The Company had no additional operating and finance leases
that have not yet commenced at March 31, 2019. The Company does not have any
lease arrangements with any of its related parties as of March 31, 2019.
Note 13 – Financial Instruments with Off-balance Sheet
Risk and Derivatives
The Company has entered into interest rate swaps (“swaps”)
to facilitate customer transactions and meet their financing needs. These swaps
qualify as derivatives, but are not designated as hedging instruments. Interest
rate swap contracts involve the risk of dealing with counterparties and their
ability to meet contractual terms. When the fair value of a derivative
instrument contract is positive, this generally indicates that the counterparty
or customer owes the Company, and results in credit risk to the Company. When
the fair value of a derivative instrument contract is negative, the Company
owes the customer or counterparty and therefore, has no credit risk. The
notional value of commercial loan swaps outstanding was $43.8 million with a
fair value of $0.7 million as of March 31, 2019 compared to $16.6 million with
a fair value of $0.4 million as of December 31, 2018. The swap positions are
offset to minimize the potential impact on the Company’s financial statements.
Fair values of the swaps are carried as both gross assets and gross
liabilities in the Condensed Consolidated Statements of Condition. The
associated net gains and losses on the swaps are recorded in other non-interest
income.
Note 14 – Litigation
The Company and its subsidiaries
are subject in the ordinary course of business to various pending or
threatened legal proceedings in which claims for monetary damages are
asserted. After consultation with legal counsel, management does not anticipate
that the ultimate liability, if any, arising out of these legal matters will
have a material adverse effect on the Company's financial condition, operating
results or liquidity.
Note 15 – Fair Value
Generally accepted accounting principles provide entities
the option to measure eligible financial assets, financial liabilities and
commitments at fair value (i.e. the fair value option), on an
instrument-by-instrument basis, that are otherwise not permitted to be
accounted for at fair value under other accounting standards. The election to use
the fair value option is available when an entity first recognizes a financial
asset or financial liability or upon entering into a commitment. Subsequent
changes in fair value must be recorded in earnings. The Company applies the
fair value option on residential mortgage loans held for sale. The fair value
option on residential mortgage loans held for sale allows the recognition of
gains on sale of mortgage loans to more accurately reflect the timing and
economics of the transaction.
The standard for fair value measurement establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy are described
below.
Basis of Fair Value Measurement:
Level 1- Unadjusted quoted prices in active markets that
are accessible at the measurement date for identical, unrestricted assets or
liabilities;
Level 2- Quoted prices in markets that are not active, or
inputs that are observable, either directly or indirectly, for substantially
the full term of the asset or liability;
Level 3- Prices or valuation techniques that require inputs
that are both significant to the fair value measurement and unobservable (i.e.
supported by little or no market activity).
A financial instrument’s level within the fair value
hierarchy is based on the lowest level of input that is significant to the fair
value measurement.
Changes to interest rates may result in changes in the cash
flows due to prepayments or extinguishments. Accordingly, this could result in
higher or lower measurements of the fair values.
Assets and Liabilities
Mortgage loans held for sale
Mortgage loans held for sale are valued based on quotations
from the secondary market for similar instruments and are classified as Level 2
of the fair value hierarchy.
Investments available-for-sale
U.S. government agencies, mortgage-backed, and asset-backed
securities
Item 2.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The Company
Sandy Spring Bancorp, Inc. (the
“Company") is the bank holding company for Sandy Spring Bank (the
"Bank").
The Company is an $8.3
billion community banking organization that focuses its lending and other
services on businesses and consumers in the local market area. T
he Company is registered as a bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended (the "Holding
Company Act"). As such, the Company is subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). The Company began operating in 1988. The Bank
traces its origin to 1868, making it among the oldest institutions in the
region. Independent and community-oriented, Sandy Spring Bank offers a broad
range of commercial banking, retail banking, mortgage and trust services
throughout central Maryland, Northern Virginia, and the greater Washington,
D.C. market. Through its subsidiaries, Sandy Spring Insurance Corporation and
West Financial Services, Inc., Sandy Spring Bank also offers a variety of comprehensive
insurance and wealth management services. The Bank is a state chartered bank
subject to supervision and regulation by the Federal Reserve and the State of
Maryland. The Bank's deposit accounts are insured by the Deposit Insurance Fund
administered by the Federal Deposit Insurance Corporation (the
"FDIC") to the maximum permitted by law. The Bank is a member of the
Federal Reserve System and is an Equal Housing Lender. The Company, the Bank,
and its other subsidiaries are Affirmative Action/Equal Opportunity Employers.
The Bank’s subsidiaries, Sandy Spring Insurance Corporation
and West Financial Services, Inc., offer a variety of comprehensive insurance
and investment management services. During 2018, the Company completed the acquisition
of WashingtonFirst Bankshares, Inc., the parent company for WashingtonFirst
Bank (collectively referred to as “WashingtonFirst”). At the date of
acquisition, WashingtonFirst had 19 community banking offices and more than
$2.1 billion in assets. The all-stock transaction resulted in the issuance of
11.4 million common shares and was valued at approximately $447 million.
Overview
Net income for the Company for the first quarter of 2019
totaled $30.3 million ($0.85 per diluted share) as compared to net income of
$21.7 million ($0.61 per diluted share) for the first quarter of 2018 and net
income of $25.6 million ($0.72 per diluted share) for the fourth quarter of
2018. The current quarter’s results included $1.8 million of recovered interest
income from a previously acquired credit impaired loans. Excluding the
after-tax impact of this item, the net income for the first quarter of 2019
would have been $29.0 million or $0.81 per diluted share.
These results reflect the following events:
·
Total assets grew 5% while loans and deposits grew by 8% and 11%,
respectively, compared to the first quarter of 2018.
·
First quarter results reflected an annualized return on average
assets of 1.49% and annualized return on average common equity of 11.46% as
compared to 1.12% and 8.70% respectively for the first quarter of 2018
including the impact of merger expenses of $9.0 million. Exclusive of the
prior year’s first quarter merger costs on an after-tax basis, the return on
average assets and return on average common equity would have been 1.47% and
11.40%, respectively.
·
The net interest margin was 3.60% for the first quarter of 2019,
compared to 3.58% for the first quarter of 2018 and 3.57% for the fourth
quarter of 2018. Excluding recovered interest income on acquired credit
impaired loans during the quarter the net interest margin would have been
3.52%. Neither the prior year quarter nor the previous quarter recorded any
recovered interest.
·
Non-interest income excluding insurance mortality proceeds and
securities gains increased 6% from the prior year quarter.
·
Tangible book value increased 10% to $21.05 per share at the end
of the first quarter of the current year compared to $19.12 at March 31, 2018.
·
The tangible common equity ratio increased to 9.39% at March 31,
2019 from 8.99% at March 31, 2018.
·
The Non-GAAP efficiency ratio was 51.44% for the current quarter
as compared to 49.54% for the first quarter of 2018 and 51.78% for the fourth
quarter of 2018.
The local economy continues to experience low unemployment rate,
wage growth and increased housing starts; however, these trends have been
tempered by other concerns such as deficit growth, domestic political turmoil and
geo-political uncertainty. These factors, in concert, impact the pace of
economic expansion and create volatility in global economic markets.
Additionally, the recent trends in interest rates continue to cause a degree of
uncertainty among individual consumers and small and mid-sized businesses. Management
remains confident that future growth opportunities for the Company will
continue to present themselves despite this mixed economic environment.
Total
assets at March 31, 2019 increased 5% compared to March 31, 2018. This growth
has been driven by organic loan growth as loan balances at March 31, 2019 have
increased 8% compared to March 31, 2018. Deposits increased 11% compared to
balances at March 31, 2018. Liquidity continues to remain strong due to the
available borrowing lines with the Federal Home Loan Bank of Atlanta, the
Federal Reserve and other sources, in addition to the size and composition of
the available-for-sale investment portfolio. Stockholders’ equity increased
$81.2 million compared to March 31, 2018 due to the retention of earnings from the
past twelve months.
Non-performing loans (which excludes purchased credit impaired
loans) represented 0.61% of total loans at March 31, 2019 compared to 0.48% at
March 31, 2018. The Company’s non-performing loans were $40.1 million at March
31, 2019 compared to $29.4 million at March 31, 2018. The ratio of annualized
net charge-offs to average loans for the current quarter remained at the same
level as the prior year quarter at 0.02%.
Net
interest income for the first quarter of 2019 increased 6% compared to the
first quarter of 2018 as a result of the increased interest income driven by
the Company’s organic loan growth during the period that more than offset the
growth in interest expense during the period. The net interest margin was
3.60% for the first quarter of 2019 compared to 3.58% for the first quarter of
2018. The current quarter’s margin included the effect of $1.8 million in
recovered interest income from a previously acquired credit impaired loans.
Excluding this amount, the net interest margin for the current quarter would
have been 3.52%. No recovered interest was recorded in the first quarter of
the prior year.
The provision for loan losses was a credit of $0.1 million
for the first quarter of 2019 compared to charge of $2.0 million for the first
quarter of 2018. The decrease in the provision reflects the overall improvement
in the qualitative credit metrics of the loan portfolio during the previous
twelve months and lower loan growth during the current quarter.
Non-interest income increased 6% for the first quarter of
2019 as compared to the first quarter of 2018 excluding the insurance mortality
proceeds that were realized for each of the quarters, as well as the securities
gains for the previous year’s quarter. This increase in non-interest income
was primarily due to the impact of increased mortgage banking income and, to a
lesser extent, income from wealth management activities and credit related fees.
Non-interest
expenses decreased 11% to $44.2 million for the first quarter of 2019 compared
to $49.6 million in the first quarter of 2018. The prior year’s quarter
included $9.0 million in merger expenses. Excluding these expenses, non-interest
expenses increased 9% compared to the first quarter of 2018 due to increased
compensation and benefit costs driven by a combination of increases in
compensation levels resulting from annual merit increases, current quarter
health care expenses and an increase in the Company’s contribution to the
employee retirement savings plans. The non-GAAP efficiency ratio was 51.44%
for the first quarter of 2019, compared to 49.54% for the first quarter of 2018.
The current period’s ratio increased as compared to the prior period, as the
rate of increase in the non-interest expenses exceeded the rate of increase in
the non-GAAP income.
Results of Operations
For the Three Months Ended March 31, 2019 Compared to the
Three Months Ended March 31, 2018
Net income for the Company for the first quarter of 2019
totaled $30.3 million ($0.85 per diluted share) compared to net income of $21.7
million ($0.61 per diluted share) for the first quarter of 2018.
Net Interest Income
For
the first quarter of 2019 net interest income increased 6% to $66.8 million
compared to $62.9 million for the first quarter of 2018. On a tax-equivalent
basis, net interest income for the first quarter of 2019 was $68.0 million
compared to $64.0 million for the first quarter of 2018, an increase of 6%.
The growth in net interest income was the result of the Company’s organic loan
growth during the previous twelve months which more than offset the impact of
deposit growth as interest rates rose during that period.
Net
interest margin was 3.60% for the first quarter of 2019 compared to 3.58% for
the first quarter of 2018. The current quarter’s margin included the effect of
$1.8 million in recovered interest income from a previously acquired credit
impaired loans. Excluding this amount, the net interest margin for the current
quarter would have been 3.52%. Amortization of the fair value adjustments to
both interest-earning assets and interest-bearing liabilities directly
attributable to the acquisition had an 8 basis point positive effect on net
interest margin for the current period. Excluding the amortization of fair
value adjustments and recovered interest from net interest income, the net
interest margin for the current quarter would have been 3.44%, compared to
3.45% for the prior year’s first quarter and 3.44% for the fourth quarter of
2018, on a comparative basis.
The
impact of the amortization of the fair value adjustments on net interest income
for the current quarter is presented in the following table:
(In thousands)
|
|
For the Three Months
Ended March 31, 2019
|
Net Interest Income Excluding Purchase Accounting
Adjustments:
|
|
|
|
Net Interest Income
|
|
$
|
66,750
|
|
Accretion of fair value adjustment on pools of homogeneous
loans
|
|
|
(197)
|
|
Accretion of loan fair value adjustment on purchased credit
impaired loans
|
|
|
(292)
|
|
Settlements of purchased credit impaired loans
|
|
|
(1,799)
|
|
Accretion of fair value adjustment on certificates of
deposits
|
|
|
(178)
|
|
Accretion of fair value adjustment on subordinated debentures
|
|
|
(36)
|
Net Interest Income Excluding Purchase Accounting Adjustments
|
|
$
|
64,248
|
Sandy
Spring Bancorp, Inc. and Subsidiaries
|
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
Average
|
|
(1)
|
|
Average
|
|
|
Average
|
|
(1)
|
|
Average
|
|
|
(Dollars in thousands and tax-equivalent)
|
|
Balances
|
|
Interest
|
|
Yield/Rate
|
|
|
Balances
|
|
Interest
|
|
Yield/Rate
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans
|
|
$
|
1,230,319
|
|
$
|
11,788
|
|
3.83
|
%
|
|
$
|
1,117,478
|
|
$
|
10,381
|
|
3.72
|
%
|
|
Residential construction loans
|
|
|
189,720
|
|
|
1,963
|
|
4.20
|
|
|
|
193,327
|
|
|
1,844
|
|
3.87
|
|
|
Total mortgage loans
|
|
|
1,420,039
|
|
|
13,751
|
|
3.88
|
|
|
|
1,310,805
|
|
|
12,225
|
|
3.74
|
|
|
Commercial AD&C loans
|
|
|
676,205
|
|
|
9,880
|
|
5.93
|
|
|
|
582,876
|
|
|
8,136
|
|
5.66
|
|
|
Commercial investor real estate loans
|
|
|
1,964,699
|
|
|
25,729
|
|
5.31
|
|
|
|
1,988,340
|
|
|
23,428
|
|
4.78
|
|
|
Commercial owner occupied real estate loans
|
|
|
1,207,799
|
|
|
14,386
|
|
4.83
|
|
|
|
940,065
|
|
|
10,578
|
|
4.56
|
|
|
Commercial business loans
|
|
|
780,318
|
|
|
10,808
|
|
5.62
|
|
|
|
657,372
|
|
|
8,049
|
|
4.97
|
|
|
Total commercial loans
|
|
|
4,629,021
|
|
|
60,803
|
|
5.33
|
|
|
|
4,168,653
|
|
|
50,191
|
|
4.88
|
|
|
Consumer loans
|
|
|
515,644
|
|
|
6,330
|
|
4.98
|
|
|
|
538,198
|
|
|
5,546
|
|
4.24
|
|
|
Total loans (2)
|
|
|
6,564,704
|
|
|
80,884
|
|
4.99
|
|
|
|
6,017,656
|
|
|
67,962
|
|
4.57
|
|
|
Loans held for sale
|
|
|
17,846
|
|
|
192
|
|
4.31
|
|
|
|
35,768
|
|
|
368
|
|
4.12
|
|
|
Taxable securities
|
|
|
768,658
|
|
|
5,976
|
|
3.11
|
|
|
|
761,392
|
|
|
5,267
|
|
2.77
|
|
|
Tax-exempt securities (3)
|
|
|
242,282
|
|
|
2,173
|
|
3.59
|
|
|
|
300,933
|
|
|
2,622
|
|
3.49
|
|
|
Total investment securities (4)
|
|
|
1,010,940
|
|
|
8,149
|
|
3.23
|
|
|
|
1,062,325
|
|
|
7,889
|
|
2.97
|
|
|
Interest-bearing deposits with banks
|
|
|
33,068
|
|
|
194
|
|
2.38
|
|
|
|
93,241
|
|
|
357
|
|
1.55
|
|
|
Federal funds sold
|
|
|
629
|
|
|
5
|
|
3.33
|
|
|
|
3,888
|
|
|
13
|
|
1.32
|
|
|
Total interest-earning assets
|
|
|
7,627,187
|
|
|
89,424
|
|
4.74
|
|
|
|
7,212,878
|
|
|
76,589
|
|
4.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
(53,095)
|
|
|
|
|
|
|
|
|
(45,673)
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
62,478
|
|
|
|
|
|
|
|
|
76,965
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
61,722
|
|
|
|
|
|
|
|
|
60,143
|
|
|
|
|
|
|
|
Other assets
|
|
|
559,824
|
|
|
|
|
|
|
|
|
537,298
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,258,116
|
|
|
|
|
|
|
|
$
|
7,841,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
709,844
|
|
|
300
|
|
0.17
|
%
|
|
$
|
758,305
|
|
|
204
|
|
0.11
|
%
|
|
Regular savings deposits
|
|
|
331,473
|
|
|
93
|
|
0.11
|
|
|
|
468,651
|
|
|
301
|
|
0.26
|
|
|
Money market savings deposits
|
|
|
1,658,628
|
|
|
6,307
|
|
1.54
|
|
|
|
1,380,380
|
|
|
3,127
|
|
0.92
|
|
|
Time deposits
|
|
|
1,570,277
|
|
|
7,780
|
|
2.01
|
|
|
|
1,231,121
|
|
|
3,327
|
|
1.10
|
|
|
Total interest-bearing deposits
|
|
|
4,270,222
|
|
|
14,480
|
|
1.38
|
|
|
|
3,838,457
|
|
|
6,959
|
|
0.74
|
|
|
Other borrowings
|
|
|
170,660
|
|
|
398
|
|
0.95
|
|
|
|
139,610
|
|
|
108
|
|
0.31
|
|
|
Advances from FHLB
|
|
|
925,652
|
|
|
6,064
|
|
2.66
|
|
|
|
1,101,282
|
|
|
5,078
|
|
1.87
|
|
|
Subordinated debentures
|
|
|
37,412
|
|
|
491
|
|
5.25
|
|
|
|
37,555
|
|
|
468
|
|
4.99
|
|
|
Total interest-bearing liabilities
|
|
|
5,403,946
|
|
|
21,433
|
|
1.61
|
|
|
|
5,116,904
|
|
|
12,613
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
|
1,682,720
|
|
|
|
|
|
|
|
|
1,651,258
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
98,159
|
|
|
|
|
|
|
|
|
63,343
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
1,073,291
|
|
|
|
|
|
|
|
|
1,010,106
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
8,258,116
|
|
|
|
|
|
|
|
$
|
7,841,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and spread
|
|
|
|
|
|
67,991
|
|
3.13
|
%
|
|
|
|
|
|
63,976
|
|
3.29
|
%
|
|
Less: tax-equivalent adjustment
|
|
|
|
|
|
1,241
|
|
|
|
|
|
|
|
|
1,085
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
66,750
|
|
|
|
|
|
|
|
$
|
62,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/earning assets
|
|
|
|
|
|
|
|
4.74
|
%
|
|
|
|
|
|
|
|
4.29
|
%
|
|
Interest expense/earning assets
|
|
|
|
|
|
|
|
1.14
|
|
|
|
|
|
|
|
|
0.71
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
3.60
|
%
|
|
|
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Tax-equivalent income has been adjusted using the combined
marginal federal and state rate of 26.13% for 2019 and 2018, respectively.
The annualized
|
taxable-equivalent adjustments utilized in the above
table to compute yields aggregated to $1.2 million and $1.1 million in 2019
and 2018, respectively.
|
(2) Non-accrual loans are included in the average balances.
|
|
|
(3) Includes only investments that are exempt from federal
taxes.
|
|
(4) Investments available-for-sale are presented at amortized
cost.
|
|
|
Interest Income
The Company's total tax-equivalent interest income increased
17% for the first quarter of 2019 compared to the prior year quarter. The
previous table reflects the growth in the various categories of interest-earning
assets as loan growth during the previous twelve months more than offset modest
declines in other interest-earning assets.
The average balance of the loan portfolio increased 9% for
the first quarter of 2019 compared to the prior year period. A significant
amount of this growth was concentrated in the commercial real estate loan portfolios.
The yield on average loans increased by 42 basis points compared to the prior
year quarter. Excluding the interest recovery noted during the quarter, the
increase in the average loan yield was 32 basis points. The average yield on
total investment securities increased 26 basis points while the average balance
of the investment portfolio decreased by 5% for the first quarter of 2019
compared to the first quarter of 2018. The increase in the yield on investments
was driven by the yield increase in taxable investments as a result of an
increase in yields on U.S. treasuries and government agencies. The increase in
the yield on loans and the investment portfolio resulted in the 45 basis point
rise in the yield on interest-earning assets from period to period. The net
increase in the yield on interest-earning assets was 37 basis points, excluding
the aforementioned interest recovery.
Interest Expense
Interest expense increased 70% in the first quarter of 2019
compared to the first quarter of 2018. The majority of the increase from period
to period was mainly attributable to the rates that were either increased or,
due to pre-existing rates structures in WashingtonFirst acquisition, maintained
on various categories of deposits to perpetuate deposit relationships or
provide the funding for loan growth. The cost of interest-bearing deposits
increased predominantly due to the 20% growth in money market and 28% growth in
time deposit average balances coupled with the significant increases in money
market and time deposit rates. Additionally, the amount of average borrowings
decreased by 11% from period to period and the average rate paid increased 70
basis points. The overall impact was an increase of 61 basis points in the
average rate paid on interest-bearing liabilities in the first quarter of 2019
compared to the first quarter of 2018.
Effect of Volume and Rate Changes on Net
Interest Income
The following table analyzes the reasons for the changes
from year-to-year in the principal elements that comprise net interest income:
|
|
|
|
2019 vs. 2018
|
|
|
2018 vs. 2017
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
Or
|
|
Due to Change In
Average:*
|
|
Or
|
|
Due to Change In Average:*
|
(Dollars in thousands and tax equivalent)
|
|
(Decrease)
|
|
Volume
|
|
Rate
|
|
(Decrease)
|
|
Volume
|
|
Rate
|
Interest income from earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans
|
|
$
|
1,407
|
|
$
|
1,088
|
|
$
|
319
|
|
$
|
3,033
|
|
$
|
2,473
|
|
$
|
560
|
|
Residential construction loans
|
|
|
119
|
|
|
(35)
|
|
|
154
|
|
|
408
|
|
|
344
|
|
|
64
|
|
Commercial AD&C loans
|
|
|
1,744
|
|
|
1,344
|
|
|
400
|
|
|
4,482
|
|
|
3,697
|
|
|
785
|
|
Commercial investor real estate loans
|
|
|
2,301
|
|
|
(280)
|
|
|
2,581
|
|
|
13,009
|
|
|
12,240
|
|
|
769
|
|
Commercial owner occupied real estate loans
|
|
|
3,808
|
|
|
3,153
|
|
|
655
|
|
|
1,550
|
|
|
1,865
|
|
|
(315)
|
|
Commercial business loans
|
|
|
2,759
|
|
|
1,624
|
|
|
1,135
|
|
|
3,042
|
|
|
2,316
|
|
|
726
|
|
Consumer loans
|
|
|
784
|
|
|
(241)
|
|
|
1,025
|
|
|
1,616
|
|
|
751
|
|
|
865
|
|
Loans held for sale
|
|
|
(176)
|
|
|
(192)
|
|
|
16
|
|
|
286
|
|
|
292
|
|
|
(6)
|
|
Taxable securities
|
|
|
709
|
|
|
(23)
|
|
|
732
|
|
|
1,532
|
|
|
1,572
|
|
|
(40)
|
|
Tax exempt securities
|
|
|
(449)
|
|
|
(492)
|
|
|
43
|
|
|
(399)
|
|
|
159
|
|
|
(558)
|
|
Interest-bearing deposits with banks
|
|
|
(163)
|
|
|
(298)
|
|
|
135
|
|
|
267
|
|
|
141
|
|
|
126
|
|
Federal funds sold
|
|
|
(8)
|
|
|
(16)
|
|
|
8
|
|
|
9
|
|
|
5
|
|
|
4
|
Total interest income
|
|
|
12,835
|
|
|
5,632
|
|
|
7,203
|
|
|
28,835
|
|
|
25,855
|
|
|
2,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on funding of earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
96
|
|
|
(13)
|
|
|
109
|
|
|
90
|
|
|
35
|
|
|
55
|
|
Regular savings deposits
|
|
|
(208)
|
|
|
(70)
|
|
|
(138)
|
|
|
252
|
|
|
32
|
|
|
220
|
|
Money market savings deposits
|
|
|
3,180
|
|
|
732
|
|
|
2,448
|
|
|
2,349
|
|
|
408
|
|
|
1,941
|
|
Time deposits
|
|
|
4,453
|
|
|
1,112
|
|
|
3,341
|
|
|
1,780
|
|
|
1,703
|
|
|
77
|
|
Other borrowings
|
|
|
290
|
|
|
28
|
|
|
262
|
|
|
32
|
|
|
7
|
|
|
25
|
|
Advances from FHLB
|
|
|
986
|
|
|
(906)
|
|
|
1,892
|
|
|
1,949
|
|
|
1,699
|
|
|
250
|
|
Subordinated debentures
|
|
|
23
|
|
|
(2)
|
|
|
25
|
|
|
456
|
|
|
441
|
|
|
15
|
Total interest expense
|
|
|
8,820
|
|
|
881
|
|
|
7,939
|
|
|
6,908
|
|
|
4,325
|
|
|
2,583
|
|
|
Net interest income
|
|
$
|
4,015
|
|
$
|
4,751
|
|
$
|
(736)
|
|
$
|
21,927
|
|
$
|
21,530
|
|
$
|
397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Variances that are the combined effect of volume and rate, but
cannot be separately identified, are allocated to the volume and rate
variances
|
|
based on their respective relative amounts.
|
Non-interest Income
Non-interest income amounts and trends are presented in the
following table for the periods indicated:
|
|
|
|
Three Months Ended March 31,
|
|
2019/2018
|
2019/2018
|
|
(Dollars in thousands)
|
|
2019
|
|
2018
|
|
$ Change
|
|
% Change
|
|
|
Securities gains
|
|
$
|
-
|
|
$
|
63
|
|
$
|
(63)
|
|
(100.0)
|
%
|
|
Service charges on deposit accounts
|
|
|
2,307
|
|
|
2,259
|
|
|
48
|
|
2.1
|
|
|
Mortgage banking activities
|
|
|
2,863
|
|
|
2,207
|
|
|
656
|
|
29.7
|
|
|
Wealth management income
|
|
|
5,236
|
|
|
5,061
|
|
|
175
|
|
3.5
|
|
|
Insurance agency commissions
|
|
|
1,900
|
|
|
1,824
|
|
|
76
|
|
4.2
|
|
|
Income from bank owned life insurance
|
|
|
1,189
|
|
|
2,331
|
|
|
(1,142)
|
|
(49.0)
|
|
|
Bank card fees
|
|
|
1,252
|
|
|
1,370
|
|
|
(118)
|
|
(8.6)
|
|
|
Other income
|
|
|
2,222
|
|
|
2,003
|
|
|
219
|
|
10.9
|
|
|
|
Total non-interest income
|
|
$
|
16,969
|
|
$
|
17,118
|
|
$
|
(149)
|
|
(0.9)
|
|
Total non-interest income was $17.0 million for the first
quarter of 2019 compared to $17.1 million for the first quarter of 2018, a
decrease of 1%. Exclusive of insurance mortality proceeds of $0.6 million in
the current quarter and similar proceeds of $1.6 million, as well as $0.1
million in securities gains in the prior year’s quarter, non-interest income
grew $0.9 million or 6% compared to the prior year. While the current quarter
experienced increases in mortgage banking income and other non-interest income
over the prior year’s quarter with lesser increases in wealth management and
insurance commission income, these were offset by lower insurance mortality
proceeds. Further detail by type of non-interest income follows:
·
Income from mortgage banking activities increased by $0.7 million
in the first quarter of 2019 as compared to the first quarter of 2018. The
increase in mortgage banking activities is attributable to the increased
origination volume that is being driven by the current lower interest rate
environment.
·
Wealth management
income increased 3%
in the
first quarter of 2019 as compared to the first quarter of 2018. Revenue from
wealth management
is comprised of income
from trust and estate services earned by the Bank and investment management
fees earned by West Financial Services, the Company’s investment management subsidiary.
Investment management fees increased 12% for the first quarter of 2019 compared
to the same period of 2018, driven primarily by an increase in assets under
management. Overall total assets under management increased to $3.1 billion at
March 31, 2019 compared to $2.9 billion at March 31, 2018 due to positive
market movements and additions from new and existing clients.
·
Insurance agency
commissions increased 4% in the first quarter of 2019 compared to the first
quarter of 2018 as commission revenue associated with the majority of product
lines increased in the current quarter compared to the prior year.
·
Income from bank
owned life insurance policies declined $1.1 million in the first quarter of
2019 compared to the first quarter of 2018 as mortality proceeds, typically an
infrequent event, declined from $1.6 million in the first quarter of the prior
year to $0.6 million for the current year’s quarter.
·
Bank card fees
declined 8.6% in the first quarter of 2019 compared to the first quarter of
2018. This was the result of the prior year’s quarter including a $0.2 million
for interchange income related to the acquisition of WashingtonFirst.
Excluding this adjustment, bank card fees increased 6% year over year due to
increased transaction volume.
·
Other non-interest
income increased 11% or $0.2 million for the quarter ended March 31, 2019
compared to the same quarter of the prior year as a result of credit related
fees that are sporadic in their timing.
Non-interest Expense
Non-interest expense amounts and trends are presented in the
following table for the periods indicated:
|
|
|
Three Months Ended March 31,
|
|
2019/2018
|
2019/2018
|
|
(Dollars in thousands)
|
|
2019
|
|
2018
|
|
$ Change
|
|
% Change
|
|
Salaries and employee benefits
|
|
$
|
25,976
|
|
$
|
23,912
|
|
$
|
2,064
|
|
8.6
|
%
|
Occupancy expense of premises
|
|
|
5,231
|
|
|
4,942
|
|
|
289
|
|
5.8
|
|
Equipment expenses
|
|
|
2,576
|
|
|
2,225
|
|
|
351
|
|
15.8
|
|
Marketing
|
|
|
943
|
|
|
1,148
|
|
|
(205)
|
|
(17.9)
|
|
Outside data services
|
|
|
1,778
|
|
|
1,397
|
|
|
381
|
|
27.3
|
|
FDIC insurance
|
|
|
1,136
|
|
|
1,193
|
|
|
(57)
|
|
(4.8)
|
|
Amortization of intangible assets
|
|
|
491
|
|
|
541
|
|
|
(50)
|
|
(9.2)
|
|
Merger expenses
|
|
|
-
|
|
|
8,958
|
|
|
(8,958)
|
|
(100.0)
|
|
Professional fees and services
|
|
|
1,245
|
|
|
1,040
|
|
|
205
|
|
19.7
|
|
Other expenses
|
|
|
4,816
|
|
|
4,285
|
|
|
531
|
|
12.4
|
|
|
Total non-interest expense
|
|
$
|
44,192
|
|
$
|
49,641
|
|
$
|
(5,449)
|
|
(11.0)
|
|
Non-interest
expenses decreased 11% to $44.2 million for the first quarter of 2019 compared
to $49.6 million in the first quarter of 2018, which included $9.0 million in
merger expenses related to the completion and integration of the acquisition of
WashingtonFirst in 2018. Exclusive of the merger expenses, non-interest
expense for the current quarter increased 9% driven primarily by higher
compensation and benefit costs, in addition to greater facilities and
operational costs. Further detail by category of non-interest expense follows:
·
Salaries and employee benefits, the largest component of
non-interest expenses, increased 9% in the first quarter of 2019 resulting from
the combination of higher compensation expense from annual merit increases over
the preceding twelve months, an increase in health care expenses experienced
during the current quarter and management’s decision, beginning in the current
year, to increase the Company’s contribution to the employee retirement savings
plan as a result of the reduction in the corporate tax rate that occurred at
the end of 2017. The average number of full-time equivalent employees
decreased to 910 in the first quarter of 2019 compared to 923 in the first
quarter of 2018.
·
Occupancy and equipment expense increased
as a result of the impact on rent expense from the adoption of new lease
accounting guidance and, to a lesser extent, greater maintenance costs.
·
Reduced advertising initiatives resulted
in 18% reduction in marketing costs.
·
Professional fees and
services grew 20% from the prior year quarter due to the greater utilization of
various consulting services.
Income Taxes
The Company had income tax expense of $9.3 million in the
first quarter of 2019, compared to income tax expense of $6.7 million in the
first quarter of 2018. The lower tax expense for the prior year was the result
of lower income before taxes due to lower net interest income and merger expenses
for that period. The resultant effective tax rate was 23.5% for the first
quarter of 2019 compared to 23.6% for the first quarter of 2018.
Operating Expense Performance
Management views the GAAP efficiency ratio as an important
financial measure of expense performance and cost management. The ratio
expresses the level of non-interest expenses as a percentage of total revenue
(net interest income plus total non-interest income). Lower ratios may
indicate improved productivity as the growth rate in revenue streams exceeds
the growth in operating expenses.
Non-GAAP Financial Measures
The GAAP and non-GAAP efficiency ratios are reconciled and
provided in the following table. The GAAP efficiency ratio in the first quarter
of 2019 improved compared to the first quarter of 2018, as non-interest expense
decreased due to the lack of merger expenses and net interest income increased.
Conversely, the non-GAAP efficiency ratio in the current period increased
compared to the prior year period as the rate of increase in the non-GAAP
non-interest expenses exceeded the rate of increase in the non-GAAP income.
In addition to efficiency ratios, the Company uses pre-tax,
pre-provision income, excluding merger expenses, as a measure of the level of
recurring income before taxes. Management believes this provides financial
statement users with a useful metric of the run-rate of revenues and expenses
which is readily comparable to other financial institutions. This measure is
calculated by adding the provision for loan losses, merger expenses and the
provision for income taxes back to net income. This metric increased modestly in
the first quarter of 2019 compared to the first quarter of 2018 primarily due
to an increase in net interest income which offset the decline in merger
expenses.
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
(Dollars in thousands)
|
|
2019
|
|
2018
|
Pre-tax pre-provision pre-merger income:
|
|
|
|
|
|
|
Net income
|
|
$
|
30,317
|
|
$
|
21,665
|
|
Plus non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
Merger expenses
|
|
|
-
|
|
|
8,958
|
|
|
Income taxes
|
|
|
9,338
|
|
|
6,706
|
|
|
Provision (credit) for loan losses
|
|
|
(128)
|
|
|
1,997
|
Pre-tax pre-provision pre-merger income
|
|
$
|
39,527
|
|
$
|
39,326
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio - GAAP basis:
|
|
|
|
|
|
|
Non-interest expense
|
|
$
|
44,192
|
|
$
|
49,641
|
|
|
|
|
|
|
|
|
|
|
Net interest income plus non-interest income
|
|
$
|
83,719
|
|
$
|
80,009
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio - GAAP basis
|
|
|
52.79%
|
|
|
62.04%
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio - Non-GAAP basis:
|
|
|
|
|
|
|
Non-interest expense
|
|
$
|
44,192
|
|
$
|
49,641
|
|
Less non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
491
|
|
|
541
|
|
|
Merger expenses
|
|
|
-
|
|
|
8,958
|
Non-interest expenses - as adjusted
|
|
$
|
43,701
|
|
$
|
40,142
|
|
|
|
|
|
|
|
|
|
|
Net interest income plus non-interest income
|
|
$
|
83,719
|
|
$
|
80,009
|
|
Plus non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
Tax-equivalent income
|
|
|
1,241
|
|
|
1,085
|
|
Less non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
Securities gains
|
|
|
-
|
|
|
63
|
|
Net interest income plus non-interest income - as adjusted
|
|
$
|
84,960
|
|
$
|
81,031
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio - Non-GAAP basis
|
|
|
51.44%
|
|
|
49.54%
|
FINANCIAL
CONDITION
The Company’s total assets grew to $8.3 billion at March
31, 2019, as compared to $8.2 billion at December 31, 2018. Total loans remained
level at March 31, 2019 compared December 31, 2018 at $6.6 billion. Loans
experienced significant growth in the fourth quarter of 2018, which had the
effect of slowing loan demand during the first quarter of the current year.
The lower loan demand was typical of the seasonality experienced during the
first quarter of each year. Management expects loan growth to resume
throughout the remainder of 2019. Deposit growth was 5% from December 31,
2018, to March 31, 2019, as interest-bearing deposits experienced 6% growth and
noninterest-bearing deposits grew 4%.
Analysis of Loans
A comparison of the loan portfolio at the dates indicated
is presented in the following table:
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Period-to-Period Change
|
(Dollars in thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
1,249,968
|
|
19.0
|
%
|
|
$
|
1,228,247
|
|
18.7
|
%
|
|
$
|
21,721
|
|
1.8
|
%
|
|
Residential construction
|
|
|
176,388
|
|
2.7
|
|
|
|
186,785
|
|
2.8
|
|
|
|
(10,397)
|
|
(5.6)
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial owner occupied real estate
|
|
|
1,216,713
|
|
18.5
|
|
|
|
1,202,903
|
|
18.3
|
|
|
|
13,810
|
|
1.1
|
|
|
Commercial investor real estate
|
|
|
1,962,879
|
|
29.9
|
|
|
|
1,958,395
|
|
29.8
|
|
|
|
4,484
|
|
0.2
|
|
|
Commercial AD&C
|
|
|
688,939
|
|
10.5
|
|
|
|
681,201
|
|
10.4
|
|
|
|
7,738
|
|
1.1
|
|
Commercial business
|
|
|
769,660
|
|
11.7
|
|
|
|
796,264
|
|
12.1
|
|
|
|
(26,604)
|
|
(3.3)
|
|
Consumer
|
|
|
505,443
|
|
7.7
|
|
|
|
517,839
|
|
7.9
|
|
|
|
(12,396)
|
|
(2.4)
|
|
|
Total loans
|
|
$
|
6,569,990
|
|
100.0
|
%
|
|
$
|
6,571,634
|
|
100.0
|
%
|
|
$
|
(1,644)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Investment Securities
The composition of investment securities at the periods
indicated is presented in the following table:
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Period-to-Period Change
|
(Dollars in thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries and government agencies
|
|
$
|
313,588
|
|
31.7
|
%
|
|
$
|
296,678
|
|
29.4
|
%
|
|
$
|
16,910
|
|
5.7
|
%
|
|
State and municipal
|
|
|
264,580
|
|
26.8
|
|
|
|
282,024
|
|
27.9
|
|
|
|
(17,444)
|
|
(6.2)
|
|
|
Mortgage-backed and asset-backed
|
|
|
338,097
|
|
34.2
|
|
|
|
348,515
|
|
34.4
|
|
|
|
(10,418)
|
|
(3.0)
|
|
|
Corporate debt
|
|
|
9,387
|
|
1.0
|
|
|
|
9,240
|
|
0.9
|
|
|
|
147
|
|
1.6
|
|
|
Trust preferred
|
|
|
310
|
|
-
|
|
|
|
310
|
|
-
|
|
|
|
-
|
|
-
|
|
|
Marketable equity securities
|
|
|
568
|
|
0.1
|
|
|
|
568
|
|
0.1
|
|
|
|
-
|
|
-
|
|
|
|
Total available-for-sale securities
|
|
|
926,530
|
|
93.8
|
|
|
|
937,335
|
|
92.7
|
|
|
|
(10,805)
|
|
(1.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
|
60,769
|
|
6.2
|
|
|
|
73,389
|
|
7.3
|
|
|
|
(12,620)
|
|
(17.2)
|
|
|
|
Total other equity securities
|
|
|
60,769
|
|
6.2
|
|
|
|
73,389
|
|
7.3
|
|
|
|
(12,620)
|
|
(17.2)
|
|
Total securities
|
|
$
|
987,299
|
|
100.0
|
%
|
|
$
|
1,010,724
|
|
100.0
|
%
|
|
$
|
(23,425)
|
|
(2.3)
|
|
The investment portfolio consists primarily of U.S.
Treasuries, U.S. Agency securities, U.S. Agency mortgage-backed securities,
U.S. Agency collateralized mortgage obligations, asset-backed securities and
state and municipal securities. The portfolio is monitored on a continuing
basis with consideration given to interest rate trends and the structure of the
yield curve and with a frequent assessment of economic projections and
analysis. At March 31, 2019, 97% of the investment portfolio was invested in
Aa/AA or Aaa/AAA-rated securities. The composition and size of the portfolio at
March 31, 2019 has remained stable compared to the prior year-end. The duration
of the portfolio is monitored to ensure the adequacy and ability to meet liquidity
demands. At March 31, 2019 the duration of the portfolio was 3.7 years compared
to 3.9 years at December 31, 2018. The decrease in the duration is attributable
to the declining interest rate environment during the first quarter of 2019.
These attributes have resulted in a portfolio with low credit risk that would
provide the liquidity necessary to meet the loan demand.
Other Earning
Assets
Residential mortgage loans held for
sale were $25 million at March 31, 2019 compared to $23 million at December 31,
2018. The aggregate of interest-bearing deposits with banks and federal funds
increased by $32 million at March 31, 2019 compared to December 31, 2018 due to
the timing of cash flows.
Deposits
The composition of deposits at the periods indicated is
presented in the following table:
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Period-to-Period Change
|
(Dollars in thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Noninterest-bearing deposits
|
|
$
|
1,813,708
|
|
29.1
|
%
|
|
$
|
1,750,319
|
|
29.6
|
%
|
|
$
|
63,389
|
|
3.6
|
%
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
755,676
|
|
12.1
|
|
|
|
703,145
|
|
11.9
|
|
|
|
52,531
|
|
7.5
|
|
|
Money market savings
|
|
|
1,686,178
|
|
27.1
|
|
|
|
1,605,024
|
|
27.1
|
|
|
|
81,154
|
|
5.1
|
|
|
Regular savings
|
|
|
336,950
|
|
5.5
|
|
|
|
330,231
|
|
5.6
|
|
|
|
6,719
|
|
2.0
|
|
|
Time deposits of less than $100,000
|
|
|
433,944
|
|
7.0
|
|
|
|
427,421
|
|
7.2
|
|
|
|
6,523
|
|
1.5
|
|
|
Time deposits of $100,000 or more
|
|
|
1,198,067
|
|
19.2
|
|
|
|
1,098,740
|
|
18.6
|
|
|
|
99,327
|
|
9.0
|
|
|
|
Total interest-bearing deposits
|
|
|
4,410,815
|
|
70.9
|
|
|
|
4,164,561
|
|
70.4
|
|
|
|
246,254
|
|
5.9
|
|
Total deposits
|
|
$
|
6,224,523
|
|
100.0
|
%
|
|
$
|
5,914,880
|
|
100.0
|
%
|
|
$
|
309,643
|
|
5.2
|
|
Deposits and Borrowings
Total deposits increased by 5% from $5.9 billion at December
31, 2018 to $6.2 billion at March 31, 2019. The majority of this increase
occurred in interest-bearing deposits, predominantly in the money market,
demand and time deposit categories with lesser increases in savings and
noninterest-bearing demand deposits. Interest-bearing deposits represented 71%
of deposits with the remaining 29% in noninterest-bearing balances at March 31,
2019 compared to 30% and 70%, respectively at December 31, 2018. As a result of
the increase in deposits, total borrowings were reduced by $0.3 billion or 27%
at March 31, 2019 compared to December 31, 2018 primarily in advances from the
FHLB and overnight funding.
Capital Management
Management monitors historical and projected earnings,
dividends and asset growth, as well as risks associated with the various types
of on and off-balance sheet assets and liabilities, in order to determine appropriate
capital levels. Total stockholders' equity was $1.1 billion at March 31, 2019 and
December 31, 2018. The ratio of average equity to average assets was 13.00%
for the three months ended March 31, 2019, as compared to 12.88% for the first
three months of 2018.
Bank holding companies and banks are required to maintain
capital ratios in accordance with guidelines adopted by the federal bank
regulators. These guidelines are commonly known as Risk-Based Capital
guidelines. The actual regulatory ratios and required ratios for capital
adequacy are summarized for the Company in the following table.
Risk-Based Capital Ratios
|
|
|
|
|
Minimum
|
|
Ratios at
|
|
Regulatory
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Requirements
|
Total capital to risk-weighted assets
|
12.54%
|
|
12.26%
|
|
8.00%
|
|
|
|
|
|
|
Tier 1 capital to risk-weighted assets
|
11.35%
|
|
11.06%
|
|
6.00%
|
|
|
|
|
|
|
Common equity tier 1 capital
|
11.19%
|
|
10.90%
|
|
4.50%
|
|
|
|
|
|
|
Tier 1 leverage
|
9.61%
|
|
9.50%
|
|
4.00%
|
As of March 31, 2019, the most recent notification from the
Bank’s primary regulator categorized the Bank as a "well-capitalized"
institution under the prompt corrective action rules of the Federal Deposit
Insurance Act. Designation as a well-capitalized institution under these
regulations is not a recommendation or endorsement of the Company or the Bank
by federal bank regulators.
The minimum capital level requirements applicable to the
Company and the Bank are: (1) a common equity Tier 1 capital ratio of 4.5%; (2)
a Tier 1 capital ratio of 6%; (3) a total capital ratio of 8%; and (4) a Tier 1
leverage ratio of 4%. The rules also establish a “capital conservation buffer”
of 2.5% above the regulatory minimum capital requirements, which must consist
entirely of common equity Tier 1 capital. An institution would be subject to
limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses to executive officers if its capital level falls below
the buffer amount. These limitations establish a maximum percentage of eligible
retained income that could be utilized for such actions.
Tangible Common Equity
Tangible equity, tangible assets and tangible book value
per share are non-GAAP financial measures calculated using GAAP amounts.
Tangible common equity and tangible assets exclude the balances of goodwill and
other intangible assets from stockholder’s equity and total assets,
respectively. Management believes that this non-GAAP financial measure provides
information to investors that may be useful in understanding our financial
condition. Because not all companies use the same calculation of tangible
equity and tangible assets, this presentation may not be comparable to other
similarly titled measures calculated by other companies.
Tangible common equity totaled $748 million at March 31,
2019, compared to $727 million at December 31, 2018. At March 31, 2019, the
ratio of tangible common equity to tangible assets has increased to 9.39%
compared to 9.21% at December 31, 2018. Tangible common equity growth was the
result of increased net earnings during the current quarter.
A reconciliation of the non-GAAP ratio of tangible equity
to tangible assets and tangible book value per share are provided in the
following table:
Tangible Common Equity Ratio – Non-GAAP
(Dollars in thousands, except per share data)
|
March 31, 2019
|
|
December 31, 2018
|
Tangible common equity ratio:
|
|
|
|
|
|
Total stockholders' equity
|
$
|
1,095,848
|
|
$
|
1,067,903
|
|
Accumulated other comprehensive loss
|
|
9,050
|
|
|
15,754
|
|
Goodwill
|
|
(347,149)
|
|
|
(347,149)
|
|
Other intangible assets, net
|
|
(9,297)
|
|
|
(9,788)
|
Tangible common equity
|
$
|
748,452
|
|
$
|
726,720
|
|
|
|
|
|
|
|
Total assets
|
$
|
8,327,900
|
|
$
|
8,243,272
|
|
Goodwill
|
|
(347,149)
|
|
|
(347,149)
|
|
Other intangible assets, net
|
|
(9,297)
|
|
|
(9,788)
|
Tangible assets
|
$
|
7,971,454
|
|
$
|
7,886,335
|
|
|
|
|
|
|
|
Tangible common equity ratio
|
|
9.39%
|
|
|
9.21%
|
|
|
|
|
|
|
|
Tangible book value per share
|
$
|
21.05
|
|
$
|
20.45
|
Credit Risk
The fundamental lending business of the Company is based on
understanding, measuring and controlling the credit risk inherent in the loan
portfolio. The Company’s loan portfolio is subject to varying degrees of
credit risk. Credit risk entails both general risks, which are inherent in the
process of lending, and risk specific to individual borrowers. The Company’s
credit risk is mitigated through portfolio diversification, which limits
exposure to any single customer, industry or collateral type. Typically, each
consumer and residential lending product has a generally predictable level of
credit losses based on historical loss experience. Residential mortgage and
home equity loans and lines generally have the lowest credit loss experience.
Loans secured by personal property, such as auto loans, generally experience
medium credit losses. Unsecured loan products, such as personal revolving
credit, have the highest credit loss experience and for that reason, the
Company has chosen not to engage in a significant amount of this type of
lending. Credit risk in commercial lending can vary significantly, as losses
as a percentage of outstanding loans can shift widely during economic cycles
and are particularly sensitive to changing economic conditions. Generally,
improving economic conditions result in improved operating results on the part
of commercial customers, enhancing their ability to meet their particular debt
service requirements. Improvements, if any, in operating cash flows can be
offset by the impact of rising interest rates that may occur during improved
economic times. Inconsistent economic conditions may have an adverse effect on
the operating results of commercial customers, reducing their ability to meet
debt service obligations.
Loans acquired with
evidence of credit deterioration since their origination as of the date of the
acquisition are recorded at their initial fair value. Credit deterioration is
determined based on the probability of collection of all contractually required
principal and interest payments. These loans are not considered non-performing
for reporting purposes but are managed and monitored in the same manner and
using the same techniques and strategies as organically generated loans. In
accordance with GAAP, the historical allowance for loan losses related to the
acquired loans is not carried over to the Company’s financial statements. The
following credit related sections should be read in conjunction with the
section “Loans Acquired with Deteriorated Credit Quality” in “Note 1 – Significant
Accounting Policies” of the Notes to the Condensed Consolidated Financial
Statements.
Total non-performing loans increased to $40.1 million at
March 31, 2019 or 0.61% of total loans compared to $36.0 million or 0.55% of
total loans at December 31, 2018. While the diversification of the lending
portfolio among different commercial, residential and consumer product lines
along with different market conditions of the D.C. suburbs, Northern Virginia
and Baltimore metropolitan area has mitigated some of the risks in the
portfolio, local economic conditions and levels of non-performing loans may
continue to be influenced by the conditions being experienced in various business
sectors of the economy on both a regional and national level.
To control and manage credit risk, management has a credit
process in place to reasonably ensure that credit standards are maintained
along with an in-house loan administration accompanied by oversight and review
procedures. The primary purpose of loan underwriting is the evaluation of
specific lending risks and involves the analysis of the borrower’s ability to
service the debt as well as the assessment of the value of the underlying
collateral. Oversight and review procedures include the monitoring of
portfolio credit quality, early identification of potential problem credits and
the proactive management of problem credits. As part of the oversight and
review process, the Company maintains an allowance for loan losses (the
“allowance”).
The allowance represents an estimation of the losses that
are inherent in the loan portfolio. The adequacy of the allowance is
determined through the ongoing evaluation of the credit portfolio, and involves
consideration of a number of factors, as outlined below, to establish an
adequate allowance for loan losses. Determination of the allowance is inherently
subjective and requires significant estimates, including estimated losses on
pools of homogeneous loans based on historical loss experience and
consideration of current economic trends, which may be susceptible to
significant change. Loans deemed uncollectible are charged against the
allowance, while recoveries are credited to the allowance. Management adjusts
the level of the allowance through the provision for loan losses, which is
recorded as a current period operating expense.
The methodology for assessing the appropriateness of the
allowance includes: (1) a general allowance that reflects historical losses
supplemented by qualitative factors, as adjusted, by credit category, and (2) a
specific allowance for impaired credits on an individual or portfolio basis.
The amount of the allowance is reviewed quarterly by the Risk Committee of the
board of directors.
The Company recognizes a collateral dependent lending
relationship as non-performing when either the loan becomes 90 days delinquent
or as a result of factors (such as bankruptcy, interruption of cash flows,
etc.) considered at the monthly credit committee meeting. When a commercial
loan is placed on non-accrual status, it is considered to be impaired and all
accrued but unpaid interest is reversed. Classification as an impaired loan is
based on a determination that the Company may not collect all principal and
interest payments according to contractual terms. Impaired loans exclude large
groups of smaller-balance homogeneous loans that are collectively evaluated for
impairment such as residential real estate and consumer loans. Typically, all
payments received on non-accrual loans are first applied to the remaining
principal balance of the loans. Any additional recoveries are credited to the
allowance. Integral to the assessment of the allowance process is an
evaluation that is performed to determine whether a specific allowance on an
impaired loan is warranted and, when losses are confirmed, a charge-off is
taken to reduce the loan to its net realizable value. Any further collateral
deterioration results in either further specific allowances being established
or additional charge-offs. When additional deterioration becomes apparent, an
action plan is developed for the particular loan and an appraisal will be obtained
depending on the time elapsed since the prior appraisal, the loan balance
and/or the result of the internal evaluation. A current appraisal on large
loans is usually obtained if the appraisal on file is more than 12 months old
and there has been a material change in market conditions, zoning, physical use
or the adequacy of the collateral based on an internal evaluation. The Company’s
policy is to strictly adhere to regulatory appraisal standards. If an
appraisal is ordered, no more than a 30 day turnaround is requested from the
appraiser, who is selected by Credit Administration from an approved appraiser
list. After receipt of the updated appraisal, the assigned credit officer will
recommend to the Chief Credit Officer whether a specific allowance or a
charge-off should be taken. The Chief Credit Officer has the authority to
approve a specific allowance or charge-off between monthly credit committee
meetings to ensure that there are no significant time lapses during this
process.
The Company’s methodology for evaluating whether a loan is
impaired begins with risk-rating credits on an individual basis and includes
consideration of the borrower’s overall financial condition, payment record and
available cash resources that may include the sufficiency of collateral value
and, in a select few cases, verifiable support from financial guarantors. In
measuring impairment, the Company looks primarily to the discounted cash flows
of the project itself or to the value of the collateral as the primary sources
of repayment of the loan. The Company may consider the existence of guarantees
and the financial strength and wherewithal of the guarantors involved in any loan
relationship. Guarantees may be considered as a source of repayment based on
the guarantor’s financial condition and respective payment capacity.
Accordingly, absent a verifiable payment capacity, a guarantee alone would not
be sufficient to avoid classifying the loan as impaired.
Management has established a credit process that dictates
that structured procedures be performed to monitor these loans between the
receipt of an original appraisal and the updated appraisal. These procedures
include the following:
·
An internal evaluation is updated
periodically to include borrower financial statements and/or cash flow
projections.
·
The borrower may be contacted for a
meeting to discuss an updated or revised action plan which may include a
request for additional collateral.
·
Re-verification of the documentation
supporting the Company’s position with respect to the collateral securing the
loan.
·
At the monthly credit committee meeting
the loan may be downgraded and a specific allowance may be decided upon in
advance of the receipt of the appraisal.
·
Upon receipt of the updated appraisal
(or based on an updated internal financial evaluation) the loan balance is compared
to the appraisal and a specific allowance is decided upon for the particular
loan, typically for the amount of the difference between the appraisal and the
loan balance.
·
The Company will specifically reserve
for or charge-off the excess of the loan amount over the amount of the
appraisal net of closing costs.
If an updated appraisal is received subsequent to the
preliminary determination of a specific allowance or partial charge-off, and it
is less than the initial appraisal used in the initial assessment, an
additional specific allowance or charge-off is taken on the related credit.
Partially charged-off loans are not written back up based on updated appraisals
and always remain on non-accrual with any and all subsequent payments first applied
to the remaining balance of the loan as principal reductions. No interest
income is recognized on loans that have been partially charged-off.
Loans considered to
be troubled debt restructurings (“TDRs”) are loans that have their terms
restructured (e.g., interest rates, loan maturity date, payment and
amortization period, etc.) in circumstances that provide payment relief to a
borrower experiencing financial difficulty. All restructured loans are
considered impaired loans and may either be in accruing status or non-accruing
status. Non-accruing restructured loans may return to accruing status provided
doubt has been removed concerning the collectability of principal and interest
as evidenced by a sufficient period of payment performance in accordance with
the restructured terms. Loans may be removed from the restructured category if
the borrower is no longer experiencing financial difficulty, a re-underwriting
event took place and the revised loan terms of the subsequent restructuring
agreement are considered to be consistent with terms that can be obtained in
the credit market for loans with comparable risk.
The Company may extend the maturity of a performing or
current loan that may have some inherent weakness associated with the loan.
However, the Company generally follows a policy of not extending maturities on
non-performing loans under existing terms. Maturity date extensions only occur
under revised terms that clearly place the Company in a position to increase
the likelihood of or assure full collection of the loan under the contractual
terms and /or terms at the time of the extension that may eliminate or mitigate
the inherent weakness in the loan. These terms may incorporate, but are not
limited to additional assignment of collateral, significant balance
curtailments/liquidations and assignments of additional project cash flows.
Guarantees may be a consideration in the extension of loan maturities. As a
general matter, the Company does not view extension of a loan to be a
satisfactory approach to resolving non-performing credits. On an
exception basis, certain performing loans that have displayed some inherent
weakness in the underlying collateral values, an inability to comply with
certain loan covenants which are not affecting the performance of the credit or
other identified weakness may be extended.
Collateral values or estimates of discounted cash flows
(inclusive of any potential cash flow from guarantees) are evaluated to
estimate the probability and severity of potential losses. The actual
occurrence and severity of losses involving impaired credits can differ
substantially from estimates.
The determination of the allowance requires significant
judgment, and estimates of probable losses in the loan portfolio can vary
significantly from the amounts actually observed. While management uses
available information to recognize probable losses, future additions to the
allowance may be necessary based on changes in the credits comprising the
portfolio and changes in the financial condition of borrowers, such as may
result from changes in economic conditions. In addition, federal and state
regulatory agencies, as an integral part of their examination process, and
independent consultants engaged by the Bank, periodically review the loan
portfolio and the allowance. Such reviews may result in adjustments to the
allowance based upon their analysis of the information available at the time of
each examination.
The Company makes provisions for loan losses in amounts
necessary to maintain the allowance at an appropriate level, as established by
use of the allowance methodology previously discussed. The provision for loan
losses was a credit of $0.1 million for the first quarter of 2019 compared to a
charge of $2.0 million for the first quarter of 2018 and $3.4 million for the
fourth quarter of 2018. The decrease in the provision for the current period
compared to the prior year was primarily the result of the overall improvement
in the qualitative credit metrics of the loan portfolio during the previous
twelve months and lower loan growth during the current quarter.
The Company typically sells a substantial portion of its
fixed-rate residential mortgage originations in the secondary mortgage market.
Concurrent with such sales, the Company is required to make customary
representations and warranties to the purchasers about the mortgage loans and
the manner in which they were originated. The related sale agreements grant the
purchasers recourse back to the Company, which could require the Company to
repurchase loans or to share in any losses incurred by the purchasers. This
recourse exposure typically extends for a period of six to twelve months after
the sale of the loan although the time frame for repurchase requests can extend
for an indefinite period. Such transactions could be due to a number of causes
including borrower fraud or early payment default. The Company has seen a very
limited number of repurchase and indemnity demands from purchasers for such
events and routinely monitors its exposure in this regard. The Company
maintains a liability of $0.8 million for probable losses due to repurchases.
The Company periodically engages in whole loan sale
transactions of its residential mortgage loans as a part its interest rate risk
management strategy. There were no whole loan sales of mortgage loans from the
portfolio during the current quarter. During the first three months of 2018
the Company sold $60.0 million of loans on a servicing-retained basis. The gain
on that transaction was insignificant and the servicing asset associated with
those sales was $0.5 million. Income earned by the Company on its loan
servicing rights which is derived primarily from contractually specified
servicing fees and other ancillary fees, is not significant. At March 31, 2019
none of the loans sold were considered impaired.
Mortgage loan servicing rights are accounted for at
amortized cost and are monitored for impairment on an ongoing basis. The
amortized cost of the Company's mortgage loan servicing rights was $1.1 million
both at March 31, 2019 and December 31, 2018. The Company did not incur any
impairment losses during the current period.
Allowance for Loan Losses
During the first quarter of 2019, there were no changes in
the Company’s methodology for assessing the appropriateness of the allowance
for loan losses from the prior year. Variations can occur over time in the
estimation of the allowance as a result of the credit performance of borrowers.
At March 31, 2019, total non-performing loans, excluding
credit deteriorated loans from acquisitions, were $40.1 million, or 0.61% of
total loans, compared to $36.0 million, or 0.55% of total loans, at December
31, 2018. The growth in non-performing loans occurred as a result of modest
increases in all segments of the loan portfolio, predominantly loans secured by
real estate. Non-performing loans include accruing loans 90 days or more past
due and restrucutred loans, but exclude acquired non-performing loans. The
allowance represented 132% of non-performing loans at March 31, 2019 as
compared to 149% at December 31, 2018. The allowance for loan losses as a
percent of total loans was 0.81% at both March 31, 2019 and December 31, 2018.
Continued analysis of the actual loss history on the
problem credits in 2018 and 2019 provided an indication that the coverage of
the inherent losses on the problem credits was adequate. The Company continues
to monitor the impact of the economic conditions on our commercial customers
together with the reduced inflow of non-accruals and criticized loans. The
improvement in these credit metrics supports management’s outlook for continued
improved credit quality performance.
The balance of impaired loans was $26.1 million, with
specific allowances of $5.3 million against those loans at March 31, 2019, as
compared to $22.2 million with specific allowances of $4.9 million, at December
31, 2018.
The Company's borrowers are concentrated in nine counties
in Maryland, three counties in Virginia and in Washington D.C. Commercial and
residential mortgages, including home equity loans and lines, represented 88%
of total loans at March 31, 2019 and 87% of total loans at December 31, 2018.
Certain loan terms may create concentrations of credit risk and increase the
Company’s exposure to loss. These include terms that permit the deferral of
principal payments or payments that are smaller than normal interest accruals
(negative amortization); loans with high loan-to-value ratios; loans, such as
option adjustable-rate mortgages, that may expose the borrower to future
increases in repayments that are in excess of increases that would result
solely from increases in market interest rates; and interest-only loans. The
Company does not make loans that provide for negative amortization or option
adjustable-rate mortgages.
Summary of Loan Loss Experience
The following table presents the activity in the allowance
for loan losses for the periods indicated:
|
|
|
|
|
Three Months Ended
|
|
Year Ended
|
(Dollars in thousands)
|
|
March 31, 2019
|
|
December 31, 2018
|
Balance, January 1
|
|
$
|
53,486
|
|
$
|
45,257
|
Provision (credit) for loan losses
|
|
|
(128)
|
|
|
9,023
|
Loan charge-offs:
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
(113)
|
|
|
(225)
|
|
Residential construction
|
|
|
-
|
|
|
-
|
Commercial real estate:
|
|
|
|
|
|
|
|
Commercial investor
|
|
|
-
|
|
|
(131)
|
|
Commercial owner occupied
|
|
|
-
|
|
|
-
|
|
Commercial AD&C
|
|
|
-
|
|
|
-
|
Commercial business
|
|
|
(17)
|
|
|
(449)
|
Consumer
|
|
|
(226)
|
|
|
(611)
|
|
Total charge-offs
|
|
|
(356)
|
|
|
(1,416)
|
Loan recoveries:
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
24
|
|
|
62
|
|
Residential construction
|
|
|
2
|
|
|
15
|
Commercial real estate:
|
|
|
|
|
|
|
|
Commercial investor
|
|
|
7
|
|
|
87
|
|
Commercial owner occupied
|
|
|
-
|
|
|
-
|
|
Commercial AD&C
|
|
|
-
|
|
|
62
|
Commercial business
|
|
|
10
|
|
|
258
|
Consumer
|
|
|
44
|
|
|
138
|
|
Total recoveries
|
|
|
87
|
|
|
622
|
|
Net charge-offs
|
|
|
(269)
|
|
|
(794)
|
|
|
Balance, period end
|
|
$
|
53,089
|
|
$
|
53,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans
|
|
|
0.02%
|
|
|
0.01%
|
Allowance for loan losses to loans
|
|
|
0.81%
|
|
|
0.81%
|
Analysis of Credit Risk
The following table presents information with respect to
non-performing assets and 90-day delinquencies for the periods indicated:
(Dollars in thousands)
|
|
March 31, 2019
|
|
December 31, 2018
|
Non-accrual loans:
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
9,704
|
|
$
|
9,336
|
|
Residential construction
|
|
|
156
|
|
|
159
|
Commercial real estate:
|
|
|
|
|
|
|
|
Commercial investor
|
|
|
6,071
|
|
|
5,355
|
|
Commercial owner occupied
|
|
|
5,992
|
|
|
4,234
|
|
Commercial AD&C
|
|
|
3,306
|
|
|
3,306
|
Commercial business
|
|
|
8,013
|
|
|
7,086
|
Consumer
|
|
|
4,081
|
|
|
4,107
|
|
|
Total non-accrual loans
|
|
|
37,323
|
|
|
33,583
|
|
|
|
|
|
|
|
|
|
Loans 90 days past due
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
221
|
|
|
221
|
|
Residential construction
|
|
|
-
|
|
|
-
|
Commercial real estate:
|
|
|
|
|
|
|
|
Commercial investor
|
|
|
-
|
|
|
-
|
|
Commercial owner occupied
|
|
|
90
|
|
|
-
|
|
Commercial AD&C
|
|
|
-
|
|
|
-
|
Commercial business
|
|
|
-
|
|
|
49
|
Consumer
|
|
|
-
|
|
|
219
|
|
Total 90 days past due loans
|
|
|
311
|
|
|
489
|
|
|
|
|
|
|
|
|
|
Restructured loans (accruing)
|
|
|
2,479
|
|
|
1,942
|
|
Total non-performing loans
|
|
|
40,113
|
|
|
36,014
|
Other real estate owned, net
|
|
|
1,410
|
|
|
1,584
|
|
Total non-performing assets
|
|
$
|
41,523
|
|
$
|
37,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
0.61%
|
|
|
0.55%
|
Non-performing assets to total assets
|
|
|
0.50%
|
|
|
0.46%
|
Allowance for loan to non-performing loans
|
|
|
132.35%
|
|
|
148.51%
|
Market Risk Management
The Company's net income is largely
dependent on its net interest income. Net interest income is susceptible to
interest rate risk to the extent that interest-bearing liabilities mature or
re-price on a different basis than interest-earning assets. When interest-bearing
liabilities mature or re-price more quickly than interest-earning assets in a
given period, a significant increase in market rates of interest could
adversely affect net interest income. Similarly, when interest-earning assets
mature or re-price more quickly than interest-bearing liabilities, falling
interest rates could result in a decrease in net interest income. Net interest
income is also affected by changes in the portion of interest-earning assets
that are funded by interest-bearing liabilities rather than by other sources of
funds, such as noninterest-bearing deposits and stockholders' equity.
The Company’s interest rate risk
management goals are (1) to increase net interest income at a growth rate
consistent with the growth rate of total assets, and (2) to minimize
fluctuations in net interest margin as a percentage of interest-earning
assets. Management attempts to achieve these goals by balancing, within policy
limits, the volume of floating-rate liabilities with a similar volume of
floating-rate assets; by keeping the average maturity of fixed-rate asset and
liability contracts reasonably matched; by maintaining a pool of administered
core deposits; and by adjusting pricing rates to market conditions on a
continuing basis.
The Company’s board of directors has
established a comprehensive interest rate risk management policy, which is
administered by management’s Asset Liability Management Committee (“ALCO”). The
policy establishes limits on risk, which are quantitative measures of the
percentage change in net interest income (a measure of net interest income at
risk) and the fair value of equity capital (a measure of economic value of
equity or “EVE” at risk) resulting from a hypothetical change in U.S. Treasury
interest rates for maturities from one day to thirty years. The Company
measures the potential adverse impacts that changing interest rates may have on
its short-term earnings, long-term value, and liquidity by employing simulation
analysis through the use of computer modeling. The simulation model captures
optionality factors such as call features and interest rate caps and floors embedded
in investment and loan portfolio contracts. As with any method of gauging
interest rate risk, there are certain shortcomings inherent in the interest
rate modeling methodology used by the Company. When interest rates change,
actual movements in different categories of interest-earning assets and
interest-bearing liabilities, loan prepayments, and withdrawals of time and
other deposits, may deviate significantly from assumptions used in the model.
As an example, certain money market deposit accounts are assumed to reprice at
100% of the interest rate change in each of the up rate shock scenarios even
though this is not a contractual requirement. As a practical matter,
management would likely lag the impact of any upward movement in market rates
on these accounts as a mechanism to manage the bank’s net interest margin.
Finally, the methodology does not measure or reflect the impact that higher
rates may have on adjustable-rate loan customers’ ability to service their
debts, or the impact of rate changes on demand for loan, lease, and deposit
products.
The Company prepares a current base
case and eight alternative simulations at least once a quarter and reports the
analysis to the board of directors. In addition, more frequent forecasts are
produced when interest rates are particularly uncertain or when other business
conditions so dictate.
The statement of condition is subject
to quarterly testing for eight alternative interest rate shock possibilities to
indicate the inherent interest rate risk. Average interest rates are shocked
by +/- 100, 200, 300, and 400 basis points (“bp”), although the Company may
elect not to use particular scenarios that it determines are impractical in a
current rate environment. It is management’s goal to structure the balance
sheet so that net interest earnings at risk over a twelve-month period and the
economic value of equity at risk do not exceed policy guidelines at the various
interest rate shock levels.
The Company augments its quarterly
interest rate shock analysis with alternative external interest rate scenarios
on a monthly basis. These alternative interest rate scenarios may include
non-parallel rate ramps and non-parallel yield curve twists. If a measure of
risk produced by the alternative simulations of the entire balance sheet
violates policy guidelines, ALCO is required to develop a plan to restore the
measure of risk to a level that complies with policy limits within two
quarters.
Measures of net interest income at risk produced by
simulation analysis are indicators of an institution’s short-term performance
in alternative rate environments. These measures are typically based upon a
relatively brief period, usually one year. They do not necessarily indicate
the long-term prospects or economic value of the institution.
Estimated Changes in Net Interest Income
|
Change in Interest Rates:
|
+ 400 bp
|
+ 300 bp
|
+ 200 bp
|
+ 100 bp
|
- 100 bp
|
- 200 bp
|
-300 bp
|
400 bp
|
Policy Limit
|
23.50%
|
17.50%
|
15.00%
|
10.00%
|
10.00%
|
15.00%
|
17.50%
|
23.50%
|
March 31, 2019
|
4.58%
|
3.73%
|
2.76%
|
1.46%
|
(2.05%)
|
(3.85%)
|
N/A
|
N/A
|
December 31, 2018
|
2.74%
|
2.29%
|
2.38%
|
1.15%
|
(1.74%)
|
(3.15%)
|
N/A
|
N/A
|
As shown above, the overall net
interest income at risk decreased in rising parallel interest rate movements
and increased as interest rates declined compared to December 31, 2018. The
decrease in the risk position results primarily from the decline in borrowing
costs which were partially offset by increases in interest expenses associated
with money market and certificate of deposit accounts. All measures remained
well within prescribed policy limits
.
The measures of equity value at risk indicate the ongoing
economic value of the Company by considering the effects of changes in interest
rates on all of the Company’s cash flows, and by discounting the cash flows to
estimate the present value of assets and liabilities. The difference between
these discounted values of the assets and liabilities is the economic value of
equity, which, in theory, approximates the fair value of the Company’s net
assets.
Estimated
Changes in Economic Value of Equity (EVE)
|
Change in Interest Rates:
|
+ 400 bp
|
+ 300 bp
|
+ 200 bp
|
+ 100 bp
|
- 100 bp
|
- 200 bp
|
-300 bp
|
-400 bp
|
Policy Limit
|
35.00%
|
25.00%
|
20.00%
|
10.00%
|
10.00%
|
20.00%
|
25.00%
|
35.00%
|
March 31, 2019
|
(11.94%)
|
(7.23%)
|
(3.49%)
|
(0.51%)
|
(1.89%)
|
(4.39%)
|
N/A
|
N/A
|
December 31, 2018
|
(10.23%)
|
(7.18%)
|
(3.61%)
|
(1.70%)
|
(0.77%)
|
(2.80%)
|
N/A
|
N/A
|
Overall, the measure of the economic value of equity
(“EVE”) at risk increased from December 31, 2018 to March 31, 2019 in larger
rising and declining interest rate scenarios. The primary driver of the degradation
in the indicated EVE risk positions was the result of lower market rates and
shorter durations than the previous quarter.
Liquidity Management
Liquidity is measured by a financial institution's ability
to raise funds through loan repayments, maturing investments, deposit growth,
borrowed funds, capital and the sale of highly marketable assets such as
investment securities and residential mortgage loans. The Company's liquidity
position, considering both internal and external sources available, exceeded
anticipated short-term and long-term needs at March 31, 2019. Management
considers core deposits, defined to include all deposits other than time
deposits of $100 thousand or more, to be a relatively stable funding source.
Core deposits equaled 66% of total interest-earning assets at March 31, 2019
.
In addition, loan payments, maturities, calls and pay downs of
securities, deposit growth and earnings contribute a flow of funds available to
meet liquidity requirements. In assessing liquidity, management considers
operating requirements, the seasonality of deposit flows, investment, loan and
deposit maturities and calls, expected funding of loans and deposit
withdrawals, and the market values of available-for-sale investments, so that
sufficient funds are available on short notice to meet obligations as they
arise and to ensure that the Company is able to pursue new business
opportunities.
Liquidity is measured using an approach designed to take
into account, in addition to factors already discussed above, the Company’s
growth and mortgage banking activities. Also considered are changes in the
liquidity of the investment portfolio due to fluctuations in interest rates.
Under this approach, implemented by the Funds Management Subcommittee of ALCO
under formal policy guidelines, the Company’s liquidity position is measured
weekly, looking forward at thirty day intervals from thirty (30) to three
hundred sixty (360) days. The measurement is based upon the projection of
funds sold or purchased position, along with ratios and trends developed to
measure dependence on purchased funds and core growth. The projected excess of
liquidity versus requirements provides the Company with flexibility in how it
funds loans and other earning assets.
The Company also has external sources of funds, which can
be drawn upon when required. The main sources of external liquidity are
available lines of credit with the Federal Home Loan Bank of Atlanta and the
Federal Reserve. The line of credit with the Federal Home Loan Bank of Atlanta
totaled $2.2 billion, all of which was available for borrowing based on pledged
collateral, with $0.8 billion borrowed against it as of March 31, 2019. The
secured lines of credit at the Federal Reserve and correspondent banks totaled
$280 million, all of which was available for borrowing based on pledged
collateral, with no borrowings against it as of March 31, 2019. In addition,
the Company had unsecured lines of credit with correspondent banks of $590
million at March 31, 2019. At March 31, 2019, there were no outstanding
borrowings against these lines of credit. Based upon its liquidity analysis,
including external sources of liquidity available, management believes the
liquidity position was appropriate at March 31, 2019.
The parent company (“Bancorp”) is a separate legal entity
from the Bank and must provide for its own liquidity. In addition to its
operating expenses, Bancorp is responsible for paying any dividends declared to
its common shareholders and interest and principal on outstanding debt.
Bancorp’s primary source of income is dividends received from the Bank. The
amount of dividends that the Bank may declare and pay to Bancorp in any
calendar year, without the receipt of prior approval from the Federal Reserve,
cannot exceed net income for that year to date plus retained net income (as
defined) for the preceding two calendar years. Based on this requirement, as of
March 31, 2019, the Bank could have declared a dividend of $111 million to
Bancorp. At March 31, 2019, Bancorp had liquid assets of $27 million.
Arrangements to fund credit products or guarantee financing
take the form of loan commitments (including lines of credit on revolving
credit structures) and letters of credit. Approvals for these arrangements are
obtained in the same manner as loans. Generally, cash flows, collateral value
and risk assessment are considered when determining the amount and structure of
credit arrangements.
Commitments to extend credit in the form of consumer,
commercial real estate and business at the dates indicated were as follows:
|
|
|
|
March 31,
|
|
December 31,
|
(In thousands)
|
|
2019
|
|
2018
|
Commercial real estate development and construction
|
|
$
|
517,551
|
|
$
|
562,777
|
Residential real estate-development and construction
|
|
|
114,677
|
|
|
130,251
|
Real estate-residential mortgage
|
|
|
65,527
|
|
|
31,227
|
Lines of credit, principally home equity and business lines
|
|
|
1,312,115
|
|
|
1,296,481
|
Standby letters of credit
|
|
|
60,634
|
|
|
59,826
|
|
Total commitments to extend credit and available credit lines
|
|
$
|
2,070,504
|
|
$
|
2,080,562
|
|
|
|
|
|
|
|
|
Commitments to extend credit are agreements to provide
financing to a customer with the provision that there are no violations of any
condition established in the agreement. Commitments generally have interest
rates determined by current market rates, expirations dates or other
termination clauses and may require payment of a fee. Lines of credit
typically represent unused portions of lines of credit that were provided and
remain available as long as customers comply with the requisite contractual
conditions. Commitments to extend credit are evaluated on a case by case basis
periodically. Many of the commitments are expected to expire without being
drawn upon. It is highly unlikely that all customers would draw on their lines
of credit in full at any time and, therefore, the total commitment amount or
line of credit amounts do not necessarily represent future cash requirements.
Item 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See “Financial Condition - Market Risk and Interest Rate
Sensitivity” in Management’s Discussion and Analysis of Financial Condition and
Results of Operations, above, which is incorporated herein by reference.
Item 4. CONTROLS AND
PROCEDURES
The Company’s management, under the
supervision and with the participation of the Company’s Chief Executive Officer
and Chief Financial Officer, evaluated as of the last day of the period covered
by this report, the effectiveness of the design and operation of the Company’s
disclosure controls and procedures, as defined in Rule 13a-15 under the
Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were effective. There were no changes in the Company’s
internal controls over financial reporting (as defined in Rule 13a-15 under the
Securities Act of 1934) during the three months ended March 31, 2019 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business, the Company becomes
involved in litigation arising from the banking, financial and other activities
it conducts. Management, after consultation with legal counsel, does not
anticipate that the ultimate liability, if any, arising from these matters will
have a material effect on the Company’s financial condition, operating results
or liquidity.
Item 1A. Risk Factors
There have been no material changes in the risk factors as
discussed in the 2018 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
In December 2018, the Company’s board of directors
authorized the repurchase of up to 1,800,000 shares of common stock. The
Company did not repurchase any shares of its common stock in the quarter ended
March 31, 2019.
Item 3. Defaults Upon Senior Securities – None
Item 4. Mine Safety Disclosures – Not applicable
Item 5. Other Information - None
Item 6.
Exhibits
Signatures
Pursuant to the requirements of
Section 13 of the Securities Exchange Act of 1934, the Registrant has duly
caused this quarterly report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SANDY SPRING BANCORP, INC.
(Registrant)
By:
/s/ Daniel J. Schrider
Daniel J. Schrider
President and Chief Executive Officer
Date: May 3, 2019
By:
/s/ Philip J. Mantua
Philip
J. Mantua
Executive Vice President and Chief Financial Officer
Date: May 3, 2019
Sandy Spring Bancorp (NASDAQ:SASR)
Historical Stock Chart
From Aug 2024 to Sep 2024
Sandy Spring Bancorp (NASDAQ:SASR)
Historical Stock Chart
From Sep 2023 to Sep 2024