Construction - commercial and residential
|
|
—
|
|
|
—
|
|
|
2,274
|
|
|
2,274
|
|
|
Home equity
|
|
—
|
|
|
109
|
|
|
—
|
|
|
109
|
|
|
Other consumer
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total assets measured at fair value on a nonrecurring basis as of September 30, 2020
|
|
$
|
—
|
|
|
$
|
36,581
|
|
|
$
|
31,747
|
|
|
$
|
68,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
Significant
|
|
|
|
|
|
|
|
Other
|
|
Other
|
|
|
|
|
|
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Quoted Prices
|
|
Inputs
|
|
Inputs
|
|
Total
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
(Fair Value)
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,100
|
|
|
$
|
10,100
|
|
|
Income producing - commercial real estate
|
|
—
|
|
|
—
|
|
|
11,948
|
|
|
11,948
|
|
|
Owner occupied - commercial real estate
|
|
—
|
|
|
—
|
|
|
6,934
|
|
|
6,934
|
|
|
Real estate mortgage - residential
|
|
—
|
|
|
—
|
|
|
4,981
|
|
|
4,981
|
|
|
Construction - commercial and residential
|
|
—
|
|
|
—
|
|
|
11,409
|
|
|
11,409
|
|
|
Home equity
|
|
—
|
|
|
—
|
|
|
387
|
|
|
387
|
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
1,487
|
|
|
1,487
|
|
|
Total assets measured at fair value on a nonrecurring basis as of December 31, 2019
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47,246
|
|
|
$
|
47,246
|
|
Fair Value of Financial Instruments
The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists.
Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole.
The estimated fair value of the Company’s financial instruments at September 30, 2020 (unaudited) and December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
Quoted Prices (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
|
Carrying
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Value
|
|
Fair Value
|
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
7,559
|
|
|
$
|
7,559
|
|
|
$
|
—
|
|
|
$
|
7,559
|
|
|
$
|
—
|
|
|
Federal funds sold
|
|
30,830
|
|
|
30,830
|
|
|
—
|
|
|
30,830
|
|
|
—
|
|
|
Interest bearing deposits with other banks
|
|
818,719
|
|
|
818,719
|
|
|
—
|
|
|
818,719
|
|
|
—
|
|
|
Investment securities
|
|
977,570
|
|
|
977,570
|
|
|
—
|
|
|
976,070
|
|
|
1,500
|
|
|
Federal Reserve and Federal Home Loan Bank stock
|
|
40,061
|
|
|
40,061
|
|
|
—
|
|
|
40,061
|
|
|
—
|
|
|
Loans held for sale
|
|
79,084
|
|
|
79,084
|
|
|
—
|
|
|
79,084
|
|
|
—
|
|
|
Loans
|
|
7,770,040
|
|
|
7,733,020
|
|
|
—
|
|
|
—
|
|
|
7,733,020
|
|
|
Bank owned life insurance
|
|
76,326
|
|
|
76,326
|
|
|
—
|
|
|
76,326
|
|
|
—
|
|
|
Annuity investment
|
|
14,541
|
|
|
14,541
|
|
|
—
|
|
|
14,541
|
|
|
—
|
|
|
Mortgage banking derivatives
|
|
6,015
|
|
|
6,015
|
|
|
—
|
|
|
—
|
|
|
6,015
|
|
|
Interest Rate Caps
|
|
4,233
|
|
|
4,233
|
|
|
—
|
|
|
4,233
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
2,384,108
|
|
|
2,384,108
|
|
|
—
|
|
|
2,384,108
|
|
|
—
|
|
|
Interest bearing deposits
|
|
4,780,160
|
|
|
4,780,160
|
|
|
—
|
|
|
4,780,160
|
|
|
—
|
|
|
Certificates of deposit
|
|
1,014,517
|
|
|
1,033,703
|
|
|
—
|
|
|
1,033,703
|
|
|
—
|
|
|
Customer repurchase agreements
|
|
24,293
|
|
|
24,293
|
|
|
—
|
|
|
24,293
|
|
|
—
|
|
|
Borrowings
|
|
567,980
|
|
|
573,641
|
|
|
—
|
|
|
573,641
|
|
|
—
|
|
|
Interest rate swap derivatives
|
|
910
|
|
|
910
|
|
|
—
|
|
|
910
|
|
|
—
|
|
|
Derivative liability
|
|
136
|
|
|
136
|
|
|
—
|
|
|
136
|
|
|
—
|
|
|
Interest Rate Caps
|
|
4,487
|
|
|
4,487
|
|
|
—
|
|
|
4,487
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
7,539
|
|
|
$
|
7,539
|
|
|
$
|
—
|
|
|
$
|
7,539
|
|
|
$
|
—
|
|
|
Federal funds sold
|
|
38,987
|
|
|
38,987
|
|
|
—
|
|
|
38,987
|
|
|
—
|
|
|
Interest bearing deposits with other banks
|
|
195,447
|
|
|
195,447
|
|
|
—
|
|
|
195,447
|
|
|
—
|
|
|
Investment securities
|
|
843,363
|
|
|
843,363
|
|
|
—
|
|
|
832,432
|
|
|
10,931
|
|
|
Federal Reserve and Federal Home Loan Bank stock
|
|
35,194
|
|
|
35,194
|
|
|
—
|
|
|
35,194
|
|
|
—
|
|
|
Loans held for sale
|
|
56,707
|
|
|
56,707
|
|
|
—
|
|
|
56,707
|
|
|
—
|
|
|
Loans
|
|
7,472,090
|
|
|
7,550,249
|
|
|
—
|
|
|
—
|
|
7,550,249
|
|
|
Bank owned life insurance
|
|
75,724
|
|
|
75,724
|
|
|
—
|
|
|
75,724
|
|
|
—
|
|
|
Annuity investment
|
|
14,697
|
|
|
14,697
|
|
|
—
|
|
|
14,697
|
|
|
—
|
|
|
Interest Rate Caps
|
|
280
|
|
|
280
|
|
|
—
|
|
|
280
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
2,064,367
|
|
|
2,064,367
|
|
|
—
|
|
|
2,064,367
|
|
|
—
|
|
|
Interest bearing deposits
|
|
3,876,985
|
|
|
3,876,985
|
|
|
—
|
|
|
3,876,985
|
|
|
—
|
|
|
Certificates of deposit
|
|
1,283,039
|
|
|
1,291,688
|
|
|
—
|
|
|
1,291,688
|
|
|
—
|
|
|
Customer repurchase agreements
|
|
30,980
|
|
|
30,980
|
|
|
—
|
|
|
30,980
|
|
|
—
|
|
|
Borrowings
|
|
467,687
|
|
|
328,330
|
|
|
—
|
|
|
328,330
|
|
|
—
|
|
|
Interest rate swap derivatives
|
|
203
|
|
|
203
|
|
|
—
|
|
|
203
|
|
|
—
|
|
|
Derivative liability
|
|
86
|
|
|
86
|
|
|
—
|
|
|
86
|
|
|
—
|
|
|
Interest Rate Caps
|
|
312
|
|
|
312
|
|
|
—
|
|
|
312
|
|
|
—
|
|
|
Mortgage banking derivatives
|
|
66
|
|
|
66
|
|
|
—
|
|
|
—
|
|
|
66
|
|
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Eagle Bancorp, Inc. (the “Company”) and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
This report contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward-looking statements can be identified by use of words such as “may,” “will,” “can,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “assume," "probable," "possible," "continue,” “should,” “could,” “would,” “strive," "seeks," "deem," "projections," "forecast," "consider," "indicative," "uncertainty," "likely," "unlikely," ""likelihood," "unknown," "attributable," "depends," "intends," "generally," "feel" "typically," "judgment," "subjective" and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market (including the macroeconomic and other challenges and uncertainties resulting from the coronavirus (“COVID-19”) pandemic, including on our credit quality and business operations), interest rates and interest rate policy, competitive factors and other conditions, which by their nature are not susceptible to accurate forecast, and are subject to significant uncertainty. For details on factors that could affect these expectations, see the risk factors contained in this report and the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company's Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company’s past results are not necessarily indicative of future performance. All information is as of the date of this report. Any forward-looking statements made by or on behalf of the Company speak only as to the date they are made. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward looking statement for any reason.
GENERAL
The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating twenty-two years of successful operations. The Company provides general commercial and consumer banking services through EagleBank (the “Bank”), its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System. The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the Company’s primary market area. The Company’s philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of twenty branch offices, including nine in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C.
The Bank offers a broad range of commercial banking services to its business and professional clients, as well as full service consumer banking services to individuals living and/or working primarily in the Bank’s market area. The Bank emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, non-profit organizations and associations, and investors living and working in and near the primary service area. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, “NOW” accounts and money market and savings accounts, business, construction, and commercial loans, residential mortgages and consumer loans, and cash management services. The Bank is also active in the origination and sale of residential mortgage loans and the origination of Small Business Administration ("SBA”) loans. The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under best efforts and or mandatory delivery commitments with the investors to purchase the loans subject to compliance with pre-established criteria. The decision whether to sell residential mortgage loans on a mandatory or best efforts lock basis is a function of multiple factors, including but not limited to overall market volumes of mortgage loan originations, forecasted “pull -through” rates of origination, loan closing operational considerations, pricing differentials between the two methods, and availability and pricing of various interest rate hedging strategies associated with the mortgage origination pipeline. The Company continually monitors these factors to maximize profitability and minimize operational and interest rate risks.
The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated. The Company originates multifamily Federal Housing Administration ("FHA”) loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”). The Company securitizes these loans through the Government National Mortgage Association (“Ginnie Mae”) MBS I program and sells the resulting securities in the open market to authorized dealers in the normal course of business, and periodically bundles and sells the servicing rights. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages other real estate owned (“OREO”) assets. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Additionally, the Bank offers investment advisory services through referral programs with third parties. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.
Impact of COVID-19
In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. Governmental responses to the pandemic have included orders closing nonessential businesses, directing individuals to restrict their movements, observe social distancing, and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to COVID-19 pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.
Our business and consumer customers are experiencing varying degrees of financial distress. In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including directing employees to work from home insofar as is possible, implementing our business continuity plans and protocols to the extent necessary, and our branches have modified hours and advanced safety measures. We have established general guidelines for returning that include having employees maintain safe distances, staggered work schedules to limit the number of employees in a single location, more frequent cleaning of our facilities and other practices encouraging a safe working environment during this challenging time, including required COVID-19 training programs
On March 27, 2020, the CARES Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act created the Paycheck Protection Program (the "PPP"), a program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.
As an SBA preferred lender, the Bank is participating in the PPP program, and at September 30, 2020, had an outstanding balance of PPP loans of $456.1 million to just over 1,400 businesses. The statutory interest rate on these loans is 1.00% and the average yield, which includes fee amortization, was 2.41% for the third quarter of 2020.
There have also been various governmental actions taken or proposed to provide forms of relief, such as streamlining the application process for forgiveness of all PPP loans under $50,000, limiting debt collections efforts, including foreclosures, and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees. Governmental actions taken in response to the COVID-19 pandemic have not always been coordinated or consistent across jurisdictions but, in general, have been expanding in scope and intensity. The efficacy and ultimate effect of these actions is not known.
In response to the COVID-19 pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications. Initial modifications under the program have predominantly been for 90 days, with a second 90 day modification if warranted. The deferred payments along with interest accrued during the deferral period are due and payable on the existing maturity date of the existing loan. As of September 30, 2020, we had ongoing temporary modifications on approximately 321 loans representing $851 million (approximately 10.8% of total loans) in outstanding balances. Overall, as of September 30, 2020, the Bank's COVID-19 modification program has granted temporary modifications on approximately 740 loans representing approximately $1.63 billion in outstanding balances, including 419 temporary modifications representing $787 million that have or are expected to return to pre-modification terms.
Some of these deferrals may have met the criteria for treatment under U.S. generally accepted accounting principles ("GAAP") as troubled debt restructurings ("TDRs"). Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term loan modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.
Significant uncertainties as to future economic conditions exist, and we have taken deliberate actions in response, including maintaining record levels of on and off-balance sheet liquidity and have maintained regulatory capital ratios significantly above the well capitalized. Furthermore, we suspended our share repurchase program during the first quarter of 2020. Accordingly, we made no share repurchases in the second quarter of 2020. The Company’s Board of Directors approved lifting the suspension of the Company’s share repurchase program in the third quarter of 2020; however, no share repurchases were made in the third quarter of 2020. The Board of Directors has authorized management through the current share repurchase program to continue to evaluate opportunities for share repurchases. As a result, management may enter the markets from time to time as determined appropriate.
Additionally, the economic pressures, coupled with the implementation of the expected loss methodology for determining our provision for credit losses as required by the Current Expected Credit Loss ("CECL") standard described below, have contributed to an increased provision for credit losses for the first nine months of 2020. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act and other legislative and regulatory developments related to COVID-19; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain.
CRITICAL ACCOUNTING POLICIES
The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and 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 a 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 Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and Note 1 to the Consolidated Financial Statements included in this report. There have been no significant changes to the Company’s accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 except as indicated below and in “Accounting Standards Adopted in 2020” in Note 1 to the Consolidated Financial Statements in this report.
Provision for Credit Losses and Provision for Unfunded Commitments
A consequence of lending activities is that we may incur credit losses, so we record an allowance for credit losses ("ACL") with respect to loan receivables and a reserve for unfunded commitments (“RUC”) as estimates of those losses. The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as changes in interest rates, the financial performance of borrowers and unemployment rates.
As a result of our January 1, 2020, adoption of ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments,” and its related amendments, our methodology for estimating these credit losses changed significantly from December 31, 2019. The new standard replaced the “incurred loss” approach with an “current expected credit loss” approach known as CECL. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.”
The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, we consider forecasts about future economic conditions that are reasonable and supportable. The RUC represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. The RUC is determined by estimating future draws and applying the expected loss rates on those draws.
Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for credit losses and the RUC. Our determination of the amount of the allowance for credit losses requires significant reliance on estimates and significant judgment as to the amount and timing of expected future cash flows on loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts. The Company uses the discounted cash flow (“DCF”) method to estimate expected credit losses for the commercial, income producing – commercial real estate, owner occupied – commercial real estate, real estate mortgage – residential, construction – commercial and residential, construction – C&I (owner occupied), home equity, and other consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, probability of default, and loss given default. The modeling of expected prepayment speeds are based on historical internal data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment as an initial loss driver, which is next adjusted to estimate regional unemployment rates. For all DCF models, management has determined that eight quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over twelve months on a straight-line basis. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period. PPP loans are included in the model but do not carry a reserve, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. Government.
The allowance for credit losses attributable to each portfolio segment also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff, and trends in delinquencies. While our methodology in establishing the reserve for credit losses attributes portions of the ACL and RUC to the commercial and consumer portfolio segments, the entire ACL and RUC is available to absorb credit losses inherent in the total loan portfolio and total amount of unfunded credit commitments, respectively.
Going forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. For example, the COVID-19 pandemic has negatively impacted the performance outlook in the Accommodation & Food Service segment of our loan portfolio, which informs our CECL economic forecast and increased our loss reserve as of September 30, 2020. See Notes 1 and 5 to the Consolidated Financial Statements, the “Provision for Credit Losses” section in Management’s Discussion and Analysis, and the COVID-19 risk factors in Item 1A for more information on the provision for credit losses.
Goodwill
As of June 30, 2020, COVID-19 caused the occurrence of what management deemed to be a triggering event that caused us to perform a goodwill impairment test to determine if an impairment charge was required for that period. Determining the fair value of a reporting unit under the goodwill impairment test involves judgement and often involves the use of significant estimates and assumptions. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables. Based on the results of the assessment of all reporting units, the Company concluded that no goodwill impairment existed as of June 30, 2020. However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations. Management did not consider a triggering event to have occurred during the third quarter of 2020. Annual impairment testing of intangibles and goodwill as required by GAAP will be performed in the fourth quarter of 2020.
RESULTS OF OPERATIONS
Earnings Summary
Net income for the three months ended September 30, 2020 was $41.3 million compared to $36.5 million for the three months ended September 30, 2019, a 13% increase. Net income per basic and diluted common share for the three months ended September 30, 2020 was $1.28 compared to $1.07 per basic and diluted common share for the same period in 2019, a 20% increase. Net income for the nine months ended September 30, 2020 was $93.3 million compared to $107.5 million for the nine months ended September 30, 2019, a 13% decrease. Net income per basic and diluted common share for the nine months ended September 30, 2020 was $2.88 compared to $3.12 for the same period in 2019, an 8% decrease.
Net income increased for the three months ended September 30, 2020 relative to the same period in 2019 due to higher noninterest income (as discussed below). This was partially offset by an increase in provisioning for credit losses and lower net interest income. In particular, the provision for credit losses increased to $6.6 million for the three months ended September 30, 2020 compared to $3.2 million for the same period in 2019, a 107% increase (see "Provision for Credit Losses" section below for further details on drivers of the change). Net income declined for the nine months ended September 30, 2020 relative to the same period in 2019 due substantially to a decline in the net interest margin, and increased provisioning for credit losses (see "Provision for Credit Losses" section below, and Note 1 and Note 5 for further detail on CECL), partially offset by higher noninterest income (as discussed in the "Noninterest Income" section below).
The most significant portion of revenue (i.e. net interest income plus noninterest income) is net interest income, which decreased to $79.0 million for the three months ended September 30, 2020 compared to $81.0 million for the same period in 2019. The decrease resulted from a decline in the net interest margin substantially offset by growth in average earning assets of 17.9%.
The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, was 3.08% for the three months ended September 30, 2020 and 3.72% for the same period in 2019. The net interest margin was 3.27% for the nine months ended September 30, 2020 and 3.88% for the same period in 2019. The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below.
Total noninterest income for the three months ended September 30, 2020 increased to $17.8 million from $6.3 million for the three months ended September 30, 2019, a 183% increase. Service charges on deposits for the three months ended September 30, 2020 decreased from $1.5 million to $1.1 million for the three months ended September 30, 2019, a 29.0% decrease, due to lesser insufficient funds fees. Total noninterest income for the nine months ended September 30, 2020 increased to $35.8 million from $19.0 million for the nine months ended September 30, 2019, an 89% increase. Service charges on deposits for the nine months ended September 30, 2020 decreased to $3.4 million from $4.8 million for the nine months ended September 30, 2019, a 28% decrease, due to lesser insufficient funds fees. For further information on the components and drivers of these changes see "Noninterest Income" section below.
The benefit of noninterest sources funding earning assets decreased by 41 basis points to 33 basis points for the three months ended September 30, 2020 as compared to 74 basis points for the same period in 2019, due to significantly lower market interest rates. The combination of a 23 basis point decrease in the net interest spread and a 41 basis point decrease in the value of noninterest sources resulted in a 64 basis point decrease in the net interest margin for the three months ended September 30, 2020 as compared to the same period in 2019. The benefit of noninterest sources funding earning assets decreased by 34 basis points to 42 basis points from 76 basis points for the nine months ended September 30, 2020 as compared to the same period in 2019 due to significantly lower market interest rates. The combination of a 27 basis point decrease in the net interest spread and a 34 basis point decrease in the value of noninterest sources resulted in a 61 basis point decrease in the net interest margin for the nine months ended September 30, 2020 as compared to the same period in 2019. Despite currently having lesser value resulting from lower interest rates, the Company continues to consider the value of its noninterest sources of funds as very significant to its business model and its overall profitability over the longer term.
Gain on sale of loans for the three months ended September 30, 2020 was $12.2 million compared to $2.6 million for the three months ended September 30, 2019, an increase of 377%. Gain on sale of loans for the nine months ended September 30, 2020 increased to $16.2 million from $5.9 million for the nine months ended September 30, 2019, a 177% increase, due to higher gains on the sale of residential mortgage loans ($10.3 million). Residential lending gains for the three and nine months ended September 30, 2020 are impacted by the change in strategy to almost exclusively lock loans on a best efforts basis during the third quarter of 2020 and an adjustment to the accounting methodology by which gains are recognized to align with GAAP, as described in the "Noninterest Income" section below.
Other income for the three months ended September 30, 2020 increased to $4.0 million from $1.7 million for the three months ended September 30, 2019, a 141% increase, due substantially to $1.2 million gain on the sale of an OREO property and $912 thousand higher gains associated with the origination, securitization, sale and servicing of FHA loans. Other income for the nine months ended September 30, 2020 increased to $12.8 million from $5.4 million for the nine months ended September 30, 2019, a 138% increase due substantially to $3.4 million higher gains associated with the origination, securitization, sale, and servicing of FHA loans, $1.4 million higher small business investment company ("SBIC") income, $1.2 million gain on the sale of an OREO property, $1.2 million higher swap fee income, and $703 thousand higher commitment fees, partially offset by lower service charges on deposits of $1.4 million.
Gains on sale of investment securities were $115 thousand and $153 thousand for the three months ended September 30, 2020 and 2019, respectively. Gains on sale of investment securities were $1.7 million and $1.6 million for the nine months ended September 30, 2020 and 2019, respectively.
Noninterest expenses totaled $36.9 million for the three months ended September 30, 2020, as compared to $33.5 million for the three months ended September 30, 2019, a 10% increase. Noninterest expenses totaled $109.2 million for the nine months ended September 30, 2020, as compared to $105.1 million for the nine months ended September 30, 2019, a 4% increase. See the "Noninterest Expense" section for further detail on the components and drivers of the change.
Income tax expense were $14.1 million for the three months ended September 30, 2020 a decrease of 0.4%, compared to the same period in 2019. The provision for income taxes was $31.8 million for the nine months ended September 30, 2020, a decrease of $7.7 million compared to the same period in 2019. The components and drivers of the change are discussed in the "Income Tax Expense" section below.
The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 38.10% for the third quarter of 2020, as compared to 38.34% for the third quarter of 2019, and was 39.56% for the nine months ended September 30, 2020 as compared to 40.08% for the same period in 2019.
The Company believes it has effectively managed its net interest income over the past twelve months as market interest rates have trended sharply lower. This factor has been significant to overall earnings performance over the past twelve months as net interest income represents 87% of the Company's total revenue for the first nine months of 2020.
At September 30, 2020, total loans (including PPP loans) were 4.4% higher than they were at December 31, 2019, and average loans were 8.2% higher in the first nine months of 2020 as compared to the first nine months of 2019. PPP loans represented $456.1 million of total loans at the end of the third quarter 2020. Excluding PPP loans, the decrease in loan balance is mostly attributable to the successful completion of construction projects and the related construction loan payoffs. In order to fund such loan increases and sustain significant liquidity, the Company has relied on funding from interest bearing accounts primarily as a result of inflows from certain financial intermediary relationships. At September 30, 2020, total deposits were 13.2% higher than deposits at December 31, 2019, while average deposits were 16.8% higher for the first nine months of 2020 compared with the first nine months of 2019. This has led the Company to be able to sustain strong primary and secondary sources of liquidity.
In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 80% and 87% of average earning assets for the first nine months of 2020 and 2019, respectively. For the first nine months of 2020, as compared to the same period in 2019, average loans, excluding loans held for sale, increased $593 million, or 8.2%, due primarily to growth in PPP, income producing commercial real estate, and commercial loans. Average investment securities for the nine months ended September 30, 2020 and 2019 both amounted to 9% average earning assets. The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 11% and 4% of average earning assets for the first nine months of 2020 and 2019, respectively.
The ratio of common equity to total assets decreased to 12.11% at September 30, 2020 from 13.25% at December 31, 2019, due to total assets growing faster than common equity, including common equity reductions due to $44 million in share repurchase activity, the approximate $10.6 million charge to common equity due to implementation of CECL on January 1, 2020, and COVID-19’s impact on our loan loss provisioning as discussed in the “Earnings Summary” above. As discussed later in “Capital Resources and Adequacy,” the regulatory capital ratios of the Bank and Company remain above well capitalized levels.
For the three months ended September 30, 2020, the Company reported an annualized return on average assets (“ROAA”) of 1.57%, as compared to 1.62% for the three months ended September 30, 2019. Total shareholders’ equity was $1.22 billion and $1.19 billion at September 30, 2020 and December 31, 2019, respectively, an increase of 3%. The annualized return on average common equity (“ROACE”) for the three months ended September 30, 2020 was 14.46% as compared to 12.09% for the three months ended September 30, 2019. The annualized return on average tangible common equity (“ROATCE”) for the three months ended September 30, 2020 was 15.93% as compared to 13.25% for the three months ended September 30, 2019. Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. The increase in these ratios was primarily due to substantially higher noninterest income.
For the nine months ended September 30, 2020, the Company reported an annualized ROAA of 1.24% as compared to 1.66% for the nine months ended September 30, 2019. The annualized ROACE for the nine months ended September 30, 2020 was 10.44% as compared to 12.34% for the nine months ended September 30, 2019. The annualized ROATCE for the nine months ended September 30, 2020 was 11.45% as compared to 13.57% for the nine months ended September 30, 2019. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. The decline in these ratios was primarily due to the implementation of CECL and COVID-19 impacts on loan loss provisioning, as well as a lower net interest margin.
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investment securities. The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings. Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations). Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.
Net interest income was $79.0 million for the three months ended September 30, 2020 and $81.0 million for the same period in 2019, which reflects the impact of lower interest rates and higher cash balances given strong deposit flows, partially offset by improved funding mix and lower funding costs. The lack of growth was primarily the result of a decline in the net interest margin, as explained below, substantially offset by growth in average earning assets of 17.9%. For the nine months ended September 30, 2020, net interest income decreased by $3.2 million from the same period in prior year, resulting from net interest margin declines despite growth in average earning assets of 17.0%.
The net interest margin was 3.08% for the three months ended September 30, 2020 and 3.72% for the same period in 2019, which reflects the impact of lower interest rates and higher cash balances given strong deposit flows, partially offset by improved funding mix and lower funding costs.
The net interest margin was 3.27% for the nine months ended September 30, 2020 and 3.88% for the same period in 2019, owing in part to the COVID-19 pandemic, the sharply lower interest rate environment in 2020 as compared to 2019, together with a substantially higher on balance sheet liquidity position were the primary factors that negatively impacted the year to date net interest margin. Additionally, the net interest margin for both the three and nine months ended September 30, 2020 was negatively impacted by approximately two basis points due to lower rates on PPP loans in 2020.
In the third quarter of 2020, as average U.S. Treasury rates in the two to five year range declined by approximately 7 basis points and the average yield curve remained fairly flat, the Company experienced 18 basis points of net interest margin compression (from 3.26% to 3.08%) as compared to the second quarter of 2020. In addition, our cost of funds declined 7 basis points (from 0.65% to 0.58%), while the yield on earning assets declined by 25 basis points (from 3.91% to 3.66%). Average liquidity for the third quarter was $1.3 billion versus $1.1 billion for the second quarter of 2020. The yield on our loan assets was negatively impacted by the low interest rate environment in the third quarter of 2020, including a 19 basis point decline in the average one-month LIBOR rate. A substantial portion of the variable rate loan portfolio has interest rate floors that cushioned the decline in loan yields.
Average earning asset yields decreased 134 basis points to 3.66% for the three months ended September 30, 2020, as compared to 5.00% for the same period in 2019. The average cost of interest bearing liabilities decreased by 111 basis points (to 0.91% from 2.02%) for the three months ended September 30, 2020 as compared to the same period in 2019. Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 23 basis points for the three months ended September 30, 2020 as compared to 2019 (2.75% as compared to 2.98%). While the net interest income decreased by 1% to $240.1 million for the nine months ended September 30, 2020 as compared to $243.3 million over the same period in 2019. This was largely the result of net interest margin declines despite growth in average earning assets of 17.0%.
Average earning asset yields decreased 112 basis points to 4.02% for the nine months ended September 30, 2020, as compared to 5.14% for the same period in 2019. The average cost of interest bearing liabilities decreased by 85 basis points (to 1.17% from 2.02%) for the nine months ended September 30, 2020 as compared to the same period in 2019. Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 27 basis points for the nine months ended September 30, 2020 as compared to 2019 (2.85% as compared to 3.12%).
The tables below present the average balances and rates of the major categories of the Company’s assets and liabilities for the three and nine months ended September 30, 2020 and 2019. Included in the tables are measurements of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets.
Eagle Bancorp, Inc.
Consolidated Average Balances, Interest Yields And Rates (Unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with other banks and other short-term investments
|
$
|
1,275,932
|
|
|
$
|
384
|
|
|
0.12
|
%
|
|
$
|
344,853
|
|
|
$
|
1,762
|
|
|
2.03
|
%
|
|
Loans held for sale (1)
|
79,354
|
|
|
567
|
|
|
2.86
|
%
|
|
49,765
|
|
|
492
|
|
|
3.95
|
%
|
|
Loans (1) (2)
|
7,910,260
|
|
|
88,730
|
|
|
4.46
|
%
|
|
7,492,816
|
|
|
101,805
|
|
|
5.39
|
%
|
|
Investment securities available for sale (2)
|
906,990
|
|
|
4,141
|
|
|
1.82
|
%
|
|
741,907
|
|
|
4,904
|
|
|
2.62
|
%
|
|
Federal funds sold
|
33,403
|
|
|
11
|
|
|
0.13
|
%
|
|
25,855
|
|
|
71
|
|
|
1.09
|
%
|
|
Total interest earning assets
|
10,205,939
|
|
|
93,833
|
|
|
3.66
|
%
|
|
8,655,196
|
|
|
109,034
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest earning assets
|
376,681
|
|
|
|
|
|
|
341,452
|
|
|
|
|
|
|
Less: allowance for credit losses
|
109,025
|
|
|
|
|
|
|
73,242
|
|
|
|
|
|
|
Total noninterest earning assets
|
267,656
|
|
|
|
|
|
|
268,210
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
10,473,595
|
|
|
|
|
|
|
$
|
8,923,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
|
$
|
756,005
|
|
|
$
|
483
|
|
|
0.25
|
%
|
|
$
|
791,785
|
|
|
$
|
1,828
|
|
|
0.92
|
%
|
|
Savings and money market
|
3,998,603
|
|
|
4,929
|
|
|
0.49
|
%
|
|
2,922,751
|
|
|
13,606
|
|
|
1.85
|
%
|
|
Time deposits
|
1,112,664
|
|
|
5,583
|
|
|
2.00
|
%
|
|
1,444,328
|
|
|
9,142
|
|
|
2.51
|
%
|
|
Total interest bearing deposits
|
5,867,272
|
|
|
10,995
|
|
|
0.75
|
%
|
|
5,158,864
|
|
|
24,576
|
|
|
1.89
|
%
|
|
Customer repurchase agreements
|
28,523
|
|
|
84
|
|
|
1.17
|
%
|
|
27,809
|
|
|
82
|
|
|
1.17
|
%
|
|
Other short-term borrowings
|
300,003
|
|
|
506
|
|
|
0.66
|
%
|
|
100,100
|
|
|
408
|
|
|
1.59
|
%
|
|
Long-term borrowings
|
267,946
|
|
|
3,211
|
|
|
4.69
|
%
|
|
217,555
|
|
|
2,979
|
|
|
5.36
|
%
|
|
Total interest bearing liabilities
|
6,463,744
|
|
|
14,796
|
|
|
0.91
|
%
|
|
5,504,328
|
|
|
28,045
|
|
|
2.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand
|
2,724,640
|
|
|
|
|
|
|
2,160,450
|
|
|
|
|
|
|
Other liabilities
|
74,066
|
|
|
|
|
|
|
61,115
|
|
|
|
|
|
|
Total noninterest bearing liabilities
|
2,798,706
|
|
|
|
|
|
|
2,221,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
1,211,145
|
|
|
|
|
|
|
1,197,513
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
10,473,595
|
|
|
|
|
|
|
$
|
8,923,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
$
|
79,037
|
|
|
|
|
|
|
$
|
80,989
|
|
|
|
|
Net interest spread
|
|
|
|
|
2.75
|
%
|
|
|
|
|
|
2.98
|
%
|
|
Net interest margin
|
|
|
|
|
3.08
|
%
|
|
|
|
|
|
3.72
|
%
|
|
Cost of funds
|
|
|
|
|
0.58
|
%
|
|
|
|
|
|
1.28
|
%
|
|
|
|
|
|
|
0.58
|
%
|
|
|
|
|
|
|
(1)Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $5.4 million and $4.3 million for the three months ended September 30, 2020 and 2019, respectively.
(2)Interest and fees on loans and investments exclude tax equivalent adjustments.
Eagle Bancorp, Inc.
Consolidated Average Balances, Interest Yields and Rates (Unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
|
Average Balance
|
|
Interest
|
|
Average Yield/Rate
|
|
Average Balance
|
|
Interest
|
|
Average Yield/Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with other banks and other short-term investments
|
$
|
990,051
|
|
|
$
|
2,104
|
|
|
0.28
|
%
|
|
$
|
285,150
|
|
|
$
|
4,533
|
|
|
2.13
|
%
|
|
Loans held for sale (1)
|
66,158
|
|
|
1,605
|
|
|
3.23
|
%
|
|
34,265
|
|
|
1,041
|
|
|
4.05
|
%
|
|
Loans (1) (2)
|
7,859,188
|
|
|
277,373
|
|
|
4.71
|
%
|
|
7,265,726
|
|
|
300,966
|
|
|
5.54
|
%
|
|
Investment securities available-for-sale (2)
|
865,484
|
|
|
14,139
|
|
|
2.18
|
%
|
|
784,970
|
|
|
15,740
|
|
|
2.68
|
%
|
|
Federal funds sold
|
33,424
|
|
|
84
|
|
|
0.34
|
%
|
|
21,352
|
|
|
167
|
|
|
1.05
|
%
|
|
Total interest earning assets
|
9,814,305
|
|
|
295,305
|
|
|
4.02
|
%
|
|
8,391,463
|
|
|
322,447
|
|
|
5.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest earning assets
|
368,974
|
|
|
|
|
|
|
339,355
|
|
|
|
|
|
|
Less: allowance for credit losses
|
99,198
|
|
|
|
|
|
|
70,902
|
|
|
|
|
|
|
Total noninterest earning assets
|
269,776
|
|
|
|
|
|
|
268,453
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
10,084,081
|
|
|
|
|
|
|
$
|
8,659,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
|
$
|
787,434
|
|
|
$
|
2,679
|
|
|
0.45
|
%
|
|
$
|
696,825
|
|
|
$
|
4,206
|
|
|
0.81
|
%
|
|
Savings and money market
|
3,751,397
|
|
|
21,619
|
|
|
0.77
|
%
|
|
2,781,663
|
|
|
37,848
|
|
|
1.82
|
%
|
|
Time deposits
|
1,199,654
|
|
|
19,757
|
|
|
2.20
|
%
|
|
1,406,237
|
|
|
25,883
|
|
|
2.46
|
%
|
|
Total interest bearing deposits
|
5,738,485
|
|
|
44,055
|
|
|
1.03
|
%
|
|
4,884,725
|
|
|
67,937
|
|
|
1.86
|
%
|
|
Customer repurchase agreements
|
29,710
|
|
|
257
|
|
|
1.16
|
%
|
|
29,617
|
|
|
255
|
|
|
1.15
|
%
|
|
Other short-term borrowings
|
273,452
|
|
|
1,364
|
|
|
0.66
|
%
|
|
113,845
|
|
|
1,983
|
|
|
2.30
|
%
|
|
Long-term borrowings
|
257,265
|
|
|
9,486
|
|
|
4.84
|
%
|
|
217,458
|
|
|
8,937
|
|
|
5.42
|
%
|
|
Total interest bearing liabilities
|
6,298,912
|
|
|
55,162
|
|
|
1.17
|
%
|
|
5,245,645
|
|
|
79,112
|
|
|
2.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand
|
2,519,867
|
|
|
|
|
|
|
2,183,412
|
|
|
|
|
|
|
Other liabilities
|
71,314
|
|
|
|
|
|
|
66,318
|
|
|
|
|
|
|
Total noninterest bearing liabilities
|
2,591,181
|
|
|
|
|
|
|
2,249,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
1,193,988
|
|
|
|
|
|
|
1,164,541
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
10,084,081
|
|
|
|
|
|
|
$
|
8,659,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
$
|
240,143
|
|
|
|
|
|
|
$
|
243,335
|
|
|
|
|
Net interest spread
|
|
|
|
|
2.85
|
%
|
|
|
|
|
|
3.12
|
%
|
|
Net interest margin
|
|
|
|
|
3.27
|
%
|
|
|
|
|
|
3.88
|
%
|
|
Cost of funds
|
|
|
|
|
0.75
|
%
|
|
|
|
|
|
1.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $16.1 million and $13.1 million for the nine months ended September 30, 2020 and 2019, respectively.
(2)Interest and fees on loans and investments exclude tax equivalent adjustments.
Provision for Credit Losses
The provision for credit losses represents the amount of expense charged to current earnings to fund the ACL on loans and the ACL on available for sale investment securities. The amount of the allowance for credit losses on loans is based on many factors that reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.
The provision for unfunded commitments is presented separately on the Statement of Income. This provision considers the probability that unfunded commitments will fund.
Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. Refer to additional detail regarding these forecasts in the “Discounted Cash Flow Method" section of Note 1 to the Consolidated Financial Statements.
The results of this process, in combination with conclusions of the Bank’s outside consultants’ review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under “Critical Accounting Policies” above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table on the next page which reflects activity in the allowance for credit losses.
During the three months ended September 30, 2020, the ACL on loans reflected $6.6 million in provision for credit losses attributable to the ACL for loans and $5.2 million in net charge-offs, which were attributable primarily to two large commercial real estate relationships totaling $4.9 million. The provision for credit losses on loans was $6.6 million for the three months ended September 30, 2020 as compared to $3.2 million for the same period in 2019. The higher provisioning in the third quarter of 2020, as compared to the third quarter of 2019, was primarily due to the implementation of the CECL accounting standard for credit loss allowances and the impact of COVID-19 on our actual and expected future credit losses. Net charge-offs of $5.2 million in the third quarter of 2020 represented an annualized 0.26% of average loans, excluding loans held for sale, as compared to $1.5 million, or an annualized 0.08% of average loans, excluding loans held for sale, in the third quarter of 2019.
During the nine months ended September 30, 2020, the ACL on loans reflected $40.7 million in provision for credit losses attributable to the ACL for loans, a day one CECL impact of $10.6 million charged to retained earnings, and $14.6 million in net charge-offs during the period. The provision for credit losses on loans was $40.7 million for the nine months ended September 30, 2020 as compared to $10.1 million for the same period in 2019. The higher provisioning for the nine months ended September 30, 2020, as compared to the same period in 2019, is primarily due to the implementation of CECL and the impact of COVID-19 on our actual and expected future credit losses. Net charge-offs of $14.6 million in the first nine months of 2020 represented an annualized 0.25% of average loans, excluding loans held for sale, as compared to $6.4 million, or an annualized 0.12% of average loans, excluding loans held for sale, in the first nine months of 2019.
As part of its comprehensive loan review process, internal loan and credit committees carefully evaluate loans that are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves.
The maintenance of a high quality loan portfolio, with an adequate allowance for credit losses, will continue to be a primary management objective for the Company.
The following table sets forth activity in the allowance for credit losses for the periods indicated (unaudited).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
(dollars in thousands)
|
|
2020
|
|
2019
|
|
Balance at beginning of period, prior to adoption of CECL
|
|
$
|
73,658
|
|
|
$
|
69,944
|
|
|
Impact of adopting CECL
|
|
10,614
|
|
|
—
|
|
|
Charge-offs:
|
|
|
|
|
|
Commercial
|
|
7,332
|
|
|
1,799
|
|
|
Income producing - commercial real estate
|
|
4,300
|
|
|
5,343
|
|
|
Owner occupied - commercial real estate
|
|
20
|
|
|
—
|
|
|
Real estate mortgage - residential
|
|
—
|
|
|
—
|
|
|
Construction - commercial and residential
|
|
2,947
|
|
|
—
|
|
|
Construction - C&I (owner occupied)
|
|
—
|
|
|
—
|
|
|
Home equity
|
|
92
|
|
|
—
|
|
|
Other consumer
|
|
—
|
|
|
2
|
|
|
Total charge-offs
|
|
14,691
|
|
|
7,144
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
Commercial
|
|
116
|
|
|
377
|
|
|
Income producing - commercial real estate
|
|
—
|
|
|
302
|
|
|
Owner occupied - commercial real estate
|
|
—
|
|
|
2
|
|
|
Real estate mortgage - residential
|
|
—
|
|
|
3
|
|
|
Construction - commercial and residential
|
|
—
|
|
|
52
|
|
|
Construction - C&I (owner occupied)
|
|
—
|
|
|
—
|
|
|
Home equity
|
|
—
|
|
|
—
|
|
|
Other consumer
|
|
20
|
|
|
38
|
|
|
Total recoveries
|
|
136
|
|
|
774
|
|
|
Net charge-offs
|
|
14,555
|
|
|
6,370
|
|
|
Provision for Credit Losses- Loans
|
|
40,498
|
|
|
10,146
|
|
|
Balance at end of period
|
|
$
|
110,215
|
|
|
$
|
73,720
|
|
|
|
|
|
|
|
|
Annualized ratio of net charge-offs during the period to average loans outstanding during the period
|
|
0.25
|
%
|
|
0.12
|
%
|
The following table reflects the allocation of the allowance for credit losses at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category. Balances as of September 30, 2020 are calculated under CECL whereas balances as of December 31, 2019 are calculated under GAAP applicable at that time, the incurred loss model.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
(dollars in thousands)
|
|
Amount
|
|
% (1)
|
|
Amount
|
|
% (1)
|
|
Commercial
|
|
$
|
27,224
|
|
|
25
|
%
|
|
$
|
18,169
|
|
|
20
|
%
|
|
PPP loans
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
Income producing - commercial real estate
|
|
55,440
|
|
|
49
|
%
|
|
28,527
|
|
|
50
|
%
|
|
Owner occupied - commercial real estate
|
|
13,090
|
|
|
12
|
%
|
|
5,598
|
|
|
13
|
%
|
|
Real estate mortgage - residential
|
|
1,871
|
|
|
2
|
%
|
|
1,352
|
|
|
1
|
%
|
|
Construction - commercial and residential
|
|
9,493
|
|
|
9
|
%
|
|
17,739
|
|
|
14
|
%
|
|
Construction - C&I (owner occupied)
|
|
2,048
|
|
|
2
|
%
|
|
1,533
|
|
|
1
|
%
|
|
Home equity
|
|
1,007
|
|
|
1
|
%
|
|
575
|
|
|
1
|
%
|
|
Other consumer
|
|
42
|
|
|
—
|
%
|
|
227
|
|
|
—
|
%
|
|
Total allowance
|
|
$
|
110,215
|
|
|
100
|
%
|
|
$
|
73,720
|
|
|
100
|
%
|
_______________________________________________
(1)Represents the percent of loans in each category to total loans.
Under the CECL standard and based on the January 1, 2020 effective date, the Company made an initial adjustment to the allowance for credit losses of $10.6 million along with $4.1 million to the reserve for unfunded commitments. This adjustment increased the ratio of the allowance to total loans to 1.12% at January 1, 2020 from 0.98% at December 31, 2019. Based on our ongoing risk analysis and modeling under the CECL allowance methodology, the Company further increased the allowance for loan losses to 1.23% as of March 31, 2020 and again to 1.36% as of June 30, 2020, which included the assessment of COVID-19 risks as of March 31, 2020 and as of June 30, 2020, respectively. Based on our ongoing risk analysis and modeling through September 30, 2020, under the CECL allowance methodology, the Company further increased the allowance for loan losses to 1.40% of total loans, which reflects COVID-19 risks assessments and an updated unemployment forecast for the Washington, D.C. metropolitan area.
Nonperforming Assets
As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, and nonaccrual loans, which includes the nonperforming portion of TDRs and OREO, totaled $63.0 million at September 30, 2020 representing 0.62% of total assets, as compared to $50.2 million of nonperforming assets, or 0.56% of total assets, at December 31, 2019.
At September 30, 2020, the Company had no accruing loans 90 days or more past due. Management remains attentive to early signs of deterioration in borrowers’ financial conditions and to taking the appropriate action to mitigate risk. Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.40% of total loans at September 30, 2020, is adequate to absorb expected credit losses within the loan portfolio at that date.
The updated CECL standard allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation. This can occur due to credit deterioration, increased collateral dependency or other factors leading to impairment. In particular, the Company individually evaluates loans on non-accrual and those identified as TDRs, though it may individually evaluate other loans or groups of loans as well if it determines they no longer share similar risk with their assigned segment. Reserves on individually assessed loans are determined by one of two methods: the fair value of collateral or the discounted cash flow. Fair value of collateral is used for loans determined to be collateral dependent, and the fair value represents the net realizable value of the collateral, adjusted for sales costs, commissions, senior liens, etc. Discounted cash flow is used on loans that are not collateral dependent where structural concessions have been made and continuing payments are expected. The continuing payments are discounted over the expected life at the loan’s original contract rate and include adjustments for risk of default.
Under the incurred loss methodology that the Company applied as of December 31, 2019 nonperforming assets included loans that the Company considered to be impaired. Impaired loans were defined as those as to which we believed it was probable that we would not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms had been modified in a TDR that had not shown a period of performance as required under applicable accounting standards. Valuation allowances for those loans determined to be impaired were evaluated in accordance with ASC Topic 310—“Receivables,” and updated quarterly. For collateral dependent impaired loans, the carrying amount of the loan was determined by current appraised value less estimated costs to sell the underlying collateral, which may have been adjusted downward under certain circumstances for actual events and/or changes in market conditions. For example, current average actual selling prices less average actual closing costs on an impaired multi-unit real estate project may have indicated the need for an adjustment in the appraised valuation of the project, which in turn could increase the associated ASC Topic 310 specific reserve for the loan. Generally, all appraisals associated with impaired loans were updated on a not less than annual basis.
Loans are considered to have been modified in a TDR when, due to a borrower's financial difficulties, the Company makes unilateral concessions to the borrower that it would not otherwise consider. Concessions could include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Alternatively, management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions, and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant. Such modifications are not considered to be TDRs, as the accommodation of a borrower's request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty. For example: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business that suggests a temporary interest-only period on an amortizing loan; (2) there may be delays in absorption on a real estate project that reasonably suggests extension of the loan maturity at market terms; or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing. The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the change in terms, and the exercise of prudent business judgment. The Company had 11 TDRs at September 30, 2020 totaling approximately $19.4 million. four of these loans totaling approximately $8.9 million are performing under their modified terms. For the first nine months of 2020, there were two performing TDR loans totaling $6.3 million that defaulted on their modified terms. For the first nine months of 2019, there was one performing TDR loan totaling $2.3 million that defaulted on its modified terms. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. For both the three months ended September 30, 2020 and 2019, there were no loans modified in a TDR. There is uncertainty regarding the region’s overall economic outlook given lack of clarity over how long COVID-19 will continue to impact our region. Management has been working with customers on payment deferrals to assist companies in managing through this crisis. These deferrals amounted to 321 notes and $851 million at September 30, 2020 (approximately 10.8% of total loans). Through September 30, 2020, we granted approximately 740 temporary modifications representing approximately $1.6 billion in outstanding balances, including 419 temporary modifications representing $787 million that have or are expected to return to pre-modification terms. We have also granted second deferrals totaling $665 million on 118 notes as of September 30, 2020. Some of these deferrals may have met the criteria for treatment under GAAP as TDRs. Additionally, none of the deferrals are reflected in the Company’s asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the GAAP requirements to treat such short-term loan modifications as TDRs. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board. Other loan portfolio areas of concern and additional COVID-19 loan related matters are discussed below.
The following table details the deferrals discussed above as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry/Collateral Type
|
|
Number of Notes
|
|
Total Outstanding (in millions)
|
|
Deferred Note Count
|
|
Total Deferred Outstanding (in millions)
|
|
Percentage Outstanding Deferred
|
|
Weighted Avg LTV of RE Collateral
|
|
Average Loan Size (in millions)
|
|
Hotels
|
|
43
|
|
$
|
532
|
|
|
17
|
|
$
|
387
|
|
|
72.7
|
%
|
|
60
|
%
|
|
$
|
22.8
|
|
|
Transportation & Warehousing
|
|
66
|
|
$
|
173
|
|
|
34
|
|
$
|
134
|
|
|
77.5
|
%
|
|
65
|
%
|
|
$
|
3.9
|
|
|
Restaurants
|
|
427
|
|
$
|
274
|
|
|
127
|
|
$
|
115
|
|
|
42.0
|
%
|
|
61
|
%
|
|
$
|
0.9
|
|
|
Retail
|
|
319
|
|
$
|
475
|
|
|
17
|
|
$
|
73
|
|
|
15.4
|
%
|
|
69
|
%
|
|
$
|
4.3
|
|
|
Other Real Estate
|
|
919
|
|
$
|
3,752
|
|
|
21
|
|
$
|
34
|
|
|
0.9
|
%
|
|
47
|
%
|
|
$
|
1.6
|
|
|
Healthcare
|
|
196
|
|
$
|
249
|
|
|
8
|
|
$
|
28
|
|
|
11.2
|
%
|
|
67
|
%
|
|
$
|
3.5
|
|
|
Art/Entertainment/Recreation
|
|
65
|
|
$
|
138
|
|
|
8
|
|
$
|
23
|
|
|
16.7
|
%
|
|
15
|
%
|
|
$
|
2.9
|
|
|
Other
|
|
2,992
|
|
|
$
|
2,287
|
|
|
89
|
|
$
|
57
|
|
|
2.5
|
%
|
|
60
|
%
|
|
$
|
0.6
|
|
|
Total
|
|
5,027
|
|
|
$
|
7,880
|
|
|
321
|
|
$
|
851
|
|
|
10.8
|
%
|
|
62
|
%
|
|
$
|
2.7
|
|
Total nonperforming loans amounted to $58.1 million at September 30, 2020 (0.74% of total loans) compared to $48.7 million at December 31, 2019 (0.65% of total loans).
Included in nonperforming assets at September 30, 2020 was $5.0 million of OREO consisting of four foreclosed properties. This compared to $1.5 million of OREO, consisting of three foreclosed properties at December 31, 2019. The increase was due to a foreclosure involving an ultra high-end residential property located in Washington, D.C. The Company is continuing to see softness in the market for ultra high-end residential properties. This is particularly true in light of COVID-19 and the related limitations in marketing residential properties.
The Company had three foreclosed properties with a net carrying value of $1.5 million at September 30, 2019. OREO properties are carried at fair value less estimated costs to sell. It is the Company's policy to obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties generally not less frequently than annually. Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. There was one sale of an OREO property during the first nine months of 2020 and no sales during the first nine months of 2019.
The following table shows the amounts of nonperforming assets at the dates indicated (unaudited for September 30, 2020).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Nonaccrual Loans:
|
|
|
|
|
|
Commercial
|
|
$
|
15,836
|
|
|
$
|
14,928
|
|
|
Income producing - commercial real estate
|
|
20,068
|
|
|
9,711
|
|
|
Owner occupied - commercial real estate
|
|
14,178
|
|
|
6,463
|
|
|
Real estate mortgage - residential
|
|
5,587
|
|
|
5,631
|
|
|
Construction - commercial and residential
|
|
2,274
|
|
|
11,509
|
|
|
Construction - C&I (owner occupied)
|
|
—
|
|
|
—
|
|
|
Home equity
|
|
109
|
|
|
487
|
|
|
Loans held for sale
|
|
—
|
|
|
—
|
|
|
Other consumer
|
|
8
|
|
|
—
|
|
|
Accruing loans-past due 90 days
|
|
—
|
|
|
—
|
|
|
Total nonperforming loans (1)
|
|
58,060
|
|
|
48,729
|
|
|
Other real estate owned
|
|
4,987
|
|
|
1,487
|
|
|
Total nonperforming assets
|
|
$
|
63,047
|
|
|
$
|
50,216
|
|
|
|
|
|
|
|
|
Coverage ratio, allowance for credit losses to total nonperforming loans
|
|
189.83
|
%
|
|
151.16
|
%
|
|
Ratio of nonperforming loans to total loans
|
|
0.74
|
%
|
|
0.65
|
%
|
|
Ratio of nonperforming assets to total assets
|
|
0.62
|
%
|
|
0.56
|
%
|
________________________________________________________
(1)Nonaccrual loans reported in the table above include two loans totaling $6.3 million that migrated from a performing TDR during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019 when there was one loan totaling $2.3 million that migrated from a performing TDR.
Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio.
At September 30, 2020, there were $24.9 million of performing loans considered to be potential problem loans, defined as loans that are not included in the 90 days past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. Potential problem loans increased to $24.9 million at September 30, 2020 from $20.0 million at December 31, 2019. The Company has taken a conservative posture with respect to risk rating its loan portfolio. Based upon their status as potential problem loans, these loans receive heightened scrutiny and ongoing intensive risk management.
Noninterest Income
Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from bank owned life insurance (“BOLI”) and other income.
Total noninterest income for the three months ended September 30, 2020 increased to $17.8 million from $6.3 million for the three months ended September 30, 2019, a 183% increase. Gain on sale of loans for the three months ended September 30, 2020 increased to $12.2 million from $2.6 million for the three months ended September 30, 2019, a 377% increase, due to higher gains on the sale of residential mortgage loans ($9.5 million) and an accounting adjustment, as further discussed below. Owing to the historically low interest rate environment and refinance activity, residential mortgage loan locked commitments were $593.0 million for the third quarter of 2020 as compared to $282.1 million for the third quarter of 2019. Partially offsetting these increases were service charges on deposits for the three months ended September 30, 2020 decreased to $1.1 million from $1.5 million for the three months ended September 30, 2019, a 29% decrease, due to lesser insufficient funds fees.
The decision whether to sell residential mortgage loans on a mandatory or best efforts lock basis is a function of multiple factors, including but not limited to overall market volumes of mortgage loan originations, forecasted “pull -through” rates of origination, loan underwriting and closing operational considerations, pricing differentials between the two methods, and availability and pricing of various interest rate hedging strategies associated with the mortgage origination pipeline. The Company continually monitors these factors to maximize profitability and minimize operational and interest rate risks.
As a result of elevated origination volumes and market dislocations associated with the current COVID-19 pandemic, beginning in the second quarter of 2020, and continuing through the third quarter of 2020, the Company began to shift its pipeline strategy towards a best efforts lock basis, and for the three months ended September 30, 2020 our residential mortgage loans have been sold almost entirely on a best efforts basis.
Prior to the third quarter, revenue associated with residential real estate best efforts loans was recognized at closing. In connection with this shift in pipeline strategy from mandatory to best efforts, beginning in the third quarter of 2020, the Company, adjusted its accounting treatment of loans sold on a best efforts basis which accelerated revenue recognition associated with the pipeline to when the loans are committed, in order be accordance with GAAP. The change reflects the timely recognition of non-interest income associated with the gains and fees attributable to the best efforts sale and aligns the accounting treatment of best efforts with the accounting treatment of loans sold on a mandatory basis. Under the adjustment to the accounting for best efforts implemented in the third quarter of 2020, the Company recognized an additional $1.6 million in noninterest income associated with the residential mortgage operations. Had the company utilized the adjusted accounting method for best efforts in prior quarters, non-interest income would have been higher by an immaterial amount in those quarters.
Other income for the three months ended September 30, 2020 increased to $4.0 million from $1.7 million for the three months ended September 30, 2019, a 141% increase, primarily due to a $1.2 million gain on the sale of an OREO property and $912 thousand higher gains associated with the origination, securitization, sale and servicing of FHA loans. Gain on sale of investment securities were $115 thousand for the three months ended September 30, 2020 compared to $153 thousand for the same period in 2019.
Total noninterest income for the nine months ended September 30, 2020 increased to $35.8 million from $19.0 million for the nine months ended September 30, 2019, an 89% increase. Gain on sale of loans for the nine months ended September 30, 2020 increased to $16.2 million from $5.9 million for the nine months ended September 30, 2019, a 177% increase, due to higher gains on the sale of residential mortgage loans ($10.3 million). Owing to the historically low interest rate environment, refinance activity and the adjustment to the accounting described above, residential mortgage loan locked commitments were $1.4 billion for the first nine months ended September 30, 2020 as compared to $674.2 million for the first nine months of 2019. Residential lending gains for the first nine months of 2020 include the $1.6 million change in accounting treatment discussed above and $2.6 million in hedge and mark to market losses incurred during the first quarter of 2020 attributable to the Federal Reserve’s market actions negatively impacting mortgage backed securities pricing combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19 at the end of March 2020. Service charges on deposits for the nine months ended September 30, 2020 decreased to $3.4 million from $4.8 million for the nine months ended September 30, 2019, a 28% decrease, due to lesser insufficient funds fees.
Other income for the nine months ended September 30, 2020 increased to $12.8 million from $5.4 million for the nine months ended September 30, 2019, a 138% increase due substantially to $3.4 million higher gains associated with the origination, securitization, sale, and servicing of FHA loans, $1.4 million higher SBIC income, $1.2 million gain on the sale of an OREO property, $1.2 million higher swap fee income, and $703 thousand higher commitment fees, partially offset by less service charges on deposits of $1.4 million. Gains on sale of investment securities were $1.7 million and $1.6 million for the nine months ended September 30, 2020 and 2019, respectively.
Servicing agreements relating to the Ginnie Mae mortgage-backed securities program require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. The Company will generally recover funds advanced pursuant to these arrangements under the FHA insurance and guarantee program. However, in the interim, the Company must absorb the cost of the funds it advances during the time the advance is outstanding. The Company must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan. At September 30, 2020, the Company had no funds advanced outstanding under FHA mortgage loan servicing agreements. To the extent the mortgage loans underlying the Company’s servicing portfolio experience delinquencies, the Company would be required to dedicate cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.
The Company originates residential mortgage loans and, pending market conditions and other factors outlined above, may utilize either or both "mandatory delivery" and “best efforts” forward loan sale commitments to sell those loans, servicing released. Loans sold are subject to repurchase in circumstances where documentation is deficient, the underlying loan becomes delinquent, or there is fraud by the borrower. Loans sold are subject to penalty if the loan pays off within a specified period following loan funding and sale. The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under GAAP for possible repurchases. There were no repurchases due to fraud by the borrower during the three or nine months ended September 30, 2020. The reserve amounted to $169 thousand at September 30, 2020 and is included in other liabilities on the Consolidated Balance Sheets.
Beyond the participation in the PPP program, the Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium. There was $169 thousand of income from this source for the three months ended September 30, 2020 compared to $47 thousand for the same period in 2019. Income from this source was $288 thousand for the nine months ended September 30, 2020 compared to $171 thousand for the same period in 2019. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter. See "Note 1: Summary of Significant Accounting Policies" for details regarding the Company’s participation in the PPP program.
Noninterest Expense
Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional, FDIC insurance, and other expenses.
Total noninterest expenses totaled $36.9 million for the three months ended September 30, 2020, as compared to $33.5 million for the three months ended September 30, 2019, a 10% increase due substantially to higher FDIC fees and rent expense as discussed below. Total noninterest expenses totaled $109.2 million for the nine months ended September 30, 2020, as compared to $105.1 million for the nine months ended September 30, 2019, a 4% increase.
Salaries and employee benefits were $19.4 million for the three months ended September 30, 2020, as compared to $19.1 million for the same period in 2019, an increase of $293 thousand or 2%. The increase was primarily due to higher salaries and increased headcount in the third quarter of 2020, partially offset by lower share based compensation expenses. Salaries and employee benefits were $54.3 million for the nine months ended September 30, 2020, as compared to $60.5 million for the same period in 2019, a decrease of $6.2 million or 10%. The decrease was primarily due to the $6.2 million of largely nonrecurring charges accrued in the first quarter of 2019 related to share based compensation awards and the resignation of our former CEO and Chairman in March 2019, of which a portion was reversed in the second quarter of 2020. The decrease was partially offset by higher salaries attributable to merit increases and increased headcount in the first nine months of 2020.
At September 30, 2020, the Company’s full time equivalent staff numbered 515 as compared to 492 at December 31, 2019, and 482 at September 30, 2019.
Premises and equipment expenses amounted to $5.1 million and $3.5 million for the three months ended September 30, 2020 and 2019, respectively, a 46% increase. For the first nine months of September 30, 2020 and 2019 premises and equipment expenses amounted to $12.4 million and $11.0 million, respectively, a 13% increase. In accordance with ASC 842 on Leases, a $1.7 million adjustment to rent expense was recorded during the third quarter as our internal review process identified a lease extension that was not originally recorded in the lease balances reflected in the Statement of Condition upon implementation of the new lease accounting standard.
Marketing and advertising expenses totaled $928 thousand for the three months ended September 30, 2020 and $1.2 million for the same period in 2019. Marketing and advertising expenses totaled $3.1 million for the nine months ended September 30, 2020 and $3.6 million for the same period in 2019. The decrease for the nine months was due to repurposing of marketing initiatives due to COVID-19, which resulted in a cutback of print, digital and radio advertising, as well as, a reduction in event-related sponsorships due to cancellations and virtual modifications to the event structures.
Data processing expense increased to $2.7 million for the three months ended September 30, 2020 from $2.2 million for the same period in 2019, a 24% increase related to an increase in licensing fees. Data processing expense increased to $8.0 million for the nine months ended September 30, 2020 from $7.2 million for the same period in 2019, a 11% increase. The nine month increase was a result of an increase in licensing fees and network expenses.
Legal, accounting and professional fees decreased $528 thousand for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, as the Bank recognized receivables on legal expenditures associated with insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies. The Bank does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time. Legal fees and expenditures of $957 thousand for the third quarter of 2020 were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit. Legal, accounting and professional fees increased $6.0 million to $14.1 million for the nine months ended September 30, 2020 compared to $8.0 million for the nine months ended September 30, 2019, primarily as a result of the previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit, where we filed a motion to dismiss on April 2, 2020. Briefing on our motion is now complete and is under consideration by the court. The amount of legal fees and expenditures for the year is net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies but does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time. See Part II, Item 1 for more information.
FDIC expenses were $2.2 million for the three months ended September 30, 2020 compared to $85 thousand for the same period in 2019, a 2,432% increase. FDIC expenses were $5.6 million for the nine months ended September 30, 2020 compared to $2.3 million for the same period in 2019, a 139% increase. The increases for both the three and nine months periods in 2020 compared to the same periods in 2019 were due to a nonrecurring $1.1 million regulatory credit in the third quarter of 2019 and a higher assessment base resulting from growth in total assets.
The major components of other expenses include broker fees, franchise taxes, core deposit intangible amortization and insurance expense. Other expenses decreased to $3.5 million for the three months ended September 30, 2020 from $3.8 million for the same period in 2019, a 7% decrease. Other expenses decreased to $11.8 million for the nine months ended September 30, 2020 from $12.5 million for the same period in 2019, a 6% decrease, primarily due to $2.3 million lower broker fees, offset by $931 thousand higher OREO property tax expense on a single relationship, and $378 thousand higher franchise taxes.
The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 38.10% for the third quarter of 2020, as compared to 38.34% for the third quarter of 2019. For the first nine months of 2020, the efficiency ratio was 39.56% as compared to 40.08% for the same period in 2019.
As a percentage of average assets, total noninterest expense (annualized) was 1.41% for the three months ended September 30, 2020 as compared to 1.50% for the same period in 2019. As a percentage of average assets, total noninterest expense (annualized) was 1.44% for the nine months ended September 30, 2020 as compared to 1.62% for the same period in 2019.
Income Tax Expense
The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) for the third quarter of 2020 was 25.4% as compared to 27.9% for the third quarter of 2019. The decrease was due to disallowed compensation deductions in respect of compensation for key executives in 2020, as well as, additional tax credits in 2020 compared to 2019. On an interim basis, tax expense is recorded using an annual forecasted effective tax rate. The forecasted rate for 2020 is lower than 2019 as a result of lower pre-tax income due to increased credit reserves significantly attributable to COVID-19 along with the impact of the reduction in permanent differences and increased tax credits. As a result, the annual effective tax rate recorded on an interim basis declined.
The Company's effective tax rate for the nine months ended September 30, 2020 was 25.4% as compared to 26.9% for the nine months ended September 30, 2019. The decrease in the effective tax rate was mainly attributable to a decrease in disallowed compensation deductions in respect of compensation for key executives, mainly related to the compensation of our former CEO and Chairman who resigned in March 2019 as well as additional tax credits in 2020 as compared to 2019. On an interim basis tax expense is recorded using an annual forecasted effective tax rate. The forecasted rate for 2020 is lower than 2019 as result of lower pre-tax income due to increased credit reserves significantly attributable to COVID-19 along with the impact of the reduction in permanent differences and increased tax credits. As a result, the annual effective tax rate on an interim basis declined.
FINANCIAL CONDITION
Summary
Total assets at September 30, 2020 were $10.1 billion, a 12.4% increase as compared to $9.0 billion at December 31, 2019. Total loans (excluding loans held for sale) were $7.9 billion at September 30, 2020, a 4.4% increase as compared to $7.6 billion at December 31, 2019, primarily due to PPP loans, which represented $456.1 million of total loans at the end of third quarter. Loans held for sale amounted to $79.1 million at September 30, 2020 and $56.7 million at December 31, 2019, a 39.5% increase. The investment portfolio totaled $977.6 million at September 30, 2020. As compared to December 31, 2019, the investment portfolio at September 30, 2020 increased by $134.2 million, or 15.9%, primarily due to the deployment of deposit inflows in to higher yielding assets.
Total deposits at September 30, 2020 were $8.2 billion, a 13.2% increase compared to deposits of $7.22 billion at December 31, 2019. We continue to work on expanding the breadth and depth of our existing relationships while we pursue building new relationships. Total borrowed funds (excluding customer repurchase agreements) were $568.0 million at September 30, 2020, as compared to $467.7 million at December 31, 2019.
Total shareholders’ equity was $1.22 billion and $1.19 billion September 30, 2020 and December 31, 2019, respectively. During the nine months ended September 30, 2020, growth in retained earnings, $11.3 million in unrealized gains on AFS securities (net of taxes), and $3.9 million in additional paid in capital attributable to share based compensation, were partially offset by $44.2 million in stock repurchases, dividends declared of $21.3 million, and the day one CECL entry of $10.9 million net of taxes.
The Company’s capital ratios remain substantially in excess of regulatory minimum and buffer requirements, with a total risk based capital ratio of 16.72% at September 30, 2020, as compared to 16.20% at December 31, 2019, both common equity tier 1 (“CET1”) risk based capital and tier 1 risk based capital ratios of 13.19% at September 30, 2020, as compared to 12.87% at December 31, 2019, and a tier 1 leverage ratio of 10.82% at September 30, 2020, as compared to 11.62% at December 31, 2019. The ratio of common equity to total assets was 12.11% at September 30, 2020, as compared to 13.25% at December 31, 2019. Book value per share was $37.96 at September 30, 2020, a 6% increase over $35.82 at December 31, 2019. In addition, the tangible common equity ratio was 11.18% at September 30, 2020, as compared to 12.22% at December 31, 2019. Tangible book value per share was $34.70 at September 30, 2020, a 6% increase over $32.67 at December 31, 2019. Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
While the Company’s capital position remains above regulatory well-capitalized levels, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19 just following the outbreak, the Board decided to place the Company’s remaining authorization to repurchase shares on hold during the first quarter of 2020. Accordingly, no shares were repurchased in the second and third quarters of 2020, although the Company’s Board of Directors approved lifting the suspension of the Company’s share repurchase program in the third quarter of 2020. The Board of Directors has authorized management through the current share repurchase program to continue to evaluate opportunities for share repurchases.
Under the capital rules applicable to the Company and Bank, in order to be considered well-capitalized, the Bank must have a CET1 risk based capital ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. The Company and the Bank exceed all these requirements and satisfy the capital conservation buffer of 2.5% of CET1 capital required to engage in capital distribution. Failure to maintain the required capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.
Loans, net of amortized deferred fees and costs, at September 30, 2020 (unaudited) and December 31, 2019 by major category are summarized below.
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September 30, 2020
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December 31, 2019
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(dollars in thousands)
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Amount
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%
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Amount
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%
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Commercial
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$
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1,524,613
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19
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%
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$
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1,545,906
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20
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%
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PPP loans
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456,115
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6
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%
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—
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—
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%
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Income producing - commercial real estate
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3,724,839
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47
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%
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3,702,747
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50
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%
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Owner occupied - commercial real estate
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997,645
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13
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%
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985,409
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13
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%
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Real estate mortgage - residential
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82,385
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1
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%
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104,221
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1
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%
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Construction - commercial and residential
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879,144
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11
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%
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1,035,754
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14
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%
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Construction - C&I (owner occupied)
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140,357
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2
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%
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89,490
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1
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%
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Home equity
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72,648
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1
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%
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80,061
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1
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%
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Other consumer
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2,509
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—
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%
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2,160
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—
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%
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Total loans
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7,880,255
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100
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%
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7,545,748
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100
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%
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Less: allowance for credit losses
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(110,215)
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(73,658)
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Net loans (1)
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$
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7,770,040
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$
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7,472,090
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(1)Excludes accrued interest receivable of $43.7 million and $21.3 million at September 30, 2020 and December 31, 2019, respectively, which is recorded in other assets.
In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank. Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality.
Loans outstanding reached $7.9 billion at September 30, 2020, an increase of $334.5 million, or 4%, as compared to $7.6 billion at December 31, 2019. Loan growth during the nine months ended September 30, 2020 was predominantly in PPP loans. Despite a continued level of in-market competition for business, the Bank continued to experience organic loan production and modest portfolio growth, driven mostly by PPP loans. Notwithstanding increased supply of units, multi-family commercial real estate leasing in the Bank’s market area has held up well, particularly for well-located close-in projects. While as a general comment, there has been some softening in the Suburban Maryland office leasing market in certain well located pockets and submarkets. Overall, commercial real estate values have generally held up well with price escalation in prime pockets, but we continue to be cautious of the capitalization rates at which some assets are trading and we are being careful with valuations as a result. While the ultra high-end residential real estate market has softened, the moderately priced housing market has remained stable to increasing, with well-located, Metro accessible properties garnering a premium. However, the potential impact from COVID-19 has not yet been fully reflected in the market. Please refer to the COVID-19 risk factors in Item 1A below.
Loan Portfolio Exposures- COVID-19:
Industry areas of potential concern within the Loan Portfolio are presented below as of September 30, 2020 (unaudited):
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Industry
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Principal Balance
(in 000’s)
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% of Loan Portfolio
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Accommodation & Food Services
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$
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804,712
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(1)
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10.2
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%
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Retail Trade
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$
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99,202
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(2)
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1.3
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%
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1 Includes $81,983 of PPP loans.
2 Includes $13,561 of PPP loans.
Concerns over exposures to the Accommodation and Food Service industry and Retail Trade are the most immediate at this time. Accommodation and Food Service exposure represents 10.2% of the Bank’s loan portfolio as of September 30, 2020 among 331 customers. Retail Trade exposure represents 1.3% of the Bank’s loan portfolio and represented 155 customers. The Bank has ongoing extensive outreach to these customers and is assisting where necessary with PPP loans and payment deferrals or interest-only periods in the short term while customers work with the Bank to develop longer term stabilization strategies as the landscape of the COVID-19 pandemic evolves. The uncertain duration and severity of the pandemic will likely impact future credit challenges in these areas.
The table below is collateral-based and shows exposures on loans secured by commercial real estate (“CRE”) by property type as of September 30, 2020 (unaudited). This table excludes loans disclosed in the industry table above.
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Property Type
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Principal Balance (in 000’s)
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% of Loan
Portfolio
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Restaurant
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$
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46,710
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0.6
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%
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Hotel
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35,782
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0.5
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%
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Retail
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389,485
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4.9
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%
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Although not evidenced at September 30, 2020, it is anticipated that some portion of the CRE loans secured by the above property types could be impacted by the tenancies associated with impacted industries. The Bank is working with CRE investor borrowers and monitoring rent collections as part of our portfolio management oversight.
Deposits and Other Borrowings
The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, savings accounts and certificates of deposit. The deposit base includes transaction accounts, time and savings accounts, which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the Federal Home Loan Banks (the “FHLB”), federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and IntraFi Network, LLC (“IntraFi”).
For the nine months ended September 30, 2020, noninterest bearing deposits increased $319.7 million as compared to December 31, 2019, while interest bearing deposits increased by $634.7 million during the same period.
From time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from national brokerage networks, including IntraFi. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep product (“ICS”), which provide for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance. The Bank also is able to obtain one-way CDARS deposits and participates in IntraFi’s Insured Network Deposit (“IND”). At September 30, 2020, total deposits included $1.74 billion of brokered deposits (excluding the CDARS and ICS two-way) which represented 21% of total deposits. At December 31, 2019, total brokered deposits (excluding the CDARS and ICS two-way) were $1.80 billion, or 25% of total deposits. The CDARS and ICS two-way component represented $581.0 million, or 7%, of total deposits and $502.9 million, or 7%, of total deposits at September 30, 2020 and December 31, 2019, respectively. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank. However, to the extent that the condition, regulatory position or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits. In that event, we would be required to obtain alternate sources for funding.
At September 30, 2020, the Company had $2.4 billion in noninterest bearing demand deposits, representing 29% of total deposits, compared to $2.1 billion of noninterest bearing demand deposits at December 31, 2019, or 29% of total deposits. A portion of the growth in noninterest bearing demand deposits was the result of funding PPP loans into operating accounts at the Bank during the second quarter of 2020. Average noninterest bearing deposits of total deposits for the first nine months of 2020 and for the first nine months of 2019 were both 31%. The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets.
As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds that are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $24.3 million at September 30, 2020 compared to $31.0 million at December 31, 2019. Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S. agency securities and/or U.S. agency backed mortgage backed securities. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.
At September 30, 2020 the Company had $1.01 billion in time deposits. Time deposits decreased by $268.5 million from year end December 31, 2019. The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered certificates of deposits ("CDs") to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning.
The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at September 30, 2020 and December 31, 2019. At September 30, 2020, the Company had $300 million of FHLB advances borrowed as part of the overall asset liability strategy and to support loan growth, as compared to $250 million at December 31, 2019. Outstanding FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank’s commercial mortgage, residential mortgage and home equity loan portfolios.
Long-term borrowings outstanding at September 30, 2020 included the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024, and the Company’s July 26, 2016 issuance of $150.0 million of subordinated notes, due August 1, 2026. At September 30, 2020, the Company had $50 million of FHLB long-term advances borrowed as part of the overall asset liability strategy and to support loan growth. For additional information on the subordinated notes, please refer to Note 9 to the Consolidated Financial Statements included in this report.
Liquidity Management
Liquidity is a measure of the Company’s and Bank’s ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank’s primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. The Bank’s investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements and public funds, to generate cash from sales as needed to meet ongoing loan demand. These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial.
Additionally, the Bank can purchase up to $155 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at September 30, 2020, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.47 billion, against which there was nothing outstanding at September 30, 2020. The Bank also has a commitment from IntraFi to place up to $1 billion of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of $719.5 million at September 30, 2020. At September 30, 2020, the Bank was also eligible to make advances from the FHLB up to $1.3 billion based on loans pledged as collateral to the FHLB, of which there was $350 million outstanding at September 30, 2020. The Bank may enter into repurchase agreements as well as obtain additional borrowing capabilities from the FHLB, provided adequate collateral exists to secure these lending relationships. The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank of Richmond (“Federal Reserve Bank”). This facility, which amounts to approximately $621 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only.
The loss of deposits through disintermediation is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank was founded under a philosophy of relationship banking and, therefore, believes that it has less of an exposure to disintermediation and resultant liquidity concerns than do many banks. The Bank makes competitive deposit interest rate comparisons weekly and feels its interest rate offerings are competitive.
There is, however, a risk that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks’ lines of credit to offset a decline in deposits in the short run. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The Asset Liability Committee of the Bank (the “ALCO”) and the full Board of Directors of the Bank have adopted policy guidelines which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan. Additionally, as noted above, if the condition, regulatory treatment or reputation of the Company or Bank deteriorates, we may experience an outflow of brokered deposits as a result of our inability to attract them or to accept or renew them. In that event, we would be required to obtain alternate sources for funding.
Our primary and secondary sources of liquidity remain strong. Average deposits increased 1.3% for the third quarter of 2020 as compared to the second quarter of 2020. We maintain a very liquid investment portfolio, including significant overnight liquidity. Average short term liquidity was $1.3 billion in third quarter of 2020, which is above EagleBank’s average needs. Secondary sources of liquidity amount to $2.7 billion.
At September 30, 2020, under the Bank’s liquidity formula, it had $4.5 billion of primary and secondary liquidity sources. The amount is deemed adequate to meet current and projected funding needs.
Commitments and Contractual Obligations
Loan commitments outstanding and lines and letters of credit at September 30, 2020 are as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Unfunded loan commitments
|
|
$
|
2,207,862
|
|
|
Unfunded lines of credit
|
|
99,180
|
|
|
Letters of credit
|
|
70,087
|
|
|
Total
|
|
$
|
2,377,129
|
|
Unfunded loan commitments are agreements whereby the Bank has made a commitment and the borrower has accepted the commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment as is the case in asset based lending credit facilities. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. As of September 30, 2020, unfunded loan commitments included $410 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature. Average unfunded loan commitments declined in the third quarter 2020 from the previous seven quarters, from an average of $2.3 billion to just below $2.0 billion primarily attributable primarily to a decrease in unfunded commitments in accordance with CECL.
Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. The pipeline of loan commitments remains strong. The Bank did see additional draws on committed lines of credit during the second half of the first quarter which were largely paid back down in the second and third quarters.
Letters of credit include standby and commercial letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank’s customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary.
Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk
A fundamental risk in banking is exposure to market risk, or interest rate risk, since a bank’s net income is largely dependent on net interest income. The Bank’s ALCO formulates and monitors the management of interest rate risk through policies and guidelines established by it and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives.
During the nine months ended September 30, 2020, the Company was able to produce a net interest margin of 3.27% as compared to 3.88% during the same period in 2019, and continue to manage its overall interest rate risk position. The Company, along with many other banks, has been challenged in 2020 during a period of extremely low interest rates together with a relatively flat yield curve.
The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits. In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and risk in its portfolio of mortgage backed securities should interest rates remain at current levels. Further, the Company has been managing the investment portfolio to provide liquidity and some additional yield over cash. Additionally, the Company has limited call risk in its U.S. agency investment portfolio. During the three months ended September 30, 2020, the average investment portfolio balance increased by $165.1 million, or 22%, as compared to average balance for the three months ended September 30, 2019. The cash received from deposit growth along with cash flows from the investment portfolio were deployed into loans, the purchase of replacement investments and held in cash.
The percentage mix of municipal securities was 10% of total investments at September 30, 2020 and 9% at September 30, 2019. The portion of the portfolio invested in mortgage backed securities was 73% at both September 30, 2020 and 2019. The portion of the portfolio invested in U.S. agency investments was 7% at September 30, 2020 and 14% at September 30, 2019. Shorter duration floating rate corporate bonds were 1% of total investments both at September 30, 2020 and September 30, 2019, and SBA bonds, which are included in mortgage backed securities, were 8% and 10% of total investments at September 30, 2020 and September 30, 2019, respectively. The duration of the investment portfolio remained relatively consistent at 3.2 years at September 30, 2020 from 3.3 years at September 30, 2019.
The re-pricing duration of the loan portfolio was 19 months at September 30, 2020 as compared to 20 months at September 30, 2019 with fixed rate loans amounting to 45% of total loans at September 30, 2020 and 40% at September 30, 2019. Variable and adjustable rate loans comprised 55% (offset by 3% from the dilution impact of PPP loans) and 60% of total loans at September 30, 2020 and 2019, respectively. Variable rate loans are generally indexed to either the one month LIBOR interest rate, or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate.
The duration of the deposit portfolio increased to 44 months at September 30, 2020 from 39 months at June 30, 2020. The increase since June was due substantially to a change in the deposit mix and the duration of money market accounts as deposit competition waned with rates at all-time lows and the additions of some four and five year CDs at historically low rates.
The Company has continued its emphasis on funding loans in its marketplace, although demand for new loans during the COVID-19 pandemic has diminished. A disciplined approach to loan pricing, with variable and adjustable rate loans comprising 55% of total loans (offset by 3% from the dilution impact of PPP loans) at September 30, 2020, has resulted in a loan portfolio yield of 4.71% for the nine months ended September 30, 2020 as compared to 5.54% for the same period in 2019. Variable and adjustable rate loans provide additional income opportunities should interest rates rise from current levels.
The net unrealized gain before income tax on the investment portfolio was $20.9 million at September 30, 2020 as compared to a net unrealized gain before tax of $6.6 million at September 30, 2019. The increase in the net unrealized gain on the investment portfolio was due primarily to lower interest rates at September 30, 2020. At September 30, 2020, the net unrealized gain position represented 2.3% of the investment portfolio’s book value.
There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, as a result of competitive pressures, customer preferences and the inability to perfectly forecast future interest rates and movements.
One of the tools used by the Company to manage its interest rate risk is a static gap analysis presented below. The Company also employs an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related income statement effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities (including prepayments), loan prepayments, interest rates, and the level of noninterest income and noninterest expense. The data is then subjected to a “shock test” which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from September 30, 2020. In addition to analysis of simultaneous changes in interest rates along the yield curve, changes based on interest rate “ramps” is also performed. This analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes.
For the analysis presented below, at September 30, 2020, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor of 0 basis points and 10 basis points in the same analysis as of June 30, 2020 and March 31, 2020, respectively), and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario. The floor rate in the analysis was lowered due to the fact that in the current interest rate environment, there are interest bearing accounts with current rates less than 10 basis points.
The Company’s analysis at September 30, 2020 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points. This moderate impact is due substantially to the significant level of variable rate and repriceable assets and liabilities and related shorter relative durations. The repricing duration of the investment portfolio at September 30, 2020 is 3.2 years, the loan portfolio 1.6 years, the interest bearing deposit portfolio 3.6 years, and the borrowed funds portfolio 6.1 years.
The following table reflects the result of simulation analysis on the September 30, 2020 asset and liabilities balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in interest
rates (basis points)
|
|
Percentage change in net
interest income
|
|
Percentage change in
net income
|
|
Percentage change in
market value of portfolio
equity
|
|
+
|
400
|
|
16.3%
|
|
27.0%
|
|
9.8%
|
|
+
|
300
|
|
11.2%
|
|
18.5%
|
|
7.7%
|
|
+
|
200
|
|
6.0%
|
|
10.0%
|
|
5.5%
|
|
+
|
100
|
|
1.9%
|
|
3.2%
|
|
3.1%
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
-
|
100
|
|
(1.3)%
|
|
(2.2)%
|
|
(12.1)%
|
|
-
|
200
|
|
(2.0)%
|
|
(3.3)%
|
|
(20.2)%
|
The results of the simulation are within the relevant policy limits adopted by the Company for percentage change in net interest income. For net interest income, the Company has adopted a policy limit of -10% for a 100 basis point change, -12% for a 200 basis point change, -18% for a 300 basis point change and -24% for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change. The amounts in the third quarter exceeded these limits due to the already low level of rates on non-maturing deposit instruments. Management has determined that due to the level of market rates at September 30, 2020, interest rate shocks of -100, -200, -300 and -400 basis points leave the Bank with near zero down to negative rate instruments and are not considered practical or informative. The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at September 30, 2020 are not considered to be excessive. The impact of -1.3% in net interest income and -2.2% in net income given a 100 basis point decrease in market interest rates reflects in large measure the impact of variable rate loans and fed funds sold repricing downward while deposits remain at expected floor rates and are not expected to have lower interest rates.
In the third quarter of 2020, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above. The interest rate risk position at September 30, 2020, was relatively similar to the June 30, 2020 position for both the up and down rate scenarios.
Although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in modeling. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.
During the third quarter of 2020, average market interest rates decreased across the yield curve. Overall, there was a slight steepening of the yield curve as compared to the third quarter of 2019 with rate decreases being generally more significant at the shorter end of the yield curve.
As compared to the third quarter of 2019, the average two-year U.S. Treasury rate decreased by 155 basis points from 1.69% to 0.14%, the average five year U.S. Treasury rate decreased by 136 basis points from 1.63% to 0.27% and the average ten year U.S. Treasury rate decreased by 115 basis points from 1.80% to 0.65%. The Company’s net interest margin was 3.08% for the third quarter of 2020 and 3.72% in the third quarter of 2019. The Company believes that the net interest margin in the most recent quarter as compared to 2019’s third quarter has been consistent with its interest rate risk analysis.
Gap Position
Banks and other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities. This revenue represented 87% and 93% of the Company’s revenue for the third quarter of 2020 and 2019, respectively.
In falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by lower yielding short-term funds, or what is referred to as a negative mismatch or gap. Conversely, in a rising interest rate environment, net interest income is maximized with shorter term, higher yielding assets being funded by longer-term liabilities or what is referred to as a positive mismatch or gap.
The gap position, which is a measure of the difference in maturity and repricing volume between assets and liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indication of the sensitivity of the Company to changes in interest rates. A negative gap indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods.
At September 30, 2020, the Company had a positive gap position of approximately $425 million, or 4% of total assets, out to three months, and a positive cumulative gap position of $457 million, or 5% of total assets out to twelve months; as compared to a positive gap position of approximately $420 million or 5% of total assets out to three months and a positive cumulative gap position of $384 million of 4% of total assets out to 12 months at September 30, 2019. The change in the gap position at September 30, 2020 as compared to June 30, 2020 was due to term deposits moving into overnight deposits in the low and flat interest rate environment.. Such a change in gap position is not deemed material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis that captures the full optionality within the balance sheet. The current position is within guideline limits established by the ALCO. While management believes that this overall position creates a reasonable balance in managing its interest rate risk and maximizing its net interest margin within plan objectives, there can be no assurance as to actual results.
Management has carefully considered its strategy to maximize interest income by reviewing interest rate levels, economic indicators and call features within its investment portfolio, as well as interest rate floors within its loan portfolio. These factors have been discussed with the ALCO and management believes that current strategies remain appropriate to current economic and interest rate trends.
If interest rates increase by 100 basis points, the Company’s net interest income and net interest margin are expected to increase modestly due to the impact of significant volumes of variable rate assets more than offsetting the assumption of an increase in money market interest rates by 70% of the change in market interest rates.
If interest rates decline by 100 basis points, the Company’s net interest income and margin are expected to decline modestly as the impact of lower market rates on a large amount of liquid assets more than offsets the ability to lower interest rates on interest bearing liabilities.
Because competitive market behavior does not necessarily track the trend of interest rates but at times moves ahead of financial market influences, the change in the cost of liabilities may be different than anticipated by the gap model. If this were to occur, the effects of a declining interest rate environment may not be in accordance with management’s expectations.
GAP Analysis
September 30, 2020
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricible in:
|
|
0-3
months
|
|
4-12
months
|
|
13-36
months
|
|
37-60
months
|
|
Over 60
months
|
|
Total
Rate
Sensitive
|
|
Non Sensitive
|
|
Total
|
|
RATE SENSITIVE ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
207,873
|
|
|
$
|
103,032
|
|
|
$
|
202,216
|
|
|
$
|
152,709
|
|
|
$
|
311,740
|
|
|
$
|
977,570
|
|
|
|
|
|
|
Loans (1)(2)
|
|
3,973,982
|
|
|
818,269
|
|
|
1,543,850
|
|
|
873,128
|
|
|
750,110
|
|
|
7,959,339
|
|
|
|
|
|
|
Fed funds and other short-term investments
|
|
849,549
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
849,549
|
|
|
|
|
|
|
Other earning assets
|
|
76,326
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
76,326
|
|
|
|
|
|
|
Total
|
|
$
|
5,107,730
|
|
|
$
|
921,301
|
|
|
$
|
1,746,066
|
|
|
$
|
1,025,837
|
|
|
$
|
1,061,850
|
|
|
$
|
9,862,784
|
|
|
243,510
|
|
|
$
|
10,106,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE SENSITIVE LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand
|
|
$
|
85,494
|
|
|
$
|
237,819
|
|
|
$
|
516,240
|
|
|
$
|
380,872
|
|
|
$
|
1,163,683
|
|
|
$
|
2,384,108
|
|
|
|
|
|
|
Interest bearing transaction
|
|
823,607
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
823,607
|
|
|
|
|
|
|
Savings and money market
|
|
3,631,553
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
325,000
|
|
|
3,956,553
|
|
|
|
|
|
|
Time deposits
|
|
217,601
|
|
|
403,135
|
|
|
331,860
|
|
|
58,365
|
|
|
3,556
|
|
|
1,014,517
|
|
|
|
|
|
|
Customer repurchase agreements and fed funds purchased
|
|
24,293
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,293
|
|
|
|
|
|
|
Other borrowings
|
|
—
|
|
|
148,420
|
|
|
—
|
|
|
69,559
|
|
|
350,000
|
|
|
567,979
|
|
|
|
|
|
|
Total
|
|
$
|
4,782,548
|
|
|
$
|
789,374
|
|
|
$
|
848,100
|
|
|
$
|
508,796
|
|
|
$
|
1,842,239
|
|
|
$
|
8,771,057
|
|
|
111,835
|
|
|
$
|
8,882,892
|
|
|
GAP
|
|
$
|
325,182
|
|
|
$
|
131,927
|
|
|
$
|
897,966
|
|
|
$
|
517,041
|
|
|
$
|
(780,389)
|
|
|
$
|
1,091,727
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
325,182
|
|
|
$
|
457,109
|
|
|
$
|
1,355,075
|
|
|
$
|
1,872,116
|
|
|
$
|
1,091,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap as percent of total assets
|
|
3.22
|
%
|
|
4.52
|
%
|
|
13.41
|
%
|
|
18.52
|
%
|
|
10.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFF BALANCE-SHEET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps - LIBOR based
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Interest Rate Swaps - Fed Funds based
|
|
100,000
|
|
|
(100,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,000
|
|
|
$
|
(100,000)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
GAP
|
|
$
|
425,182
|
|
|
$
|
31,927
|
|
|
$
|
897,966
|
|
|
$
|
517,041
|
|
|
$
|
(780,389)
|
|
|
$
|
1,091,727
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
425,182
|
|
|
$
|
457,109
|
|
|
$
|
1,355,075
|
|
|
$
|
1,872,116
|
|
|
$
|
1,091,727
|
|
|
$
|
—
|
|
|
|
|
|
|
Cumulative gap as percent of total assets
|
|
4.21
|
%
|
|
4.52
|
%
|
|
13.41
|
%
|
|
18.52
|
%
|
|
10.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Includes loans held for sale
(2)Nonaccrual loans are included in the over 60 months category
Capital Resources and Adequacy
The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company’s current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.
The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At September 30, 2020, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represent 328% of total risk based capital. Construction, land and land development loans represent 100% of total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive Capital Plan and Policy, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.
The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.
The Board of Governors of the Federal Reserve Board and the FDIC have adopted rules (the “Basel III Rules”) implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the Basel III Rules, the Company and Bank are required to maintain, inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of 7.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%, a minimum total capital to risk-weighted assets ratio of 10.5%, and a minimum leverage ratio of 4.0%. At September 30, 2020, the Company and the Bank meet all these requirements, and satisfy the requirement to maintain a capital conservation buffer of 2.5% of CET1 capital for capital adequacy purposes.
During the fourth quarter of 2019, the Company extended the Repurchase Program. Under the Board approval in December, the Company may repurchase up to an aggregate of 1,641,000 shares of its common stock (inclusive of shares remaining under the initial authorization), through December 31, 2020, subject to earlier termination by the Board of Directors (the “Repurchase Program Extension”).
While the Company’s capital position remains well above regulatory well capitalized levels, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19, the Company’s remaining authorization to repurchase shares was put on hold during the first quarter of 2020 and there were no share repurchases in the second and third quarters of 2020. The Company’s Board of Directors approved lifting the suspension of the Company’s share repurchase program in the third quarter of 2020. The Board of Directors have authorized management through the current share repurchase program to continue to evaluate opportunities for share repurchases.
The Company announced a regular quarterly cash dividend on September 24, 2020 of $0.22 per share to shareholders of record on September 15, 2020 and payable on the first business day following October 31, 2020.
The actual capital amounts and ratios for the Company and Bank as of September 30, 2020 (unaudited) and December 31, 2019 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Bank
|
|
Minimum
Required For
Capital
|
|
To Be Well
Capitalized
Under Prompt
Corrective
|
|
|
|
Actual
|
|
Actual
|
|
Adequacy
|
|
Action
|
|
(dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Purposes
|
|
Regulations*
|
|
As of September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1 capital (to risk weighted assets)
|
|
$
|
1,121,616
|
|
|
13.19
|
%
|
|
$
|
1,290,062
|
|
|
15.19
|
%
|
|
7.00
|
%
|
|
6.50
|
%
|
|
Total capital (to risk weighted assets)
|
|
1,422,072
|
|
|
16.72
|
%
|
|
1,384,518
|
|
|
16.30
|
%
|
|
10.50
|
%
|
|
10.00
|
%
|
|
Tier 1 capital (to risk weighted assets)
|
|
1,121,616
|
|
|
13.19
|
%
|
|
1,290,062
|
|
|
15.19
|
%
|
|
8.50
|
%
|
|
8.00
|
%
|
|
Tier 1 capital (to average assets)
|
|
1,121,616
|
|
|
10.82
|
%
|
|
1,290,062
|
|
|
12.47
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1 capital (to risk weighted assets)
|
|
$
|
1,082,516
|
|
|
12.87
|
%
|
|
$
|
1,225,486
|
|
|
14.64
|
%
|
|
7.00
|
%
|
|
6.50
|
%
|
|
Total capital (to risk weighted assets)
|
|
1,362,253
|
|
|
16.20
|
%
|
|
1,299,223
|
|
|
15.52
|
%
|
|
10.50
|
%
|
|
10.00
|
%
|
|
Tier 1 capital (to risk weighted assets)
|
|
1,082,516
|
|
|
12.87
|
%
|
|
1,225,486
|
|
|
14.64
|
%
|
|
8.50
|
%
|
|
8.00
|
%
|
|
Tier 1 capital (to average assets)
|
|
1,082,516
|
|
|
11.62
|
%
|
|
1,225,486
|
|
|
13.18
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
* Applies to Bank only
Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At September 30, 2020 the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above.
In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020. In March 2020, the federal banking regulators issued an interim final rule that provides banking organizations with an alternative option to temporarily delay for two years the estimated impact of the adoption of the CECL methodology on regulatory capital, followed by the three-year phase-in period. The cumulative amount that is not recognized in regulatory capital will be phased in at 25 percent per year beginning January 1, 2022. We have elected to adopt the March 2020 interim final rule.
Use of Non-GAAP Financial Measures
The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP.
Tangible common equity to tangible assets (the "tangible common equity ratio"), tangible book value per common share, the annualized return on average tangible common equity, and efficiency ratio are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders' equity by common shares outstanding. The Company calculates the ROATCE by dividing net income available to common shareholders by average tangible common equity which is calculated by excluding the average balance of intangible assets from the average common shareholders’ equity. The Company calculates the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income. The efficiency ratio measures a bank’s overhead as a percentage of its revenue. The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions.
GAAP Reconciliation (Unaudited)
(dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2020
|
|
Nine Months Ended
September 30, 2020
|
|
Year Ended
December 31, 2019
|
|
Three Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
|
Common shareholders’ equity
|
|
|
$
|
1,223,402
|
|
|
$
|
1,190,681
|
|
|
|
|
$
|
1,184,594
|
|
|
Less: Intangible assets
|
|
|
(105,165)
|
|
|
(104,739)
|
|
|
|
|
(104,915)
|
|
|
Tangible common equity
|
|
|
$
|
1,118,237
|
|
|
$
|
1,085,942
|
|
|
|
|
$
|
1,079,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common share
|
|
|
$
|
37.96
|
|
|
$
|
35.82
|
|
|
|
|
$
|
35.13
|
|
|
Less: Intangible book value per common share
|
|
|
(3.26)
|
|
|
(3.15)
|
|
|
|
|
(3.11)
|
|
|
Tangible book value per common share
|
|
|
$
|
34.70
|
|
|
$
|
32.67
|
|
|
|
|
$
|
32.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$
|
10,106,294
|
|
|
$
|
8,988,719
|
|
|
|
|
$
|
9,003,467
|
|
|
Less: Intangible assets
|
|
|
(105,165)
|
|
|
(104,739)
|
|
|
|
|
(104,915)
|
|
|
Tangible assets
|
|
|
$
|
10,001,129
|
|
|
$
|
8,883,980
|
|
|
|
|
$
|
8,898,552
|
|
|
Tangible common equity ratio
|
|
|
11.18
|
%
|
|
12.22
|
%
|
|
|
|
12.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shareholders’ equity
|
$
|
1,137,826
|
|
|
$
|
1,193,988
|
|
|
$
|
1,172,051
|
|
|
$
|
1,197,513
|
|
|
$
|
1,164,542
|
|
|
Less: Average intangible assets
|
(105,106)
|
|
|
(104,826)
|
|
|
(105,167)
|
|
|
(105,034)
|
|
|
(105,297)
|
|
|
Average tangible common equity
|
$
|
1,032,720
|
|
|
$
|
1,089,162
|
|
|
$
|
1,066,884
|
|
|
$
|
1,092,479
|
|
|
$
|
1,059,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Available to Common Shareholders
|
$
|
41,346
|
|
|
$
|
93,325
|
|
|
$
|
142,943
|
|
|
$
|
36,495
|
|
|
$
|
107,487
|
|
|
Average tangible common equity
|
$
|
1,032,720
|
|
|
$
|
1,089,162
|
|
|
$
|
1,066,884
|
|
|
$
|
1,092,479
|
|
|
$
|
1,059,245
|
|
|
Annualized Return on Average Tangible Common Equity
|
15.93
|
%
|
|
11.45
|
%
|
|
13.40
|
%
|
|
13.25
|
%
|
|
13.57
|
%
|