Eagle Bancorp, Inc.
Consolidated Average Balances, Interest Yields and Rates (Unaudited)
(dollars in thousands)
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
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
|
|
$
|
210,476
|
|
|
$
|
480
|
|
|
|
0.46
|
%
|
|
$
|
317,494
|
|
|
$
|
376
|
|
|
|
0.24
|
%
|
Loans held for sale
(1)
|
|
|
38,179
|
|
|
|
701
|
|
|
|
3.67
|
%
|
|
|
49,670
|
|
|
|
914
|
|
|
|
3.68
|
%
|
Loans
(1) (2)
|
|
|
5,168,346
|
|
|
|
131,432
|
|
|
|
5.11
|
%
|
|
|
4,438,401
|
|
|
|
116,143
|
|
|
|
5.28
|
%
|
Investment securities available for sale
(2)
|
|
|
479,191
|
|
|
|
4,944
|
|
|
|
2.07
|
%
|
|
|
372,814
|
|
|
|
4,444
|
|
|
|
2.40
|
%
|
Federal funds sold
|
|
|
9,770
|
|
|
|
22
|
|
|
|
0.45
|
%
|
|
|
8,724
|
|
|
|
11
|
|
|
|
0.25
|
%
|
Total interest earning assets
|
|
|
5,905,962
|
|
|
|
137,579
|
|
|
|
4.68
|
%
|
|
|
5,187,103
|
|
|
|
121,888
|
|
|
|
4.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest earning assets
|
|
|
280,752
|
|
|
|
|
|
|
|
|
|
|
|
276,965
|
|
|
|
|
|
|
|
|
|
Less: allowance for credit losses
|
|
|
54,866
|
|
|
|
|
|
|
|
|
|
|
|
47,579
|
|
|
|
|
|
|
|
|
|
Total noninterest earning assets
|
|
|
225,886
|
|
|
|
|
|
|
|
|
|
|
|
229,386
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
6,131,848
|
|
|
|
|
|
|
|
|
|
|
$
|
5,416,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
|
|
$
|
216,916
|
|
|
$
|
252
|
|
|
|
0.23
|
%
|
|
$
|
165,737
|
|
|
$
|
110
|
|
|
|
0.13
|
%
|
Savings and money market
|
|
|
2,664,106
|
|
|
|
5,348
|
|
|
|
0.40
|
%
|
|
|
2,342,286
|
|
|
|
3,975
|
|
|
|
0.34
|
%
|
Time deposits
|
|
|
753,618
|
|
|
|
3,073
|
|
|
|
0.82
|
%
|
|
|
768,668
|
|
|
|
2,844
|
|
|
|
0.75
|
%
|
Total interest bearing deposits
|
|
|
3,634,640
|
|
|
|
8,673
|
|
|
|
0.48
|
%
|
|
|
3,276,691
|
|
|
|
6,929
|
|
|
|
0.43
|
%
|
Customer repurchase agreements
|
|
|
71,076
|
|
|
|
76
|
|
|
|
0.22
|
%
|
|
|
54,091
|
|
|
|
61
|
|
|
|
0.23
|
%
|
Other short-term borrowings
|
|
|
33,242
|
|
|
|
344
|
|
|
|
2.05
|
%
|
|
|
41,464
|
|
|
|
54
|
|
|
|
0.26
|
%
|
Long-term borrowings
|
|
|
68,954
|
|
|
|
2,074
|
|
|
|
5.95
|
%
|
|
|
92,657
|
|
|
|
2,563
|
|
|
|
5.50
|
%
|
Total interest bearing liabilities
|
|
|
3,807,912
|
|
|
|
11,167
|
|
|
|
0.59
|
%
|
|
|
3,464,903
|
|
|
|
9,607
|
|
|
|
0.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand
|
|
|
1,526,446
|
|
|
|
|
|
|
|
|
|
|
|
1,217,024
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
27,373
|
|
|
|
|
|
|
|
|
|
|
|
25,850
|
|
|
|
|
|
|
|
|
|
Total noninterest bearing liabilities
|
|
|
1,553,819
|
|
|
|
|
|
|
|
|
|
|
|
1,242,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
770,117
|
|
|
|
|
|
|
|
|
|
|
|
708,712
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
6,131,848
|
|
|
|
|
|
|
|
|
|
|
$
|
5,416,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
126,412
|
|
|
|
|
|
|
|
|
|
|
$
|
112,281
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
4.09
|
%
|
|
|
|
|
|
|
|
|
|
|
4.18
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
4.30
|
%
|
|
|
|
|
|
|
|
|
|
|
4.37
|
%
|
Cost of funds
|
|
|
|
|
|
|
|
|
|
|
0.38
|
%
|
|
|
|
|
|
|
|
|
|
|
0.37
|
%
|
(1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $7.5 million and $5.6 million
for the six months ended June 30, 2016 and 2015, 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 allowance for credit losses. The amount of the allowance for credit losses is based on many factors, which reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses, 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.
Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. This process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies. The results of this process, in combination with conclusions of the Bank’s outside loan review consultant, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under the caption “Critical Accounting Policies” 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.
During the first six months of 2016, the allowance for credit losses increased $3.8 million, reflecting $6.9 million in provision for credit losses and $3.1 million in net charge-offs during the period. The provision for credit losses was $6.9 million for the six months ended June 30, 2016 as compared to $6.8 million for the same period in 2015. At June 30, 2016, the allowance for credit losses represented 1.05% of loans outstanding, compared to 1.05% at December 31, 2015 and 1.07% at June 30, 2015. The slightly higher provisioning in the first six months of 2016, as compared to the first six months of 2015, is due to higher loan growth, as net loans increased $405.1 million during the first six months of 2016, as compared to an increase of $238.5 during the same period in 2015, and to overall improved asset quality. Net charge-offs of $3.1 million in the first six months of 2016 represented an annualized 0.12% of average loans, excluding loans held for sale, as compared to $3.9 million or an annualized 0.18% of average loans, excluding loans held for sale, in the first six months of 2015.
During the three months ended June 30, 2016, the allowance for credit losses increased $1.9 million, reflecting $3.9 million in provision for credit losses and $2.0 million in net charge-offs during the period. The provision for credit losses was $3.9 million for the three months ended June 30, 2016 as compared to $3.5 million for the same period in 2015. The slightly higher provisioning in the second quarter of 2016, as compared to the same period in 2015, is due to higher loan growth, as net loans increased $247.6 million during the second quarter of 2016, as compared to an increase of $106.0 during the same period in 2015, and to overall improved asset quality. Net charge-offs of $2.0 million for the second quarter of 2016 represented an annualized 0.15% of average loans, excluding loans held for sale, as compared to $3.5 million or an annualized 0.21% of average loans, excluding loans held for sale, in the same period in 2015.
As part of its comprehensive loan review process, the Bank’s Board of Directors and 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 maintenance of a high quality loan portfolio, with an adequate allowance for possible 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.
|
|
Six Months Ended June 30,
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
52,687
|
|
|
$
|
46,075
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,693
|
|
|
|
3,305
|
|
Income producing - commercial real estate
|
|
|
591
|
|
|
|
397
|
|
Owner occupied - commercial real estate
|
|
|
-
|
|
|
|
-
|
|
Real estate mortgage - residential
|
|
|
-
|
|
|
|
-
|
|
Construction - commercial and residential
|
|
|
-
|
|
|
|
-
|
|
Construction - C&I (owner occupied)
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
96
|
|
|
|
419
|
|
Other consumer
|
|
|
25
|
|
|
|
87
|
|
Total charge-offs
|
|
|
3,405
|
|
|
|
4,208
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
86
|
|
|
|
75
|
|
Income producing - commercial real estate
|
|
|
4
|
|
|
|
18
|
|
Owner occupied - commercial real estate
|
|
|
2
|
|
|
|
2
|
|
Real estate mortgage - residential
|
|
|
3
|
|
|
|
3
|
|
Construction - commercial and residential
|
|
|
204
|
|
|
|
104
|
|
Construction - C&I (owner occupied)
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
8
|
|
|
|
4
|
|
Other consumer
|
|
|
16
|
|
|
|
67
|
|
Total recoveries
|
|
|
323
|
|
|
|
273
|
|
Net charge-offs
|
|
|
3,082
|
|
|
|
3,935
|
|
Provision for Credit Losses
|
|
|
6,931
|
|
|
|
6,781
|
|
Balance at end of period
|
|
$
|
56,536
|
|
|
$
|
48,921
|
|
|
|
|
|
|
|
|
|
|
Annualized ratio of net charge-offs during the period to average loans outstanding during the period
|
|
|
0.12
|
%
|
|
|
0.18
|
%
|
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.
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
June 30, 2015
|
|
(dollars in thousands)
|
|
Amount
|
|
|
% (1)
|
|
|
Amount
|
|
|
% (1)
|
|
|
Amount
|
|
|
% (1)
|
|
Commercial
|
|
$
|
13,386
|
|
|
|
21
|
%
|
|
$
|
11,563
|
|
|
|
21
|
%
|
|
$
|
12,911
|
|
|
|
21
|
%
|
Income producing - commercial real estate
|
|
|
19,072
|
|
|
|
45
|
%
|
|
|
14,122
|
|
|
|
42
|
%
|
|
|
12,411
|
|
|
|
41
|
%
|
Owner occupied - commercial real estate
|
|
|
4,202
|
|
|
|
11
|
%
|
|
|
3,279
|
|
|
|
10
|
%
|
|
|
3,113
|
|
|
|
11
|
%
|
Real estate mortgage - residential
|
|
|
1,061
|
|
|
|
3
|
%
|
|
|
1,268
|
|
|
|
3
|
%
|
|
|
1,082
|
|
|
|
3
|
%
|
Construction - commercial and residential
|
|
|
15,226
|
|
|
|
16
|
%
|
|
|
20,133
|
|
|
|
20
|
%
|
|
|
16,634
|
|
|
|
20
|
%
|
Construction - C&I (owner occupied)
|
|
|
1,798
|
|
|
|
2
|
%
|
|
|
955
|
|
|
|
2
|
%
|
|
|
999
|
|
|
|
1
|
%
|
Home equity
|
|
|
1,556
|
|
|
|
2
|
%
|
|
|
1,292
|
|
|
|
2
|
%
|
|
|
1,496
|
|
|
|
3
|
%
|
Other consumer
|
|
|
235
|
|
|
|
-
|
|
|
|
75
|
|
|
|
-
|
|
|
|
275
|
|
|
|
-
|
|
Total allowance
|
|
$
|
56,536
|
|
|
|
100
|
%
|
|
$
|
52,687
|
|
|
|
100
|
%
|
|
$
|
48,921
|
|
|
|
100
|
%
|
(1) Represents the percent of loans in each category to total loans.
|
Nonperforming Assets
As shown in the table below, the Company’s level of nonperforming assets, which are comprised of loans delinquent 90 days or more, nonaccrual loans, which includes the nonperforming portion of troubled debt restructurings (“TDRs”) and other real estate owned, totaled $24.5 million at June 30, 2016 representing 0.39% of total assets, as compared to $19.1 million of nonperforming assets, or 0.31% of total assets, at December 31, 2015 and $25.6 million of nonperforming assets, or 0.44% of total assets, at June 30, 2015. The Company had no accruing loans 90 days or more past due at June 30, 2016, December 31, 2015 or June 30, 2015. 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 1.05% of total loans at June 30, 2016, is adequate to absorb potential credit losses within the loan portfolio at that date.
Included in nonperforming assets are loans that the Company considers to be impaired. Impaired loans are defined as those as to which we believe it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a TDR that have not shown a period of performance as required under applicable accounting standards. Valuation allowances for those loans determined to be impaired are evaluated in accordance with ASC Topic 310—“
Receivables,
” and updated quarterly. For collateral dependent impaired loans, the carrying amount of the loan is determined by current appraised value less estimated costs to sell the underlying collateral, which may be 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 indicate 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 are 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 which suggests a temporary interest only period on an amortizing loan; (2) there may be delays in absorption on a real estate project which 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 most common change in terms provided by the Company is an extension of an interest only term. 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 ten TDR’s at June 30, 2016 totaling approximately $12.5 million. Eight of these loans, totaling approximately $7.3 million, are performing under the modified terms, and as a result are not disclosed in the table below. During the first six months of 2016, there was one default on a $5.0 million restructured loan, as compared to the first six months of 2015, which had no defaults on restructured loans. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. There was one nonperforming TDR totaling $5.0 million reclassified to nonperforming loans during the six months ended June 30, 2016. There were no nonperforming TDRs reclassified to nonperforming loans during the six months ended June 30, 2015. 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. There were two loans totaling $590 thousand modified in a TDR during the three months ended June 30, 2016, as compared to the three months ended June 30, 2015 which had one loan modified in a TDR totaling $272 thousand.
Total nonperforming loans amounted to $21.4 million at June 30, 2016 (0.40% of total loans), compared to $13.2 million at December 31, 2015 (0.26% of total loans) and $14.9 million at June 30, 2015 (0.33% of total loans). The increase in the ratio of nonperforming loans to total loans at June 30, 2016 as compared to June 30, 2015 was due to an increase in the level of nonperforming loans.
Included in nonperforming assets at June 30, 2016 was $3.2 million of OREO, consisting of six foreclosed properties. The Company had eight foreclosed properties with a net carrying value of $5.9 million at December 31, 2015 and nine foreclosed properties with a net carrying value of $10.7 million at June 30, 2015. 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. During the first six months of 2016, two foreclosed property with a net carrying value of $2.5 million were sold for a net gain of $563 thousand. The decrease in OREO at June 30, 2016, is due to the sale of two OREO properties.
The following table shows the amounts of nonperforming assets at the dates indicated.
|
|
June 30,
|
|
|
December 31,
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Nonaccrual Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,775
|
|
|
$
|
9,684
|
|
|
$
|
4,940
|
|
Income producing - commercial real estate
|
|
|
10,234
|
|
|
|
2,062
|
|
|
|
5,961
|
|
Owner occupied - commercial real estate
|
|
|
1,261
|
|
|
|
1,297
|
|
|
|
1,268
|
|
Real estate mortgage - residential
|
|
|
576
|
|
|
|
338
|
|
|
|
329
|
|
Construction - commercial and residential
|
|
|
5,413
|
|
|
|
585
|
|
|
|
557
|
|
Construction - C&I (owner occupied)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
121
|
|
|
|
887
|
|
|
|
161
|
|
Other consumer
|
|
|
-
|
|
|
|
18
|
|
|
|
23
|
|
Accrual loans-past due 90 days
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total nonperforming loans (1)
|
|
|
21,380
|
|
|
|
14,871
|
|
|
|
13,239
|
|
Other real estate owned
|
|
|
3,152
|
|
|
|
10,715
|
|
|
|
5,852
|
|
Total nonperforming assets
|
|
$
|
24,532
|
|
|
$
|
25,586
|
|
|
$
|
19,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coverage ratio, allowance for credit losses to total nonperforming loans
|
|
|
264.44
|
%
|
|
|
328.98
|
%
|
|
|
397.95
|
%
|
Ratio of nonperforming loans to total loans
|
|
|
0.40
|
%
|
|
|
0.33
|
%
|
|
|
0.26
|
%
|
Ratio of nonperforming assets to total assets
|
|
|
0.39
|
%
|
|
|
0.44
|
%
|
|
|
0.31
|
%
|
(1)
|
Nonaccrual loans reported in the table above include loans that migrated from performing troubled debt restructuring. There was one loan totaling $5.0 million that migrated from performing TDR during the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, where there were no loans that migrated from 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 June 30, 2016, there were $11.5 million of performing loans considered potential problem loans, defined as loans that are not included in the 90 day 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. The $11.5 million in potential problem loans at June 30, 2016 compared to $18.6 million at December 31, 2015, and $26.4 million at June 30, 2015. 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. Additionally, the Company's loan loss allowance methodology incorporates increased reserve factors for certain loans considered potential problem loans as compared to the general portfolio. See “Provision for Credit Losses” for a description of the allowance methodology.
Noninterest Income
Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, loss on extinguishment of debt, income from BOLI and other income.
Total noninterest income for the six months ended June 30, 2016 was $13.9 million as compared to $14.0 million for the six months ended June 30, 2015, a 1% decrease. This decrease was primarily due to a decline of $2.1 million in gains on the sale of residential mortgage loans due to lower origination and sales volume, a $926 thousand increase in other income, an increase of $723 thousand in gains on SBA loan sales, and an increase of $256 thousand in service charges on deposits. Residential mortgage loans closed were $345.8 million for the first six months of 2016 versus $548.9 million for the first six months of 2015. Net investment gains were $1.1 million for the six months ended June 30, 2016 compared to $2.2 million for the same period in 2015. The Company recognized a $1.1 million loss on the early extinguishment of debt during March 2015 due to the early payoff of FHLB advances; however, no such losses were recognized during the first six months of 2016. Excluding investment securities gains and the related loss on early extinguishment of debt, total noninterest income was $12.7 million for the six months ended June 30, 2016, as compared to $13.0 million for the same period in 2015, a 2% decrease.
Total noninterest income for the three months ended June 30, 2016 increased to $7.6 million from $6.2 million for the three months ended June 30, 2015, a 22% increase. This increase was primarily due to an increase of $820 thousand in gains on the sale of SBA loans, an increase in gains realized on the sale of investment securities of $498 thousand, and an increase in service charges on deposits of $141 thousand. There was a small decline in gains on sales of residential mortgages of $122 thousand. Residential mortgage loans closed were $213.8 million for the second quarter in 2016 versus $264.2 million for the second quarter of 2015. Net investment gains were $498 thousand for the three months ended June 30, 2016. There were no net investment gains for the three months ended June 30, 2015. Excluding gains on sales of investment securities in the second quarter of 2016, noninterest income was $7.1 million in the second quarter of 2016 as compared to $6.2 million for the second quarter of 2015, an increase of 14%.
For the six months ended June 30, 2016, service charges on deposit accounts increased by $256 thousand to $2.9 million from $2.6 million in the same period in 2015, an increase of 10%. For the three months ended June 30, 2016, service charges on deposit accounts increased by $141 thousand to $1.4 million from $1.3 million in the same period in 2015, an increase of 11%. The increase for the six and three month periods was primarily related to increased transaction volume.
The Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to sell those loans, servicing released. Sales of these mortgage loans yielded gains of $4.1 million for the six months ended June 30, 2016 compared to $6.3 million in the same period in 2015.
Sales of residential mortgage loans yielded gains of $2.9 million for the three months ended June 30, 2016 compared to $3.0 million in the same period in 2015. Loans sold are subject to repurchase in circumstances where documentation is deficient or the underlying loan becomes delinquent or 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 generally accepted accounting principles for possible repurchases. There were no repurchases due to fraud by the borrower during the six months ended June 30, 2016. The reserve amounted to $85 thousand at June 30, 2016 and is included in other liabilities on the Consolidated Balance Sheets. The Bank does not originate “sub-prime” loans and has no exposure to this market segment.
The Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium. Income from this source was $1.3 million and $1.1 million for the six and three months ended June 30, 2016 compared to $587 thousand and $247 thousand for the six and three month periods in 2015. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter.
Net investment gains were $1.1 million for the six months ended June 30, 2016 compared to $2.2 million for the same period in 2015. A $1.1 million loss on the early extinguishment of debt was recorded in March of 2015 due to the early payoff of FHLB advances. This decision was made in light of deposit growth in the quarter and expected benefits to the cost of funds going forward.
Other income totaled $3.6 million for the six months ended June 30, 2016 as compared to $2.7 million for the same period in 2015, an increase of 34% due primarily to a $573 thousand gain on the sale of one OREO property. ATM fees increased to $752 thousand for the six months ended June 30, 2016 from $644 thousand for the same period in 2015, a 17% increase. Noninterest loan fees decreased to $1.5 million for the six months ended June 30, 2016 from $1.6 million for the same period in 2015, a 4% decrease. Noninterest fee income increased to $701 thousand for the six months ended June 30, 2016 from $336 thousand for the same period in 2015, a 108% increase.
Other income remained relatively stable at $1.3 million for the three months ended June 30, 2016 and the same period in 2015, an increase of 2%. ATM fees increased to $388 thousand for the three months ended June 30, 2016 from $350 thousand for the same period in 2015, an 11% increase. Noninterest loan fees decreased to $667 thousand for the three months ended June 30, 2016 from $891 thousand for the same period in 2015, a 25% decrease. Noninterest fee income totaled $157 thousand for the three months ended June 30, 2016 an increase of $226 thousand, or 328%, over the balance for the same period in 2015.
Noninterest Expense
Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, FDIC insurance, merger expenses, and other expenses.
Total noninterest expenses totaled $56.4 million for the six months ended June 30, 2016, as compared to $54.7 million for the six months ended June 30, 2015. Total noninterest expenses totaled $28.3 million for the three months ended June 30, 2016, as compared to $26.6 million for the three months ended June 30, 2015.
Salaries and employee benefits were $32.0 million for the six months ended June 30, 2016, as compared to $30.4 million for 2015, a 5% increase. Salaries and employee benefits were $15.9 million for the three months ended June 30, 2016, as compared to $14.7 million for 2015, an 8% increase. Cost increases for both the six and three month periods for salaries and benefits were due primarily to increased staff, merit increases and incentive compensation. At June 30, 2016, the Company’s full time equivalent staff numbered 470, as compared to 434 at December 31, 2015 and 447 at June 30, 2015.
Premises and equipment expenses amounted to $7.6 million for the six months ended June 30, 2016 as compared to $8.1 million for the same period in 2015, a 6% decrease. Premises and equipment expenses amounted to $3.8 million for the three months ended June 30, 2016 as compared to $4.1 million for the same period in 2015, a 7% decrease. For the six month period, premises and equipment expenses were lower due primarily to the closing of one branch office acquired in the Merger and to sublease arrangements. For the three month period, premises and equipment expenses were lower due primarily to the closing of one branch office acquired in the Merger and transactions to reduce space in two additional offices. For the six and three months ended June 30, 2016, the Company recognized $298 thousand and $165 thousand of sublease revenue as compared to $132 thousand and $30 thousand for the same periods in 2015. The sublease revenue is accounted for as a reduction to premises and equipment expenses.
Marketing and advertising expenses increased to $1.7 million for the six months ended June 30, 2016 from $1.4 million for the same period in 2015, a 19% increase. Marketing and advertising expenses increased to $920 thousand for the three months ended June 30, 2016 from $735 thousand for the same period in 2015, a 25% increase. The increase in both the six and three month periods was primarily due to costs associated with digital and print advertising and sponsorships.
Data processing expenses increased to $3.8 million for the six months ended June 30, 2016 from $3.6 million in the same period in 2015, a 6% increase. Data processing expenses remained steady at $1.8 million for the three months ended June 30, 2016 and the same period in 2015, a 1% decrease. The increase in expenses for the six month period was primarily due to licensing agreements.
Legal, accounting and professional fees increased to $2.1 million for the six months ended June 30, 2016 from $1.9 million in the same period in 2015, a 12% increase. Legal, accounting and professional fees increased to $1.0 million for the three months ended June 30, 2016 from $870 thousand in the same period in 2015, a 16% increase. The increase in expenses for both the six and three month periods were primarily due to professional fees for credit administration training, consultants, the customer call center, and employee fitness centers which are professionally managed by a third-party company.
Other expenses remained relatively stable at $7.6 million for the six months ended June 30, 2016 and the same period in 2015, a decrease of 1%. For the three months ended June 30, 2016, other expenses amounted to $4.1 million as compared to $3.6 million for the same period in 2015, an increase of 13%. The major components of cost in this category include core deposit intangible amortization, franchise taxes, director compensation and expenses for the operations of OREO property, as well as valuation adjustments on OREO property. Other expenses for the three months period ended June 30, 2016 increased primarily due to higher broker fees and other expenses.
The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 40.20% for the first six months of 2016, as compared to 43.28% for the same period in 2015. As a percentage of average assets, total noninterest expense (annualized) improved to 1.84% for the six months ended June 30, 2016 as compared to 2.02% for the same period in 2015. For the second quarter of 2016 the efficiency ratio improved to 39.63% from 41.70% for the second quarter of 2015. As a percentage of average assets, total noninterest expense (annualized) improved to 1.83% for the three months ended June 30, 2016 as compared to 1.91% for the same period in 2015. Cost control remains a significant operating objective of the Company.
Income Tax Expense
The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) increased to 38.3% for the six months ended June 30, 2016 as compared to 37.8% for the same period in 2015. For the second quarter of 2016, the Company’s effective tax rate increased to 38.4% for the three months ended June 30, 2016 as compared to 37.9% for the same period in 2015. The higher effective tax rate for the six and three months ended June 30, 2016 relates to relatively lower levels of tax exempt income compared to taxable income.
FINANCIAL CONDITION
Summary
Total assets at June 30, 2016 were $6.37 billion, an 11% increase as compared to $5.75 billion at June 30, 2015, and a 5% increase as compared to $6.08 billion at December 31, 2015. Total loans (excluding loans held for sale) were $5.40 billion at June 30, 2016, a 19% increase as compared to $4.55 billion at June 30, 2015, and an 8% increase as compared to $5.00 billion at December 31, 2015. Loans held for sale amounted to $59.3 million at June 30, 2016 as compared to $132.7 million at June 30, 2015, a 55% decrease, and $47.5 million at December 31, 2015, a 25% increase. The investment portfolio totaled $409.5 million at June 30, 2016, a 3% decrease from the $423.7 million balance at June 30, 2015. As compared to December 31, 2015, the investment portfolio at June 30, 2016 decreased by $78.4 million or 16%.
Total deposits at June 30, 2016 were $5.34 billion, compared to deposits of $4.83 billion at June 30, 2015, an 11% increase, and deposits of $5.16 billion at December 31, 2015, a 3% increase. Total borrowed funds (excluding customer repurchase agreements) were $119.0 million at June 30, 2016 as compared to $72.9 million at June 30, 2015, a 63% increase, and $68.9 million at December 31, 2015, a 73% increase. During April 2016, $50.0 million in FHLB advances were borrowed as part of the overall asset liability strategy and to support loan growth. These advances remained outstanding as of June 30, 2016 and mature in October 2016. We continue to work on expanding the breadth and depth of our existing relationships while we pursue building new relationships.
Total shareholders’ equity at June 30, 2016 increased to $788.6 million, compared to $765.1 million at June 30, 2015, a 3% increase, and $738.6 million at December 31, 2015, a 7% increase. The smaller increase in shareholders’ equity at June 30, 2016 compared to the same period in 2015 reflects increased earnings offset by the redemption of all $71.9 million of the preferred stock issued under the Small Business Lending Fund ("SBLF") during the fourth quarter of 2015. The ratio of common equity to total assets was 12.39% at June 30, 2016, as compared to 12.05% at June 30, 2015 and 12.16% at December 31, 2015. The Company’s capital position remains substantially in excess of regulatory requirements for well capitalized status, with a total risk based capital ratio of 12.73% at June 30, 2016, as compared to 13.75% at June 30, 2015, and 12.75% at December 31, 2015. In addition, the tangible common equity ratio was 10.88% at June 30, 2016, compared to 10.34% at June 30, 2015 and 10.56% at December 31, 2015.
Effective January 1, 2015, the Company, Bank, and all other banks of similar size became subject to new capital requirements. These new requirements create a new required ratio for common equity Tier 1 ("CETI") capital, increase the leverage and Tier 1 capital ratios, change the risk weight of certain assets for purposes of the risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios and change what qualifies as capital for purposes of meeting these various capital requirements. Under the new standards for 2015, in order to be considered well-capitalized, the Bank must have a CETI ratio of 6.5% (new), a Tier 1 risk-based ratio of 8.0% (increased from 6.0%), a total risk-based capital ratio of 10.0% (unchanged) and a leverage ratio of 5.0% (unchanged). The Company and the Bank meet all these new requirements, including the full capital conservation buffer. Beginning in 2016, 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 June 30, 2016, December 31, 2015 and June 30, 2015 by major category are summarized below.
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
June 30, 2015
|
|
(dollars in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Commercial
|
|
$
|
1,140,863
|
|
|
|
21
|
%
|
|
$
|
1,052,257
|
|
|
|
21
|
%
|
|
$
|
960,506
|
|
|
|
21
|
%
|
Income producing - commercial real estate
|
|
|
2,461,581
|
|
|
|
45
|
%
|
|
|
2,115,478
|
|
|
|
42
|
%
|
|
|
1,863,583
|
|
|
|
41
|
%
|
Owner occupied - commercial real estate
|
|
|
584,358
|
|
|
|
11
|
%
|
|
|
498,103
|
|
|
|
10
|
%
|
|
|
497,834
|
|
|
|
11
|
%
|
Real estate mortgage - residential
|
|
|
150,129
|
|
|
|
3
|
%
|
|
|
147,365
|
|
|
|
3
|
%
|
|
|
149,842
|
|
|
|
3
|
%
|
Construction - commercial and residential
|
|
|
847,268
|
|
|
|
16
|
%
|
|
|
985,607
|
|
|
|
20
|
%
|
|
|
901,617
|
|
|
|
20
|
%
|
Construction - C&I (owner occupied)
|
|
|
100,063
|
|
|
|
2
|
%
|
|
|
79,769
|
|
|
|
2
|
%
|
|
|
54,134
|
|
|
|
1
|
%
|
Home equity
|
|
|
110,697
|
|
|
|
2
|
%
|
|
|
112,885
|
|
|
|
2
|
%
|
|
|
118,544
|
|
|
|
3
|
%
|
Other consumer
|
|
|
8,470
|
|
|
|
-
|
|
|
|
6,904
|
|
|
|
-
|
|
|
|
4,837
|
|
|
|
-
|
|
Total loans
|
|
|
5,403,429
|
|
|
|
100
|
%
|
|
|
4,998,368
|
|
|
|
100
|
%
|
|
|
4,550,897
|
|
|
|
100
|
%
|
Less: allowance for credit losses
|
|
|
(56,536
|
)
|
|
|
|
|
|
|
(52,687
|
)
|
|
|
|
|
|
|
(48,921
|
)
|
|
|
|
|
Net loans
|
|
$
|
5,346,893
|
|
|
|
|
|
|
$
|
4,945,681
|
|
|
|
|
|
|
$
|
4,501,976
|
|
|
|
|
|
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 $5.40 billion at June 30, 2016, an increase of $853 million, or 19%, as compared to $4.55 billion at June 30, 2015, and an increase of $405 million, or 8%, as compared to $5.00 billion at December 31, 2015. The loan growth during the six months ended June 30, 2016 was predominantly in the income producing- commercial real estate, commercial, and owner occupied commercial real estate categories. Despite an increased level of in-market competition for business, the Bank continued to experience strong organic loan growth across the portfolio. Multi-family commercial real estate leasing in the Bank’s market area has held up well, particularly for well-located close-in projects, while suburban office leasing softened. Overall, commercial real estate values have generally held up well with price escalation in prime pockets. The housing market has remained stable to increasing, with well-located, Metro accessible properties garnering a premium.
Owner occupied commercial real estate and construction - C&I (owner occupied) represent 13% of the loan portfolio. The Bank has a large portion of its loan portfolio related to real estate, with 74% consisting of commercial real estate and real estate construction loans. When owner occupied commercial real estate and construction - C&I (owner occupied) is excluded, the percentage of total loans represented by commercial real estate decreases to 61%. Real estate also serves as collateral for loans made for other purposes, resulting in 84% of all loans being secured by real estate.
In July 2015, the Company sold the indirect consumer loan portfolio acquired in the Merger, amounting to approximately $80.3 million as of the time of sale. The sale of this non-strategic loan class allowed the Company to deploy the funds into commercial and commercial real estate loans, its core competency, improve its yield on earning assets and reduce operating expenses. The estimated loss of approximately $900 thousand was included as an adjustment to the intangibles established in the Merger. The transaction closed on July 24, 2015.
Deposits and Other Borrowings
The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, and savings accounts. Additionally, the Bank obtains certificates of deposits from the local market areas surrounding the Bank’s offices. The deposit base includes transaction accounts, time and savings accounts and 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 FHLB, federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and Promontory Interfinancial Network, LLC (“Promontory”).
For the six months ended June 30, 2016, noninterest bearing deposits increased $227 million as compared to December 31, 2015, while interest bearing deposits decreased by $49 million during the same period. Average total deposits for the first six months of 2016 were $5.16 billion, as compared to $4.49 billion for the same period in 2015, a 15% increase.
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 a regional brokerage firm, and other national brokerage networks, including Promontory. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (“CDARS”) and the Insured Cash Sweep product (“ICS”), which provides for reciprocal (“two-way”) transactions among banks facilitated by Promontory for the purpose of maximizing FDIC insurance. These reciprocal CDARS and ICS funds are classified as brokered deposits, although bank regulators have recognized that these reciprocal deposits have many characteristics of core deposits. The Bank also is able to obtain one way CDARS deposits and participates in Promontory’s Insured Network Deposit (“IND”). At June 30, 2016, total deposits included $682.9 million of brokered deposits (excluding the CDARS and ICS two-way), which represented 13% of total deposits. At December 31, 2015, total brokered deposits (excluding the CDARS and ICS two-way) were $597.5 million, or 12% of total deposits. The CDARS and ICS two-way component represented $470.2 million, or 8% of total deposits and $611.8 million or 12% of total deposits at June 30, 2016 and December 31, 2015, 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 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 June 30, 2016 the Company had $1.63 billion in noninterest bearing demand deposits, representing 31% of total deposits, compared to $1.41 billion of noninterest bearing demand deposits at December 31, 2015, or 27% of total deposits. These deposits are primarily business checking accounts on which the payment of interest was prohibited by regulations of the Federal Reserve prior to July 2011. Since July 2011, banks are no longer prohibited from paying interest on demand deposits account, including those from businesses. To date, the Bank has elected not to pay interest on business checking accounts, nor is the payment of such interest a prevalent practice in the Bank’s market area at present. It is not clear over the long-term what effect the elimination of this prohibition will have on the Bank’s interest expense, allocation of deposits, deposit pricing, loan pricing, net interest margin, ability to compete, ability to establish and maintain customer relationships, or profitability. Payment of interest on these deposits could have a significant negative impact on the Company’s net interest income and net interest margin, net income, and the return on assets and equity, although no such effect is currently anticipated.
As an enhancement to the basic noninterest bearing demand deposit account, the Bank offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds which are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $80.5 million at June 30, 2016 compared to $72.4 million at December 31, 2015. Customers 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 an example 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 Bank to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.
The Company had no outstanding balances under its federal funds purchase lines of credit provided by correspondent banks at June 30, 2016 and December 31, 2015. The Bank had $50.0 million in short-term borrowings outstanding under its credit facility from the FHLB at June 30, 2016. There were no borrowings outstanding under its credit facility from the FHLB at December 31, 2015.
The Company has a credit facility with a regional bank, secured by a portion of the stock of the Bank, pursuant to which the Company may borrow, on a revolving basis, up to $50.0 million for working capital purposes, to finance capital contributions to the Bank and ECV. There were no amounts outstanding under this credit facility at June 30, 2016 or December 31, 2015. For additional information on this credit facility please refer to “Capital Resources and Adequacy” below.
The Company redeemed the balance of its $9.3 million of subordinated notes, due 2021 during 2015.
The only long-term borrowing outstanding at June 30, 2016 was the Company’s August 5, 2014, issuance of $70.0 million of subordinated notes, due September 1, 2024. For additional information on the subordinated notes, please refer to “Capital Resources and Adequacy” below and the “Subsequent Events” footnote.
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, 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, 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, which are termed secondary sources and which are substantial. The Company’s secondary sources of liquidity include a $50.0 million line of credit with a regional bank, secured by a portion of the stock of the Bank, against which there were no amounts outstanding at June 30, 2016. Additionally, the Bank can purchase up to $137.5 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at June 30, 2016, and can obtain unsecured funds under one-way CDARS brokered deposits in the amount of $952.8 million, against which there was $32.4 million outstanding at June 30, 2016. The Bank has a commitment from Promontory to place up to $500.0 million of brokered deposits from its IND program with the Bank in amounts requested by the Bank, as compared to an actual balance of $274.1 million at June 30, 2016. At June 30, 2016 the Bank was also eligible to make advances from the FHLB up to $956.0 million based on collateral at the FHLB, of which there $50.0 million outstanding at June 30, 2016. 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 $433.0 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. 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’s Board of Directors (“ALCO”) has adopted policy guidelines which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan.
At June 30, 2016, under the Bank’s liquidity formula, it had $2.73 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 June 30, 2016 are as follows:
(dollars in thousands)
|
|
June 30, 2016
|
|
Unfunded loan commitments
|
|
$
|
2,042,345
|
|
Unfunded lines of credit
|
|
|
108,472
|
|
Letters of credit
|
|
|
70,077
|
|
Total
|
|
$
|
2,220,894
|
|
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.
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.
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
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 re-pricing 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 quarter ended June 30, 2016, as compared to the same three months in 2015, the Company was able to increase its net interest income (by 11%), produce a net interest spread of 4.07%, which was 7 basis points lower than the 4.14% for the same quarter ended 2015, and manage its overall interest rate risk position.
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 prepayment 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 mitigate extension risk and related declines in market values in that same portfolio should interest rates increase. Additionally, the Company has limited call risk in its U.S. agency investment portfolio. During the three months ended June 30, 2016, the average investment portfolio balances decreased as compared to balances at March 31, 2016, in large part due to calls on securities being exercised and higher prepay speeds on mortgage-backed securities resulting in higher than expected cash flows due to return of principal. Given the strength of loan demand, the cash received from calls and prepayments on the investment portfolio was redeployed into loans rather than the purchase of additional investments with relatively lower yields.
The percentage mix of municipal securities increased to 25% of total investments at June 30, 2016 from 22% at June 30, 2015, the portion of the portfolio invested in mortgage backed securities increased to 62% at June 30, 2016 from 59% at June 30, 2015. The portion of the portfolio invested in U.S. agency investments decreased to 9% at June 30, 2016 from 16% at June 30, 2015. Shorter duration floating rate corporate bonds and SBA bonds were 3% of total investments at June 30, 2016. Due to the rolling forward of the investment portfolio and faster prepayment of mortgage-backed security principal, the duration of the investment portfolio decreased to 3.4 years at June 30, 2016 from 3.9 years at June 30, 2015, which better prepared the Company for expected increases in market interest rates.
The re-pricing duration of the loan portfolio was fairly stable at 24 months at June 30, 2016 versus 26 months at June 30, 2015, with fixed rate loans amounting to 35% of total loans at June 30, 2016 compared to 39% of total loans at June 30, 2015. Variable and adjustable rate loans comprised 65% of total loans at June 30, 2016, compared to 61% of total loans at June 30, 2015. Variable rate loans are generally indexed to either the Wall Street Journal prime interest rate, or the one month LIBOR interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate.
The duration of the deposit portfolio was also fairly stable at 30 months at June 30, 2016, as compared to 31 months at June 30, 2015. The change since June 30, 2016 was due substantially to a change in the mix and duration of money market deposits.
The Company has continued its emphasis on funding loans in its marketplace, and has been able to achieve favorable loan pricing, including interest rate floors on many loan originations, although competition for new loans persists. A disciplined approach to loan pricing, together with loans floors existing in 60% of total loans (at June 30, 2016), has resulted in a loan portfolio yield of 5.10% for the three months ended June 30, 2016 as compared to 5.29% for the same period in 2015. Subject to interest rate floors, 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 $9.0 million at June 30, 2016 as compared to a net unrealized gain before tax of $2.1 million at June 30, 2015. The higher net unrealized gain on the investment portfolio at June 30, 2016 as compared to June 30, 2015 was due to lower interest rates at June 30, 2016. At June 30, 2016, the unrealized gain position represented 2.2% 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 June 30, 2016. 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 June 30, 2016, 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 10 basis points, 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.
As quantified in the table below, the Company’s analysis at June 30, 2016 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 re-priceable assets and liabilities and related shorter relative durations. The re-pricing duration of the investment portfolio at June 30, 2016 is 3.4 years, the loan portfolio 2.0 years; the interest bearing deposit portfolio 2.5 years and the borrowed funds portfolio 2.3 years.
The following table reflects the result of simulation analysis on the June 30, 2016 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
|
|
+14.5%
|
|
+22.9%
|
|
+5.3%
|
+300
|
|
+9.9%
|
|
+15.2%
|
|
+3.7%
|
+200
|
|
+5.2%
|
|
+7.5%
|
|
+1.9%
|
+100
|
|
+0.9%
|
|
+0.3%
|
|
+0.1%
|
0
|
|
-
|
|
-
|
|
-
|
-100
|
|
-1.9%
|
|
-3.3%
|
|
-6.7%
|
-200
|
|
-2.5%
|
|
-4.2%
|
|
-12.7%
|
|
|
|
|
|
|
|
The results of simulation are within the policy limits adopted by the Company. 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 changes in net interest income, net income and the economic value of equity in both a higher and lower interest rate shock scenario at June 30, 2016 are not considered to be excessive. The positive impact of +0.9% in net interest income and +0.3% in net income given a 100 basis point increase in market interest rates reflects in large measure the impact of floor interest rates in a substantial portion of the loan portfolio and a lower level of expected residential mortgage activity.
In the second quarter of 2016, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above. Except for the lower level of asset liquidity at June 30, 2016 as compared to December 31, 2015, the interest rate risk position at June 30, 2016 was similar to the interest rate risk position at December 31, 2015. As compared to December 31, 2015, the sum of federal funds sold, interest bearing deposits with banks and other short-term investments and loans held for sale decreased by $40.8 million at June 30, 2016.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, 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 calculating the tables. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.
During the second quarter of 2016, average market interest rates decreased across the yield curve. Overall, there was a flattening of the yield curve as compared to the second quarter of 2015 with rate decreases being more significant the further out on the yield curve the maturity.
As compared to the second quarter of 2015, the average two-year U.S. Treasury rate decreased by 6 basis points from 0.83% to 0.77%, the average five year U.S. Treasury rate decreased by 12 basis points from 1.36% to 1.24% and the average ten year U.S. Treasury rate decreased by 17 basis points from 1.91% to 1.74%. The Company’s net interest spread for the second quarter of 2016 was 4.07% compared to 4.14% for the second quarter of 2015. The decline was due in large part to compression on loan yields and some increase in the cost of interest bearing liabilities. The Company believes that the change in the net interest spread in the most recent quarter as compared to 2015’s second quarter has been consistent with its risk analysis at December 31, 2015.
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 89% and 90% of the Company’s revenue for the second quarters of 2016 and 2015, 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 June 30, 2016, the Company had a positive GAP position of approximately $986 million or 15% of total assets out to three months and a positive cumulative GAP position of $961 million or 15% of total assets out to 12 months; as compared to a positive GAP position of approximately $554 million or 9% of total assets out to three months and a positive cumulative GAP position of $827 million or 14% of total assets out to 12 months at December 31, 2015. The change in the positive GAP position at June 30, 2016 as compared to December 31, 2015, was due substantially to the lower amount of asset liquidity on the balance sheet and increase in the mix of variable rate loans. The change in the GAP position at June 30, 2016 as compared to December 31, 2015 is not deemed material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis which 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 are 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 loan floors providing no additional interest income and 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
June 30, 2016
(dollars in thousands)
Repriceable in:
|
|
0-3
months
|
|
|
4-12
months
|
|
|
13-36
months
|
|
|
37-60
months
|
|
|
Over 60
months
|
|
|
Total Rate Sensitive
|
|
|
Non-
sensitive
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE SENSITIVE ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
59,982
|
|
|
$
|
62,734
|
|
|
$
|
106,496
|
|
|
$
|
77,388
|
|
|
$
|
122,776
|
|
|
$
|
429,376
|
|
|
|
|
|
|
|
|
|
Loan
s
(1)(2)
|
|
|
2,938,382
|
|
|
|
516,636
|
|
|
|
1,092,016
|
|
|
|
754,867
|
|
|
|
160,851
|
|
|
|
5,462,752
|
|
|
|
|
|
|
|
|
|
Fed funds and other short-term investments
|
|
|
235,485
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
235,485
|
|
|
|
|
|
|
|
|
|
Other earning assets
|
|
|
59,357
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,357
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,293,206
|
|
|
$
|
579,370
|
|
|
$
|
1,198,512
|
|
|
$
|
832,255
|
|
|
$
|
283,627
|
|
|
$
|
6,186,970
|
|
|
$
|
178,350
|
|
|
$
|
6,365,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE SENSITIVE LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand
|
|
$
|
66,575
|
|
|
$
|
199,724
|
|
|
$
|
531,944
|
|
|
$
|
531,945
|
|
|
$
|
301,544
|
|
|
$
|
1,631,732
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
|
|
|
216,393
|
|
|
|
-
|
|
|
|
38,504
|
|
|
|
38,504
|
|
|
|
-
|
|
|
|
293,401
|
|
|
|
|
|
|
|
|
|
Savings and money market
|
|
|
2,034,311
|
|
|
|
-
|
|
|
|
300,068
|
|
|
|
300,067
|
|
|
|
-
|
|
|
|
2,634,446
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
109,420
|
|
|
|
404,666
|
|
|
|
237,950
|
|
|
|
24,373
|
|
|
|
-
|
|
|
|
776,409
|
|
|
|
|
|
|
|
|
|
Customer repurchase agreements and fed
funds purchased
|
|
|
80,508
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80,508
|
|
|
|
|
|
|
|
|
|
Other borrowings
|
|
|
50,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68,989
|
|
|
|
118,989
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,557,207
|
|
|
$
|
604,390
|
|
|
$
|
1,108,466
|
|
|
$
|
894,889
|
|
|
$
|
370,533
|
|
|
$
|
5,535,485
|
|
|
$
|
41,207
|
|
|
$
|
5,576,692
|
|
GAP
|
|
$
|
735,999
|
|
|
$
|
(25,020
|
)
|
|
$
|
90,046
|
|
|
$
|
(62,634
|
)
|
|
$
|
(86,906
|
)
|
|
$
|
651,485
|
|
|
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
735,999
|
|
|
$
|
710,979
|
|
|
$
|
801,025
|
|
|
$
|
738,391
|
|
|
$
|
651,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap as percent of total assets
|
|
|
11.56
|
%
|
|
|
11.17
|
%
|
|
|
12.58
|
%
|
|
|
11.60
|
%
|
|
|
10.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFF BALANCE-SHEET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps - LIBOR based
|
|
$
|
150,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(75,000
|
)
|
|
$
|
(75,000
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps - Fed Funds based
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
250,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(175,000
|
)
|
|
$
|
(75,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
GAP
|
|
$
|
985,999
|
|
|
$
|
(25,020
|
)
|
|
$
|
90,046
|
|
|
$
|
(237,634
|
)
|
|
$
|
(161,906
|
)
|
|
$
|
651,485
|
|
|
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
985,999
|
|
|
$
|
960,979
|
|
|
$
|
1,051,025
|
|
|
$
|
813,391
|
|
|
$
|
651,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap as percent of total assets
|
|
|
15.49
|
%
|
|
|
15.10
|
%
|
|
|
16.51
|
%
|
|
|
12.78
|
%
|
|
|
10.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes loans held for sale.
(2)
Nonaccrual loans are included in the over 60 months category.
Although NOW and money market accounts are subject to immediate repricing, the Bank’s GAP model has incorporated a repricing schedule to account for a lag in rate changes based on our experience, as measured by the amount of those deposit rate changes relative to the amount of rate change in assets.
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, 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 significant growth in its commercial real estate portfolio in recent years. At June 30, 2016 non-owner-occupied commercial real estate loans (including construction, land and land development loans) represent 377% of total risk based capital. Construction, land and land development loans represent 106% 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. 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 a credit facility with a regional bank, pursuant to which the Company may borrow, on a revolving basis, up to $50.0 million for working capital purposes, to finance capital contributions to the Bank in whole and to ECV in part. The credit facility is secured by a first lien on a portion of the stock of the Bank, pursuant to which the Company may borrow, and bears interest at a floating rate equal to the Wall Street Journal Prime Rate minus 0.25% with a floor interest rate of 3.50%. Interest is payable on a monthly basis. The term of the credit facility expires on September 30, 2016. There were no amounts outstanding under this credit facility at June 30, 2016, December 31, 2015, or June 30, 2015.
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.
In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which became applicable to the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures.
On August 5, 2014, the Company completed the sale of $70.0 million of its noncallable 5.75% subordinated notes, due September 1, 2024 (the “Notes”). The Notes were sold to the public at par. The notes qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under capital regulations applicable under the Basel III Rule capital requirements.
During 2015, the Company redeemed the remaining balance of $9.3 million of subordinated notes, due 2021. As a result, the only long-term borrowing outstanding at December 31, 2015 was the Company’s August 5, 2014, issuance of $70.0 million of subordinated notes, due September 1, 2024 noted above.
In March 2015, the Company completed the public offering of $100 million of its common stock at $35.50 per share and received gross proceeds of sale of $100 million and net proceeds of sale of approximately $94.6 million.
On November 2, 2015, the Company redeemed all of the 56,600 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series B, liquidation amount $1,000 per share (the “Series B Preferred Stock”), and all of the 15,300 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series C, liquidation amount $1,000 per share (“Series C Preferred Stock”). The aggregate redemption price of the Series B Preferred Stock and Series C Preferred Stock was approximately $71.96 million, including dividends accrued but unpaid through, but not including, the redemption date.
The actual capital amounts and ratios for the Company and Bank as of June 30, 2016, December 31, 2015 and June 30, 2015 are presented in the table below.
|
|
Company
|
|
|
Bank
|
|
|
|
|
|
|
To Be Well
Capitalized Under
|
|
|
|
Actual
|
|
|
Actual
|
|
|
Minimun Required For
|
|
|
Prompt
Corrective
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Capital Adequacy Purposes
|
|
|
Action
Regulations
|
|
As of June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1 capital (to risk weighted aseets)
|
|
$
|
683,620
|
|
|
|
10.74
|
%
|
|
$
|
672,980
|
|
|
|
10.61
|
%
|
|
|
5.125%
|
|
|
|
6.5%
|
|
Total capital (to risk weighted assets)
|
|
|
809,220
|
|
|
|
12.73
|
%
|
|
|
729,360
|
|
|
|
11.49
|
%
|
|
|
8.625%
|
|
|
|
10.0%
|
|
Tier 1 capital (to risk weighted assets)
|
|
|
683,620
|
|
|
|
10.74
|
%
|
|
|
672,980
|
|
|
|
10.61
|
%
|
|
|
6.625%
|
|
|
|
8.0%
|
|
Tier 1 capital (to average assets)
|
|
|
683,620
|
|
|
|
11.24
|
%
|
|
|
672,980
|
|
|
|
11.08
|
%
|
|
|
5.000%
|
|
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1 capital (to risk weighted aseets)
|
|
$
|
632,408
|
|
|
|
10.68
|
%
|
|
$
|
620,879
|
|
|
|
10.52
|
%
|
|
|
4.50%
|
|
|
|
6.5%
|
|
Total capital (to risk weighted assets)
|
|
|
755,212
|
|
|
|
12.75
|
%
|
|
|
673,442
|
|
|
|
11.41
|
%
|
|
|
8.00%
|
|
|
|
10.0%
|
|
Tier 1 capital (to risk weighted assets)
|
|
|
632,408
|
|
|
|
10.68
|
%
|
|
|
620,879
|
|
|
|
10.52
|
%
|
|
|
6.00%
|
|
|
|
8.0%
|
|
Tier 1 capital (to average assets)
|
|
|
632,408
|
|
|
|
10.90
|
%
|
|
|
620,879
|
|
|
|
10.74
|
%
|
|
|
5.00%
|
|
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1 capital (to risk weighted aseets)
|
|
$
|
584,464
|
|
|
|
10.37
|
%
|
|
$
|
573,693
|
|
|
|
10.23
|
%
|
|
|
4.50%
|
|
|
|
6.5%
|
|
Total capital (to risk weighted assets)
|
|
|
775,454
|
|
|
|
13.75
|
%
|
|
|
622,542
|
|
|
|
11.10
|
%
|
|
|
8.00%
|
|
|
|
10.0%
|
|
Tier 1 capital (to risk weighted assets)
|
|
|
656,364
|
|
|
|
11.64
|
%
|
|
|
573,693
|
|
|
|
10.23
|
%
|
|
|
6.00%
|
|
|
|
8.0%
|
|
Tier 1 capital (to average assets)
|
|
|
656,364
|
|
|
|
12.03
|
%
|
|
|
573,693
|
|
|
|
10.56
|
%
|
|
|
5.00%
|
|
|
|
5.0%
|
|
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 June 30, 2016 the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained required capital ratios.
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") and tangible book value per common share 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 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.
Non-GAAP Reconciliation (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Twelve Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
June 30, 2015
|
|
Common shareholders' equity
|
|
$
|
788,628
|
|
|
$
|
738,601
|
|
|
$
|
693,161
|
|
Less: Intangible assets
|
|
|
(108,021
|
)
|
|
|
(108,542
|
)
|
|
|
(109,957
|
)
|
Tangible common equity
|
|
$
|
680,607
|
|
|
$
|
630,059
|
|
|
$
|
583,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common share
|
|
$
|
23.48
|
|
|
$
|
22.07
|
|
|
$
|
20.76
|
|
Less: Intangible book value per common share
|
|
|
(3.21
|
)
|
|
|
(3.24
|
)
|
|
|
(3.30
|
)
|
Tangible book value per common share
|
|
$
|
20.27
|
|
|
$
|
18.83
|
|
|
$
|
17.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,365,320
|
|
|
$
|
6,075,577
|
|
|
$
|
5,752,669
|
|
Less: Intangible assets
|
|
|
(108,021
|
)
|
|
|
(108,542
|
)
|
|
|
(109,957
|
)
|
Tangible assets
|
|
$
|
6,257,299
|
|
|
$
|
5,968,107
|
|
|
$
|
5,642,712
|
|
Tangible common equity ratio
|
|
|
10.88
|
%
|
|
|
10.56
|
%
|
|
|
10.34
|
%
|