Eagle Bancorp, Inc.
Consolidated Average Balances, Interest Yields and Rates (Unaudited)
(dollars in thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
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
|
|
$
|
285,150
|
|
|
$
|
4,533
|
|
|
|
2.13
|
%
|
|
$
|
321,266
|
|
|
$
|
4,152
|
|
|
|
1.73
|
%
|
Loans held for sale (1)
|
|
|
34,265
|
|
|
|
1,041
|
|
|
|
4.05
|
%
|
|
|
24,692
|
|
|
|
839
|
|
|
|
4.53
|
%
|
Loans (1) (2)
|
|
|
7,265,726
|
|
|
|
300,966
|
|
|
|
5.54
|
%
|
|
|
6,550,754
|
|
|
|
270,085
|
|
|
|
5.51
|
%
|
Investment securities available-for-sale (2)
|
|
|
784,970
|
|
|
|
15,740
|
|
|
|
2.68
|
%
|
|
|
664,798
|
|
|
|
12,525
|
|
|
|
2.52
|
%
|
Federal funds sold
|
|
|
21,352
|
|
|
|
167
|
|
|
|
1.05
|
%
|
|
|
15,060
|
|
|
|
104
|
|
|
|
0.92
|
%
|
Total interest earning assets
|
|
|
8,391,463
|
|
|
|
322,447
|
|
|
|
5.14
|
%
|
|
|
7,576,570
|
|
|
|
287,705
|
|
|
|
5.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest earning assets
|
|
|
339,355
|
|
|
|
|
|
|
|
|
|
|
|
294,948
|
|
|
|
|
|
|
|
|
|
Less: allowance for credit losses
|
|
|
70,902
|
|
|
|
|
|
|
|
|
|
|
|
66,429
|
|
|
|
|
|
|
|
|
|
Total noninterest earning assets
|
|
|
268,453
|
|
|
|
|
|
|
|
|
|
|
|
228,519
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
8,659,916
|
|
|
|
|
|
|
|
|
|
|
$
|
7,805,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
|
|
$
|
696,825
|
|
|
$
|
4,206
|
|
|
|
0.81
|
%
|
|
$
|
433,921
|
|
|
$
|
2,252
|
|
|
|
0.69
|
%
|
Savings and money market
|
|
|
2,781,663
|
|
|
|
37,848
|
|
|
|
1.82
|
%
|
|
|
2,670,578
|
|
|
|
23,846
|
|
|
|
1.19
|
%
|
Time deposits
|
|
|
1,406,237
|
|
|
|
25,883
|
|
|
|
2.46
|
%
|
|
|
1,078,608
|
|
|
|
13,798
|
|
|
|
1.71
|
%
|
Total interest bearing deposits
|
|
|
4,884,725
|
|
|
|
67,937
|
|
|
|
1.86
|
%
|
|
|
4,183,107
|
|
|
|
39,896
|
|
|
|
1.28
|
%
|
Customer repurchase agreements
|
|
|
29,617
|
|
|
|
255
|
|
|
|
1.15
|
%
|
|
|
45,504
|
|
|
|
166
|
|
|
|
0.49
|
%
|
Other short-term borrowings
|
|
|
113,845
|
|
|
|
1,983
|
|
|
|
2.30
|
%
|
|
|
228,398
|
|
|
|
3,425
|
|
|
|
1.98
|
%
|
Long-term borrowings
|
|
|
217,458
|
|
|
|
8,937
|
|
|
|
5.42
|
%
|
|
|
217,068
|
|
|
|
8,937
|
|
|
|
5.43
|
%
|
Total interest bearing liabilities
|
|
|
5,245,645
|
|
|
|
79,112
|
|
|
|
2.02
|
%
|
|
|
4,674,077
|
|
|
|
52,424
|
|
|
|
1.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand
|
|
|
2,183,412
|
|
|
|
|
|
|
|
|
|
|
|
2,090,868
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
66,318
|
|
|
|
|
|
|
|
|
|
|
|
36,705
|
|
|
|
|
|
|
|
|
|
Total noninterest bearing liabilities
|
|
|
2,249,730
|
|
|
|
|
|
|
|
|
|
|
|
2,127,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
1,164,541
|
|
|
|
|
|
|
|
|
|
|
|
1,003,439
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
8,659,916
|
|
|
|
|
|
|
|
|
|
|
$
|
7,805,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
243,335
|
|
|
|
|
|
|
|
|
|
|
$
|
235,281
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.12
|
%
|
|
|
|
|
|
|
|
|
|
|
3.58
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.88
|
%
|
|
|
|
|
|
|
|
|
|
|
4.15
|
%
|
Cost of funds
|
|
|
|
|
|
|
|
|
|
|
1.26
|
%
|
|
|
|
|
|
|
|
|
|
|
0.93
|
%
|
|
(1)
|
Loans placed on nonaccrual
status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $13.1 million
and $14.9 million for the nine months ended September 30, 2019 and 2018, 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. The 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 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 the caption “Critical Accounting Policies” contained in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2018 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 page 44 which reflects activity in the allowance
for credit losses.
During the three months
ended September 30, 2019, the allowance for credit losses reflected $3.2 million in provision for credit losses and $1.5 million
in net charge-offs during the period. The provision for credit losses was $3.2 million for the three months ended September 30,
2019 as compared to $2.4 million for the same period in 2018. Net charge-offs of $1.5 million in the third quarter of 2019 represented
an annualized 0.08% of average loans, excluding loans held for sale, as compared to $862 thousand, or an annualized 0.05% of average
loans, excluding loans held for sale, in the third quarter of 2018.
During the nine months
ended September 30, 2019, the allowance for credit losses reflected $10.1 million in provision for credit losses and $6.4 million
in net charge-offs during the period. The provision for credit losses was $10.1 million for the nine months ended September 30,
2019 as compared to $6.1 million for the same period in 2018. Net charge-offs of $6.4 million in the first nine months of 2019
represented an annualized 0.12% of average loans, excluding loans held for sale, as compared to $2.6 million, or an annualized
0.05% of average loans, excluding loans held for sale, in the first nine months of 2018.
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 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.
|
|
Nine
Months Ended September 30,
|
|
(dollars in thousands)
|
|
2019
|
|
|
2018
|
|
Balance at beginning of
period
|
|
$
|
69,944
|
|
|
$
|
64,758
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,799
|
|
|
|
2,435
|
|
Income
producing - commercial real estate
|
|
|
5,343
|
|
|
|
121
|
|
Owner
occupied - commercial real estate
|
|
|
—
|
|
|
|
132
|
|
Real
estate mortgage - residential
|
|
|
—
|
|
|
|
—
|
|
Construction
- commercial and residential
|
|
|
—
|
|
|
|
1,160
|
|
Construction
- C&I (owner occupied)
|
|
|
—
|
|
|
|
—
|
|
Home
equity
|
|
|
—
|
|
|
|
—
|
|
Other
consumer
|
|
|
2
|
|
|
|
15
|
|
Total
charge-offs
|
|
|
7,144
|
|
|
|
3,863
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
377
|
|
|
|
86
|
|
Income
producing - commercial real estate
|
|
|
302
|
|
|
|
2
|
|
Owner
occupied - commercial real estate
|
|
|
2
|
|
|
|
2
|
|
Real
estate mortgage - residential
|
|
|
3
|
|
|
|
4
|
|
Construction
- commercial and residential
|
|
|
52
|
|
|
|
994
|
|
Construction
- C&I (owner occupied)
|
|
|
—
|
|
|
|
—
|
|
Home
equity
|
|
|
—
|
|
|
|
133
|
|
Other
consumer
|
|
|
38
|
|
|
|
13
|
|
Total
recoveries
|
|
|
774
|
|
|
|
1,234
|
|
Net charge-offs
|
|
|
6,370
|
|
|
|
2,629
|
|
Provision
for Credit Losses
|
|
|
10,146
|
|
|
|
6,060
|
|
Balance at end
of period
|
|
$
|
73,720
|
|
|
$
|
68,189
|
|
|
|
|
|
|
|
|
|
|
Annualized ratio
of net charge-offs during the period to average loans outstanding during the period
|
|
|
0.12
|
%
|
|
|
0.05
|
%
|
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.
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
(dollars
in thousands)
|
|
Amount
|
|
|
%(1)
|
|
|
Amount
|
|
|
%(1)
|
|
Commercial
|
|
$
|
18,169
|
|
|
|
19
|
%
|
|
$
|
15,857
|
|
|
|
22
|
%
|
Income producing - commercial real estate
|
|
|
28,527
|
|
|
|
51
|
%
|
|
|
28,034
|
|
|
|
46
|
%
|
Owner occupied - commercial real estate
|
|
|
5,598
|
|
|
|
13
|
%
|
|
|
6,242
|
|
|
|
13
|
%
|
Real estate mortgage - residential
|
|
|
1,352
|
|
|
|
1
|
%
|
|
|
965
|
|
|
|
2
|
%
|
Construction - commercial and residential
|
|
|
17,882
|
|
|
|
14
|
%
|
|
|
17,484
|
|
|
|
15
|
%
|
Construction - C&I (owner occupied)
|
|
|
1,390
|
|
|
|
1
|
%
|
|
|
691
|
|
|
|
1
|
%
|
Home equity
|
|
|
575
|
|
|
|
1
|
%
|
|
|
599
|
|
|
|
1
|
%
|
Other consumer
|
|
|
227
|
|
|
|
—
|
|
|
|
72
|
|
|
|
—
|
|
Total
allowance
|
|
$
|
73,720
|
|
|
|
100
|
%
|
|
$
|
69,944
|
|
|
|
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 is comprised of loans delinquent 90 days or more, nonaccrual loans,
which includes the nonperforming portion of TDRs, and OREO, totaled $59.1 million at September 30, 2019 representing 0.66% of total
assets, as compared to $17.7 million of nonperforming assets, or 0.21% of total assets, at December 31, 2018. Nonperforming assets
of $59.1 million as of September 30, 2019 included one loan of $16.5 million which was brought current shortly after quarter end.
Excluding this loan the ratio of nonperforming assets to total assets would have been 0.47% as of September 30, 2019. The additional
increase in nonperforming loans at September 30, 2019, was substantially attributable to softness in the market for ultra high-end
residential properties.
The Company had one
accruing loan 90 days or more past due at September 30, 2019. This loan totaled $16.5 million and was brought current shortly after
quarter end. The Company had no accruing loans 90 days or more past due at December 31, 2018. 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 0.98% of total loans at September 30, 2019, 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 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 September 30, 2019 totaling approximately $10.1 million.
Seven of these loans totaling approximately $8.6 million are performing under their modified terms. There was one performing TDR
totaling $2.3 million that defaulted on its modified terms which was reclassified to nonperforming loans during the nine months
ended September 30, 2019. During the nine months ended September 30, 2018, there were two performing TDRs totaling $937 thousand
that defaulted on their modified terms which were reclassified to nonperforming 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. For the three months ended September 30, 2019, there
was one restructured loan totaling approximately $309 thousand that was paid off from the sale proceeds of the collateral property.
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 the three months ended September 30, 2019, there were no loans modified in a TDR, as compared
to the three months ended September 30, 2018 which had one loan totaling $2.4 million modified in a TDR.
Total nonperforming
loans amounted to $57.7 million at September 30, 2019 (0.76% of total loans) compared to $16.3 million at December 31, 2018 (0.23%
of total loans). Nonperforming loans of $57.7 million as of September 30, 2019 included one loan of $16.5 million which was brought
current shortly after quarter end. Excluding this loan the ratio of nonperforming loans to total loans would have been 0.54% as
of September 30, 2019. The additional increase in the ratio of nonperforming loans to total loans at September 30, 2019 as compared
to December 31, 2018 was due to increased nonperforming loans substantially attributable to softness in the market for ultra high-end
residential properties.
Included in nonperforming
assets at September 30, 2019 was $1.5 million of OREO consisting of three foreclosed properties. Included in nonperforming assets
at December 31, 2018 was $1.4 million of OREO, consisting of one foreclosed property. The Company had one foreclosed property with
a net carrying value of $1.4 million at September 30, 2018. 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 were no sales
of OREO property during the first nine months of 2019 and 2018.
The following table
shows the amounts of nonperforming assets at the dates indicated.
|
|
September 30,
|
|
|
December 31,
|
|
(dollars in thousands)
|
|
2019
|
|
|
2018
|
|
Nonaccrual Loans:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
16,074
|
|
|
$
|
7,115
|
|
Income producing - commercial real estate
|
|
|
5,654
|
|
|
|
1,766
|
|
Owner occupied - commercial real estate
|
|
|
4,124
|
|
|
|
2,368
|
|
Real estate mortgage - residential
|
|
|
5,635
|
|
|
|
1,510
|
|
Construction - commercial and residential
|
|
|
9,148
|
|
|
|
3,031
|
|
Construction - C&I (owner occupied)
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
487
|
|
|
|
487
|
|
Other consumer
|
|
|
—
|
|
|
|
—
|
|
Accrual loans-past due 90 days
|
|
|
16,528
|
|
|
|
—
|
|
Total nonperforming loans (1)
|
|
|
57,650
|
|
|
|
16,277
|
|
Other real estate owned
|
|
|
1,487
|
|
|
|
1,394
|
|
Total nonperforming assets
|
|
$
|
59,137
|
|
|
$
|
17,671
|
|
|
|
|
|
|
|
|
|
|
Coverage ratio, allowance for credit losses to total nonperforming loans
|
|
|
127.87
|
%
|
|
|
429.72
|
%
|
Ratio of nonperforming loans to total loans
|
|
|
0.76
|
%
|
|
|
0.23
|
%
|
Ratio of nonperforming assets to total assets
|
|
|
0.66
|
%
|
|
|
0.21
|
%
|
|
(1)
|
Nonaccrual loans reported in the table above include one loan totaling $2.3 million that migrated
from a performing TDRs during the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018
where there were two loans totaling $937 thousand that migrated from performing TDRs.
|
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, 2019,
there were $48.3 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. Potential problem loans decreased to $48.3 million at
September 30, 2019 from $102.7 million at December 31, 2018. 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, income from BOLI and other
income.
Total noninterest income
for the three months ended September 30, 2019 increased to $6.3 million from $5.6 million for the three months ended September
30, 2018, a 12% increase, due substantially to $1.1 million higher gains on the sale of residential mortgage loans ($2.5 million
versus $1.4 million) resulting from higher loan origination and sales volume as compared to 2018, partially offset by lower service
charges on deposit accounts of $320 thousand. Residential mortgage loans closed were $224 million for the third quarter of 2019
versus $107 million for the third quarter of 2018.
Total noninterest income
for the nine months ended September 30, 2019 increased to $19.0 million from $16.5 million for the nine months ended September
30, 2018, a 15% increase, due substantially to $1.6 million higher gains on the sale of investment securities primarily due to
$829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations, and $1.4 million higher gains
on the sale of residential mortgage loans ($5.7 million versus $4.3 million) resulting from higher volume as compared to 2018,
offset by $394 thousand lower service charges on deposit accounts. Residential mortgage loans closed were $470 million for the
nine months ended September 30, 2019 versus $334 million for the same period in 2018.
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, 2019, 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.
Service charges on
deposit accounts decreased by $320 thousand, or 18%, from $1.8 million for the three months ended September 30, 2018 to $1.5 million
for the same period in 2019. Service charges on deposit accounts decreased by $394 thousand, or 8%, from $5.2 million for the nine
months ended September 30, 2018 to $4.8 million for the same period in 2019. The decrease for the three and nine month period was
due primarily to a lower volume of insufficient funds and return item charges.
The Company originates
residential mortgage loans and utilizes 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 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 three months
ended September 30, 2019. The reserve amounted to $67 thousand at September 30, 2019 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 $47 thousand
for the three months ended September 30, 2019 compared to $73 thousand for the same period in 2018. Income from this source was
$171 thousand for the nine months ended September 30, 2019 compared to $373 thousand for the same period in 2018. Activity in SBA
loan sales to secondary markets can vary widely from quarter to quarter.
Other income totaled
$1.7 million for the three months ended September 30, 2019 as compared to $2.0 million for the same period in 2018, a decrease
of 17%. ATM fees decreased slightly to $361 thousand for the three months ended September 30, 2019 from $363 thousand for the same
period in 2018, a decrease of less than 1%. Noninterest fee income totaled $437 thousand for the three months ended September 30,
2019 a decrease of $120 thousand, or 20%, over the total for the same period in 2018.
Other income totaled
$5.4 million for the nine months ended September 30, 2019 as compared to $5.5 million for the same period in 2018, a decrease of
3%. ATM fees decreased to $1.0 million for the nine months ended September 30, 2019 from $1.1 million for the same period in 2018,
a decrease of 4%. Noninterest fee income totaled $1.4 million for both the nine months ended September 30, 2019 and 2018, a decrease
of $35 thousand, or 2.5%.
Net investment gains
were $153 thousand for the three months ended September 30, 2019 compared to no gains for the same period in 2018. Net investment
gains were $1.6 million for the nine months ended September 30, 2019 compared to $68 thousand for the same period in 2018 primarily
due to $829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations.
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 $33.5 million for the three months ended September 30, 2019, as compared to $31.6 million for the three months ended September
30, 2018, a 6% increase. Total noninterest expenses totaled $105.1 million for the nine months ended September 30, 2019, as compared
to $95.0 million for the nine months ended September 30, 2018, an 11% increase.
Salaries and employee
benefits were $19.1 million for the three months ended September 30, 2019, as compared to $17.2 million for the same period in
2018, an increase of 11% due primarily to $2.0 million of non-recurring charges related to the acceleration of share based compensation
expense associated with the resignation of certain directors. Salaries and employee benefits were $60.5 million for the nine months
ended September 30, 2019, as compared to $51.8 million for the same period in 2018, an increase of 17% due primarily to $8.2 million
of nonrecurring charges related to acceleration of share based compensation expenses associated with the retirement of our former
Chairman and Chief Executive Officer and the resignation of certain directors.
At September 30, 2019,
the Company’s full time equivalent staff numbered 482, as compared to 470 at December 31, 2018, and 478 at September 30,
2018.
Premises and equipment
expenses amounted to $3.5 million and $3.9 million for the three months ended September 30, 2019 and 2018, respectively, a 10%
decrease. For the three months ended September 30, 2019, the Company recognized $126 thousand of sublease revenue as compared to
$123 thousand for the same period in 2018. Premises and equipment expenses amounted to $11.0 million and $11.7 million for the
nine month periods ended September 30, 2019 and 2018, respectively, a 6% decrease. For the nine months ended September 30, 2019,
the Company recognized $377 thousand of sublease revenue as compared to $379 thousand for the same period in 2018. Sublease revenue
is accounted for as a reduction to premises and equipment expenses.
Marketing and advertising
expenses totaled $1.2 million for both the three months ended September 30, 2019 and 2018. Marketing and advertising expenses increased
to $3.6 million for the nine months ended September 30, 2019 from $3.4 million for the same period in 2018, a 6% increase, primarily
due to increased digital, radio and television advertising spend.
Data processing expense
decreased to $2.2 million for the three months ended September 30, 2019 from $2.4 million for the same period in 2018, a 10% decrease
primarily due to ongoing contract renegotiations. Data processing expense increased to $7.2 million for the nine months ended September
30, 2019 from $7.1 million for the same period in 2018, an increase of less than 1%.
Legal, accounting and
professional fees and expenses for the three months ended September 30, 2019 increased to $3.6 million from $2.1 million for the
same period in 2018, a 70% increase. Legal, accounting and professional fees and expenses for the nine months ended September 30,
2019 increased to $8.1 million from $7.3 million for the same period in 2018, an 11% increase. The increased expenses for both
the quarter and year to date 2019 periods were primarily associated with government agencies investigations previously
disclosed in the second quarter 2019 earnings press release. The Company expects to incur elevated levels of legal and professional
fees and expenses for at least the remainder of 2019 as it continues to cooperate with these investigations. Other than these increased
costs, we do not believe at this time that the resolution of these investigations will be materially adverse to the Company. As
a result of these ongoing investigations, there have been no regulatory restrictions placed on the Company’s ability to fully
engage in its banking business as presently conducted. We are, however, unable to predict the duration, scope or outcome of these
investigations.
FDIC insurance decreased
to $85 thousand for the three months ended September 30, 2019 from $933 thousand for the same period in 2018, a 91% decrease as
the increased premium cost of a higher assessment base was effectively offset by the $1.1 million FDIC assessment credit detailed
in the “Earnings Summary” section. FDIC insurance decreased to $2.3 million for the nine months ended September 30,
2019 from $2.6 million for the same period in 2018, a 9% decrease.
Other expenses decreased
to $3.8 million for the three months ended September 30, 2019 from $3.9 million for the same period in 2018, a decrease of 3%.
The major components of cost in this category include broker fees, franchise taxes, core deposit intangible amortization, and insurance
expense. Other expenses increased to $12.5 million for the nine months ended September 30, 2019 from $11.1 million for the same
period in 2018, an increase of 12%, due primarily to real estate and utility costs on special assets ($441 thousand) and director
compensation ($424 thousand).
The efficiency ratio,
which measures the ratio of noninterest expense to total revenue, was 38.34% for the third quarter of 2019, as compared to 36.37%
for the third quarter of 2018. For the first nine months of 2019, the efficiency ratio was 40.08% as compared to 37.74% for the
same period in 2018.
As a percentage of
average assets, total noninterest expense (annualized) was 1.50% for the three months ended September 30, 2019 as compared to 1.58%
for the same period in 2018. As a percentage of average assets, total noninterest expense (annualized) was 1.62% for both the nine
months ended September 30, 2019 and 2018.
Income Tax Expense
The Company’s
ratio of income tax expense to pre-tax income (“effective tax rate”) increased to 27.9% and 26.9% for the three and
nine months ended September 30, 2019, respectively, as compared to 26.3% and 25.7%, respectively, for the same periods in 2018.
The higher effective tax rate for the three and nine months ended September 30, 2019, was due primarily to an increase in nondeductible
expenses and a decrease in federal tax credits.
FINANCIAL CONDITION
Summary
Total assets at September
30, 2019 were $9.00 billion, a 7% increase as compared to $8.39 billion at December 31, 2018. Total loans (excluding loans held
for sale) were $7.56 billion at September 30, 2019, an 8% increase as compared to $6.99 billion at December 31, 2018. Loans held
for sale amounted to $52.2 million at September 30, 2019, a 171% increase as compared to $19.3 million at December 31, 2018. The
investment portfolio totaled $708.5 million at September 30, 2019, a 10% decrease as compared to $784.1 million at December 31,
2018.
Total deposits at September
30, 2019 were $7.40 billion, compared to deposits of $6.97 billion at December 31, 2018, a 6% increase. Total borrowed funds (excluding
customer repurchase agreements) were $317.6 million at September 30, 2019 of which $100.0 million were FHLB advances that mature
in August 2029. Total borrowed funds were $217.3 million at December 31, 2018 none of which were FHLB advances. We continue to
work on expanding the breadth and depth of our existing relationships while we pursue building new relationships.
Total
shareholders’ equity at September 30, 2019 increased 7% to $1.18 billion from $1.11 billion at December 31, 2018
primarily as the result of growth in retained earnings. The Company’s capital position remains substantially in excess
of regulatory requirements for well capitalized status, with a total risk based capital ratio of 16.08% at both September 30,
2019 and December 31, 2018. Tangible book value per share was $32.02 at September 30, 2019, a 10% increase over $29.17 at
December 31, 2018. A $0.22 per share dividend was declared in respect of the common stock on September 25, 2019 to
shareholders of record on October 15, 2019 and was paid on October 31, 2019. In addition, the tangible common equity ratio
was 12.13% at September 30, 2019 and 12.11% at December 31, 2018. Furthermore, Kroll Bond Rating Agency reaffirmed our BBB+
senior unsecured debt rating (A- at the Bank level) based on our strong capital position, above-peer earnings, low operating
expense base relative to peer, and a history of strong asset quality metrics.
Under the capital rules
applicable to the Company and Bank, in order to be considered well-capitalized, the Bank must have a common equity Tier 1 risk
based capital (“CET1”) 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 meet all these requirements, and satisfy the requirement to maintain the
fully phased in capital conservation buffer of 2.5% of common equity tier 1 capital for capital adequacy purposes. 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, 2019 and December 31, 2018 by major category are summarized below.
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
(dollars in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Commercial
|
|
$
|
1,466,862
|
|
|
|
19
|
%
|
|
$
|
1,553,112
|
|
|
|
22
|
%
|
Income producing - commercial real estate
|
|
|
3,812,284
|
|
|
|
51
|
%
|
|
|
3,256,900
|
|
|
|
46
|
%
|
Owner occupied - commercial real estate
|
|
|
956,345
|
|
|
|
13
|
%
|
|
|
887,814
|
|
|
|
13
|
%
|
Real estate mortgage - residential
|
|
|
104,563
|
|
|
|
1
|
%
|
|
|
106,418
|
|
|
|
2
|
%
|
Construction - commercial and residential
|
|
|
1,053,789
|
|
|
|
14
|
%
|
|
|
1,039,815
|
|
|
|
15
|
%
|
Construction - C&I (owner occupied)
|
|
|
81,916
|
|
|
|
1
|
%
|
|
|
57,797
|
|
|
|
1
|
%
|
Home equity
|
|
|
81,117
|
|
|
|
1
|
%
|
|
|
86,603
|
|
|
|
1
|
%
|
Other consumer
|
|
|
2,285
|
|
|
|
—
|
|
|
|
2,988
|
|
|
|
—
|
|
Total loans
|
|
|
7,559,161
|
|
|
|
100
|
%
|
|
|
6,991,447
|
|
|
|
100
|
%
|
Less: allowance for credit losses
|
|
|
(73,720
|
)
|
|
|
|
|
|
|
(69,944
|
)
|
|
|
|
|
Net loans
|
|
$
|
7,485,441
|
|
|
|
|
|
|
$
|
6,921,503
|
|
|
|
|
|
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
$7.60 billion at September 30, 2019, an increase of $567.7 million, or 8%, as compared to $6.99 billion at December 31, 2018. Loan
growth during the nine months ended September 30, 2019 was predominantly in the income producing – commercial real estate
and owner occupied – commercial real estate loan categories. Despite an increased level of in-market competition for
business, the Bank continued to experience organic loan growth across the portfolio. 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, the sector has evidenced some positive absorption. Overall, commercial real estate values have
generally held up well with price escalation in prime pockets, but we continue to be cautious of the cap rates at which some assets
are trading and we are being careful with valuations as a result. While the ultra high-end real estate market has softened,
the moderately priced housing market has remained stable to increasing, with well-located, Metro accessible properties garnering
a premium.
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 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 nine months
ended September 30, 2019, noninterest bearing deposits decreased $53.1 million as compared to December 31, 2018, while interest
bearing deposits increased by $481.3 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 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. The Bank also is able to obtain one-way CDARS deposits and
participates in Promontory’s Insured Network Deposit (“IND”). At September 30, 2019, total deposits
included $1.70 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 23% of total deposits.
At December 31, 2018, total brokered deposits (excluding the CDARS and ICS two-way) were $1.36 billion, or 20% of total
deposits. The CDARS and ICS two-way component represented $638.9 million, or 9%, of total deposits and $391.7 million, or 6%,
of total deposits at September 30, 2019 and December 31, 2018, 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, 2019
the Company had $2.05 billion in noninterest bearing demand deposits, representing 28% of total deposits, compared to $2.10 billion
of noninterest bearing demand deposits at December 31, 2018, or 30% of total deposits. Average noninterest bearing deposits were
31% of total deposits for the first nine months of 2019 and 33% for the first nine months of 2018. 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 which are not suited for either a certificate of deposit
or a money market account. The balances in these accounts were $30.3 million at September 30, 2019 compared to $30.4 million at
December 31, 2018. 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, 2019
the Company had $1.40 billion in time deposits. Time deposits increased by $71.5 million from year end December 31, 2018. The Bank
raises and renews time deposits through its branch network, for its public funds customers, and through brokered 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, 2019 and December 31, 2018. The Bank had $100.0 million in short-term borrowings outstanding under its credit facility from
the FHLB at September 30, 2019. The Bank did not have short-term borrowings outstanding at December 31, 2018. 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, 2019 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. For additional information on the subordinated notes, please refer to Note 10 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 $172.5 million in
federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at September 30, 2019,
and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.35 billion, against which there
was $35.3 million outstanding at September 30, 2019. The Bank also has a commitment from Promontory to place up to $700.0 million
of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of $431.8 million
at September 30, 2019. At September 30, 2019 the Bank was also eligible to make advances from the FHLB up to $1.7 billion based
on collateral at the FHLB, of which there was $100 million outstanding at September 30, 2019. 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 $639.0 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. 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 (“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.
At September 30, 2019,
under the Bank’s liquidity formula, it had $4.57 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, 2019 are as follows:
(dollars in thousands)
|
|
2019
|
|
Unfunded loan commitments
|
|
$
|
2,140,889
|
|
Unfunded lines of credit
|
|
|
88,495
|
|
Letters of credit
|
|
|
68,851
|
|
Total
|
|
$
|
2,298,235
|
|
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, 2019, unfunded loan commitments included $103.4 million related to interest rate lock commitments on residential mortgage loans
and were of a short-term nature.
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 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 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 three months
ended September 30, 2019, as compared to the same period in 2018, the Company was able to maintain its net interest income relatively
stable, produce a net interest margin of 3.72%, and continue to 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 provide liquidity and provide 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, 2019, the average investment
portfolio balances increased modestly as compared to average balances for the three months ended September 30, 2018, but
decreased from balances at December 31, 2018. The cash received from deposit growth along with cash flows from the
investment portfolio were deployed into loans and the purchase of replacement investments and held in cash.
The percentage mix
of municipal securities was 9% of total investments at September 30, 2019 and 6% at September 30, 2018. The portion of the portfolio
invested in mortgage backed securities was 73% at September 30, 2019 and 72% at September 30, 2018. The portion of the portfolio
invested in U.S. agency investments was 14% at September 30, 2019 and 21% at September 30, 2018. Shorter duration floating rate
corporate bonds were 1% of total investments at both September 30, 2019 and September 30, 2018, and SBA bonds, which are included
in mortgage backed securities, were 10% and 11% of total investments at September 30, 2019 and September 30, 2018, respectively.
More recently over the last three months, as a result of generally lower interest rates, mortgage prepayment speeds increased and
the duration of the investment portfolio decreased to 2.9 years at September 30, 2019 from 3.9 years at September 30, 2018.
The re-pricing duration
of the loan portfolio was 20 months at September 30, 2019 versus 17 months at December 31, 2018, with fixed rate loans amounting
to 40% and 36% of total loans at September 30, 2019 and September 30, 2018, respectively. Variable and adjustable rate loans comprised
60% and 64% of total loans at September 30, 2019 and September 30, 2018, 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 29 months at September 30, 2019 from 26 months at December 31, 2018. The change since December 31,
2018 was due substantially to a change in the mix and duration of time deposits as market interest rates decreased and customers
anticipated continuing rate declines. Additionally, the Bank maintained a higher percentage of fixed rate time deposits at September
30, 2019 than was the case at December 31, 2018.
The Company has continued
its emphasis on funding loans in its marketplace although competition for
new loans persists. A disciplined approach to loan pricing, with variable and adjustable rate loans comprising 60% of total loans
(at September 30, 2019), has resulted in a loan portfolio yield of 5.39% for the three months ended September 30, 2019 as compared
to 5.69% for the same period in 2018. 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 $9.1 million at September 30, 2019 as compared to a net unrealized loss
before tax of $9.5 million at December 31, 2018. The increase in the net unrealized gain on the investment portfolio at September
30, 2019 as compared to December 31, 2018 was due primarily to lower interest rates at September 30, 2019. At September 30, 2019,
the net unrealized gain position represented 1.3% 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, 2019. 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, 2019, 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 September 30, 2019 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 September 30, 2019 is 2.9 years, the loan portfolio 1.7 years, the interest bearing deposit portfolio 2.4 years, and
the borrowed funds portfolio 4.4 years.
The following table
reflects the result of simulation analysis on the September 30, 2019 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
|
|
+19.2%
|
|
+32.7%
|
|
+6.9%
|
+300
|
|
+14.4%
|
|
+24.6%
|
|
+6.0%
|
+200
|
|
+9.7%
|
|
+16.4%
|
|
+4.9%
|
+100
|
|
+4.8%
|
|
+8.2%
|
|
+2.9%
|
0
|
|
—
|
|
—
|
|
—
|
-100
|
|
-3.7%
|
|
-6.3%
|
|
-4.3%
|
-200
|
|
-8.0%
|
|
-13.6%
|
|
-14.0%
|
The results of simulation
are within the relevant 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. Due to the level of market
rates at September 30, 2019, interest rate shocks of -300 and -400 basis points leave the Bank with zero and 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 both a higher and lower interest rate shock scenario at September 30, 2019 are not considered to be excessive.
The impact of -3.7% in net interest income and -6.3% 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 non-interest bearing deposits are
not expected to have lower interest costs.
In the third quarter
of 2019, 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, 2019 was similar to the interest rate risk position
at December 31, 2018.
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 third quarter
of 2019, average market interest rates decreased across the yield curve. Overall, there was a flattening of the yield curve as
compared to the third quarter of 2018 with rate decreases being generally more significant at the longer end of the yield curve.
As compared to the
third quarter of 2018, the average two-year U.S. Treasury rate decreased by 89 basis points from 2.58% to 1.69%, the average five
year U.S. Treasury rate decreased by 118 basis points from 2.81% to 1.63% and the average ten year U.S. Treasury rate decreased
by 112 basis points from 2.92% to 1.80%. The Company’s net interest margin was 3.72% for the third quarter of 2019 and 4.15%
in the third quarter of 2018. The Company believes that the net interest margin in the most recent quarter as compared to 2018’s
third quarter has been consistent with its interest risk analysis at December 31, 2018.
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 93% and 94% of the Company’s
revenue for the third quarter of 2019 and 2018, 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, 2019,
the Company had 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 or 4% of total assets out to 12 months; as compared to a positive GAP position of approximately
$604 million or 7% of total assets out to three months and a positive cumulative GAP position of $417 million or 5% of total assets
out to 12 months at December 31, 2018. The change in the positive GAP position at September 30, 2019, as compared to December 31,
2018, was due to an increase in immediately repricing interest bearing liabilities while increasing fixed rate assets. The change
in the GAP position at September 30, 2019 as compared to December 31, 2018 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 significant volumes of variable rate assets together with 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, 2019
(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
|
|
$
|
161,837
|
|
|
$
|
81,444
|
|
|
$
|
161,635
|
|
|
$
|
123,778
|
|
|
$
|
208,576
|
|
|
$
|
737,270
|
|
|
|
|
|
|
|
|
|
Loans
(1)(2)
|
|
|
3,878,017
|
|
|
|
648,834
|
|
|
|
1,271,654
|
|
|
|
971,558
|
|
|
|
841,297
|
|
|
|
7,611,360
|
|
|
|
|
|
|
|
|
|
Fed
funds and other short-term investments
|
|
|
388,865
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
388,865
|
|
|
|
|
|
|
|
|
|
Other
earning assets
|
|
|
74,726
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74,726
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,503,445
|
|
|
$
|
730,278
|
|
|
$
|
1,433,289
|
|
|
$
|
1,095,336
|
|
|
$
|
1,049,873
|
|
|
$
|
8,812,221
|
|
|
$
|
191,246
|
|
|
$
|
9,003,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE
SENSITIVE LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing demand
|
|
$
|
77,850
|
|
|
$
|
215,716
|
|
|
$
|
463,364
|
|
|
$
|
336,501
|
|
|
$
|
957,675
|
|
|
$
|
2,051,106
|
|
|
|
|
|
|
|
|
|
Interest
bearing transaction
|
|
|
918,011
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
918,011
|
|
|
|
|
|
|
|
|
|
Savings
and money market
|
|
|
2,809,530
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
225,000
|
|
|
|
3,034,530
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
|
|
348,057
|
|
|
|
550,545
|
|
|
|
369,117
|
|
|
|
128,008
|
|
|
|
3,139
|
|
|
|
1,398,866
|
|
|
|
|
|
|
|
|
|
Customer
repurchase agreements and fed funds purchased
|
|
|
30,297
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,297
|
|
|
|
|
|
|
|
|
|
Other
borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
148,197
|
|
|
|
69,392
|
|
|
|
100,000
|
|
|
|
317,589
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,183,745
|
|
|
$
|
766,261
|
|
|
$
|
980,678
|
|
|
$
|
533,901
|
|
|
$
|
1,285,814
|
|
|
$
|
7,750,399
|
|
|
$
|
68,474
|
|
|
$
|
7,818,873
|
|
GAP
|
|
$
|
319,700
|
|
|
$
|
(35,983
|
)
|
|
$
|
452,611
|
|
|
$
|
561,435
|
|
|
$
|
(235,941
|
)
|
|
$
|
1,061,822
|
|
|
|
|
|
|
|
|
|
Cumulative
GAP
|
|
$
|
319,700
|
|
|
$
|
283,717
|
|
|
$
|
736,328
|
|
|
$
|
1,297,763
|
|
|
$
|
1,061,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
gap as percent of total assets
|
|
|
3.55
|
%
|
|
|
3.15
|
%
|
|
|
8.18
|
%
|
|
|
14.41
|
%
|
|
|
11.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFF
BALANCE-SHEET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swaps - LIBOR based
|
|
$
|
100,000
|
|
|
$
|
—
|
|
|
$
|
(100,000
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swaps - Fed Funds based
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,000
|
|
|
$
|
—
|
|
|
$
|
(100,000
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
GAP
|
|
$
|
419,700
|
|
|
$
|
(35,983
|
)
|
|
$
|
352,611
|
|
|
$
|
561,435
|
|
|
$
|
(235,941
|
)
|
|
$
|
1,061,822
|
|
|
|
|
|
|
|
|
|
Cumulative
GAP
|
|
$
|
419,700
|
|
|
$
|
383,717
|
|
|
$
|
736,328
|
|
|
$
|
1,297,763
|
|
|
$
|
1,061,822
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Cumulative
gap as percent of total assets
|
|
|
4.66
|
%
|
|
|
4.26
|
%
|
|
|
8.18
|
%
|
|
|
14.41
|
%
|
|
|
11.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2019, non-owner-occupied commercial real estate loans
(including construction, land, and land development loans) represent 355% of total risk based capital. Construction, land and land
development loans represent 123% 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 requires
a minimum leverage ratio of 4.0%. The Company and the Bank meet all these requirements, and satisfy the requirement to maintain
the fully phased in capital conservation buffer of 2.5% of common equity tier 1 capital for capital adequacy purposes.
During the third quarter
of 2019, the Company adopted its first share repurchase program. Under the repurchase program, the Company may repurchase up to
1,715,547 shares of its common stock, or approximately 5% of its outstanding shares of common stock at June 30, 2019 of approximately
34,539,853. The repurchase program will expire on December 31, 2019, subject to earlier termination of the program by the Board
of Directors. Through September 30, 2019, the Company has repurchased 822,200 shares at a weighted average price of $40.58 per
share.
The Company announced
a regular quarterly cash dividend on September 25, 2019 of $0.22 per share to shareholders of record on October 15, 2019 and payable
October 31, 2019.
The actual capital
amounts and ratios for the Company and Bank as of September 30, 2019 and December 31, 2018 are presented in the table below.
|
|
Company
|
|
|
Bank
|
|
|
|
|
|
To
Be Well
Capitalized Under
Prompt
|
|
|
|
Actual
|
|
|
Actual
|
|
|
Minimum
Required For
|
|
|
Corrective
Action
|
|
(dollars
in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Capital
Adequacy Purposes
|
|
|
Regulations
*
|
|
As of September 30,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1
capital (to risk weighted assets)
|
|
$
|
1,074,526
|
|
|
|
12.76
|
%
|
|
$
|
1,220,452
|
|
|
|
14.51
|
%
|
|
|
7.000
|
%
|
|
|
6.5
|
%
|
Total
capital (to risk weighted assets)
|
|
|
1,354,313
|
|
|
|
16.08
|
%
|
|
|
1,294,239
|
|
|
|
15.38
|
%
|
|
|
10.500
|
%
|
|
|
10.0
|
%
|
Tier
1 capital (to risk weighted assets)
|
|
|
1,074,526
|
|
|
|
12.76
|
%
|
|
|
1,220,452
|
|
|
|
14.51
|
%
|
|
|
8.500
|
%
|
|
|
8.0
|
%
|
Tier
1 capital (to average assets)
|
|
|
1,074,526
|
|
|
|
12.19
|
%
|
|
|
1,220,452
|
|
|
|
13.87
|
%
|
|
|
4.000
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1
capital (to risk weighted assets)
|
|
$
|
1,007,438
|
|
|
|
12.49
|
%
|
|
$
|
1,147,151
|
|
|
|
14.23
|
%
|
|
|
6.375
|
%
|
|
|
6.5
|
%
|
Total
capital (to risk weighted assets)
|
|
|
1,297,427
|
|
|
|
16.08
|
%
|
|
|
1,217,140
|
|
|
|
15.10
|
%
|
|
|
9.875
|
%
|
|
|
10.0
|
%
|
Tier
1 capital (to risk weighted assets)
|
|
|
1,007,438
|
|
|
|
12.49
|
%
|
|
|
1,147,151
|
|
|
|
14.23
|
%
|
|
|
7.875
|
%
|
|
|
8.0
|
%
|
Tier
1 capital (to average assets)
|
|
|
1,007,438
|
|
|
|
12.10
|
%
|
|
|
1,147,151
|
|
|
|
13.78
|
%
|
|
|
5.000
|
%
|
|
|
5.0
|
%
|
*
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, 2019 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 calculates return on average tangible
common equity by dividing annualized year to date net income by tangible common equity. 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.
GAAP
Reconciliation (Unaudited)
(dollars
in thousands except per share data)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
Twelve
Months Ended
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2019
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
September
30, 2018
|
|
|
September
30, 2018
|
|
Common
shareholders’ equity
|
|
|
|
|
|
$
|
1,184,594
|
|
|
$
|
1,108,941
|
|
|
|
|
|
|
$
|
1,061,651
|
|
Less:
Intangible assets
|
|
|
|
|
|
|
(104,915
|
)
|
|
|
(105,766
|
)
|
|
|
|
|
|
|
(106,481
|
)
|
Tangible
common equity
|
|
|
|
|
|
$
|
1,079,679
|
|
|
$
|
1,003,175
|
|
|
|
|
|
|
$
|
955,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value per common share
|
|
|
|
|
|
$
|
35.13
|
|
|
$
|
32.25
|
|
|
|
|
|
|
$
|
30.94
|
|
Less:
Intangible book value per common share
|
|
|
|
|
|
|
(3.11
|
)
|
|
|
(3.08
|
)
|
|
|
|
|
|
|
(3.10
|
)
|
Tangible
book value per common share
|
|
|
|
|
|
$
|
32.02
|
|
|
$
|
29.17
|
|
|
|
|
|
|
$
|
27.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
$
|
9,003,467
|
|
|
$
|
8,389,137
|
|
|
|
|
|
|
$
|
8,057,855
|
|
Less:
Intangible assets
|
|
|
|
|
|
|
(104,915
|
)
|
|
|
(105,766
|
)
|
|
|
|
|
|
|
(106,481
|
)
|
Tangible
assets
|
|
|
|
|
|
$
|
8,898,552
|
|
|
$
|
8,283,371
|
|
|
|
|
|
|
$
|
7,951,374
|
|
Tangible
common equity ratio
|
|
|
|
|
|
|
12.13
|
%
|
|
|
12.11
|
%
|
|
|
|
|
|
|
12.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shareholders’ equity
|
|
$
|
1,197,513
|
|
|
$
|
1,164,541
|
|
|
$
|
1,022,642
|
|
|
$
|
1,040,826
|
|
|
$
|
1,003,439
|
|
Less:
Average intangible assets
|
|
|
(105,034
|
)
|
|
|
(105,297
|
)
|
|
|
(106,806
|
)
|
|
|
(106,629
|
)
|
|
|
(106,949
|
)
|
Average
tangible common equity
|
|
$
|
1,092,479
|
|
|
$
|
1,059,245
|
|
|
$
|
915,836
|
|
|
$
|
934,197
|
|
|
$
|
896,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Available to Common Shareholders
|
|
$
|
36,495
|
|
|
$
|
107,487
|
|
|
$
|
152,276
|
|
|
$
|
38,949
|
|
|
$
|
111,959
|
|
Average
tangible common equity
|
|
$
|
1,092,479
|
|
|
$
|
1,059,245
|
|
|
$
|
915,836
|
|
|
$
|
934,197
|
|
|
$
|
896,490
|
|
Annualized
Return on Average Tangible Common Equity
|
|
|
13.25
|
%
|
|
|
13.57
|
%
|
|
|
16.63
|
%
|
|
|
16.54
|
%
|
|
|
16.70
|
%
|
(dollars
in thousands except per share data)
|
|
Nine
Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
|
|
|
Change
|
|
|
Non-GAAP
|
|
|
|
|
|
|
|
|
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets
|
|
$
|
59,137
|
|
|
$
|
(16,528
|
)
|
|
$
|
42,609
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans
|
|
$
|
57,650
|
|
|
$
|
(16,528
|
)
|
|
$
|
41,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Ratios (annualized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets to total assets
|
|
|
0.66
|
%
|
|
|
|
|
|
|
0.47
|
%
|
|
|
|
|
|
|
|
|
Nonperforming
loans to total loans
|
|
|
0.76
|
%
|
|
|
|
|
|
|
0.54
|
%
|
|
|
|
|
|
|
|
|
Allowance
for credit losses to total nonperforming loans
|
|
|
127.87
|
%
|
|
|
|
|
|
|
179.27
|
%
|
|
|
|
|
|
|
|
|