Eagle Bancorp, Inc.
Consolidated Average Balances, Interest Yields and Rates (Unaudited)
(dollars in thousands)
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
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
|
|
$
|
292,772
|
|
|
$
|
2,255
|
|
|
|
1.55
|
%
|
|
$
|
269,613
|
|
|
$
|
1,093
|
|
|
|
0.82
|
%
|
Loans held for sale (1)
|
|
|
25,293
|
|
|
|
565
|
|
|
|
4.47
|
%
|
|
|
33,796
|
|
|
|
670
|
|
|
|
3.96
|
%
|
Loans (1) (2)
|
|
|
6,502,207
|
|
|
|
174,789
|
|
|
|
5.42
|
%
|
|
|
5,800,742
|
|
|
|
147,697
|
|
|
|
5.15
|
%
|
Investment securities available for sale (2)
|
|
|
628,818
|
|
|
|
7,650
|
|
|
|
2.45
|
%
|
|
|
523,566
|
|
|
|
5,660
|
|
|
|
2.19
|
%
|
Federal funds sold
|
|
|
17,258
|
|
|
|
86
|
|
|
|
1.00
|
%
|
|
|
6,023
|
|
|
|
18
|
|
|
|
0.60
|
%
|
Total interest earning assets
|
|
|
7,466,348
|
|
|
|
185,345
|
|
|
|
5.01
|
%
|
|
|
6,633,740
|
|
|
|
155,138
|
|
|
|
4.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest earning assets
|
|
|
293,488
|
|
|
|
|
|
|
|
|
|
|
|
292,603
|
|
|
|
|
|
|
|
|
|
Less: allowance for credit losses
|
|
|
65,781
|
|
|
|
|
|
|
|
|
|
|
|
59,746
|
|
|
|
|
|
|
|
|
|
Total noninterest earning assets
|
|
|
227,707
|
|
|
|
|
|
|
|
|
|
|
|
232,857
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
7,694,055
|
|
|
|
|
|
|
|
|
|
|
$
|
6,866,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
|
|
$
|
409,066
|
|
|
$
|
1,279
|
|
|
|
0.63
|
%
|
|
$
|
345,986
|
|
|
$
|
575
|
|
|
|
0.34
|
%
|
Savings and money market
|
|
|
2,708,480
|
|
|
|
14,210
|
|
|
|
1.06
|
%
|
|
|
2,684,900
|
|
|
|
7,961
|
|
|
|
0.60
|
%
|
Time deposits
|
|
|
1,006,356
|
|
|
|
7,688
|
|
|
|
1.54
|
%
|
|
|
759,942
|
|
|
|
3,697
|
|
|
|
0.98
|
%
|
Total interest bearing deposits
|
|
|
4,123,902
|
|
|
|
23,177
|
|
|
|
1.13
|
%
|
|
|
3,790,828
|
|
|
|
12,233
|
|
|
|
0.65
|
%
|
Customer repurchase agreements
|
|
|
53,158
|
|
|
|
112
|
|
|
|
0.42
|
%
|
|
|
69,359
|
|
|
|
78
|
|
|
|
0.23
|
%
|
Other short-term borrowings
|
|
|
234,267
|
|
|
|
2,108
|
|
|
|
1.79
|
%
|
|
|
60,808
|
|
|
|
277
|
|
|
|
0.91
|
%
|
Long-term borrowings
|
|
|
217,019
|
|
|
|
5,958
|
|
|
|
5.46
|
%
|
|
|
216,624
|
|
|
|
5,958
|
|
|
|
5.47
|
%
|
Total interest bearing liabilities
|
|
|
4,628,346
|
|
|
|
31,355
|
|
|
|
1.37
|
%
|
|
|
4,137,619
|
|
|
|
18,546
|
|
|
|
0.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand
|
|
|
2,042,738
|
|
|
|
|
|
|
|
|
|
|
|
1,816,724
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
38,535
|
|
|
|
|
|
|
|
|
|
|
|
37,031
|
|
|
|
|
|
|
|
|
|
Total noninterest bearing liabilities
|
|
|
2,081,273
|
|
|
|
|
|
|
|
|
|
|
|
1,853,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
984,436
|
|
|
|
|
|
|
|
|
|
|
|
875,223
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
7,694,055
|
|
|
|
|
|
|
|
|
|
|
$
|
6,866,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
153,990
|
|
|
|
|
|
|
|
|
|
|
$
|
136,592
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.64
|
%
|
|
|
|
|
|
|
|
|
|
|
3.82
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
4.16
|
%
|
|
|
|
|
|
|
|
|
|
|
4.16
|
%
|
Cost of funds
|
|
|
|
|
|
|
|
|
|
|
0.85
|
%
|
|
|
|
|
|
|
|
|
|
|
0.57
|
%
|
|
(1)
|
Loans placed on nonaccrual status are included in average
balances. Net loan fees and late charges included in interest income on loans totaled $9.9 million and $8.2 million for the six
months ended June 30, 2018 and 2017, 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 loan review consultant, support management’s assessment as to
the adequacy of the allowance at the balance sheet date. Please refer to the discussion under the caption “Critical Accounting
Policies” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 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 at page 49, which reflects activity in the
allowance for credit losses.
During
the three months ended June 30, 2018, the allowance for credit losses increased $802 thousand, reflecting $1.7 million in provision
for credit losses and $848 thousand in net charge-offs during the period. The provision for credit losses was $1.7 million for
the three months ended June 30, 2018 as compared to $1.6 million for the same period in 2017. Net charge-offs of $848 thousand
in the second quarter of 2018 represented an annualized 0.05% of average loans, excluding loans held for sale, as compared to
$367 thousand, or an annualized 0.02% of average loans, excluding loans held for sale, in the second quarter of 2017.
During
the six months ended June 30, 2018, the allowance for credit losses increased $1.9 million, reflecting $3.6 million in provision
for credit losses and $1.8 million in net charge-offs during the period. The provision for credit losses was $3.6 million for
the six months ended June 30, 2018 as compared to $3.0 million for the same period in 2017. Net charge-offs of $1.8 million in
the first six months of 2018 represented an annualized 0.05% of average loans, excluding loans held for sale, as compared to $990
thousand, or an annualized 0.03% of average loans, excluding loans held for sale, for the same period of 2017.
As
part of its comprehensive loan review process, the Bank’s Board of Directors and Loan Committee or Credit Review Committee
carefully evaluate loans which are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances
surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety
days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically
analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to
carefully and prudently assess potential increased levels of risk requiring additional reserves.
The
maintenance of a high quality loan portfolio, with an adequate allowance for possible credit losses, will continue to be a primary
management objective for the Company.
The
following table sets forth activity in the allowance for credit losses for the periods indicated.
|
|
|
|
|
|
Six Months Ended June 30,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
64,758
|
|
|
$
|
59,074
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,261
|
|
|
|
137
|
|
Income producing - commercial real estate
|
|
|
121
|
|
|
|
1,470
|
|
Owner occupied - commercial real estate
|
|
|
132
|
|
|
|
—
|
|
Real estate mortgage - residential
|
|
|
—
|
|
|
|
—
|
|
Construction - commercial and residential
|
|
|
517
|
|
|
|
—
|
|
Construction - C&I (owner occupied)
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
Other consumer
|
|
|
—
|
|
|
|
66
|
|
Total charge-offs
|
|
|
2,031
|
|
|
|
1,673
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
26
|
|
|
|
268
|
|
Income producing - commercial real estate
|
|
|
2
|
|
|
|
50
|
|
Owner occupied - commercial real estate
|
|
|
2
|
|
|
|
2
|
|
Real estate mortgage - residential
|
|
|
3
|
|
|
|
3
|
|
Construction - commercial and residential
|
|
|
95
|
|
|
|
345
|
|
Construction - C&I (owner occupied)
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
127
|
|
|
|
3
|
|
Other consumer
|
|
|
8
|
|
|
|
12
|
|
Total recoveries
|
|
|
263
|
|
|
|
683
|
|
Net charge-offs
|
|
|
1,768
|
|
|
|
990
|
|
Provision for Credit Losses
|
|
|
3,619
|
|
|
|
2,963
|
|
Balance at end of period
|
|
$
|
66,609
|
|
|
$
|
61,047
|
|
|
|
|
|
|
|
|
|
|
Annualized ratio of net charge-offs during the
period to average loans outstanding during the period
|
|
|
0.05
|
%
|
|
|
0.03
|
%
|
The
following table reflects the allocation of the allowance for credit losses at the dates indicated. The allocation of the allowance
to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance
to absorb losses in any category.
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
(dollars in thousands)
|
|
Amount
|
|
|
%(1)
|
|
|
Amount
|
|
|
%(1)
|
|
Commercial
|
|
$
|
12,206
|
|
|
|
22
|
%
|
|
$
|
13,102
|
|
|
|
21
|
%
|
Income producing - commercial real estate
|
|
|
27,988
|
|
|
|
45
|
%
|
|
|
25,376
|
|
|
|
48
|
%
|
Owner occupied - commercial real estate
|
|
|
6,003
|
|
|
|
13
|
%
|
|
|
5,934
|
|
|
|
12
|
%
|
Real estate mortgage - residential
|
|
|
757
|
|
|
|
2
|
%
|
|
|
944
|
|
|
|
2
|
%
|
Construction - commercial and residential
|
|
|
17,855
|
|
|
|
16
|
%
|
|
|
17,805
|
|
|
|
15
|
%
|
Construction - C&I (owner occupied)
|
|
|
796
|
|
|
|
1
|
%
|
|
|
687
|
|
|
|
1
|
%
|
Home equity
|
|
|
673
|
|
|
|
1
|
%
|
|
|
770
|
|
|
|
1
|
%
|
Other consumer
|
|
|
331
|
|
|
|
—
|
|
|
|
140
|
|
|
|
—
|
|
Total allowance
|
|
$
|
66,609
|
|
|
|
100
|
%
|
|
$
|
64,758
|
|
|
|
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 $12.3 million at June 30, 2018 representing
0.16% of total assets, as compared to $14.6 million of nonperforming assets, or 0.20% of total assets, at December 31, 2017. The
Company had no accruing loans 90 days or more past due at June 30, 2018 or December 31, 2017. Management remains attentive to
early signs of deterioration in borrowers’ financial conditions and to taking the appropriate action to mitigate risk. Furthermore,
the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its
allowance for credit losses, at 1.00% of total loans at June 30, 2018, 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 thirteen TDR’s at June 30,
2018 totaling approximately $16.3 million. Nine of these loans totaling approximately $15.1 million are performing under their
modified terms. There were two performing TDRs totaling $937 thousand that defaulted on their modified terms which were reclassified
to nonperforming loans during the six months ended June 30, 2018, as compared to the same period in 2017, which had no defaults
on restructured loans. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed
on nonaccrual. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of
possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further
impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs
may be taken to further write-down the carrying value of the loan. There were two loans totaling $4.0 million modified in a TDR
during the three months ended June 30, 2018, as compared to the three months ended June 30, 2017 which had one loan totaling $4.8
million modified in a TDR.
Total
nonperforming loans amounted to $10.9 million at June 30, 2018 (0.16% of total loans) compared to $13.2 million at December 31,
2017 (0.21% of total loans). The decrease in the ratio of nonperforming loans to total loans at June 30, 2018 as compared to December
31, 2017 was due to a decrease in the level of nonperforming loans.
Included
in nonperforming assets at June 30, 2018 and December 31, 2017 was $1.4 million of OREO, consisting of one foreclosed property.
The Company had two foreclosed properties with a net carrying value of $1.4 million at June 30, 2017. OREO properties are carried
at fair value less estimated costs to sell. It is the Company’s policy to obtain third party appraisals prior to foreclosure,
and to obtain updated third party appraisals on OREO properties generally not less frequently than annually. Generally, the Company
would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable
sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately
reflect current value. During the first six months of 2018 there were no sales of OREO property, as compared to June 30, 2017,
with one foreclosed property with a net carrying value of $1.4 million sold for a net loss of $361 thousand.
The
following table shows the amounts of nonperforming assets at the dates indicated.
|
|
June 30,
|
|
|
December 31,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Nonaccrual Loans:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,059
|
|
|
$
|
3,493
|
|
Income producing - commercial real estate
|
|
|
186
|
|
|
|
832
|
|
Owner occupied - commercial real estate
|
|
|
5,071
|
|
|
|
5,501
|
|
Real estate mortgage - residential
|
|
|
1,975
|
|
|
|
775
|
|
Construction - commercial and residential
|
|
|
—
|
|
|
|
2,052
|
|
Construction - C&I (owner occupied)
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
494
|
|
|
|
494
|
|
Other consumer
|
|
|
91
|
|
|
|
91
|
|
Accrual loans-past due 90 days
|
|
|
—
|
|
|
|
—
|
|
Total nonperforming loans (1)
|
|
|
10,876
|
|
|
|
13,238
|
|
Other real estate owned
|
|
|
1,394
|
|
|
|
1,394
|
|
Total nonperforming assets
|
|
$
|
12,270
|
|
|
$
|
14,632
|
|
|
|
|
|
|
|
|
|
|
Coverage ratio, allowance for credit losses to total nonperforming loans
|
|
|
612.42
|
%
|
|
|
489.20
|
%
|
Ratio of nonperforming loans to total loans
|
|
|
0.16
|
%
|
|
|
0.21
|
%
|
Ratio of nonperforming assets to total assets
|
|
|
0.16
|
%
|
|
|
0.20
|
%
|
|
(1)
|
Nonaccrual
loans reported in the table above include loans that migrated from performing troubled
debt restructuring. There were two loans totaling $937 thousand that migrated from performing
TDRs during the six months ended June 30, 2018, as compared to the six months ended June
30, 2017 where there were no loans that migrated from performing TDR.
|
Significant
variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends
largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio.
At
June 30, 2018, there were $26.7 million of performing loans considered potential problem loans, defined as loans that are not
included in the 90 day past due, nonaccrual or restructured categories, but for which known information about possible credit
problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms,
which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. The $26.7 million in
potential problem loans at June 30, 2018 compared to $18.8 million at December 31, 2017. 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 June 30, 2018 decreased to $5.6 million from $7.0 million for the three months ended
June 30, 2017, a 21% decrease, due substantially to lower gains on the sale of residential mortgage loans ($1.5 million versus
$2.3 million) resulting from lower volume as compared to 2017, and insignificant revenue associated with the origination, securitization,
servicing, and sale of FHA Multifamily-Backed GNMA securities as compared to $752 thousand during the second quarter of 2017.
Residential mortgage loans closed were $126 million for the second quarter of 2018 versus $188 million for the second quarter
of 2017.
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 June 30, 2018, 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.
Total
noninterest income for the six months ended June 30, 2018 decreased to $10.9 million from $13.1 million for the six months ended
June 30, 2017, a 17% decrease, due substantially to lower gains on the sale of residential mortgage loans ($2.9 million versus
$4.3 million) resulting from lower volume as compared to 2017, and insignificant revenue associated with the origination, securitization,
servicing, and sale of FHA Multifamily-Backed GNMA securities for the six months ended June 30, 2018 versus $752 thousand for
the same period in 2017. Residential mortgage loans closed were $226 million for the six months ended June 30, 2018 versus $338
million for the same period in 2017.
Service
charges on deposit accounts increased by $217 thousand, or 14%, from $1.5 million for the three months ended June 30, 2017 to
$1.8 million for the same period in 2018. The increase for the three month period was primarily related to increased transaction
volume. Service charges on deposit accounts increased by $359 thousand, or 12%, from $3.0 million for the six months ended June
30, 2017 to $3.4 million for the same period in 2018. The increase for the six month period was primarily related to increased
transaction volume.
The
Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts”
forward loan sale commitments to sell those loans, servicing released. Sales of residential mortgage loans yielded gains of $1.5
million for the three months ended June 30, 2018 compared to $2.3 million in the same period in 2017. Sales of residential mortgage
loans yielded gains of $2.9 million for the six months ended June 30, 2018 compared to $4.3 million in the same period in 2017.
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 June 30, 2018. The reserve amounted to $56 thousand
at June 30, 2018 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 $130 thousand for the three months ended June 30, 2018 compared to $179 thousand for the three month period in
2017. Income from this source was $300 thousand for the six months ended June 30, 2018 compared to $237 thousand for the six month
period in 2017. 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 June 30, 2018 as compared to $2.6 million for the same period in 2017,
a decrease of 32%. ATM fees increased to $373 thousand for the three months ended June 30, 2018 from $371 thousand for the same
period in 2017, an increase of less than 1%. Noninterest fee income totaled $431 thousand for the three months ended June 30,
2018 a decrease of $849 thousand, or 66%, over the total for the same period in 2017 primarily due to $752 thousand of gains on
the origination, securitization, servicing, and sale of FHA Multifamily-Backed Ginnie Mae securities in the second quarter of
2017 compared to insignificant revenue for the same period of 2018. EagleBank received approval as a Ginnie Mae Issuer of Ginnie
Mae I multifamily mortgage-backed securities during May 2017.
Other
income totaled $3.5 million for the six months ended June 30, 2018 as compared to $4.2 million for the same period in 2017, a
decrease of 17%. ATM fees decreased slightly to $728 thousand for the six months ended June 30, 2018 from $730 thousand for the
same period in 2017, a decrease of less than 1%. Noninterest fee income totaled $873 thousand for the six months ended June 30,
2018 a decrease of $781 thousand, or 47%, over the total for the same period in 2017 primarily due to $752 thousand of gains on
the origination, securitization, servicing, and sale of FHA Multifamily-Backed Ginnie Mae securities in the first six months of
2017 compared to insignificant revenue for the same period of 2018. Activity in FHA Multifamily-backed Ginnie Mae securities can
vary widely.
Net
investment gains were $68 thousand for the six months ended June 30, 2018 compared to $531 thousand for the same period in 2017.
Noninterest
Expense
Total
noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data
processing, FDIC insurance, and other expenses.
Total
noninterest expenses totaled $32.3 million for the three months ended June 30, 2018, as compared to $30.0 million for the three
months ended June 30, 2017, an 8% increase. Total noninterest expenses totaled $63.4 million for the six months ended June 30,
2018, as compared to $59.2 million for the six months ended June 30, 2017, a 7% increase.
Salaries
and employee benefits were $17.8 million for the three months ended June 30, 2018, as compared to $16.9 million for the same period
in 2017, a 6% increase. Salaries and benefits cost increases for the three month period were due primarily to merit increases
and benefit costs. Salaries and employee benefits were $34.7 million for the six months ended June 30, 2018, as compared to $33.5
million for the same period in 2017, a 3% increase. Salaries and benefits cost increases for the six month period were due primarily
to merit increases and benefit costs. At June 30, 2018, the Company’s full time equivalent staff numbered 479, as compared
to 466 at December 31, 2017, and 483 at June 30, 2017.
Premises
and equipment expenses amounted to $3.9 million for the three month periods ended June 30, 2018 and 2017, a 1% decrease, and $7.8
million for the six month periods ended June 30, 2018 and 2017, a 1% increase. For the three months ended June 30, 2018, the Company
recognized $123 thousand of sublease revenue as compared to $91 thousand for the same period in 2017. For the six months ended
June 30, 2018, the Company recognized $256 thousand of sublease revenue as compared to $222 thousand for the same period in 2017.
Sublease revenue is accounted for as a reduction to premises and equipment expenses.
Marketing
and advertising expenses increased to $1.3 million for the three months ended June 30, 2018 from $1.2 million for the same period
in 2017, a 4% increase. Marketing and advertising expenses increased to $2.2 million for the six months ended June 30, 2018 from
$2.1 million for the same period in 2017, a 4% increase. The increase in the three and six month periods was primarily due to
costs associated with digital and print advertising and sponsorships.
Data
processing expense increased to $2.4 million for the three months ended June 30, 2018 from $2.0 million for the same period in
2017, a 20% increase. Data processing expense increased to $4.7 million for the six months ended June 30, 2018, from $4.0 million
for the same period in 2017, a 17% increase. The increase in the three and six month periods was primarily due to the costs of
software and infrastructure investments.
Legal,
accounting and professional fees increased to $2.2 million for the three months ended June 30, 2018 from $1.3 million in the same
period in 2017, a 68% increase. Legal, accounting and professional fees increased to $5.2 million for the six months ended June
30, 2018 from $2.3 million in the same period in 2017, a 124% increase. The increase in expense for the three and six month periods
was due to due diligence from independent consultants associated with the internet event late in 2017 and efforts to further mature
risk management.
FDIC
insurance increased to $951 thousand for the three months ended June 30, 2018 from $590 thousand for the same period in 2017,
a 61% increase. FDIC insurance increased to $1.6 million for the six months ended June 30, 2018 from $1.1 million for the same
period in 2017, a 43% increase. The increase for the three and six months was primarily due to a higher assessment base resulting
from growth in total assets.
Other
expenses decreased to $3.8 million for the three months ended June 30, 2018 from $4.1 million for the same period in 2017, a decrease
of 7%, primarily due to $141 thousand lower costs associated with problem loans. The major components of cost in this category
include broker fees, franchise taxes, core deposit intangible amortization, and insurance expense.
Other
expenses decreased to $7.2 million for the six months ended June 30, 2018 from $8.3 million for the same period in 2017, a decrease
of 13%, primarily due to a net loss on the sale of OREO in the first quarter of 2017 of $361 thousand, and $231 thousand lower
costs associated with problem loans.
The
efficiency ratio, which measures the ratio of noninterest expense to total revenue, improved to 38.55% for the second quarter
of 2018 from 39.10% for the second quarter of 2017. The efficiency ratio improved to 38.47% for the six months ended June 30,
2018 from 39.57% for the same period in 2017. As a percentage of average assets, total noninterest expense (annualized) improved
to 1.66% for the three months ended June 30, 2018 as compared to 1.72% for the same period in 2017. As a percentage of average
assets, total noninterest expense (annualized) improved to 1.65% for the six months ended June 30, 2018 as compared to 1.73% for
the same period in 2017.
Income
Tax Expense
The
Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) decreased to 25.1% and 25.4%
for the three and six months ended June 30, 2018, respectively, as compared to 38.5% and 37.4% for the same periods in 2017. The
lower effective tax rate for the three and six months ended June 30, 2018, were due largely to a reduction in the federal corporate
tax rate from 35% to 21% pursuant to The Tax Cuts and Jobs Act of 2017.
FINANCIAL
CONDITION
Summary
Total
assets at June 30, 2018 were $7.88 billion, a 5% increase as compared to $7.48 billion at December 31, 2017. Total loans (excluding
loans held for sale) were $6.65 billion at June 30, 2018, a 4% increase as compared to $6.41 billion at December 31, 2017. Loans
held for sale amounted to $30.5 million at June 30, 2018 as compared to $25.1 million at December 31, 2017, a 22% increase. The
investment portfolio totaled $656.9 million at June 30, 2018, a 12% increase from the $589.3 million balance at December 31, 2017.
Total
deposits at June 30, 2018 were $6.27 billion, compared to deposits of $5.85 billion at December 31, 2017, a 7% increase.
Total borrowed funds (excluding customer repurchase agreements) were $517.1 million at June 30, 2018 and $541.9 million at
December 31, 2017 of which $300.0 million in FHLB advances were outstanding as of June 30, 2018. FHLB advances outstanding
totaling $100.0 million as of June 30, 2018 were paid off during July 2018 and the remaining $200.0 million will mature in
June 2019. We continue to work on expanding the breadth and depth of our existing deposit relationships while we continue to
pursue new relationships.
Total
shareholders’ equity at June 30, 2018 increased 8% from $950.4 million at December 31, 2017. The increase in shareholders’
equity at June 30, 2018 compared to the year end 2017 was primarily the result of retained earnings. The ratio of common equity
to total assets was 12.98% at June 30, 2018, as compared to 12.71% at December 31, 2017. The Company’s capital position
remains substantially in excess of regulatory requirements for well capitalized status, with a total risk based capital ratio
of 15.77% at June 30, 2018, as compared to 15.02% at December 31, 2017. In addition, the tangible common equity ratio was 11.79%
at June 30, 2018, compared to 11.44% at December 31, 2017.
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 new requirements, and satisfies the requirement
to maintain the fully phased in capital conservation buffer of 2.5 % of common equity tier 1 capital for capital adequacy purposes.
Beginning in 2016, failure to maintain the required capital conservation buffer would limit the ability of the Company and the
Bank to pay dividends, repurchase shares or pay discretionary bonuses.
Loans,
net of amortized deferred fees and costs, at June 30, 2018 and December 31, 2017 by major category are summarized below.
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
(dollars in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Commercial
|
|
$
|
1,467,089
|
|
|
|
22
|
%
|
|
$
|
1,375,939
|
|
|
|
21
|
%
|
Income producing - commercial real estate
|
|
|
3,000,386
|
|
|
|
45
|
%
|
|
|
3,047,094
|
|
|
|
48
|
%
|
Owner occupied - commercial real estate
|
|
|
852,697
|
|
|
|
13
|
%
|
|
|
755,444
|
|
|
|
12
|
%
|
Real estate mortgage - residential
|
|
|
103,415
|
|
|
|
2
|
%
|
|
|
104,357
|
|
|
|
2
|
%
|
Construction - commercial and residential
|
|
|
1,087,287
|
|
|
|
16
|
%
|
|
|
973,141
|
|
|
|
15
|
%
|
Construction - C&I (owner occupied)
|
|
|
48,480
|
|
|
|
1
|
%
|
|
|
58,691
|
|
|
|
1
|
%
|
Home equity
|
|
|
89,539
|
|
|
|
1
|
%
|
|
|
93,264
|
|
|
|
1
|
%
|
Other consumer
|
|
|
2,811
|
|
|
|
—
|
|
|
|
3,598
|
|
|
|
—
|
|
Total loans
|
|
|
6,651,704
|
|
|
|
100
|
%
|
|
|
6,411,528
|
|
|
|
100
|
%
|
Less: allowance for credit losses
|
|
|
(66,609
|
)
|
|
|
|
|
|
|
(64,758
|
)
|
|
|
|
|
Net loans
|
|
$
|
6,585,095
|
|
|
|
|
|
|
$
|
6,346,770
|
|
|
|
|
|
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 $6.65 billion at June 30, 2018, an increase of $240.2 million, or 4%, as compared to $6.41 billion at
December 31, 2017. Loan growth during the six months ended June 30, 2018 was predominantly in the commercial loans and
construction – commercial and residential 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. Suburban office leasing has softened, but we continue to find that, as with many aspects of
the real estate market, the actual success of any particular building is largely dependent on specific locational attributes.
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. The
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 six months ended June 30, 2018, noninterest bearing deposits increased $40.0 million as compared to December 31, 2017, while
interest bearing deposits increased by $374.8 million during the same period. Average total deposits for the first six months
of 2018 were $6.17 billion, as compared to $5.61 billion for the same period in 2017, a 10% increase.
From
time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations
of less than $250 thousand, from a regional brokerage firm, and other national brokerage networks, including Promontory. Additionally,
the Bank participates in the Certificates of Deposit Account Registry Service (“CDARS”) and the Insured Cash Sweep
product (“ICS”), which provides for reciprocal (“two-way”) transactions among banks facilitated by Promontory
for the purpose of maximizing FDIC insurance. The Bank also is able to obtain one-way
CDARS deposits and participates in Promontory’s Insured Network Deposit (“IND”). At June 30, 2018, total deposits
included $1.01 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 16% of total deposits. At
December 31, 2017, total brokered deposits (excluding the CDARS and ICS two-way) were $865.5 million, or 15% of total deposits.
The CDARS and ICS two-way component represented $500.4 million, or 8% of total deposits and $574.4 million or 10% of total deposits
at June 30, 2018 and December 31, 2017, respectively. These sources are believed by the Company to represent a reliable and cost
efficient alternative funding source for the Bank. However, to the extent that the condition or reputation of the Company or Bank
deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect
to match, we may experience an outflow of brokered deposits. In that event we would be required to obtain alternate sources for
funding.
At
June 30, 2018 the Company had $2.02 billion in noninterest bearing demand deposits, representing 32% of total deposits, compared
to $1.98 billion of noninterest bearing demand deposits at December 31, 2017, or 34% of total deposits. Average noninterest bearing
deposits were 33% of total deposits for the first six months of 2018 and 32% for the first six months of 2017. These deposits
are primarily business checking accounts on which the payment of interest was prohibited by regulations of the Federal Reserve
prior to July 2011. Since July 2011, banks are no longer prohibited from paying interest on demand deposits account, including
those from businesses. To date, the Bank has elected not to pay interest on business checking accounts, nor is the payment of
such interest a prevalent practice in the Bank’s market area at present. It is not clear over the long-term what effect
the elimination of this prohibition will have on the Bank’s interest expense, allocation of deposits, deposit pricing, loan
pricing, net interest margin, ability to compete, ability to establish and maintain customer relationships, or profitability.
The Bank does offer business NOW accounts and business savings accounts to accommodate those customers who may have excess short
term cash to deploy.
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 $29.1 million at June 30, 2018
compared to $76.6 million at December 31, 2017. 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 June 30, 2018 the Company had $1.15 billion
in time deposits. Time deposits increased by $73.7 million from period end March 30, 2018 to June 30, 2018. Time deposits grew
by $235.3 million on average in the second quarter as compared to the first quarter average. A targeted effort to raise more time
deposits in the second quarter resulted in this growth. Time deposits serve as an important part of the Company’s funding
mix and became more of a focus in the second quarter of 2018.
The
Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured)
at June 30, 2018 and December 31, 2017. The Bank had $300.0 million and $325.0 million in short-term borrowings outstanding under
its credit facility from the FHLB at June 30, 2018 and December 31, 2017, respectively. 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 June 30, 2018 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 8 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
$147.5 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at
June 30, 2018, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.18 billion, against
which there was $219.0 million outstanding at June 30, 2018. 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 $326.0
million at June 30, 2018. At June 30, 2018 the Bank was also eligible to make advances from the FHLB up to $1.4 billion based
on collateral at the FHLB, of which there was $300.0 million outstanding at June 30, 2018. 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 $593.0 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’s Board of Directors (“ALCO”) has adopted policy guidelines which emphasize the importance of core deposits,
adequate asset liquidity and a contingency funding plan.
At
June 30, 2018, under the Bank’s liquidity formula, it had $3.93 billion of primary and secondary liquidity sources. The
amount is deemed adequate to meet current and projected funding needs.
Commitments
and Contractual Obligations
Loan
commitments outstanding and lines and letters of credit at June 30, 2018 are as follows:
(dollars in thousands)
|
|
|
|
Unfunded loan commitments
|
|
$
|
2,249,528
|
|
Unfunded lines of credit
|
|
|
87,390
|
|
Letters of credit
|
|
|
74,180
|
|
Total
|
|
$
|
2,411,098
|
|
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 June 30, 2018, unfunded loan commitments included $57.1 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 June 30, 2018, as compared to the same period in 2017, the Company was able to increase its net interest
income, by 12%, produce a net interest margin of 4.15%, which was 1 basis point lower than the 4.16% for the same period in 2017,
and manage its overall interest rate risk position.
The
Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates
and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial
objectives subject to established risk limits. In the current and expected future interest rate environment, the Company has been
maintaining its investment portfolio to manage the balance between yield and prepayment risk in its portfolio of mortgage backed
securities should interest rates remain at current levels. Further, the Company has been managing the investment portfolio to
mitigate extension risk and related declines in market values in that same portfolio should interest rates increase. Additionally,
the Company has limited call risk in its U.S. agency investment portfolio. During the three months ended June 30, 2018, the average
investment portfolio balances increased as compared to balances at June 30, 2017. The cash received from deposit growth along
with cash flows off of the investment portfolio were deployed into loans and the purchase of additional investments.
The
percentage mix of municipal securities was 8% of total investments at June 30, 2018 and 9% at June 30, 2017, the portion of the
portfolio invested in mortgage backed securities increased to 69% at June 30, 2018 from 60% at June 30, 2017. The portion of the
portfolio invested in U.S. agency investments was 23% at June 30, 2018 and 21% at June 30, 2017. Shorter duration floating rate
corporate bonds were 1% and 2% of total investments at June 30, 2018 and June 30, 2017, respectively, and SBA bonds, which are
included in mortgage backed securities, were 10% and 8% of total investments at June 30, 2018 and June 30, 2017, respectively.
Even as the bond portfolio rolled forward, the purchase of longer duration instruments combined with slower prepayment of mortgage
backed security principal, led to the duration of the investment portfolio increasing to only 3.8 years at June 30, 2018 from
3.4 years at June 30, 2017, as the Bank was able to earn higher yields in the bond market.
The
re-pricing duration of the loan portfolio was 16 months at June 30, 2018 versus 21 months at June 30, 2017, with fixed rate loans
amounting to 34% and 32% of total loans at June 30, 2018 and June 30, 2017, respectively. Variable and adjustable rate loans comprised
66% and 68% of total loans at June 30, 2018 and June 30, 2017, 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 decreased to 24 months at June 30, 2018 from 26 months at June 30, 2017. The change since June
30, 2017 was due substantially to a change in the mix and duration of money market deposits as market interest rates increased. Additionally, a higher mix of fixed rate time deposits was obtained in the quarter ended June 30, 2018.
The
Company has continued its emphasis on funding loans in its marketplace, and has been able to achieve favorable loan pricing, including
interest rate floors on many loan originations, although competition for new loans persists. A disciplined approach to loan pricing,
with variable and adjustable rate loans comprising 66% of total loans (at June 30, 2018), has resulted in a loan portfolio yield
of 5.53% for the three months ended June 30, 2018 as compared to 5.14% for the same period in 2017. Subject to interest rate floors,
variable and adjustable rate loans provide additional income opportunities should interest rates rise from current levels.
The
net unrealized loss before income tax on the investment portfolio was $14.7 million at June 30, 2018 as compared to a net unrealized
loss before tax of $5.1 million at December 31, 2017. The increase in the net unrealized loss on the investment portfolio at June
30, 2018 as compared to December 31, 2017 was due primarily to the higher interest rates at June 30, 2018. At June 30, 2018, the
net unrealized loss position represented -2.2% of the investment portfolio’s book value.
There
can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, as a result of competitive
pressures, customer preferences and the inability to perfectly forecast future interest rates and movements.
One
of the tools used by the Company to manage its interest rate risk is a static GAP analysis presented below. The Company also employs
an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet
cash flows and the related income statement effects in different interest rate scenarios. The model utilizes current balance sheet
data and attributes and is adjusted for assumptions as to investment maturities (including prepayments), loan prepayments, interest
rates, and the level of noninterest income and noninterest expense. The data is then subjected to a “shock test” which
assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield
curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity
over the next twelve and twenty-four month periods from June 30, 2018. In addition to analysis of simultaneous changes in interest
rates along the yield curve, changes based on interest rate “ramps” is also performed. This analysis represents the
impact of a more gradual change in interest rates, as well as yield curve shape changes.
For
the analysis presented below, at June 30, 2018, the simulation assumes a 50 basis point change in interest rates on money market
and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate
shock scenario with a floor of 10 basis points, and assumes a 70 basis point change in interest rates on money market and interest
bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.
As
quantified in the table below, the Company’s analysis at June 30, 2018 shows a moderate effect on net interest income (over
the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100
and 200 basis points and up 100, 200, 300, and 400 basis points. This moderate impact is due substantially to the significant
level of variable rate and re-priceable assets and liabilities and related shorter relative durations. The re-pricing duration
of the investment portfolio at June 30, 2018 is 3.8 years, the loan portfolio 1.3 years, the interest bearing deposit portfolio
2.0 years, and the borrowed funds portfolio 1.9 years.
The
following table reflects the result of simulation analysis on the June 30, 2018 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
|
|
+25.5%
|
|
+43.9%
|
|
+8.8%
|
+300
|
|
+19.2%
|
|
+33.0%
|
|
+6.8%
|
+200
|
|
+12.8%
|
|
+22.1%
|
|
+4.9%
|
+100
|
|
+6.5%
|
|
+11.1%
|
|
+2.8%
|
0
|
|
—
|
|
—
|
|
—
|
-100
|
|
-4.8%
|
|
-8.3%
|
|
-3.8%
|
-200
|
|
-7.5%
|
|
-12.9%
|
|
-7.5%
|
The
results of simulation are within the policy limits adopted by the Company. For net interest income, the Company has adopted a
policy limit of -10% for a 100 basis point change, -12% for a 200 basis point change, -18% for a 300 basis point change and -24%
for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point
change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change. The changes
in net interest income, net income and the economic value of equity in both a higher and lower interest rate shock scenario at
June 30, 2018 are not considered to be excessive. The positive impact of +6.5% in net interest income and +11.1% in net income
given a 100 basis point increase in market interest rates reflects in large measure the impact of variable rate loans and fed
funds sold repricing counteracted by a lower level of expected residential mortgage activity.
In
the second quarter of 2018, the Company continued to manage its interest rate sensitivity position to moderate levels of risk,
as indicated in the simulation results above. Except for the higher level of asset liquidity at June 30, 2018 as compared to December
31, 2017, the interest rate risk position at June 30, 2018 was similar to the interest rate risk position at December 31, 2017.
As compared to December 31, 2017, the sum of federal funds sold, interest bearing deposits with banks and other short-term investments
and loans held for sale increased by $81.3 million at June 30, 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 second quarter of 2018, average market interest rates increased across the yield curve. Overall, there was a flattening of
the yield curve as compared to the second quarter of 2017 with rate increases being generally more significant at the front end
of the yield curve.
As
compared to the second quarter of 2017, the average two-year U.S. Treasury rate increased by 118 basis points from 1.30% to 2.48%,
the average five year U.S. Treasury rate increased by 96 basis points from 1.81% to 2.77% and the average ten year U.S. Treasury
rate increased by 66 basis points from 2.26% to 2.92%. The Company’s net interest margin for the second quarter of 2018
was 4.15% compared to 4.16% for the second quarter of 2017. The slight decline was due in large part to the increase in the cost
of interest bearing liabilities, substantially due to a decision to raise additional time deposits. The Company believes that
the change in the net interest margin in the most recent quarter as compared to 2017’s second quarter has been consistent
with its risk analysis at December 31, 2017.
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 91% of
the Company’s revenue for the second quarter of 2018 and 2017, respectively.
In
falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by
lower yielding short-term funds, or what is referred to as a negative mismatch or GAP. Conversely, in a rising interest rate environment,
net interest income is maximized with shorter term, higher yielding assets being funded by longer-term liabilities or what is
referred to as a positive mismatch or GAP.
The
GAP position, which is a measure of the difference in maturity and repricing volume between assets and liabilities, is a means
of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indication
of the sensitivity of the Company to changes in interest rates. A negative GAP indicates the degree to which the volume of repriceable
liabilities exceeds repriceable assets in given time periods.
At
June 30, 2018, the Company had a positive GAP position of approximately $1.06 billion or 13% of total assets out to three months
and a positive cumulative GAP position of $538 million or 7% of total assets out to 12 months; as compared to a positive GAP position
of approximately $511 million or 7% of total assets out to three months and a positive cumulative GAP position of $442 million
or 6% of total assets out to 12 months at December 31, 2017. The change in the positive GAP position at June 30, 2018 as compared
to December 31, 2017, was due to extending FHLB borrowings from overnight and 3 month borrowings to a 1 year term borrowing and
a time deposit campaign during the second quarter which raised funds at terms approximating 16 months, which served to lower the
measured repricing GAP in the 4-12 month period as compared with that measure at year end 2017. The change in the GAP position
at June 30, 2018 as compared to December 31, 2017 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
$
|
82,686
|
|
|
$
|
83,960
|
|
|
$
|
179,714
|
|
|
$
|
147,253
|
|
|
$
|
199,204
|
|
|
$
|
692,817
|
|
|
|
|
|
|
|
|
|
Loans (1)(2)
|
|
|
3,938,460
|
|
|
|
448,877
|
|
|
|
1,101,355
|
|
|
|
712,939
|
|
|
|
480,566
|
|
|
|
6,682,197
|
|
|
|
|
|
|
|
|
|
Fed funds and
other short-term investments
|
|
|
258,918
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
258,918
|
|
|
|
|
|
|
|
|
|
Other
earning assets
|
|
|
62,647
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
62,647
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,342,711
|
|
|
$
|
532,837
|
|
|
$
|
1,281,069
|
|
|
$
|
860,192
|
|
|
$
|
679,770
|
|
|
$
|
7,696,579
|
|
|
$
|
183,438
|
|
|
$
|
7,880,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE SENSITIVE
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing
demand
|
|
$
|
91,841
|
|
|
$
|
251,256
|
|
|
$
|
521,491
|
|
|
$
|
359,597
|
|
|
$
|
798,731
|
|
|
$
|
2,022,916
|
|
|
|
|
|
|
|
|
|
Interest bearing
transaction
|
|
|
435,484
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
435,484
|
|
|
|
|
|
|
|
|
|
Savings and money
market
|
|
|
2,658,768
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,658,768
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
221,309
|
|
|
|
599,657
|
|
|
|
302,151
|
|
|
|
28,473
|
|
|
|
—
|
|
|
|
1,151,590
|
|
|
|
|
|
|
|
|
|
Customer repurchase
agreements and fed funds purchased
|
|
|
29,135
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,135
|
|
|
|
|
|
|
|
|
|
Other
borrowings
|
|
|
100,000
|
|
|
|
200,000
|
|
|
|
—
|
|
|
|
147,864
|
|
|
|
69,236
|
|
|
|
517,100
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,536,537
|
|
|
$
|
1,050,913
|
|
|
$
|
823,642
|
|
|
$
|
535,934
|
|
|
$
|
867,967
|
|
|
$
|
6,814,993
|
|
|
$
|
41,887
|
|
|
$
|
6,856,880
|
|
GAP
|
|
$
|
806,174
|
|
|
$
|
(518,076
|
)
|
|
$
|
457,427
|
|
|
$
|
324,258
|
|
|
$
|
(188,197
|
)
|
|
$
|
881,586
|
|
|
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
806,174
|
|
|
$
|
288,098
|
|
|
$
|
745,525
|
|
|
$
|
1,069,783
|
|
|
$
|
881,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap
as percent of total assets
|
|
|
10.23
|
%
|
|
|
3.66
|
%
|
|
|
9.46
|
%
|
|
|
13.58
|
%
|
|
|
11.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFF BALANCE-SHEET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
Swaps - LIBOR based
|
|
$
|
150,000
|
|
|
$
|
—
|
|
|
$
|
(75,000
|
)
|
|
$
|
(75,000
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swaps - Fed Funds based
|
|
|
100,000
|
|
|
|
—
|
|
|
|
(100,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
250,000
|
|
|
$
|
—
|
|
|
$
|
(175,000
|
)
|
|
$
|
(75,000
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
GAP
|
|
$
|
1,056,174
|
|
|
$
|
(518,076
|
)
|
|
$
|
282,427
|
|
|
$
|
249,258
|
|
|
$
|
(188,197
|
)
|
|
$
|
881,586
|
|
|
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
1,056,174
|
|
|
$
|
538,098
|
|
|
$
|
820,525
|
|
|
$
|
1,069
,783
|
|
|
$
|
881,586
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Cumulative gap
as percent of total assets
|
|
|
13.40
|
%
|
|
|
6.83
|
%
|
|
|
10.41
|
%
|
|
|
13.58
|
%
|
|
|
11.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 significant growth in its commercial real estate portfolio in recent years. At June 30, 2018 non-owner-occupied
commercial real estate loans (including construction, land and land development loans) represent 334% of total risk based capital.
Construction, land and land development loans represent 117% 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 policy limits 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, when fully phased in on January 1, 2019, the Company and Bank will be required to maintain,
inclusive of the fully phased in 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
actual capital amounts and ratios for the Company and Bank as of June 30, 2018 and December 31, 2017 are presented in the table
below.
|
|
Company
|
|
|
Bank
|
|
|
Minimum
|
|
|
To
Be Well Capitalized
|
|
|
|
Actual
|
|
|
Actual
|
|
|
Required For
|
|
|
Under
Prompt
|
|
(dollars
in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Capital
Adequacy
Purposes
|
|
|
Corrective
Action
Regulations *
|
|
As
of June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1
capital (to risk weighted aseets)
|
|
$
|
920,994
|
|
|
|
11.89
|
%
|
|
$
|
1,058,126
|
|
|
|
13.67
|
%
|
|
|
6.375
|
%
|
|
|
6.5
|
%
|
Total
capital (to risk weighted assets)
|
|
|
1,207,659
|
|
|
|
15.59
|
%
|
|
|
1,124,480
|
|
|
|
14.53
|
%
|
|
|
9.875
|
%
|
|
|
10.0
|
%
|
Tier
1 capital (to risk weighted assets)
|
|
|
920,994
|
|
|
|
11.89
|
%
|
|
|
1,058,126
|
|
|
|
13.67
|
%
|
|
|
7.875
|
%
|
|
|
8.0
|
%
|
Tier
1 capital (to average assets)
|
|
|
920,994
|
|
|
|
11.97
|
%
|
|
|
1,058,126
|
|
|
|
13.76
|
%
|
|
|
5.000
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1
capital (to risk weighted aseets)
|
|
$
|
845,123
|
|
|
|
11.23
|
%
|
|
$
|
969,250
|
|
|
|
12.91
|
%
|
|
|
5.750
|
%
|
|
|
6.5
|
%
|
Total
capital (to risk weighted assets)
|
|
|
1,129,954
|
|
|
|
15.02
|
%
|
|
|
1,033,554
|
|
|
|
13.76
|
%
|
|
|
9.250
|
%
|
|
|
10.0
|
%
|
Tier
1 capital (to risk weighted assets)
|
|
|
845,123
|
|
|
|
11.23
|
%
|
|
|
969,250
|
|
|
|
12.91
|
%
|
|
|
7.250
|
%
|
|
|
8.0
|
%
|
Tier
1 capital (to average assets)
|
|
|
845,123
|
|
|
|
11.45
|
%
|
|
|
969,250
|
|
|
|
13.15
|
%
|
|
|
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 June 30, 2018 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
|
|
|
Six
Months Ended
|
|
|
Twelve
Months Ended
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2018
|
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
June
30, 2017
|
|
|
June
30, 2017
|
|
Common
shareholders’ equity
|
|
|
|
|
|
$
|
1,023,137
|
|
|
$
|
950,438
|
|
|
|
|
|
|
$
|
902,675
|
|
Less:
Intangible assets
|
|
|
|
|
|
|
(106,820
|
)
|
|
|
(107,212
|
)
|
|
|
|
|
|
|
(107,061
|
)
|
Tangible
common equity
|
|
|
|
|
|
$
|
916,317
|
|
|
$
|
843,226
|
|
|
|
|
|
|
$
|
795,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per
common share
|
|
|
|
|
|
$
|
29.82
|
|
|
$
|
27.80
|
|
|
|
|
|
|
$
|
26.42
|
|
Less:
Intangible book value per common share
|
|
|
|
|
|
|
(3.11
|
)
|
|
|
(3.13
|
)
|
|
|
|
|
|
|
(3.14
|
)
|
Tangible
book value per common share
|
|
|
|
|
|
$
|
26.71
|
|
|
$
|
24.67
|
|
|
|
|
|
|
$
|
23.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
$
|
7,880,017
|
|
|
$
|
7,479,029
|
|
|
|
|
|
|
$
|
7,244,527
|
|
Less:
Intangible assets
|
|
|
|
|
|
|
(106,820
|
)
|
|
|
(107,212
|
)
|
|
|
|
|
|
|
(107,061
|
)
|
Tangible
assets
|
|
|
|
|
|
$
|
7,773,197
|
|
|
$
|
7,371,817
|
|
|
|
|
|
|
$
|
7,137,466
|
|
Tangible
common equity ratio
|
|
|
|
|
|
|
11.79
|
%
|
|
|
11.44
|
%
|
|
|
|
|
|
|
11.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shareholders’ equity
|
|
$
|
1,002,091
|
|
|
$
|
984,436
|
|
|
$
|
906,174
|
|
|
$
|
890,501
|
|
|
$
|
875,225
|
|
Less:
Average intangible assets
|
|
|
(106,955
|
)
|
|
|
(107,112
|
)
|
|
|
(107,117
|
)
|
|
|
(107,050
|
)
|
|
|
(107,153
|
)
|
Average
tangible common equity
|
|
$
|
895,136
|
|
|
$
|
877,324
|
|
|
$
|
799,057
|
|
|
$
|
783,450
|
|
|
$
|
768,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
37,295
|
|
|
$
|
73,011
|
|
|
$
|
100,232
|
|
|
$
|
27,772
|
|
|
$
|
54,789
|
|
Average
tangible common equity
|
|
$
|
895,136
|
|
|
$
|
877,324
|
|
|
$
|
799,057
|
|
|
$
|
783,450
|
|
|
$
|
768,072
|
|
Annualized
Return on Average Tangible Common Equity
|
|
|
16.71
|
%
|
|
|
16.78
|
%
|
|
|
12.54
|
%
|
|
|
14.22
|
%
|
|
|
14.38
|
%
|