EAGLE BANCORP INC - Quarter Report: 2023 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-25923
Eagle Bancorp, Inc.
(Exact name of registrant as specified in its charter)
| Maryland | 52-2061461 | ||||||||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||||||||
7830 Old Georgetown Road, Third Floor, Bethesda, Maryland | 20814 | ||||||||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||||||||
(301) 986-1800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||||||||
| Common Stock, $0.01 par value | EGBN | The Nasdaq Stock Market LLC | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act Yes ☐ No ☒
As of May 5, 2023, the registrant had 30,716,448 shares of Common Stock outstanding.
EAGLE BANCORP, INC.
TABLE OF CONTENTS
| PART I. | FINANCIAL INFORMATION | |||||||
2
PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements
EAGLE BANCORP, INC.
Consolidated Balance Sheets (Unaudited)
(dollars in thousands, except share and per share data)
| March 31, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Cash and due from banks | $ | 9,940 | $ | 12,655 | |||||||
| Federal funds sold | 3,746 | 33,927 | |||||||||
| Interest-bearing deposits with banks and other short-term investments | 159,078 | 265,272 | |||||||||
Investment securities available-for-sale (amortized cost of $1,763,371 and $1,803,898, respectively, and allowance for credit losses of $31 and $17, respectively). | 1,582,185 | 1,598,666 | |||||||||
Investment securities held-to-maturity, net of allowance for credit losses of $2,008 and $766, respectively, (fair value of $965,786 and $968,707, respectively) | 1,075,303 | 1,093,374 | |||||||||
| Federal Reserve and Federal Home Loan Bank stock | 79,134 | 65,067 | |||||||||
| Loans held for sale | 6,488 | 6,734 | |||||||||
| Loans | 7,737,676 | 7,635,632 | |||||||||
| Less: allowance for credit losses | (78,377) | (74,444) | |||||||||
| Loans, net | 7,659,299 | 7,561,188 | |||||||||
| Premises and equipment, net | 12,929 | 13,475 | |||||||||
| Operating lease right-of-use assets | 23,060 | 24,544 | |||||||||
| Deferred income taxes | 89,117 | 96,567 | |||||||||
| Bank-owned life insurance | 111,217 | 110,998 | |||||||||
| Goodwill and other intangible assets, net | 104,226 | 104,233 | |||||||||
| Other real estate owned | 1,962 | 1,962 | |||||||||
| Other assets | 171,183 | 162,192 | |||||||||
| Total Assets | $ | 11,088,867 | $ | 11,150,854 | |||||||
| Liabilities and Shareholders' Equity | |||||||||||
| Liabilities | |||||||||||
| Deposits: | |||||||||||
| Noninterest-bearing demand | $ | 2,247,706 | $ | 3,150,751 | |||||||
| Interest-bearing transaction | 907,637 | 1,138,235 | |||||||||
| Savings and money market | 2,970,093 | 3,640,697 | |||||||||
| Time | 1,337,805 | 783,499 | |||||||||
| Total deposits | 7,463,241 | 8,713,182 | |||||||||
| Customer repurchase agreements | 37,854 | 35,100 | |||||||||
| Other short-term borrowings | 2,113,801 | 975,001 | |||||||||
| Long-term borrowings | 69,825 | 69,794 | |||||||||
| Operating lease liabilities | 27,634 | 29,267 | |||||||||
| Reserve for unfunded commitments | 6,704 | 5,857 | |||||||||
| Other liabilities | 127,850 | 94,332 | |||||||||
| Total Liabilities | 9,846,909 | 9,922,533 | |||||||||
| Shareholders' Equity | |||||||||||
Common stock, par value $0.01 per share; shares authorized 100,000,000, shares issued and outstanding 31,111,647 and 31,346,903, respectively | 308 | 310 | |||||||||
| Additional paid-in capital | 397,012 | 412,303 | |||||||||
| Retained earnings | 1,025,552 | 1,015,215 | |||||||||
| Accumulated other comprehensive loss | (180,914) | (199,507) | |||||||||
| Total Shareholders' Equity | 1,241,958 | 1,228,321 | |||||||||
| Total Liabilities and Shareholders' Equity | $ | 11,088,867 | $ | 11,150,854 | |||||||
See Notes to Consolidated Financial Statements.
3
EAGLE BANCORP, INC.
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Interest Income | |||||||||||
| Interest and fees on loans | $ | 120,850 | $ | 75,830 | |||||||
| Interest and dividends on investment securities | 13,545 | 11,430 | |||||||||
| Interest on balances with other banks and short-term investments | 5,774 | 1,057 | |||||||||
| Interest on federal funds sold | 78 | 4 | |||||||||
| Total interest income | 140,247 | 88,321 | |||||||||
| Interest Expense | |||||||||||
| Interest on deposits | 48,954 | 6,359 | |||||||||
| Interest on customer repurchase agreements | 302 | 13 | |||||||||
| Interest on other short-term borrowings | 14,930 | 460 | |||||||||
| Interest on long-term borrowings | 1,037 | 1,037 | |||||||||
| Total interest expense | 65,223 | 7,869 | |||||||||
| Net Interest Income | 75,024 | 80,452 | |||||||||
| Provision for (Reversal of) Credit Losses | 6,164 | (2,787) | |||||||||
| Provision for (Reversal of) Credit Losses for Unfunded Commitments | 848 | (11) | |||||||||
| Net Interest Income After Provision for (Reversal of) Credit Losses | 68,012 | 83,250 | |||||||||
| Noninterest Income | |||||||||||
| Service charges on deposits | 1,510 | 1,286 | |||||||||
| Gain on sale of loans | 305 | 1,492 | |||||||||
| Net loss on sale of investment securities | (21) | (25) | |||||||||
| Increase in the cash surrender value of bank-owned life insurance | 655 | 626 | |||||||||
| Other income | 1,251 | 4,074 | |||||||||
| Total noninterest income | 3,700 | 7,453 | |||||||||
| Noninterest Expense | |||||||||||
| Salaries and employee benefits | 24,174 | 17,019 | |||||||||
| Premises and equipment expenses | 3,317 | 3,128 | |||||||||
| Marketing and advertising | 636 | 1,064 | |||||||||
| Data processing | 3,099 | 2,880 | |||||||||
| Legal, accounting and professional fees | 3,254 | 1,561 | |||||||||
| FDIC insurance | 1,486 | 1,058 | |||||||||
| Other expenses | 4,618 | 4,302 | |||||||||
| Total noninterest expense | 40,584 | 31,012 | |||||||||
| Income Before Income Tax Expense | 31,128 | 59,691 | |||||||||
| Income Tax Expense | 6,894 | 13,947 | |||||||||
| Net Income | $ | 24,234 | $ | 45,744 | |||||||
| Earnings Per Common Share | |||||||||||
| Basic | $ | 0.78 | $ | 1.43 | |||||||
| Diluted | $ | 0.78 | $ | 1.42 | |||||||
See Notes to Consolidated Financial Statements.
4
EAGLE BANCORP, INC.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollars in thousands)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net Income | $ | 24,234 | $ | 45,744 | |||||||
| Other Comprehensive Income (Loss), Net of Tax: | |||||||||||
| Unrealized gain (loss) on securities available-for-sale | 17,936 | (58,406) | |||||||||
| Reclassification adjustment for loss included in net income | 16 | 19 | |||||||||
| Total unrealized gain (loss) on investment securities available-for-sale | 17,952 | (58,387) | |||||||||
Unrealized loss on securities transferred to held-to-maturity (1) | — | (49,095) | |||||||||
| Amortization of unrealized loss on securities transferred to held-to-maturity | 641 | — | |||||||||
| Total unrealized gain (loss) on investment securities held-to-maturity | 641 | (49,095) | |||||||||
| Other comprehensive income (loss) | 18,593 | (107,482) | |||||||||
| Comprehensive Income (Loss) | $ | 42,827 | $ | (61,738) | |||||||
(1) Represents unamortized accumulated other comprehensive loss on securities transferred to held-to-maturity status.
See Notes to Consolidated Financial Statements.
5
| EAGLE BANCORP, INC. | |||||||||||||||||||||||||||||||||||
| Consolidated Statements of Changes in Shareholders' Equity (Unaudited) | |||||||||||||||||||||||||||||||||||
| (dollars in thousands except share and per share data) | |||||||||||||||||||||||||||||||||||
| Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||
| Common | Additional Paid-in Capital | Retained Earnings | Shareholders' Equity | ||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance January 1, 2023 | 31,346,903 | $ | 310 | $ | 412,303 | $ | 1,015,215 | $ | (199,507) | $ | 1,228,321 | ||||||||||||||||||||||||
| Net Income | — | — | — | 24,234 | — | 24,234 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 18,593 | 18,593 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 2,948 | — | — | 2,948 | |||||||||||||||||||||||||||||
| Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes | (37,104) | 2 | (2) | — | — | — | |||||||||||||||||||||||||||||
| Vesting of performance-based stock awards, net of shares withheld for payroll taxes | 27,296 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Time-based stock awards granted | 171,534 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Issuance of common stock related to employee stock purchase plan | 3,018 | — | 133 | — | — | 133 | |||||||||||||||||||||||||||||
| Cash dividends declared ($0.45 per share) | — | — | — | (13,897) | — | (13,897) | |||||||||||||||||||||||||||||
| Common stock repurchased | (400,000) | (4) | (18,370) | — | — | (18,374) | |||||||||||||||||||||||||||||
| Balance March 31, 2023 | 31,111,647 | $ | 308 | $ | 397,012 | $ | 1,025,552 | $ | (180,914) | $ | 1,241,958 | ||||||||||||||||||||||||
| Balance January 1, 2022 | 31,950,092 | $ | 316 | $ | 434,640 | $ | 930,061 | $ | (14,242) | $ | 1,350,775 | ||||||||||||||||||||||||
| Net Income | — | — | — | 45,744 | — | 45,744 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (107,482) | (107,482) | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 2,966 | — | — | 2,966 | |||||||||||||||||||||||||||||
| Issuance of common stock related to options exercised, net of shares withheld for payroll taxes | 1,789 | — | 19 | — | — | 19 | |||||||||||||||||||||||||||||
| Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes | (62,228) | 2 | (2) | — | — | — | |||||||||||||||||||||||||||||
| Vesting of performance-based stock awards, net of shares withheld for payroll taxes | 21,026 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Time-based stock awards granted | 165,416 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Issuance of common stock related to employee stock purchase plan | 3,379 | — | 197 | — | — | 197 | |||||||||||||||||||||||||||||
| Cash dividends declared ($0.40 per share) | — | — | — | (12,665) | — | (12,665) | |||||||||||||||||||||||||||||
| Balance March 31, 2022 | 32,079,474 | $ | 318 | $ | 437,820 | $ | 963,140 | $ | (121,724) | $ | 1,279,554 | ||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
6
EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash Flows From Operating Activities: | |||||||||||
| Net Income | $ | 24,234 | $ | 45,744 | |||||||
| Adjustments to reconcile Net Income to net cash provided by operating activities: | |||||||||||
| Provision for (reversal of) credit losses | 6,164 | (2,787) | |||||||||
| Provision for (reversal of) credit losses for unfunded commitments | 848 | (11) | |||||||||
| Depreciation and amortization | 890 | 843 | |||||||||
| Gain on sale of loans | (305) | (1,492) | |||||||||
| Loss (gain) on mortgage servicing rights | 35 | (930) | |||||||||
| Securities premium amortization, net | 1,715 | 2,660 | |||||||||
| Origination of loans held for sale | (27,929) | (114,699) | |||||||||
| Proceeds from sale of loans held for sale | 28,480 | 137,905 | |||||||||
| Net loss on sale of investment securities | 21 | 25 | |||||||||
| Net increase in cash surrender value of BOLI | (655) | (626) | |||||||||
| Stock-based compensation expense | 2,948 | 2,966 | |||||||||
| Net tax expense from stock-based compensation | — | 1,609 | |||||||||
| Increase in other assets | (9,019) | (3,960) | |||||||||
| Decrease (increase) in other liabilities | 33,369 | (6,395) | |||||||||
| Net Cash Provided by Operating Activities | 60,796 | 60,852 | |||||||||
| Cash Flows From Investing Activities: | |||||||||||
| Investment securities available-for-sale: | |||||||||||
| Purchases | — | (311,705) | |||||||||
| Proceeds from maturities | 31,235 | 83,050 | |||||||||
| Proceeds from sale/call | 8,303 | 6,225 | |||||||||
| Investment securities held-to-maturity: | |||||||||||
| Purchases | — | (237,036) | |||||||||
| Proceeds from maturities | 17,996 | 5,548 | |||||||||
| Proceeds from call | 68 | — | |||||||||
| Purchase of Federal Reserve stock | (69) | (60) | |||||||||
| (Purchase) sale of Federal Home Loan Bank stock | (13,998) | 5,186 | |||||||||
| Net increase in loans | (103,019) | (48,667) | |||||||||
| Redemption of BOLI | 436 | — | |||||||||
| Net change in premises and equipment | (313) | (269) | |||||||||
| Net Cash Used in Investing Activities | (59,361) | (497,728) | |||||||||
| Cash Flows From Financing Activities: | |||||||||||
| Decrease in deposits | (1,249,941) | (395,281) | |||||||||
| Increase in customer repurchase agreements | 2,754 | 4,375 | |||||||||
| Proceeds from short-term borrowings | 1,138,800 | (150,000) | |||||||||
| Proceeds from employee stock purchase plan | 133 | 197 | |||||||||
| Proceeds from exercise of equity compensation plans | — | 19 | |||||||||
| Common stock repurchased | (18,374) | — | |||||||||
| Tax equivalent shares withheld on exercise of stock-based compensation plans | — | (1,609) | |||||||||
| Cash dividends paid | (13,897) | (12,665) | |||||||||
| Net Cash Used in Financing Activities | (140,525) | (554,964) | |||||||||
| Net Decrease in Cash and Cash Equivalents | (139,090) | (991,840) | |||||||||
| Cash and Cash Equivalents at Beginning of Period | 311,854 | 1,714,222 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 172,764 | $ | 722,382 | |||||||
See Notes to Consolidated Financial Statements.
7
| EAGLE BANCORP, INC. | |||||||||||
| Consolidated Statements of Cash Flows - Continued (Unaudited) | |||||||||||
| (dollars in thousands) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Supplemental Cash Flows Information: | |||||||||||
| Interest paid | $ | 61,287 | $ | 7,574 | |||||||
| Income taxes paid | $ | — | $ | — | |||||||
| Non-Cash Investing Activities | |||||||||||
| Transfers of investment securities from available-for-sale to held-to-maturity | $ | — | $ | 922,795 | |||||||
| Change in unrealized gain (loss) of investment securities available-for-sale | $ | 24,034 | $ | — | |||||||
See Notes to Consolidated Financial Statements.
8
EAGLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. (the "Parent") and its subsidiaries (together with the Parent, the "Company"), with all significant intercompany transactions eliminated. EagleBank (the "Bank"), a Maryland chartered commercial bank, is the Parent's principal subsidiary.
The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America ("GAAP") and to general practices in the banking industry. The Consolidated Financial Statements and accompanying notes of the Company included herein are unaudited. The Consolidated Balance Sheet as of December 31, 2022 was derived from the audited Consolidated Balance Sheet as of that date. The Consolidated Financial Statements reflect all adjustments, consisting of normal recurring adjustments, that in the opinion of management are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In addition to the accounting policies described below, the Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Certain reclassifications have been made to 2022 amounts previously reported to conform to the 2023 presentation. Reclassifications had no effect on net income or shareholders' equity.
Nature of Operations
The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination of small business loans, and the origination, securitization and sale of multifamily Federal Housing Administration ("FHA") loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration ("SBA"), is typically sold to third party investors in a transaction apart from the loan's origination.
The Bank offers its products and services through fifteen banking offices, five lending centers and various digital capabilities, including remote deposit services and mobile banking services. In March 2023, the Company closed its Alexandria, Virginia branch following the lease's expiration. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.
The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the three months ended March 31, 2023. The Company expects to complete residual origination and sales activities by the end of the third quarter of 2023.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements.
Investment Securities
The Company recognizes acquired securities on the trade date. Investment securities comprise debt securities, which are classified depending on the Company's intent and ability to hold the securities to maturity. Debt securities are classified as available-for-sale when management may have the intent to sell them prior to maturity. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.
Premiums and discounts on investment securities available-for-sale and held-to-maturity are amortized or accreted to the earlier of call or maturity based on expected lives, which include prepayment adjustments and call optionality.
9
Transfers of Investment Securities from Available-for-Sale to Held-to-Maturity
Transfers of debt securities into the held-to-maturity category from the available-for-sale category are made at amortized cost, net of unrealized gain or loss reported in accumulated other comprehensive income (loss) at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held-to-maturity securities. Such amounts are amortized over the remaining life of the security.
Loans
Loans held for investment are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is recognized at the contractual rate on the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized on the interest method over the term of the loan.
Past due loans are placed on nonaccrual status when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Generally, this conclusion is reached when a loan is 90 days past due. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed through interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.
Allowance for Credit Losses - Loans
The allowance for credit losses - loans ("ACL") is an estimate of the expected credit losses in the loans held for investment portfolio.
Accounting Standards Codification ("ASC") 326, "Financial Instruments-Credit Losses" requires that an estimate of current expected credit losses ("CECL") be immediately recognized and reevaluated over the contractual life of the financial asset when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries are recorded to the extent they do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Reserves on loans that do not share risk characteristics are evaluated on an individual basis. Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. The remainder of the portfolio, representing all loans not evaluated individually for impairment, is segregated by call report codes, and a loan-level probability of default ("PD") / Loss Given Default ("LGD") cash flow method is applied using an exposure at default ("EAD") model. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments.
The Company uses regression analysis of historical internal and peer data provided by a third-party service provider (as Company loss data is insufficient) to determine suitable credit loss drivers to utilize when modeling lifetime PD and LGD. This analysis also determines how expected PD will be impacted by different forecasted levels of the loss drivers.
A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in reserve for unfunded commitments (“RUC”) on the Consolidated Balance Sheets. For periods beyond which we are able to develop reasonable and supportable forecasts, we revert to the historical loss rate on a straight-line basis over a twelve-month period.
For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of expected prepayment speeds is based on historical internal data. EAD is based on each instrument's underlying amortization schedule in order to estimate the bank's expected credit loss exposure at the time of the borrower's potential default.
For our cash flow model, management utilizes and forecasts regional unemployment by using a national forecast and estimating a regional adjustment based on historical differences between the two as the loss driver over our reasonable and supportable period of 18 months and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.
10
In addition to the quantitative model and individual evaluation conducted in connection with CECL, the Company applies qualitative and environmental factors into its methodology for the calculation of its ACL for its loan portfolio. The factors include: (i) changes in the nature and volume of the portfolio; (ii) changes in the volume and severity of past due financial assets and the volume and severity of adversely classified assets; (iii) changes in the value of underlying collateral for loans not individually evaluated; (iv) changes in lending policies and procedures; (v) changes in the quality of credit review function; (vi) changes in lending management and staff; (vii) concentrations of credit; (viii) other external factors (competition, legal, regulatory, etc.); and (ix) changes in national, regional, and local economic and business conditions. The Company's quantitative model may reflect assumptions by management that are not covered by the qualitative and environmental factors. The Company reevaluates the qualitative and environmental factors on a quarterly basis.
While our methodology in establishing the ACL attributes portions of the ACL and RUC to the separate loan pools or segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively. Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses.
A summary of our primary portfolio segments is as follows:
Commercial. The commercial loan portfolio comprises lines of credit and term loans for working capital, equipment, and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, and acquisitions; and are generally secured by accounts receivable, inventory, equipment and other assets of our clients' businesses.
Income producing commercial real estate. Income producing commercial real estate loans comprise permanent and bridge financing provided to professional real estate owners/managers of commercial and residential real estate projects and properties who generally have a demonstrated record of past success with similar properties. Collateral properties include apartment buildings, office buildings, hotels, mixed-use buildings, retail, data centers, warehouse, and shopping centers. The primary source of repayment on these loans is generally expected to come from lease or operation of the real property collateral. Income producing commercial real estate loans are impacted by fluctuation in collateral values, as well as rental demand and rates.
Owner occupied – commercial real estate. The owner occupied commercial real estate portfolio comprises permanent financing provided to operating companies and their related entities for the purchase or refinance of real property wherein their business operates. Collateral properties include industrial property, office buildings, religious facilities, mixed-use property, health care and educational facilities.
Real estate mortgage – residential. Real estate mortgage residential loans comprise consumer mortgages for the purpose of purchasing or refinancing first lien real estate loans secured by primary-residence, second-home, and rental residential real property.
Construction – commercial and residential. The construction commercial and residential loan portfolio comprises loans made to builders and developers of commercial and residential property, for both renovation, new construction, and development projects. Collateral properties include apartment buildings, mixed use property, residential condominiums, single and 1-4 residential property, and office buildings. The primary source of repayment on these loans is expected to come from the sale, permanent financing, or lease of the real property collateral. Construction loans are impacted by fluctuations in collateral values and the ability of the borrower or ultimate purchaser to obtain permanent financing.
Construction – commercial and industrial ("C&I") (owner occupied). The construction C&I (owner occupied) portfolio comprises loans to operating companies and their related entities for new construction or renovation of the real or leased property in which they operate. Generally these loans contain provisions for conversion to an owner occupied commercial real estate loan or to a commercial loan after completion of construction. Collateral properties include industrial, healthcare, religious facilities, restaurants, and office buildings.
Home equity. The home equity portfolio comprises consumer lines of credit and loans secured by subordinate liens on residential real property.
Other consumer. The other consumer portfolio comprises consumer purpose loans not secured by real property, including personal lines of credit and loans, overdraft lines, and vehicle loans. This category also includes other loan items such as overdrawn deposit accounts as well as loans and loan payments in process.
11
We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on nonaccrual depending on the circumstances of the individual loans.
Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on nonaccrual.
Classified loans represent the sum of loans graded substandard and doubtful.
The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the allowance on collectively assessed and individually assessed loans as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to management committees, Risk Committee, the Audit Committee, and the Board of Directors. The committees' reports to the Board are part of the Board review on a quarterly basis of our consolidated financial statements.
When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation that a borrower will result in financial difficulty.
We do not measure an ACL on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on nonaccrual status.
Collateral Dependent Financial Assets
Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value ("NPV") from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
Loan Modifications to Borrowers in Financial Difficulty
On January 1, 2023, the Company adopted the accounting guidance in ASU No. 2022-02, which eliminates the recognition and measurement of a troubled debt restructuring ("TDR"). Due to the removal of the TDR designation, the Company evaluates loan restructurings according to the accounting guidance to determine if we have a loan modification and whether it results in a new loan or the continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications.
12
A loan that is considered a restructured loan may be subject to an individually evaluated loan analysis if the commitment is $1.0 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan.
Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status, foreclosure or repossession of the collateral to minimize economic loss to the Company.
Allowance for Credit Losses - Available-for-Sale Securities
The Company utilizes ASC 326 to evaluate its available-for-sale ("AFS") and held-to-maturity ("HTM") debt security portfolio for expected credit losses. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment.
The entire amount of an impairment loss is recognized in earnings only when: (1) the Company intends to sell the security; (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders' equity as comprehensive income, net of deferred taxes.
Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
We have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in other assets in the Consolidated Balance Sheets. Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.
Allowance for Credit Losses - Held-to-Maturity Debt Securities
The Company separately evaluates its HTM investment securities for any credit losses. The Company pools like securities and calculates expected credit losses through an estimate based on a security's credit rating, which is recognized as part of the allowance for credit losses for held-to-maturity securities and included in the balance of investment securities held-to-maturity on the Consolidated Balance Sheets. If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually evaluated and enhanced analysis is performed. This may consist of evaluating the security as if it were a below investment grade rated security or a discounted cash flow analysis may be performed and compared to the amortized cost basis.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
13
The Company records a reserve for RUC on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company's Consolidated Statement of Income. The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company's Consolidated Balance Sheet.
The following table presents a breakdown of the provision for credit losses included in our Consolidated Statements of Income for the applicable periods (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||||||||
| Provision for (reversal of) credit losses - loans | $ | 4,908 | $ | (3,001) | ||||||||||
| Provision for credit losses - HTM debt securities | 1,242 | 817 | ||||||||||||
| Provision for (reversal of) credit losses - AFS debt securities | 14 | (603) | ||||||||||||
| Total | $ | 6,164 | $ | (2,787) | ||||||||||
These statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
New Authoritative Accounting Guidance
Accounting Standards Adopted in 2023:
ASU No. 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures" ("ASU 2022-02") eliminates the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty that assess whether a modification has created a new loan. Additionally, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. Effective January 1, 2023, the Company adopted the guidance prescribed under ASU 2022-02. Refer to the "Loan Modifications" subsection above and Note 4 for additional disclosure.
Note 2. Cash and Due from Banks
For three months ended March 31, 2023 and 2022, the Bank maintained an average daily balance of balances at the Federal Reserve Bank of $662.4 million and $2.4 billion, respectively, on which interest is paid.
Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank of Atlanta ("FHLB") and noninterest-bearing balances with domestic correspondent banks to cover associated costs for services they provide to the Bank.
14
Note 3. Investment Securities
The amortized cost and estimated fair value of the Company's available-for-sale and held-to-maturity securities are summarized as follows:
| (dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Losses | Estimated Fair Value | |||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||||||||
| Investment securities available-for-sale: | ||||||||||||||||||||||||||||||||
| U.S. treasury bonds | $ | 49,818 | $ | — | $ | (2,887) | $ | — | $ | 46,931 | ||||||||||||||||||||||
| U.S. agency securities | 741,694 | — | (67,227) | — | 674,467 | |||||||||||||||||||||||||||
| Residential mortgage-backed securities | 905,524 | 76 | (105,358) | — | 800,242 | |||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 55,421 | — | (5,139) | — | 50,282 | |||||||||||||||||||||||||||
| Municipal bonds | 8,914 | — | (432) | — | 8,482 | |||||||||||||||||||||||||||
| Corporate bonds | 2,000 | — | (188) | (31) | 1,781 | |||||||||||||||||||||||||||
| Total available-for-sale securities | $ | 1,763,371 | $ | 76 | $ | (181,231) | $ | (31) | $ | 1,582,185 | ||||||||||||||||||||||
| (dollars in thousands) | Amortized Cost | Gross Unrecognized Gains | Gross Unrecognized Losses | Estimated Fair Value | ||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||
| Investment securities held-to-maturity: | ||||||||||||||||||||||||||
| Residential mortgage-backed securities | $ | 724,756 | $ | — | $ | (77,286) | $ | 647,470 | ||||||||||||||||||
| Commercial mortgage-backed securities | 92,141 | — | (11,234) | 80,907 | ||||||||||||||||||||||
| Municipal bonds | 128,160 | — | (8,690) | 119,470 | ||||||||||||||||||||||
| Corporate bonds | 132,254 | — | (14,315) | 117,939 | ||||||||||||||||||||||
| Total | $ | 1,077,311 | $ | — | $ | (111,525) | $ | 965,786 | ||||||||||||||||||
| Allowance for credit losses | (2,008) | |||||||||||||||||||||||||
| Total held-to-maturity securities, net of ACL | $ | 1,075,303 | ||||||||||||||||||||||||
| (dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Losses | Estimated Fair Value | |||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||
| Investment securities available-for-sale: | ||||||||||||||||||||||||||||||||
| U.S. treasury bonds | $ | 49,793 | $ | — | $ | (3,466) | $ | — | $ | 46,327 | ||||||||||||||||||||||
| U.S. agency securities | 747,777 | — | (78,049) | — | 669,728 | |||||||||||||||||||||||||||
| Residential mortgage-backed securities | 937,557 | 18 | (117,072) | — | 820,503 | |||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 56,071 | — | (5,858) | — | 50,213 | |||||||||||||||||||||||||||
| Municipal bonds | 10,700 | 45 | (658) | — | 10,087 | |||||||||||||||||||||||||||
| Corporate bonds | 2,000 | — | (175) | (17) | 1,808 | |||||||||||||||||||||||||||
| Total available-for-sale securities | $ | 1,803,898 | $ | 63 | $ | (205,278) | $ | (17) | $ | 1,598,666 | ||||||||||||||||||||||
| (dollars in thousands) | Amortized Cost | Gross Unrecognized Gains | Gross Unrecognized Losses | Estimated Fair Value | ||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||
| Investment securities held-to-maturity: | ||||||||||||||||||||||||||
| Residential mortgage-backed securities | $ | 741,057 | $ | — | $ | (88,390) | $ | 652,667 | ||||||||||||||||||
| Commercial mortgage-backed securities | 92,557 | — | (11,993) | 80,564 | ||||||||||||||||||||||
| Municipal bonds | 128,273 | — | (12,092) | 116,181 | ||||||||||||||||||||||
| Corporate bonds | 132,253 | — | (12,958) | 119,295 | ||||||||||||||||||||||
| Total | $ | 1,094,140 | $ | — | $ | (125,433) | $ | 968,707 | ||||||||||||||||||
| Allowance for credit losses | (766) | |||||||||||||||||||||||||
| Total held-to-maturity securities, net of ACL | $ | 1,093,374 | ||||||||||||||||||||||||
15
In addition, at March 31, 2023 and December 31, 2022 the Company held $79.1 million and $65.1 million, respectively, in equity securities in a combination of Federal Reserve Bank and FHLB stocks, which were required to be held for regulatory purposes and which were not marketable, and therefore are carried at cost.
The Company reassessed classification of certain investments in the first quarter of 2022 and, effective March 31, 2022, it transferred a total of $1.1 billion of mortgage-backed securities, municipal bonds and corporate bonds from available-for-sale to held-to-maturity securities, including $237.0 million of securities acquired in the first quarter of 2022 for which its intention to hold to maturity was finalized. At the time of transfer, the Company reversed the allowance for credit losses associated with the available-for-sale securities through the provision for credit losses. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The related unrealized loss of $66.2 million was included in other comprehensive loss at the time of transfer and, as of March 31, 2023, $57.1 million remains in accumulated other comprehensive loss, to be amortized through interest income as a yield adjustment over the remaining term of the securities. No gain or loss was recorded at the time of transfer. Subsequent to transfer, the allowance for credit losses on these securities was evaluated under the accounting policy for held-to-maturity securities.
Accrued interest receivable on available-for-sale securities totaled $4.2 million and $4.3 million at March 31, 2023 and December 31, 2022, respectively, and accrued interest receivable on held-to-maturity securities totaled $3.7 million and $3.6 million at March 31, 2023 and December 31, 2022, respectively. The accrued interest on investment securities is excluded from the amortized cost of the securities and is reported in other assets in the Consolidated Balance Sheets.
The following tables summarizes available-for-sale and held-to-maturity securities in an unrealized loss position by length of time:
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Number of Securities | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Investment securities available-for-sale: | ||||||||||||||||||||||||||||||||||||||||||||
| U.S. treasury bonds | 2 | $ | — | $ | — | $ | 46,931 | $ | (2,887) | $ | 46,931 | $ | (2,887) | |||||||||||||||||||||||||||||||
| U. S. agency securities | 79 | 499,312 | (50,108) | 175,155 | (17,119) | 674,467 | (67,227) | |||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 158 | — | — | 800,166 | (105,358) | 800,166 | (105,358) | |||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 13 | — | — | 50,282 | (5,139) | 50,282 | (5,139) | |||||||||||||||||||||||||||||||||||||
| Municipal bonds | 1 | — | — | 8,482 | (432) | 8,482 | (432) | |||||||||||||||||||||||||||||||||||||
| Corporate bonds | 1 | — | — | 1,812 | (188) | 1,812 | (188) | |||||||||||||||||||||||||||||||||||||
| Total | 254 | $ | 499,312 | $ | (50,108) | $ | 1,082,828 | $ | (131,123) | $ | 1,582,140 | $ | (181,231) | |||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Number of Securities | Estimated Fair Value | Unrecognized Losses | Estimated Fair Value | Unrecognized Losses | Estimated Fair Value | Unrecognized Losses | |||||||||||||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Investment securities held-to-maturity: | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 143 | $ | — | $ | — | $ | 647,470 | $ | (77,286) | $ | 647,470 | $ | (77,286) | |||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 16 | — | — | 80,907 | (11,234) | 80,907 | (11,234) | |||||||||||||||||||||||||||||||||||||
| Municipal bonds | 43 | 3,122 | (29) | 116,348 | (8,661) | 119,470 | (8,690) | |||||||||||||||||||||||||||||||||||||
| Corporate bonds | 32 | 21,367 | (2,596) | 96,572 | (11,719) | 117,939 | (14,315) | |||||||||||||||||||||||||||||||||||||
| Total | 234 | $ | 24,489 | $ | (2,625) | $ | 941,297 | $ | (108,900) | $ | 965,786 | $ | (111,525) | |||||||||||||||||||||||||||||||
16
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Number of Securities | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Investment securities available-for-sale: | ||||||||||||||||||||||||||||||||||||||||||||
| U.S. treasury bond | 2 | $ | — | $ | — | $ | 46,327 | $ | (3,466) | $ | 46,327 | $ | (3,466) | |||||||||||||||||||||||||||||||
| U. S. agency securities | 85 | 490,699 | (58,437) | 179,029 | (19,612) | 669,728 | (78,049) | |||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 157 | 3,994 | — | 808,697 | (117,072) | 812,691 | (117,072) | |||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 14 | 471 | (2) | 49,742 | (5,856) | 50,213 | (5,858) | |||||||||||||||||||||||||||||||||||||
| Municipal bonds | 1 | — | — | 8,299 | (658) | 8,299 | (658) | |||||||||||||||||||||||||||||||||||||
| Corporate bonds | 1 | — | — | 1,825 | (175) | 1,825 | (175) | |||||||||||||||||||||||||||||||||||||
| Total | 260 | $ | 495,164 | $ | (58,439) | $ | 1,093,919 | $ | (146,839) | $ | 1,589,083 | $ | (205,278) | |||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Number of Securities | Estimated Fair Value | Unrecognized Losses | Estimated Fair Value | Unrecognized Losses | Estimated Fair Value | Unrecognized Losses | |||||||||||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Investment securities held-to-maturity: | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 143 | $ | — | $ | — | $ | 652,667 | $ | (88,390) | $ | 652,667 | $ | (88,390) | |||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 16 | — | — | 80,564 | (11,993) | 80,564 | (11,993) | |||||||||||||||||||||||||||||||||||||
| Municipal bonds | 43 | 3,110 | (45) | 113,071 | (12,047) | 116,181 | (12,092) | |||||||||||||||||||||||||||||||||||||
| Corporate bonds | 30 | 20,771 | (3,183) | 86,451 | (9,775) | 107,222 | (12,958) | |||||||||||||||||||||||||||||||||||||
| Total | 232 | $ | 23,881 | $ | (3,228) | $ | 932,753 | $ | (122,205) | $ | 956,634 | $ | (125,433) | |||||||||||||||||||||||||||||||
Unrealized losses at March 31, 2023 were generally attributable to changes in market interest rates and interest spread relationships since the investment securities were originally purchased, and not due to the credit quality concerns on the investment securities. However, as of March 31, 2023, the Company determined that certain of the unrealized loss positions in available-for-sale and held-to-maturity corporate and municipal bonds were evidence of expected credit losses, and therefore, for three months ended March 31, 2023 an allowance for credit losses of $14 thousand was recorded for AFS securities and $1.2 million for HTM securities for a total allowance of $31 thousand and $2.0 million, respectively. The allowance of $31 thousand for AFS securities was all for corporate bonds. The allowance of $2.0 million for HTM securities consists of $16 thousand for municipal bonds and $2.0 million on corporate bonds, The weighted average duration of debt securities, which comprise 100% of total investment securities, is 4.74 years. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. The Company currently has no plans to sell the investments, and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.
17
The amortized cost and estimated fair value of available-for-sale and held-to-maturity securities at March 31, 2023 and December 31, 2022 by contractual maturity are shown in the table below. Contractual maturities for mortgage-backed securities ("MBS") are excluded as they may differ significantly from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Amortized | Estimated | Amortized | Estimated | |||||||||||||||||||||||
| (dollars in thousands) | Cost (1) | Fair Value | Cost | Fair Value | ||||||||||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||||||||
| U. S. agency securities maturing: | ||||||||||||||||||||||||||
| One year or less | 549,420 | 499,312 | $ | 549,137 | $ | 490,699 | ||||||||||||||||||||
| After one year through five years | 110,918 | 100,911 | 111,742 | 100,297 | ||||||||||||||||||||||
| After five years through ten years | 68,936 | 64,008 | 73,886 | 68,180 | ||||||||||||||||||||||
| After ten years | 12,420 | 10,236 | 13,012 | 10,552 | ||||||||||||||||||||||
| Residential mortgage-backed securities: | 905,524 | 800,242 | 937,557 | 820,503 | ||||||||||||||||||||||
| Commercial mortgage-backed securities | 55,421 | 50,282 | 56,071 | 50,213 | ||||||||||||||||||||||
| Municipal bonds maturing: | ||||||||||||||||||||||||||
| One year or less | — | — | 300 | 300 | ||||||||||||||||||||||
| After one year through five years | — | — | 1,444 | 1,488 | ||||||||||||||||||||||
| After five years through ten years | 8,914 | 8,482 | 8,956 | 8,299 | ||||||||||||||||||||||
| After ten years | — | — | — | — | ||||||||||||||||||||||
| Corporate bonds maturing: | ||||||||||||||||||||||||||
| One year or less | — | — | — | — | ||||||||||||||||||||||
| After one year through five years | 2,000 | 1,812 | 2,000 | 1,825 | ||||||||||||||||||||||
| After five years through ten years | — | — | — | — | ||||||||||||||||||||||
| U.S. Treasury | 49,818 | 46,931 | 49,793 | 46,327 | ||||||||||||||||||||||
| Allowance for credit losses | — | (31) | — | (17) | ||||||||||||||||||||||
| 1,763,371 | 1,582,185 | 1,803,898 | 1,598,666 | |||||||||||||||||||||||
| Investment securities held-to-maturity | ||||||||||||||||||||||||||
| Residential mortgage-backed securities: | 724,756 | 647,470 | 741,057 | 652,667 | ||||||||||||||||||||||
| Commercial mortgage-backed securities | 92,141 | 80,907 | 92,557 | 80,564 | ||||||||||||||||||||||
| Municipal bonds maturing: | ||||||||||||||||||||||||||
| One year or less | 3,151 | 3,122 | 3,139 | 3,110 | ||||||||||||||||||||||
| After one year through five years | 35,520 | 34,398 | 35,579 | 33,743 | ||||||||||||||||||||||
| After five years through ten years | 77,246 | 70,370 | 77,262 | 67,945 | ||||||||||||||||||||||
| After ten years | 12,243 | 11,580 | 12,293 | 11,383 | ||||||||||||||||||||||
| Corporate bonds maturing: | ||||||||||||||||||||||||||
| One year or less | 23,963 | 21,367 | 23,954 | 20,771 | ||||||||||||||||||||||
| After one year through five years | 84,938 | 75,735 | 84,953 | 77,997 | ||||||||||||||||||||||
| After five years through ten years | 23,353 | 20,837 | 23,346 | 20,527 | ||||||||||||||||||||||
| Allowance for credit losses | (2,008) | — | (766) | — | ||||||||||||||||||||||
| 1,075,303 | 965,786 | 1,093,374 | 968,707 | |||||||||||||||||||||||
| $ | 2,838,674 | $ | 2,547,971 | $ | 2,897,272 | $ | 2,567,373 | |||||||||||||||||||
(1)Amortized cost for investment securities held-to-maturity is presented net of the allowance for credit losses on the Consolidated Balance Sheet.
For the three months ended March 31, 2023 and 2022, gross realized gains on sales and calls of investment securities were $5 thousand and zero, respectively. For the three months ended March 31, 2023 and 2022, gross realized losses on sales of investment securities were $26 thousand and $25 thousand, respectively. Gross sales and call proceeds were $8.4 million and $6.2 million for the three months ended March 31, 2023 and 2022, respectively.
18
The book value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at March 31, 2023 and December 31, 2022 was $1.6 billion and $220.1 million, respectively, which were well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of March 31, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. agency securities, which exceeded ten percent of shareholders' equity.
Note 4. Loans and Allowance for Credit Losses
The Bank makes loans to customers primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank's loan portfolio consists of loans to businesses secured by real estate and other business assets.
Loans, net of unamortized net deferred fees, at March 31, 2023 and December 31, 2022 are summarized by type as follows:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| (dollars in thousands, except amounts in the footnote) | Amount | % | Amount | % | ||||||||||||||||||||||
| Commercial | $ | 1,482,983 | 19 | % | $ | 1,487,349 | 19 | % | ||||||||||||||||||
| PPP loans | 709 | — | % | 3,256 | — | % | ||||||||||||||||||||
| Income-producing - commercial real estate | 3,970,903 | 51 | % | 3,919,941 | 51 | % | ||||||||||||||||||||
| Owner-occupied - commercial real estate | 1,095,699 | 14 | % | 1,110,325 | 15 | % | ||||||||||||||||||||
| Real estate mortgage - residential | 73,677 | 1 | % | 73,001 | 1 | % | ||||||||||||||||||||
| Construction - commercial and residential | 948,877 | 13 | % | 877,755 | 12 | % | ||||||||||||||||||||
| Construction - C&I (owner-occupied) | 109,013 | 1 | % | 110,479 | 1 | % | ||||||||||||||||||||
| Home equity | 53,829 | 1 | % | 51,782 | 1 | % | ||||||||||||||||||||
| Other consumer | 1,986 | — | % | 1,744 | — | % | ||||||||||||||||||||
| Total loans | 7,737,676 | 100 | % | 7,635,632 | 100 | % | ||||||||||||||||||||
| Less: allowance for credit losses | (78,377) | (74,444) | ||||||||||||||||||||||||
Net loans (1) | $ | 7,659,299 | $ | 7,561,188 | ||||||||||||||||||||||
(1)Excludes accrued interest receivable of $43.9 million and $43.5 million at March 31, 2023 and December 31, 2022, respectively, which were recorded in other assets on the Consolidated Balance Sheets.
Unamortized net deferred fees amounted to $28.5 million and $29.2 million at March 31, 2023 and December 31, 2022, respectively.
As of March 31, 2023 and December 31, 2022, the Bank serviced $344.1 million and $361.5 million, respectively, of multifamily FHA loans, SBA loans and other loan participations that are not reflected as loan balances on the Consolidated Balance Sheets.
Real estate loans are secured primarily by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required.
Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed-price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.
Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination.
Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate approval authority. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.
Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower's architect. Each draw request shall also include the borrower's soft cost breakdown certified by the borrower or their Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition.
Commercial permanent loans are generally secured by improved real property that is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to 1.0. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.
Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.
The Company's loan portfolio includes acquisition, development and construction ("ADC") real estate loans including both investment and owner-occupied projects. ADC loans amounted to $1.6 billion at March 31, 2023. A portion of the ADC portfolio, includes loan-funded interest reserves at origination. ADC loans that provide for the use of interest reserves represent approximately 59.0% of the outstanding ADC loan portfolio at March 31, 2023. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit, including: (1) the feasibility of the project; (2) the experience of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) the borrower equity contribution; and (5) the level of collateral protection. When appropriate, an interest reserve provides a means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower's ability to repay the loan. In order to mitigate these inherent risks, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1) construction and development timelines that are monitored on an ongoing basis and track the progress of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction meetings among senior Company management, which include monitoring of current and projected real estate market conditions. If a project has performed as expected, it is the customary practice of the Company to increase loan-funded interest reserves.
The following tables detail activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2023 and 2022. PPP loans are excluded from these tables since they do not carry an allowance for credit loss, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. Government. Allocation of a portion of the allowance to one category of loans does not restrict the use of the allowance to absorb losses in other categories.
| (dollars in thousands) | Commercial | Income-Producing Commercial Real Estate | Owner-Occupied -Commercial Real Estate | Real Estate Mortgage Residential | Construction -Commercial and Residential | Home Equity | Other Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 15,655 | $ | 35,688 | $ | 12,702 | $ | 969 | $ | 8,801 | $ | 555 | $ | 74 | $ | 74,444 | ||||||||||||||||||||||||||||||||||
| Loans charged-off | (868) | — | — | — | (136) | — | (50) | (1,054) | ||||||||||||||||||||||||||||||||||||||||||
| Recoveries of loans previously charged-off | 76 | — | — | — | — | — | 3 | 79 | ||||||||||||||||||||||||||||||||||||||||||
| Net loans (charged-off) recovered | (792) | — | — | — | (136) | — | (47) | (975) | ||||||||||||||||||||||||||||||||||||||||||
| Provision for (reversal of) credit losses | 912 | 2,452 | (245) | 33 | 1,718 | 38 | — | 4,908 | ||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 15,775 | $ | 38,140 | $ | 12,457 | $ | 1,002 | $ | 10,383 | $ | 593 | $ | 27 | $ | 78,377 | ||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 14,475 | $ | 38,287 | $ | 12,146 | $ | 449 | $ | 9,099 | $ | 474 | $ | 35 | $ | 74,965 | ||||||||||||||||||||||||||||||||||
| Loans charged-off | (514) | — | — | — | — | — | — | (514) | ||||||||||||||||||||||||||||||||||||||||||
| Recoveries of loans previously charged-off | 54 | — | — | — | — | — | 1 | 55 | ||||||||||||||||||||||||||||||||||||||||||
| Net loans (charged-off) recovered | (460) | — | — | — | — | — | 1 | (459) | ||||||||||||||||||||||||||||||||||||||||||
| Provision for (reversal of) credit losses | (1,069) | 906 | (1,631) | (68) | (1,126) | (7) | (6) | (3,001) | ||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 12,946 | $ | 39,193 | $ | 10,515 | $ | 381 | $ | 7,973 | $ | 467 | $ | 30 | $ | 71,505 | ||||||||||||||||||||||||||||||||||
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2023 and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Business/Other | Business/Other | |||||||||||||||||||||||||
| (dollars in thousands) | Assets | Real Estate | Assets | Real Estate | ||||||||||||||||||||||
| Commercial | $ | 2,223 | $ | 995 | $ | 1,563 | $ | 1,871 | ||||||||||||||||||
| Income-producing - commercial real estate | 2,000 | 4,325 | 2,000 | 4,328 | ||||||||||||||||||||||
| Owner-occupied - commercial real estate | — | 19,184 | — | 19,187 | ||||||||||||||||||||||
| Real estate mortgage - residential | — | 1,698 | — | 1,698 | ||||||||||||||||||||||
| Construction - commercial and residential | — | 533 | — | — | ||||||||||||||||||||||
| Other consumer | — | — | 50 | — | ||||||||||||||||||||||
| Total | $ | 4,223 | $ | 26,735 | $ | 3,613 | $ | 27,084 | ||||||||||||||||||
Credit Quality Indicators
The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators inform an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes that comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes that comprise the consumer portfolio segment.
The following are the definitions of the Company's credit quality indicators:
| Pass: | Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass. | ||||
| Special Mention: | Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management's close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention. | ||||
| Classified: | Classified (a) Substandard – Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard. | ||||
Classified (b) Doubtful – Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined. | |||||
The Company's credit quality indicators are generally updated annually, however, credits rated "Special Mention" or below are reviewed more frequently. Based on the most recent analysis performed, the amortized cost basis of loans by risk category, class and year of origination are as follows:
| (dollars in thousands) | Prior | 2019 | 2020 | 2021 | 2022 | 2023 | Revolving Loans Amort. Cost Basis | Revolving Loans Convert. to Term | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 207,824 | $ | 56,608 | $ | 61,430 | $ | 237,660 | $ | 160,051 | $ | 24,643 | $ | 719,939 | $ | 6,499 | $ | 1,474,654 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | 77 | — | 4,976 | — | 5,053 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 2,197 | 264 | — | 340 | — | — | 199 | 276 | 3,276 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 210,021 | 56,872 | 61,430 | 238,000 | 160,128 | 24,643 | 725,114 | 6,775 | 1,482,983 | |||||||||||||||||||||||||||||||||||||||||||||||
| YTD Gross Charge-offs | (868) | — | — | — | — | — | — | — | (868) | |||||||||||||||||||||||||||||||||||||||||||||||
| PPP loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | — | — | — | 709 | — | — | — | — | 709 | |||||||||||||||||||||||||||||||||||||||||||||||
| Income producing - commercial real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 1,431,756 | 494,678 | 366,302 | 528,962 | 696,291 | 114,213 | 199,847 | 5,275 | 3,837,324 | |||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | 12,376 | 4,195 | 6,734 | — | — | — | 47,674 | — | 70,979 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 62,600 | — | — | — | — | — | — | — | 62,600 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 1,506,732 | 498,873 | 373,036 | 528,962 | 696,291 | 114,213 | 247,521 | 5,275 | 3,970,903 | |||||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied - commercial real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 648,931 | 110,870 | 39,752 | 207,696 | 39,939 | 5,048 | 1,551 | 22,169 | 1,075,956 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 19,743 | — | — | — | — | — | — | — | 19,743 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 668,674 | 110,870 | 39,752 | 207,696 | 39,939 | 5,048 | 1,551 | 22,169 | 1,095,699 | |||||||||||||||||||||||||||||||||||||||||||||||
| Real estate mortgage - residential | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 28,363 | 8,162 | 2,626 | 16,402 | 14,362 | 2,064 | — | — | 71,979 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 1,698 | — | — | — | — | — | — | — | 1,698 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 30,061 | 8,162 | 2,626 | 16,402 | 14,362 | 2,064 | — | — | 73,677 | |||||||||||||||||||||||||||||||||||||||||||||||
| Construction - commercial and residential | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 110,247 | 92,940 | 155,158 | 250,206 | 239,367 | 910 | 99,516 | — | 948,344 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 533 | — | — | — | — | — | — | — | — | 533 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | 110,780 | 92,940 | 155,158 | 250,206 | 239,367 | 910 | 99,516 | — | 948,877 | |||||||||||||||||||||||||||||||||||||||||||||||
| YTD Gross Charge-offs | (136) | — | — | — | — | — | — | — | (136) | |||||||||||||||||||||||||||||||||||||||||||||||
| Construction - C&I (owner occupied) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 19,548 | 11,754 | 33,609 | 647 | 35,170 | 1,815 | 6,470 | — | 109,013 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 19,548 | 11,754 | 33,609 | 647 | 35,170 | 1,815 | 6,470 | — | 109,013 | |||||||||||||||||||||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 2,300 | — | 248 | 376 | 686 | — | 49,649 | 470 | 53,729 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | 39 | — | — | — | — | 61 | — | 100 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2,300 | 39 | 248 | 376 | 686 | — | 49,710 | 470 | 53,829 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 7 | — | — | — | 118 | — | 1,861 | — | 1,986 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 7 | — | — | — | 118 | — | 1,861 | — | 1,986 | |||||||||||||||||||||||||||||||||||||||||||||||
| YTD Gross Charge-offs | (50) | — | — | — | — | — | — | — | (50) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Recorded Investment | $ | 2,548,123 | $ | 779,510 | $ | 665,859 | $ | 1,242,998 | $ | 1,186,061 | $ | 148,693 | $ | 1,131,743 | $ | 34,689 | $ | 7,737,676 | ||||||||||||||||||||||||||||||||||||||
| Total YTD Gross Charge-offs | $ | (1,054) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1,054) | ||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Prior | 2018 | 2019 | 2020 | 2021 | 2022 | Revolving Loans Amort. Cost Basis | Revolving Loans Convert. to Term | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 183,329 | $ | 47,393 | $ | 56,261 | $ | 64,163 | $ | 237,146 | $ | 144,390 | $ | 736,090 | $ | 8,570 | $ | 1,477,342 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | 82 | 5,475 | — | 5,557 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 1,332 | 351 | 276 | — | — | — | 1,344 | 1,147 | 4,450 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 184,661 | 47,744 | 56,537 | 64,163 | 237,146 | 144,472 | 742,909 | 9,717 | 1,487,349 | |||||||||||||||||||||||||||||||||||||||||||||||
| YTD Gross Charge-offs | (283) | (101) | (49) | — | — | — | (483) | — | (916) | |||||||||||||||||||||||||||||||||||||||||||||||
| PPP loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | — | — | — | 2,479 | 777 | — | — | — | 3,256 | |||||||||||||||||||||||||||||||||||||||||||||||
| Income producing - commercial real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 1,016,529 | 439,221 | 480,474 | 334,165 | 542,143 | 744,328 | 192,089 | 358 | 3,749,307 | |||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | 44,195 | 5,206 | 4,209 | 6,735 | — | — | 47,676 | — | 108,021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 60,613 | 2,000 | — | — | — | — | — | — | 62,613 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 1,121,337 | 446,427 | 484,683 | 340,900 | 542,143 | 744,328 | 239,765 | 358 | 3,919,941 | |||||||||||||||||||||||||||||||||||||||||||||||
| YTD Gross Charge-offs | (680) | (645) | (676) | — | — | — | — | — | (2,001) | |||||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied - commercial real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 461,029 | 191,646 | 111,497 | 40,562 | 206,595 | 41,765 | 24,240 | 13,238 | 1,090,572 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 19,753 | — | — | — | — | — | — | — | 19,753 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 480,782 | 191,646 | 111,497 | 40,562 | 206,595 | 41,765 | 24,240 | 13,238 | 1,110,325 | |||||||||||||||||||||||||||||||||||||||||||||||
| Real estate mortgage - residential | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 16,968 | 12,438 | 8,219 | 2,640 | 16,307 | 14,731 | — | — | 71,303 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 1,698 | — | — | — | — | — | — | — | 1,698 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 18,666 | 12,438 | 8,219 | 2,640 | 16,307 | 14,731 | — | — | 73,001 | |||||||||||||||||||||||||||||||||||||||||||||||
| Construction - commercial and residential | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 84,522 | 71,841 | 90,560 | 189,023 | 191,127 | 159,771 | 90,911 | — | 877,755 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 84,522 | 71,841 | 90,560 | 189,023 | 191,127 | 159,771 | 90,911 | — | 877,755 | |||||||||||||||||||||||||||||||||||||||||||||||
| Construction - C&I (owner occupied) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 14,816 | 8,160 | 11,810 | 33,854 | 653 | 34,679 | 6,507 | — | 110,479 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 14,816 | 8,160 | 11,810 | 33,854 | 653 | 34,679 | 6,507 | — | 110,479 | |||||||||||||||||||||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 1,747 | — | — | 98 | 551 | — | 48,378 | 906 | 51,680 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | 41 | — | — | — | 61 | — | 102 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 1,747 | — | 41 | 98 | 551 | — | 48,439 | 906 | 51,782 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 4 | — | — | — | — | 126 | 1,561 | 3 | 1,694 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | — | — | 50 | 50 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 4 | — | — | — | — | 126 | 1,561 | 53 | 1,744 | |||||||||||||||||||||||||||||||||||||||||||||||
| YTD Gross Charge-offs | (3) | — | — | — | — | — | (75) | — | (78) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Recorded Investment | $ | 1,906,535 | $ | 778,256 | $ | 763,347 | $ | 673,719 | $ | 1,195,299 | $ | 1,139,872 | $ | 1,154,332 | $ | 24,272 | $ | 7,635,632 | ||||||||||||||||||||||||||||||||||||||
| Total YTD Gross Charge-Offs | $ | (966) | $ | (746) | $ | (725) | $ | — | $ | — | $ | — | $ | (558) | $ | — | $ | (2,995) | ||||||||||||||||||||||||||||||||||||||
Nonaccrual and Past Due Loans
As part of the Company's comprehensive loan review process, management evaluates loans that are past-due 30 days or more. Management makes 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 90 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 table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of March 31, 2023 and December 31, 2022:
| (dollars in thousands, except amount in the footnote) | Loans 30-59 Days Past Due | Loans 60-89 Days Past Due | Loans 90 Days or More Past Due | Total Past Due Loans | Current Loans | Nonaccrual Loans | Total Recorded Investment in Loans | |||||||||||||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial | $ | 778 | $ | 524 | $ | — | $ | 1,302 | $ | 1,479,387 | $ | 2,294 | $ | 1,482,983 | ||||||||||||||||||||||||||||||
| PPP loans | — | — | — | — | 709 | — | 709 | |||||||||||||||||||||||||||||||||||||
Income producing - commercial real estate (1) | 14,018 | — | — | 14,018 | 3,954,885 | 2,000 | 3,970,903 | |||||||||||||||||||||||||||||||||||||
| Owner occupied - commercial real estate | — | 279 | — | 279 | 1,095,406 | 14 | 1,095,699 | |||||||||||||||||||||||||||||||||||||
| Real estate mortgage - residential | — | — | — | — | 71,762 | 1,915 | 73,677 | |||||||||||||||||||||||||||||||||||||
| Construction - commercial and residential | — | — | — | — | 948,344 | 533 | 948,877 | |||||||||||||||||||||||||||||||||||||
| Construction - C&I (owner occupied) | — | — | — | — | 109,013 | — | 109,013 | |||||||||||||||||||||||||||||||||||||
| Home equity | 48 | — | — | 48 | 53,781 | — | 53,829 | |||||||||||||||||||||||||||||||||||||
| Other consumer | — | — | — | — | 1,986 | — | 1,986 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 14,844 | $ | 803 | $ | — | $ | 15,647 | $ | 7,715,273 | $ | 6,756 | $ | 7,737,676 | ||||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial | $ | 697 | $ | 643 | $ | — | $ | 1,340 | $ | 1,483,521 | $ | 2,488 | $ | 1,487,349 | ||||||||||||||||||||||||||||||
| PPP loans | — | — | — | — | 3,256 | — | 3,256 | |||||||||||||||||||||||||||||||||||||
| Income producing - commercial real estate | — | — | — | — | 3,917,941 | 2,000 | 3,919,941 | |||||||||||||||||||||||||||||||||||||
| Owner occupied - commercial real estate | — | 279 | — | 279 | 1,110,029 | 17 | 1,110,325 | |||||||||||||||||||||||||||||||||||||
| Real estate mortgage – residential | — | — | — | — | 71,088 | 1,913 | 73,001 | |||||||||||||||||||||||||||||||||||||
| Construction - commercial and residential | 531 | — | — | 531 | 877,224 | — | 877,755 | |||||||||||||||||||||||||||||||||||||
| Construction - C&I (owner occupied) | — | — | — | — | 110,479 | — | 110,479 | |||||||||||||||||||||||||||||||||||||
| Home equity | — | 52 | — | 52 | 51,730 | — | 51,782 | |||||||||||||||||||||||||||||||||||||
| Other consumer | — | 1 | — | 1 | 1,693 | 50 | 1,744 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 1,228 | $ | 975 | $ | — | $ | 2,203 | $ | 7,626,961 | $ | 6,468 | $ | 7,635,632 | ||||||||||||||||||||||||||||||
(1)The increase in the 30-59 days past due category in the income producing - commercial real estate loans is one credit for $14.0 million which became past due in the first quarter of 2023, and was brought current in April 2023.
The following presents the nonaccrual loans as of March 31, 2023 and December 31, 2022:
| (dollars in thousands, except amounts in footnotes) | Nonaccrual with No Allowance for Credit Losses | Nonaccrual with an Allowance for Credit Losses | Total Nonaccrual Loans | |||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||
| Commercial | $ | 91 | $ | 2,203 | $ | 2,294 | ||||||||||||||
| Income producing - commercial real estate | — | 2,000 | 2,000 | |||||||||||||||||
| Owner occupied - commercial real estate | 14 | — | 14 | |||||||||||||||||
| Real estate mortgage - residential | — | 1,915 | 1,915 | |||||||||||||||||
| Construction - commercial and residential | — | 533 | 533 | |||||||||||||||||
Total (1) | $ | 105 | $ | 6,651 | $ | 6,756 | ||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Commercial | $ | 101 | $ | 2,387 | $ | 2,488 | ||||||||||||||
| Income producing - commercial real estate | — | 2,000 | 2,000 | |||||||||||||||||
| Owner occupied - commercial real estate | 17 | — | 17 | |||||||||||||||||
| Real estate mortgage - residential | — | 1,913 | 1,913 | |||||||||||||||||
| Other consumer | — | 50 | 50 | |||||||||||||||||
Total (1) | $ | 118 | $ | 6,350 | $ | 6,468 | ||||||||||||||
(1)Gross interest income of $182 thousand and approximately $325 thousand would have been recorded for the three months ended March 31, 2023 and 2022, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while no interest income was actually recorded on such loans for the three months ended March 31, 2023 and 2022. See Note 1 to the Consolidated Financial Statements for a description of the Company's policy for placing loans on nonaccrual status.
Modifications with Borrowers Experiencing Financial Difficulty
On January 1, 2023, the Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2023, which eliminates the recognition and measurement of a TDR. Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulties that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are for modifications which have a direct impact on cash flows.
The Company may offer various types of modifications when restructuring a loan. Commercial and industrial loans modified in a loan restructuring often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested.
Commercial mortgage and construction loans modified in a loan restructuring often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a loan restructuring may also involve extending the interest-only payment period.
Loans modified in a loan restructuring for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for consumer and commercial loans that have been modified in a loan restructuring is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.
Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further loss. 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.
None of the loans that were restructured in the three months ended March 31, 2023, experienced any subsequent payment defaults.
The following table presents the amortized cost basis of loan restructurings at March 31, 2023 that were both experiencing financial difficulty and modified during the three months ended March 31, 2023.
| (dollars in thousands) | Principal Forgiveness | Term Extension | Combination Term Extension and Principal Payment Delay | Weighted Average Term Extension | Interest Rate Reduction | Restructured Loans/Total Loan Portfolio | ||||||||||||||||||||||||||||||||
| Accruing Restructured Loans | ||||||||||||||||||||||||||||||||||||||
| Commercial | $ | — | $ | 21,744 | $ | — | 3 months | $ | — | 0.3 | % | |||||||||||||||||||||||||||
| Income producing - commercial real estate | — | 7,211 | 60,139 | 4 months | — | 0.9 | % | |||||||||||||||||||||||||||||||
| Owner occupied - commercial real estate | — | — | 19,170 | 3 months | — | 0.2 | % | |||||||||||||||||||||||||||||||
| Total | $ | — | $ | 28,955 | $ | 79,309 | $ | — | 1.4 | % | ||||||||||||||||||||||||||||
The following presents the performance of loans restructured to borrowers experiencing financial difficulty by class of loan during the three months ended March 31, 2023:
| Payment Status (Amortized Cost Basis) | Payment Status (Amortized Cost Basis) | |||||||||||||||||||
| (dollars in thousands) | Current | 30-89 Days Past Due | 90+ Days Past Due | |||||||||||||||||
| Accruing Restructured Loans | ||||||||||||||||||||
| Commercial | $ | 21,744 | $ | — | $ | — | ||||||||||||||
| Income producing - commercial real estate | 67,350 | — | — | |||||||||||||||||
| Owner occupied - commercial real estate | 19,170 | — | — | |||||||||||||||||
| Total | $ | 108,264 | $ | — | $ | — | ||||||||||||||
There were no non-accrual loans modified during the three months ended March 31, 2023.
Note 5. Leases
The Company accounts for leases in accordance with ASC Topic 842. A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Substantially all of the leases in which the Company is the lessee comprise real estate property for branch offices, ATM locations, and corporate office space. Substantially all of our leases are classified as operating leases. With the adoption of ASC Topic 842, operating lease agreements were required to be recognized on the Consolidated Balance Sheets as a right-of-use ("ROU") asset and a corresponding lease liability.
As of March 31, 2023 and December 31, 2022, the Company had $23.1 million and $24.5 million of operating lease ROU assets, respectively, and $27.6 million and $29.3 million of operating lease liabilities, respectively, on the Company's Consolidated Balance Sheets. The Company elects not to recognize ROU assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Balance Sheets.
The leases contain terms and conditions of options to extend or terminate the lease which are recognized as part of the ROU assets and lease liabilities when an economic benefit to exercise the option exists and there is a 90% probability that the Company will exercise the option. If these criteria are not met, the options are not included in ROU assets and lease liabilities.
As of March 31, 2023, our leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or the Company's ability to incur additional financial obligations. During the three months ended March 31, 2023, the Company did not enter into new leases or renew or extend any leases. The Company had one lease expire during that period.
19
The following table presents lease costs and other lease information.
| Three Months Ended | |||||||||||||||||
| (dollars in thousands) | March 31, 2023 | March 31, 2022 | |||||||||||||||
| Lease cost | |||||||||||||||||
| Operating lease cost (cost resulting from lease payments) | $ | 1,716 | $ | 1,840 | |||||||||||||
| Variable lease cost (cost excluded from lease payments) | 256 | 231 | |||||||||||||||
| Sublease income | (30) | (87) | |||||||||||||||
| Net lease cost | $ | 1,942 | $ | 1,984 | |||||||||||||
| Operating lease - operating cash flows (fixed payments) | $ | 1,859 | $ | 1,820 | |||||||||||||
| (dollars in thousands) | March 31, 2023 | December 31, 2022 | |||||||||||||||
| Operating lease right-of-use assets | $ | 23,060 | $ | 24,544 | |||||||||||||
| Operating lease liabilities | $ | 27,634 | $ | 29,267 | |||||||||||||
| Weighted average lease term - operating leases | 5.34 | yrs | 5.50 | yrs | |||||||||||||
| Weighted average discount rate - operating leases | 2.87 | % | 2.91 | % | |||||||||||||
Future minimum payments for operating leases with initial or remaining terms of more than one year as of March 31, 2023 were as follows:
| (dollars in thousands) | ||||||||
| Twelve months ended: | ||||||||
| March 31, 2024 | $ | 5,339 | ||||||
| March 31, 2025 | 6,880 | |||||||
| March 31, 2026 | 5,987 | |||||||
| March 31, 2027 | 2,894 | |||||||
| March 31, 2028 | 2,502 | |||||||
| Thereafter | 5,776 | |||||||
| Total future minimum lease payments | 29,378 | |||||||
| Amounts representing interest | (1,744) | |||||||
| Present value of net future minimum lease payments | $ | 27,634 | ||||||
Note 6. Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities through the use of derivative financial instruments.
Interest Rate Products
Interest rate derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net market risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
The Company entered into credit risk participation agreements ("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities.
20
Credit-Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815, "Derivatives and Hedging." In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty.
The interest rate derivative agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party's exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; 3) if the Company fails to maintain its status as a well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
Mortgage Banking Derivatives
The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the three months ended March 31, 2023. The Company expects to complete residual origination and sales activities as of the end of the third quarter of 2023.
As part of its mortgage banking activities, the Bank entered into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs ("best efforts") or commits to deliver the locked loan in a binding ("mandatory") delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of MBS. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.
Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.
The fair value of the mortgage banking derivatives is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.
21
The table below identifies the balance sheet category and fair value of the Company's derivative instruments as of March 31, 2023 and December 31, 2022. The Company has a minimum collateral posting threshold with its derivative counterparty. If the Company had breached any provisions under the agreement at March 31, 2023, it could have been required to settle its obligations under the agreement at the termination value.
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Notional Amount | Fair Value | Balance Sheet Category | Notional Amount | Fair Value | Balance Sheet Category | ||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments in an asset position | ||||||||||||||||||||||||||||||||||||||
| Interest rate product | $ | 401,890 | $ | 25,844 | Other assets | $ | 396,024 | $ | 31,039 | Other assets | ||||||||||||||||||||||||||||
| Mortgage banking derivatives | 2,188 | 29 | Other assets | 6,963 | 93 | Other assets | ||||||||||||||||||||||||||||||||
| Total | $ | 404,078 | $ | 25,873 | $ | 402,987 | $ | 31,132 | ||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments in a liability position | ||||||||||||||||||||||||||||||||||||||
| Interest rate product | $ | 401,890 | $ | 25,218 | Other liabilities | $ | 396,024 | $ | 30,065 | Other liabilities | ||||||||||||||||||||||||||||
| Credit risk participation agreements | 25,770 | 3 | Other liabilities | 25,902 | 2 | Other liabilities | ||||||||||||||||||||||||||||||||
| Total | $ | 427,660 | 25,221 | $ | 421,926 | 30,067 | ||||||||||||||||||||||||||||||||
| Cash and other collateral posted | — | — | ||||||||||||||||||||||||||||||||||||
| Net derivatives in a liability position | $ | 25,221 | $ | 30,067 | ||||||||||||||||||||||||||||||||||
The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of income for the three months ended March 31, 2023 and 2022:
| The Effect of Derivatives Not Designated as Hedging Instruments in the Consolidated Statements of Income | ||||||||||||||||||||
| Amount of Gain (Loss) Recognized in Income on Derivatives | ||||||||||||||||||||
| Location of Gain (Loss) Recognized in Income on Derivatives | Three Months Ended March 31, | |||||||||||||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||||||||||||||
| Interest rate products | $ | (350) | $ | 250 | ||||||||||||||||
| Mortgage banking derivatives | (64) | 209 | ||||||||||||||||||
| Total | $ | (414) | $ | 459 | ||||||||||||||||
Note 7. Deposits
The following table provides information regarding the Bank’s deposit composition at March 31, 2023 and December 31, 2022:
| (dollars in thousands) | March 31, 2023 | December 31, 2022 | ||||||||||||
| Noninterest bearing demand | $ | 2,247,706 | $ | 3,150,751 | ||||||||||
| Interest bearing transaction | 907,637 | 1,138,235 | ||||||||||||
| Savings and money market | 2,970,093 | 3,640,697 | ||||||||||||
| Time deposits | 1,337,805 | 783,499 | ||||||||||||
| Total | $ | 7,463,241 | $ | 8,713,182 | ||||||||||
22
The remaining maturity of time deposits at March 31, 2023 and December 31, 2022 were as follows:
| (dollars in thousands) | March 31, 2023 | December 31, 2022 | ||||||||||||
| 2023 | $ | 564,913 | $ | 463,393 | ||||||||||
| 2024 | 413,794 | 152,898 | ||||||||||||
| 2025 | 276,542 | 157,320 | ||||||||||||
| 2026 | 73,364 | 2,628 | ||||||||||||
| 2027 | 4,379 | 4,130 | ||||||||||||
| 2028 | 4,813 | 3,130 | ||||||||||||
| Thereafter | — | — | ||||||||||||
| Total | $ | 1,337,805 | $ | 783,499 | ||||||||||
| (dollars in thousands) | March 31, 2023 | December 31, 2022 | ||||||||||||
| Three months or less | $ | 131,277 | $ | 159,820 | ||||||||||
| More than three months through six months | 233,638 | 99,044 | ||||||||||||
| More than six months through twelve months | 359,145 | 204,529 | ||||||||||||
| Over twelve months | 613,745 | 320,106 | ||||||||||||
| Total | $ | 1,337,805 | $ | 783,499 | ||||||||||
As of March 31, 2023 and December 31, 2022, time deposit accounts in excess of $250 thousand were as follows:
| (dollars in thousands) | March 31, 2023 | December 31, 2022 | ||||||||||||
| Three months or less | $ | 45,926 | $ | 87,959 | ||||||||||
| More than three months through six months | 144,356 | 51,746 | ||||||||||||
| More than six months through twelve months | 249,832 | 108,877 | ||||||||||||
| Over twelve months | 560,763 | 269,200 | ||||||||||||
| Total | $ | 1,000,877 | $ | 517,782 | ||||||||||
At March 31, 2023, total brokered deposits (excluding the CDARS and ICS two-way) were $2.1 billion, or 28.5% of total deposits. At December 31, 2022, total deposits included $2.3 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 26.5% of total deposits.
23
Note 8. Borrowings
The following table summarizes the Company’s borrowings, which include repurchase agreements with the Company’s customers, short-term borrowings and long-term borrowings, at March 31, 2023 and December 31, 2022:
| (dollars in thousands) | Borrowings - Principal | Unamortized Deferred Issuance Costs | Net Borrowings Outstanding | Available Capacity (1)(2) | Maturity Dates | Interest Rates (3) | ||||||||||||||||||||||||||||||||
| March 31, 2023: | ||||||||||||||||||||||||||||||||||||||
| Customer repurchase agreements | $ | 37,854 | $ | — | $ | 37,854 | $ | — | N/A | 3.27 | % | |||||||||||||||||||||||||||
| Short-term borrowings: | ||||||||||||||||||||||||||||||||||||||
| FHLB secured borrowings | 1,313,801 | — | 1,313,801 | 653,946 | May 24, 2023 - December 1, 2023 | 5.06 | % | |||||||||||||||||||||||||||||||
| FRB: | ||||||||||||||||||||||||||||||||||||||
| BTFP secured borrowings | 800,000 | — | 800,000 | 37,182 | March 26, 2024 | 4.38 | % | |||||||||||||||||||||||||||||||
| Discount window secured borrowings | — | — | — | 606,201 | N/A | N/A | ||||||||||||||||||||||||||||||||
| Raymond James repurchase agreement | — | — | — | 18,050 | N/A | N/A | ||||||||||||||||||||||||||||||||
| Total | 2,113,801 | — | 2,113,801 | 1,315,379 | ||||||||||||||||||||||||||||||||||
| Long-term borrowings: | ||||||||||||||||||||||||||||||||||||||
| Subordinated notes, 5.75% | 70,000 | (175) | 69,825 | — | September 1, 2024 | 5.75 | % | |||||||||||||||||||||||||||||||
| Total borrowings | $ | 2,221,655 | $ | (175) | $ | 2,221,480 | $ | 1,315,379 | ||||||||||||||||||||||||||||||
| December 31, 2022: | ||||||||||||||||||||||||||||||||||||||
| Customer repurchase agreements | $ | 35,100 | $ | — | $ | 35,100 | $ | — | N/A | 2.94 | % | |||||||||||||||||||||||||||
| Short-term borrowings: | ||||||||||||||||||||||||||||||||||||||
| FHLB secured borrowings | 975,001 | — | 975,001 | 145,104 | December 1, 2023 | 4.57 | % | |||||||||||||||||||||||||||||||
| FRB discount window secured borrowings | — | — | — | 607,405 | N/A | N/A | ||||||||||||||||||||||||||||||||
| Total | 975,001 | — | 975,001 | 752,509 | ||||||||||||||||||||||||||||||||||
| Long-term borrowings: | ||||||||||||||||||||||||||||||||||||||
| Subordinated notes, 5.75% | 70,000 | (206) | 69,794 | — | September 1, 2024 | 5.75 | % | |||||||||||||||||||||||||||||||
| Total borrowings | $ | 1,080,101 | $ | (206) | $ | 1,079,895 | $ | 752,509 | ||||||||||||||||||||||||||||||
(1)Available capacity on the Company's short-term borrowing arrangements with the FHLB, the FRB's BTFP program and the Raymond James repurchase line comprise pledged collateral that has not been borrowed against. At March 31, 2023, the Company had total additional undrawn borrowing capacity of approximately $1.7 billion, comprising unencumbered securities available to be pledged of approximately $1.1 billion and undrawn financing on pledged assets of $709.2 million, including $653.9 million with the FHLB, $37.2 million with the BTFP and $18.1 million with Raymond James.
(2)As part of the Company's agreement governing its participation in the BTFP program and the Raymond James repurchase agreement, the borrowing capacity is determined based on the principal balance of the pledged assets.
(3)Represent the weighted average interest rate on customer repurchase agreements and the short-term borrowings outstanding and the coupon interest rate on the subordinated notes, which approximates the effective interest rate.
The Company’s repurchase agreements operate on a rolling basis and do not contain contractual maturity dates. The contractual maturity dates on FHLB secured borrowings represent the maturity dates of current advances and are not evidence of a termination date on the line.
There are no prepayment penalties nor unused commitment fees on any of the Company’s borrowing arrangements.
24
Bank Term Funding Program (“BTFP”)
On March 12, 2023, the FRB, Department of Treasury and the FDIC issued a joint statement outlining actions they had taken to protect the U.S. economy by strengthening public confidence in the banking system as a result of and in response to recently announced bank closures. Among other actions, the Federal Reserve Board announced that it would make available additional funding to eligible depository institutions through the creation of a new BTFP. The BTFP provides eligible depository institutions, including the Company's subsidiary bank, EagleBank, an additional source of liquidity.
Borrowings are funded based on a percentage of the principal of eligible collateral posted, as defined within the terms of the program. Interest is payable at a fixed rate over the term of the borrowing and there are no prepayment penalties. The program is expected to continue until at least March 2024.
Subordinated Notes
On August 5, 2014, the Company completed the sale of $70.0 million of its 5.75% subordinated notes, due September 1, 2024 (the "2024 Notes"). The 2024 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $68.8 million which included $1.2 million in deferred financing costs, which are being amortized over the life of the 2024 Notes.
Note 9. Net Income per Common Share
The calculation of net income per common share for the three months ended March 31, 2023 and 2022 was as follows:
| Three Months Ended March 31, | ||||||||||||||
| (dollars and shares in thousands, except per share data) | 2023 | 2022 | ||||||||||||
| Basic: | ||||||||||||||
| Net income | $ | 24,234 | $ | 45,744 | ||||||||||
| Average common shares outstanding | 31,109 | 32,033 | ||||||||||||
| Basic net income per common share | $ | 0.78 | $ | 1.43 | ||||||||||
| Diluted: | ||||||||||||||
| Net income | $ | 24,234 | $ | 45,744 | ||||||||||
| Average common shares outstanding | 31,109 | 32,033 | ||||||||||||
| Adjustment for common share equivalents | 71 | 77 | ||||||||||||
| Average common shares outstanding-diluted | 31,180 | 32,110 | ||||||||||||
| Diluted net income per common share | $ | 0.78 | $ | 1.42 | ||||||||||
| Anti-dilutive shares | 3 | — | ||||||||||||
25
Note 10. Other Comprehensive (Loss) Income
The following table presents the components of other comprehensive (loss) income for the three months ended March 31, 2023 and 2022.
| (dollars in thousands) | Before Tax | Tax Effect | Net of Tax | |||||||||||||||||
| Three Months Ended March 31, 2023 | ||||||||||||||||||||
| Net unrealized gain (loss) on securities available-for-sale | $ | 24,039 | $ | (6,103) | $ | 17,936 | ||||||||||||||
| Less: Reclassification adjustment for net loss (gain) included in net income | 21 | (5) | 16 | |||||||||||||||||
| Total unrealized gain (loss) on investment securities available-for-sale | 24,060 | (6,108) | 17,952 | |||||||||||||||||
| Amortization of unrealized loss on securities transferred to held-to-maturity | 1,983 | (1,342) | 641 | |||||||||||||||||
| Total unrealized loss recognized on investment securities held-to-maturity | 1,983 | (1,342) | 641 | |||||||||||||||||
| Other comprehensive income (loss) | $ | 26,043 | $ | (7,450) | $ | 18,593 | ||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||
| Net unrealized (loss) gain on securities available-for-sale | $ | (79,227) | $ | 20,821 | $ | (58,406) | ||||||||||||||
| Less: reclassification adjustment for net loss (gain) included in net income | 25 | (6) | 19 | |||||||||||||||||
| Total unrealized (loss) gain on investment securities available-for-sale | (79,202) | 20,815 | (58,387) | |||||||||||||||||
| Net unrealized (loss) gain on securities held-to-maturity | (66,193) | 17,098 | (49,095) | |||||||||||||||||
| Total unrealized (loss) gain recognized on investment securities held-to-maturity | (66,193) | 17,098 | (49,095) | |||||||||||||||||
| Other comprehensive (loss) income | $ | (145,395) | $ | 37,913 | $ | (107,482) | ||||||||||||||
The following table presents the changes in each component of accumulated other comprehensive (loss) income, net of tax, for the three months ended March 31, 2023 and 2022.
| (dollars in thousands) | Securities Available-For-Sale | Securities Held-to-Maturity | Derivatives | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||
| Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||
| Balance at beginning of period | $ | (154,773) | $ | (44,734) | $ | — | $ | (199,507) | ||||||||||||||||||
| Other comprehensive income before reclassifications | 17,936 | — | — | 17,936 | ||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 16 | — | — | 16 | ||||||||||||||||||||||
| Amortization of unrealized loss on securities transferred to held-to-maturity | — | 641 | — | 641 | ||||||||||||||||||||||
| Net other comprehensive income during period | 17,952 | 641 | — | 18,593 | ||||||||||||||||||||||
| Balance at end of period | $ | (136,821) | $ | (44,093) | $ | — | $ | (180,914) | ||||||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||
| Balance at beginning of period | $ | (13,958) | $ | — | $ | (284) | $ | (14,242) | ||||||||||||||||||
| Other comprehensive (loss) before reclassifications | (58,406) | (49,095) | — | (107,501) | ||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 19 | — | — | 19 | ||||||||||||||||||||||
| Net other comprehensive (loss) during period | (58,387) | (49,095) | — | (107,482) | ||||||||||||||||||||||
| Balance at end of period | $ | (72,345) | $ | (49,095) | $ | (284) | $ | (121,724) | ||||||||||||||||||
26
The following tables present the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2023 and 2022.
| Details about Accumulated Other Comprehensive Loss Components | Amount Reclassified from Accumulated Other Comprehensive (Loss) Income | |||||||||||||||||||
| Three Months Ended March 31, | Affected Line Item in Consolidated Statements of Income | |||||||||||||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||||||||||||||
| Realized loss on sale of investment securities | $ | (21) | $ | (25) | Net loss on sale of investment securities | |||||||||||||||
| Income tax benefit (expense) | 5 | 6 | Income tax expense | |||||||||||||||||
| Total reclassifications for the periods | $ | (16) | $ | (19) | ||||||||||||||||
Note 11. Fair Value Measurements
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, "Fair Value Measurements and Disclosures," establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. treasury and other U.S. Government and agency securities actively traded in over-the-counter markets.
Level 2 Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or inputs that can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.
Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.
27
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022.
| (dollars in thousands) | Quoted Prices (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Unobservable Inputs (Level 3) | Total Fair Value | ||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Investment securities available-for-sale: | ||||||||||||||||||||||||||
| U.S treasury bonds | $ | — | $ | 46,931 | $ | — | $ | 46,931 | ||||||||||||||||||
| U. S. agency securities | — | 674,467 | — | 674,467 | ||||||||||||||||||||||
| Residential mortgage-backed securities | — | 800,242 | — | 800,242 | ||||||||||||||||||||||
| Commercial mortgage-backed securities | — | 50,282 | — | 50,282 | ||||||||||||||||||||||
| Municipal bonds | — | 8,482 | — | 8,482 | ||||||||||||||||||||||
| Corporate bonds | — | 1,781 | — | 1,781 | ||||||||||||||||||||||
| Loans held for sale | — | 6,488 | — | 6,488 | ||||||||||||||||||||||
| Interest rate derivatives | — | 25,844 | — | 25,844 | ||||||||||||||||||||||
| Mortgage banking derivatives | — | — | 29 | 29 | ||||||||||||||||||||||
| Total assets measured at fair value on a recurring basis | $ | — | $ | 1,614,517 | $ | 29 | $ | 1,614,546 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Credit risk participation agreements | — | 3 | — | 3 | ||||||||||||||||||||||
| Interest rate derivatives | — | 25,218 | — | 25,218 | ||||||||||||||||||||||
| Total liabilities measured at fair value on a recurring basis | $ | — | $ | 25,221 | $ | — | $ | 25,221 | ||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Investment securities available-for-sale: | ||||||||||||||||||||||||||
| U.S. treasury bonds | $ | — | $ | 46,326 | $ | — | $ | 46,326 | ||||||||||||||||||
| U. S. agency securities | — | 669,728 | — | 669,728 | ||||||||||||||||||||||
| Residential mortgage-backed securities | — | 820,502 | — | 820,502 | ||||||||||||||||||||||
| Commercial mortgage-backed securities | — | 50,214 | — | 50,214 | ||||||||||||||||||||||
| Municipal bonds | — | 10,088 | — | 10,088 | ||||||||||||||||||||||
| Corporate bonds | — | 1,808 | — | 1,808 | ||||||||||||||||||||||
| Loans held for sale | — | 6,734 | — | 6,734 | ||||||||||||||||||||||
| Interest rate caps | — | 31,039 | — | 31,039 | ||||||||||||||||||||||
| Mortgage banking derivatives | — | — | 93 | 93 | ||||||||||||||||||||||
| Total assets measured at fair value on a recurring basis | $ | — | $ | 1,636,439 | $ | 93 | $ | 1,636,532 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Credit risk participation agreements | $ | — | $ | 2 | $ | — | $ | 2 | ||||||||||||||||||
| Interest rate derivatives | — | 30,065 | — | 30,065 | ||||||||||||||||||||||
| Total liabilities measured at fair value on a recurring basis | $ | — | $ | 30,067 | $ | — | $ | 30,067 | ||||||||||||||||||
28
Investment securities available-for-sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include certain U.S. treasury, U.S. Government and agency securities that actively traded in over-the-counter markets. Level 2 securities includes certain U.S. treasury bonds, U.S. agency debt securities, mortgage-backed securities issued by Government Sponsored Entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, for which the carrying amounts approximate the fair value.
Loans held for sale: The Company has elected to carry loans held for sale at fair value. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of income. Gains and losses on sale of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Income. Fair value is derived from secondary market quotations for similar instruments. As such, the Company classifies loans subjected to fair value adjustments as Level 2 valuation.
The following tables summarize the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of March 31, 2023 and December 31, 2022.
| (dollars in thousands) | Fair Value | Aggregate Unpaid Principal Balance | Difference | |||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||
| Loans held for sale | $ | 6,488 | $ | 6,517 | $ | (29) | ||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Loans held for sale | $ | 6,734 | $ | 6,775 | $ | (41) | ||||||||||||||
There were no residential mortgage loans held for sale that were 90 or more days past due or on nonaccrual status as of March 31, 2023 or December 31, 2022.
Credit risk participation agreements: The Company enters into RPAs with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2.
Interest rate derivatives: The Company entered into an interest rate derivative agreement with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the derivatives strike rate. The fair value of the derivative is calculated by determining the total expected asset or liability exposure of the derivative. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities. Accordingly, the derivative falls within Level 2.
Mortgage banking derivatives for loans settled on a mandatory basis: The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the three months ended March 31, 2023. The Company expects to complete residual origination and sales activities as of the end of the third quarter of 2023. While the Company had mortgage banking derivatives in 2023 and 2022, the Company does not expect to have any of these derivatives by the end of the third quarter 2023.
The Company relied on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a Level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale requires grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e. an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing.
29
Mortgage banking derivative for loans settled best efforts basis: The significant unobservable input (Level 3) used in the fair value measurement of the Company's interest rate lock commitments is the pull through ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. An increase in the pull through ratio (i.e. higher percentage of loans are estimated to close) will increase the gain or loss. The pull through ratio is largely dependent on the loan processing stage that a loan is currently in. The pull through rate is computed by the Company's secondary marketing consultant using historical data and the ratio is periodically reviewed by the Company for reasonableness.
The following is a reconciliation of activity for assets measured at fair value based on Significant Other Unobservable Inputs (Level 3):
| (dollars in thousands) | Investment Securities Available-for-Sale | Mortgage Banking Derivatives | Total | |||||||||||||||||
| Assets: | ||||||||||||||||||||
Beginning balance at January 1, 2023 | $ | — | $ | 93 | $ | 93 | ||||||||||||||
| — | (64) | (64) | ||||||||||||||||||
| Ending balance at March 31, 2023 | $ | — | $ | 29 | $ | 29 | ||||||||||||||
| (dollars in thousands) | Investment Securities Available-for-Sale | Mortgage Banking Derivatives | Total | |||||||||||||||||
| Assets: | ||||||||||||||||||||
Beginning balance at January 1, 2022 | $ | 10,000 | $ | 636 | $ | 10,636 | ||||||||||||||
| — | (543) | (543) | ||||||||||||||||||
| Reclassified to investment securities held-to-maturity | (10,000) | — | (10,000) | |||||||||||||||||
| Ending balance at December 31, 2022 | $ | — | $ | 93 | $ | 93 | ||||||||||||||
For Level 3 assets measured at fair value on a recurring or nonrecurring basis as of March 31, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:
March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Valuation Technique | Description | Range | Weighted Average (1) | Fair Value | Weighted Average (1) | Range | Fair Value | ||||||||||||||||||||||||||||||||||||||||||
| Mortgage banking derivatives | Pricing Model | Pull Through Rate | 61.3% - 100.0% | 64.90 | % | $ | 29 | 83.80 | % | 83.8% - 100% | $ | 93 | ||||||||||||||||||||||||||||||||||||||
(1)Unobservable inputs for mortgage banking derivatives were weighted by loan amount.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company measures certain assets at fair value on a nonrecurring basis, and the following is a general description of the methods used to value such assets.
At March 31, 2023, substantially all of the Company's individually evaluated loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, individually evaluated loans where an allowance is established based on the fair value of collateral, i.e. those that are collateral dependent, require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.
Other real estate owned: Other real estate owned is initially recorded at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral, which the Company classifies as a Level 3 valuation.
30
Assets measured at fair value on a nonrecurring basis are included in the table below:
| (dollars in thousands) | Quoted Prices (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Unobservable Inputs (Level 3) | Total Fair Value | ||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||
| Individually assessed loans: | ||||||||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | 1,826 | $ | 1,826 | ||||||||||||||||||
| Income producing - commercial real estate | — | — | 2,773 | 2,773 | ||||||||||||||||||||||
| Owner occupied - commercial real estate | — | — | 19,184 | 19,184 | ||||||||||||||||||||||
| Real estate mortgage - residential | — | — | 1,404 | 1,404 | ||||||||||||||||||||||
| Construction - commercial and residential | — | — | 396 | 396 | ||||||||||||||||||||||
| Other real estate owned | — | — | 1,962 | 1,962 | ||||||||||||||||||||||
| Total assets measured at fair value on a nonrecurring basis as of March 31, 2023 | $ | — | $ | — | $ | 27,545 | $ | 27,545 | ||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||
| Individually assessed loans: | ||||||||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | 1,790 | $ | 1,790 | ||||||||||||||||||
| Income producing - commercial real estate | — | — | 3,131 | 3,131 | ||||||||||||||||||||||
| Owner occupied - commercial real estate | — | — | 19,187 | 19,187 | ||||||||||||||||||||||
| Real estate mortgage - residential | — | — | 1,404 | 1,404 | ||||||||||||||||||||||
| Construction - commercial and residential | — | — | 3 | 3 | ||||||||||||||||||||||
| Other real estate owned | — | — | 1,962 | 1,962 | ||||||||||||||||||||||
| Total assets measured at fair value on a nonrecurring basis as of December 31, 2022 | $ | — | $ | — | $ | 27,477 | $ | 27,477 | ||||||||||||||||||
Fair Value of Financial Instruments
The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists.
Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company's financial instruments, the fair value of such instruments has been derived based on management's assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole.
31
The estimated fair value of the Company's financial instruments at March 31, 2023 and December 31, 2022 are as follows:
| Fair Value Measurements | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | Carrying Value | Fair Value | Quoted Prices (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Unobservable Inputs (Level 3) | |||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Cash and due from banks | $ | 9,940 | $ | 9,940 | $ | 9,940 | $ | — | $ | — | ||||||||||||||||||||||
| Federal funds sold | 3,746 | 3,746 | — | 3,746 | — | |||||||||||||||||||||||||||
| Interest bearing deposits with other banks | 159,078 | 159,078 | — | 159,078 | — | |||||||||||||||||||||||||||
| Investment securities available-for-sale | 1,582,185 | 1,582,185 | — | 1,582,185 | — | |||||||||||||||||||||||||||
| Investment securities held-to-maturity | 1,075,303 | 965,786 | — | 965,786 | — | |||||||||||||||||||||||||||
| Federal Reserve and Federal Home Loan Bank stock | 79,134 | N/A | — | — | — | |||||||||||||||||||||||||||
| Loans held for sale | 6,488 | 6,488 | — | 6,488 | — | |||||||||||||||||||||||||||
| Loans | 7,737,676 | 7,567,583 | — | — | 7,567,583 | |||||||||||||||||||||||||||
| Bank owned life insurance | 111,217 | 111,217 | — | 111,217 | — | |||||||||||||||||||||||||||
| Annuity investment | 13,675 | 13,675 | — | 13,675 | — | |||||||||||||||||||||||||||
| Mortgage banking derivatives | 29 | 29 | — | — | 29 | |||||||||||||||||||||||||||
| Interest rate caps | 25,844 | 25,844 | — | 25,844 | — | |||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Noninterest bearing deposits | $ | 2,247,706 | $ | 2,247,706 | $ | — | $ | 2,247,706 | $ | — | ||||||||||||||||||||||
| Interest bearing deposits | 3,877,730 | 3,877,730 | — | 3,877,730 | — | |||||||||||||||||||||||||||
| Time deposits | 1,337,805 | 1,324,234 | — | 1,324,234 | — | |||||||||||||||||||||||||||
| Customer repurchase agreements | 37,854 | 37,854 | — | 37,854 | — | |||||||||||||||||||||||||||
| Borrowings | 2,183,626 | 2,181,709 | — | 2,181,709 | — | |||||||||||||||||||||||||||
| Credit risk participation agreement | 3 | 3 | — | 3 | — | |||||||||||||||||||||||||||
| Interest rate caps | 25,218 | 25,218 | — | 25,218 | — | |||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Cash and due from banks | $ | 12,655 | $ | 12,655 | $ | 12,655 | $ | — | $ | — | ||||||||||||||||||||||
| Federal funds sold | 33,927 | 33,927 | — | 33,927 | — | |||||||||||||||||||||||||||
| Interest bearing deposits with other banks | 265,272 | 265,272 | — | 265,272 | — | |||||||||||||||||||||||||||
| Investment securities available-for-sale | 1,598,666 | 1,598,666 | — | 1,598,666 | — | |||||||||||||||||||||||||||
| Investment securities held-to-maturity | 1,093,374 | 967,940 | — | 967,940 | — | |||||||||||||||||||||||||||
| Federal Reserve and Federal Home Loan Bank stock | 65,067 | N/A | — | — | — | |||||||||||||||||||||||||||
| Loans held for sale | 6,734 | 6,734 | — | 6,734 | — | |||||||||||||||||||||||||||
| Loans | 7,635,632 | 7,492,283 | — | — | 7,492,283 | |||||||||||||||||||||||||||
| Bank owned life insurance | 110,998 | 110,998 | — | 110,998 | — | |||||||||||||||||||||||||||
| Annuity investment | 13,869 | 13,869 | — | 13,869 | — | |||||||||||||||||||||||||||
| Mortgage banking derivatives | 93 | 93 | — | — | 93 | |||||||||||||||||||||||||||
| Interest rate caps | 31,039 | 31,039 | — | 31,039 | — | |||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Noninterest bearing deposits | $ | 3,150,751 | $ | 3,150,751 | $ | — | $ | 3,150,751 | $ | — | ||||||||||||||||||||||
| Interest bearing deposits | 4,778,932 | 4,778,932 | — | 4,778,932 | — | |||||||||||||||||||||||||||
| Time deposits | 783,499 | 777,757 | — | 777,757 | — | |||||||||||||||||||||||||||
| Customer repurchase agreements | 35,100 | 35,100 | — | 35,100 | — | |||||||||||||||||||||||||||
| Borrowings | 1,044,795 | 1,043,083 | — | 1,043,083 | — | |||||||||||||||||||||||||||
| Credit risk participation agreements | 2 | 2 | — | 2 | — | |||||||||||||||||||||||||||
| Interest rate caps | 30,065 | 30,065 | — | 30,065 | — | |||||||||||||||||||||||||||
32
Note 12 - Legal Contingencies
There have been no material changes in the status of the legal, regulatory and governmental proceedings, investigations and inquiries previously disclosed in Part II, Item 8, "Note 21 - Commitments and Contingent Liabilities" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022. From time to time, the Company and its subsidiaries are involved in various legal proceedings and regulatory and governmental investigations and inquiries incidental to their business in the ordinary course, including matters in which damages in various amounts are claimed. Such matters may result in legal expenses that could adversely impact the financial condition and results of operations of the Company. The Company had no contingent liabilities outstanding in connection with pending legal matters at March 31, 2023 and December 31, 2022.
As previously disclosed, the Company maintains director and officer insurance policies ("D&O Insurance Policies") that provide coverage for the legal defense costs. When claims are covered by D&O Insurance Policies, the Company records a corresponding receivable against the incurred legal defense cost expense subject to coverage under the D&O Insurance Policies and then eliminates the receivable and expense when the claim is paid. If the D&O Insurance Policies are exhausted, the Company will be responsible for paying the defense costs associated with any investigations and litigations for itself and on behalf of any current and former Officers and Directors entitled to indemnification from the Company. The D&O Insurance Policies for the period from December 2016 to December 2017 have been exhausted. The Company will therefore be responsible for paying any future costs related to matters from that period, including matters that are not currently pending. The Company cannot predict with any certainty the amount of defense costs that the Company may incur in the future in connection with any potential future investigations and legal proceedings, as they are dependent on various factors, many of which are outside of the Company's control.
33
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Eagle Bancorp, Inc. (the "Company") and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
Caution About Forward Looking Statements. This report contains forward looking statements. These forward looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements and are typically identified with words such as “may,” “will,” “can,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “assume,” “probable,” “possible,” “continue,” “should,” “could,” “would,” “strive,” “seeks,” “deem,” “projections,” “forecast,” “consider,” “indicative,” “uncertainty,” “likely,” “unlikely,” “likelihood,” “unknown,” “attributable,” “depends,” “intends,” “generally,” “feel,” “typically,” “judgment,” “subjective” and similar words or phrases. For details on factors that could affect these expectations, see the risk factors contained in this report and the risk factors and other cautionary language included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. These forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward looking statements. The Company's past results are not necessarily indicative of future performance, and nothing contained herein is meant to or should be considered and treated as earnings guidance of future quarters' performance projections. All information is as of the date of this report. Any forward-looking statements made by or on behalf of the Company speak only as to the date they are made. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward looking statement for any reason.
GENERAL
The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland. The Company provides general commercial and consumer banking services through EagleBank (the "Bank"), its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System. The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the Company's primary market area. The Company's philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of fifteen branch offices, including four in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C. The Bank also operates five lending offices, with one in Northern Virginia, three in Suburban Maryland and one in Washington, D.C. In March 2023, we closed our Alexandria, Virginia branch as it had an expiring lease. The branch's clients will be served from other Virginia and D.C. branches, and through digital channels.
The Bank offers a broad range of commercial banking services to its business and professional clients, as well as full service consumer banking services to individuals living and/or working primarily in the Bank's market area. The Bank emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, non-profit organizations and associations, and investors living and working in and near the primary service area. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, "NOW" accounts and money market and savings accounts, business, construction, and commercial loans, consumer loans, and cash management services. The Bank is also active in the origination of Small Business Administration ("SBA") loans.
The Bank made the strategic decision to cease originating first lien residential mortgage loans for secondary sale in the first quarter of 2023, due to diminishing residential mortgage production volumes in the face of a higher interest rate environment and increasing costs associated with regulatory compliance and risk management. The residential mortgage loans were originated for sale to third-party investors subject to compliance with pre-established criteria. The Company currently anticipates that the exit of the residential mortgage origination and secondary sale banking activities will be completed in the third quarter of 2023 following the expected sale of all of the remaining residential mortgage loans held for sale by the end of the third quarter of 2023.
34
The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated. The Company originates multifamily Federal Housing Administration ("FHA") loans through the Department of Housing and Urban Development's Multifamily Accelerated Program ("MAP"). The Company securitizes these loans through the Government National Mortgage Association ("Ginnie Mae") MBS I program and shortly thereafter sells the resulting securities in the open market to authorized dealers in the normal course of business, and periodically bundles and sells the servicing rights. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages other real estate owned ("OREO") assets. Additionally, the Bank offers investment advisory services through referral programs with third parties. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 and Note 1 to the Consolidated Financial Statements included in this report. There have been no significant changes to the Company's accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 except as indicated in "Accounting Standards Adopted in 2023" in Note 1 to the Consolidated Financial Statements in this report.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. If our results of operations remain in line with the first quarter of 2023 or decline or the trading price for our common stock remains significantly below book value per share for a prolonged period, or we experience continued economic uncertainty and stress in the banking sector, the Company will likely be required to conduct an interim goodwill impairment test in 2023, which could result in a material non-cash goodwill impairment.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2023 vs. Three Months Ended March 31, 2022
Earnings Summary
Net income for the three months ended March 31, 2023 was $24.2 million as compared to $45.7 million for the same period in 2022, a decrease of $21.5 million, or 47.0%.
The decrease in net income of $21.5 million for the three months ended March 31, 2023 relative to the same period in 2022 was due to a decrease net interest income of $5.4 million, an increase in provision for credit losses of $9.0 million, a decrease in noninterest income of $3.8 million and an increase in noninterest expenses of $9.6 million, which was partially offset by a reduction of income tax expense of $7.1 million. Net interest income decreased primarily due to a rapid increase in interest rates impacting deposits and funding costs. The provision increased as the ACL required a reversal in first quarter of 2022 and a provision in the first quarter of 2023. The provision was driven by loan growth and qualitative and economic factors. Non interest income decreased primarily due to a decrease in fees associated with residential loans and a decrease in gain on sale of residential loans. During the three months ended March 31, 2023, the Company closed residential mortgage locked commitments of $32.8 million, down from $136.7 million for the three months ended March 31, 2022. Noninterest expenses increased primarily due to increases in salaries and benefits of $7.2 million and legal and professional fees of $1.7 million. Additional detail is provided in "Noninterest Expense" section below.
35
Total revenue (i.e. net interest income plus noninterest income) was $78.7 million for the three months ended March 31, 2023 as compared to $87.9 million for the same period in 2022. The most significant portion of revenue is net interest income, which was $75.0 million for the three months ended March 31, 2023, compared to $80.5 million for the same period in 2022. Net interest income decreased primarily due to increased interest rates on deposits and borrowings which was partially offset by an increase in interest income on loans. The primary driver for the reduction in noninterest income was a decrease in gain on sale of residential loans and fees associated with residential mortgage loans.
The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, was 2.77% for the three months ended March 31, 2023 and 2.65% for the same period in 2022. The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below.
Total noninterest income for the three months ended March 31, 2023 decreased to $3.7 million from $7.5 million for the same period in 2022, a 50.4% decrease. Noninterest income was lower due to decreases in gain on sale of residential loans and fees associated with residential mortgage loans. For further information on the components and drivers of these changes see "Noninterest Income" section below.
Gain on sale of loans for the three months ended March 31, 2023 was $305 thousand compared to $1.5 million for the same period in 2022, a decrease of 79.6%. The decline in gains on sale of loan is due to lower volumes as a result of higher interest rates as well as ceasing the origination of residential mortgages as previously announced earlier this quarter.
Other income for the three months ended March 31, 2023 decreased to $1.3 million from $4.1 million for the same period in 2022, a 69.3% decrease. This decrease was primarily attributable to reductions in mortgage servicing fees of $887 thousand, FHA fees of $614 thousand, mark-to-market rate cap of $744 thousand, other loan income of $497 thousand and credit card income of $304 thousand, which were partially offset by an increase in BOLI income of $531 thousand.
Noninterest expense totaled $40.6 million for the three months ended March 31, 2023, as compared to $31.0 million for same period in 2022, a 30.9% increase. The increase in noninterest expense was due to an increase in salaries and benefits of $7.2 million and an increase of $1.7 million in legal and professional fees. See the "Noninterest Expense" section for further detail on the components and drivers of the change.
Income tax expenses were $6.9 million for the three months ended March 31, 2023, a decrease of 50.6%, compared to the same period in 2022. The components and drivers of the change are discussed in the "Income Tax Expense" section below.
The efficiency ratio was 51.55% for the three months ended March 31, 2023, as compared to 35.28% for the same period in 2022. The adverse change in the efficiency ratio was driven by increased interest expense, an increase in noninterest expense and a reduction in noninterest income.
For the three months ended March 31, 2023, the Company reported an annualized ROAA of 0.86%, as compared to 1.46% for the same period in 2022. The annualized ROACE for the three months ended March 31, 2023 was 7.92% as compared to 13.83% for the same period in 2022. The annualized ROATCE for the three months ended March 31, 2023 was 8.65% as compared to 14.99% for the same period in 2022. The decline in returns was primarily attributable to a reduction in net income. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans, investment securities, and interest bearing deposits with other banks and other short term investments. The cost of funds includes interest expense on deposits, customer repurchase agreements and other borrowings. Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations). Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.
Net interest income was $75.0 million for the three months ended March 31, 2023, as compared to $80.5 million for the same period in 2022. Net interest income decreased for the three months ended March 31, 2023 primarily due to increases in average deposit rates (3.63% compared to 0.37% and other short-term borrowings (4.77% compared to 0.67%), which were partially offset by higher average loan balances and yields (6.35% compared to 4.35%) as compared to March 31, 2022.
The net interest margin was 2.77% for the three months ended March 31, 2023 and 2.65% for the same period in 2022. The increase reflects the impact of the change in yields on earning assets which repriced primarily due to rate increases which more than offset the reduction in average interest earning assets and the increase in rates for interest bearing liabilities.
36
Net interest margin increased by 12 basis points from the first three months of 2022 as compared to the first three months of 2023 (from 2.65% to 2.77%). The yield on earning assets increased by 226 basis points (from 2.91% to 5.17%) while cost of funds increased 214 basis points (from 0.26% to 2.40%). Average interest bearing deposits with other banks and other short term investments were $526.5 million in the three months ended March 31, 2023 compared to $2.4 billion for the same period in 2022. Additionally, average borrowings increased from $346.4 million in the three months ended March 31, 2022 to $1.32 billion in the three months ended March 31, 2023. Overall yields and rates moved higher in the first three months of 2023 as compared to same period in 2022, as variable rate loans adjusted upwards and an increased number of loans moved off their rate floors.
The table below presents the average balances and rates of the major categories of the Company's assets and liabilities for the three months ended March 31, 2023 and 2022. Included in the table are measurements of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin, together with net interest income, provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets.
37
Eagle Bancorp, Inc.
Consolidated Average Balances, Interest Yields And Rates (Unaudited)
(dollars in thousands)
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
2023 | 2022 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 526,506 | $ | 5,774 | 4.45 | % | $ | 2,403,017 | $ | 1,057 | 0.18 | % | |||||||||||||||||||||||
Loans held for sale (1) | 4,093 | 60 | 5.86 | % | 26,887 | 219 | 3.26 | % | |||||||||||||||||||||||||||
Loans (1) (2) | 7,712,023 | 120,790 | 6.35 | % | 7,053,701 | 75,611 | 4.35 | % | |||||||||||||||||||||||||||
Investment securities available-for-sale (2) | 1,660,258 | 7,811 | 1.91 | % | 2,794,681 | 11,280 | 1.64 | % | |||||||||||||||||||||||||||
Investment securities held-to-maturity (2) | 1,087,047 | 5,734 | 2.14 | % | 24,011 | 150 | 2.53 | % | |||||||||||||||||||||||||||
| Federal funds sold | 14,890 | 78 | 2.12 | % | 24,176 | 4 | 0.07 | % | |||||||||||||||||||||||||||
| Total interest earning assets | 11,004,817 | 140,247 | 5.17 | % | 12,326,473 | 88,321 | 2.91 | % | |||||||||||||||||||||||||||
| Total noninterest earning assets | 495,889 | 449,784 | |||||||||||||||||||||||||||||||||
| Less: allowance for credit losses | 74,650 | 75,105 | |||||||||||||||||||||||||||||||||
| Total noninterest earning assets | 421,239 | 374,679 | |||||||||||||||||||||||||||||||||
| TOTAL ASSETS | $ | 11,426,056 | $ | 12,701,152 | |||||||||||||||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||||||||||||||
| Interest bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Interest bearing transaction | $ | 1,065,421 | $ | 6,107 | 2.32 | % | $ | 754,833 | $ | 322 | 0.17 | % | |||||||||||||||||||||||
| Savings and money market | 3,326,807 | 33,274 | 4.06 | % | 5,476,721 | 3,723 | 0.28 | % | |||||||||||||||||||||||||||
| Time deposits | 1,078,227 | 9,573 | 3.60 | % | 722,646 | 2,314 | 1.30 | % | |||||||||||||||||||||||||||
| Total interest bearing deposits | 5,470,455 | 48,954 | 3.63 | % | 6,954,200 | 6,359 | 0.37 | % | |||||||||||||||||||||||||||
| Customer repurchase agreements | 38,257 | 302 | 3.20 | % | 25,628 | 13 | 0.21 | % | |||||||||||||||||||||||||||
| Other short-term borrowings | 1,251,392 | 14,930 | 4.77 | % | 276,669 | 460 | 0.67 | % | |||||||||||||||||||||||||||
| Long-term borrowings | 69,814 | 1,037 | 5.94 | % | 69,690 | 1,037 | 5.95 | % | |||||||||||||||||||||||||||
| Total interest bearing liabilities | 6,829,918 | 65,223 | 3.87 | % | 7,326,187 | 7,869 | 0.44 | % | |||||||||||||||||||||||||||
| Noninterest bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Noninterest bearing demand | 3,263,670 | 3,920,776 | |||||||||||||||||||||||||||||||||
| Other liabilities | 91,490 | 112,404 | |||||||||||||||||||||||||||||||||
| Total noninterest bearing liabilities | 3,355,160 | 4,033,180 | |||||||||||||||||||||||||||||||||
| Shareholders' Equity | 1,240,978 | 1,341,785 | |||||||||||||||||||||||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 11,426,056 | $ | 12,701,152 | |||||||||||||||||||||||||||||||
| Net interest income | $ | 75,024 | $ | 80,452 | |||||||||||||||||||||||||||||||
| Net interest spread | 1.30 | % | 2.47 | % | |||||||||||||||||||||||||||||||
| Net interest margin | 2.77 | % | 2.65 | % | |||||||||||||||||||||||||||||||
| Cost of funds | 2.40 | % | 0.26 | % | |||||||||||||||||||||||||||||||
(1)Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $3.71 million and $3.68 million for the three months ended March 31, 2023 and 2022, respectively.
(2)Interest and fees on loans and investments exclude tax equivalent adjustments.
38
Rate/Volume Analysis of Net Interest Income
The rate/volume table below presents the composition of the change in net interest income for the period indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest bearing liabilities, and the changes in net interest income due to changes in interest rates.
Three Months Ended March 31, 2023 Compared With Three Months Ended March 31, 2022 | ||||||||||||||||||||
| (dollars in thousands) | Change Due to Volume | Change Due to Rate | Total Increase (Decrease) | |||||||||||||||||
| Interest earned on | ||||||||||||||||||||
| Loans | $ | 7,057 | $ | 38,122 | $ | 45,179 | ||||||||||||||
| Loans held for sale | (186) | 27 | (159) | |||||||||||||||||
| Investment securities available-for-sale | (4,579) | 1,110 | (3,469) | |||||||||||||||||
| Investment securities held-to-maturity | 6,641 | (1,057) | 5,584 | |||||||||||||||||
| Interest bearing bank deposits | (825) | 5,542 | 4,717 | |||||||||||||||||
| Federal funds sold | (2) | 76 | 74 | |||||||||||||||||
| Total interest income | 8,106 | 43,820 | 51,926 | |||||||||||||||||
| Interest paid on | ||||||||||||||||||||
| Interest bearing transaction | 132 | 5,653 | 5,785 | |||||||||||||||||
| Savings and money market | (1,461) | 31,012 | 29,551 | |||||||||||||||||
| Time deposits | 1,139 | 6,120 | 7,259 | |||||||||||||||||
| Customer repurchase agreements | 6 | 283 | 289 | |||||||||||||||||
| Other borrowings | 1,623 | 12,847 | 14,470 | |||||||||||||||||
| Total interest expense | 1,439 | 55,915 | 57,354 | |||||||||||||||||
| Net interest income | $ | 6,667 | $ | (12,095) | $ | (5,428) | ||||||||||||||
Provision for Credit Losses
The provision for credit losses represents the amount of expense charged to current earnings to fund the ACL on loans and the ACL on available-for-sale and held-to-maturity investment securities. The amount of the ACL on loans is based on management's assessment of current expected credit losses in the portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.
The provision for unfunded commitments is presented separately on the consolidated statements of income. This provision considers the probability that unfunded commitments will fund among other factors.
Management has developed a comprehensive analytical process to monitor the adequacy of the ACL. The ACL is estimated using a CECL model. Our methodology for determining our allowance was developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The process is being continually enhanced and refined based on periodic reviews. The maintenance of a high quality loan portfolio, with an adequate ACL, will continue to be a primary management objective for the Company.
We develop our estimate of the ACL from several sources: (i) a quantitative model that determines expected credit losses using a probability of default ("PD") / Loss Given Default ("LGD") cash flow methodology, using internal and third-party provided peer historical loss data and adjustments to account for loan-specific risk characteristics after pooling our loan portfolio based on similar risk characteristics, i.e., call codes; (ii) individual evaluation of any loans that exhibit evidence of credit deterioration, excluded from the quantitative model; and (iii) the application of qualitative and environmental factors as determined by management.
39
We utilize the following qualitative and environmental factors in our CECL methodology: (i) changes in the nature and volume of the portfolio; (ii) changes in the volume and severity of past due financial assets and the volume and severity of adversely classified assets; (iii) changes in the value of underlying collateral for loans not individually evaluated; (iv) changes in lending policies and procedures; (v) changes in the quality of credit review function; (vi) changes in lending management and staff; (vii) concentrations of credit; (viii) other external factors (competition, legal, regulatory, etc.); and (ix) changes in national, regional, and local economic and business conditions. Our model may reflect assumptions by management that are not covered by the qualitative and environmental factors, and reevaluates all of its factors quarterly.
Refer to additional detail regarding these forecasts in the "Allowance for Credit Losses - Loans" section of Note 1 to the Consolidated Financial Statements.
During the three months ended March 31, 2023, the ACL on loans reflected a provision of $4.9 million and $975 thousand in net charge-offs. The provision for credit losses on loans for the same period in 2022 reflected a reversal of $3.0 million and $459 thousand in net charge-offs. For the first three months of 2023, the provisions were primarily driven by adjustments to the qualitative components of the CECL model owing to the high inflationary environment and the related uncertainty and impacts on the broader economy, changes in the qualitative and economic ("Q&E") component of the model associated with commercial real estate office properties, as well as the increase in total loans. The increases were offset by improvements in the quality of the assets associated with individually assessed loans that were deemed impaired. The reversal in the same period in 2022 was driven by the improved macroeconomic outlook, improvement of credits in the loan portfolio.
Additionally, the ACL on securities reflected a provision of $1.3 million of the total first quarter 2023 provision related to several corporate bonds in the securities portfolio.
At March 31, 2023, the ACL for loans represented 1.01% of loans outstanding, as compared to 0.97% at December 31, 2022. The ACL represented 1,160% of nonperforming loans at March 31, 2023, as compared to 1,151% at December 31, 2022.
As part of its comprehensive loan review process, internal loan and credit committees carefully evaluate loans that are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank's loan policy requires that loans be placed on nonaccrual if they are 90 days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves.
The maintenance of a high quality loan portfolio, with an adequate allowance for credit losses, will continue to be a primary management objective for the Company. The Company's goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include carefully enforcing loan policies and procedures, evaluating each borrower's business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation.
40
The following table sets forth activity in the allowance for credit losses for the periods indicated.
| Three Months Ended March 31, | ||||||||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||||||||
| Balance at beginning of period | $ | 74,444 | $ | 74,965 | ||||||||||
| Charge-offs: | ||||||||||||||
| Commercial | (868) | (514) | ||||||||||||
| Construction - commercial and residential | (136) | — | ||||||||||||
| Other consumer | (50) | — | ||||||||||||
| Total charge-offs | (1,054) | (514) | ||||||||||||
| Recoveries: | ||||||||||||||
| Commercial | 76 | 54 | ||||||||||||
| Other consumer | 3 | 1 | ||||||||||||
| Total recoveries | 79 | 55 | ||||||||||||
| Net charge-offs | (975) | (459) | ||||||||||||
| Provision for (reversal of) credit losses- loans | 4,908 | (3,001) | ||||||||||||
| Balance at end of period | $ | 78,377 | $ | 71,505 | ||||||||||
| 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.
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | % of Total ACL | % of Total Loans | Amount | % of Total ACL | % of Total Loans | ||||||||||||||||||||||||||||||||
| Commercial | $ | 15,775 | 20 | % | 19 | % | $ | 15,655 | 21 | % | 19 | % | ||||||||||||||||||||||||||
| Income producing - commercial real estate | 38,140 | 49 | % | 51 | % | 35,688 | 48 | % | 51 | % | ||||||||||||||||||||||||||||
| Owner occupied - commercial real estate | 12,457 | 16 | % | 14 | % | 12,702 | 17 | % | 15 | % | ||||||||||||||||||||||||||||
| Real estate mortgage - residential | 1,002 | 1 | % | 1 | % | 969 | 1 | % | 1 | % | ||||||||||||||||||||||||||||
| Construction - commercial and residential | 10,383 | 13 | % | 14 | % | 8,801 | 12 | % | 12 | % | ||||||||||||||||||||||||||||
| Home equity | 593 | 1 | % | 1 | % | 555 | 1 | % | 1 | % | ||||||||||||||||||||||||||||
| Other consumer | 27 | — | % | — | % | 74 | — | % | 1 | % | ||||||||||||||||||||||||||||
| Total allowance | $ | 78,377 | 100 | % | 100 | % | $ | 74,444 | 100 | % | 100 | % | ||||||||||||||||||||||||||
Nonperforming Assets
As shown in the table below, the Company's level of nonperforming assets, which comprise loans delinquent 90 days or more and nonaccrual loans, which include the nonperforming portion of loan restructurings and OREO, totaled $8.7 million at March 31, 2023 representing 0.08% of total assets, as compared to $8.4 million of nonperforming assets, or 0.08% of total assets, at December 31, 2022.
At March 31, 2023, the Company had no accruing loans 90 days or more past due. Management remains attentive to early signs of deterioration in borrowers' financial conditions and to taking the appropriate action to mitigate risk. Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.01% of total loans at March 31, 2023, is adequate to absorb expected credit losses within the loan portfolio at that date.
41
On January 1, 2023, the Company adopted the accounting guidance in ASU No. 2022-02, which eliminates the recognition and measurement of a troubled debt restructuring ("TDR"). Due to the removal of the TDR designation, the Company evaluates loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. A loan that is considered a restructured loan may be subject to an individually evaluated loan analysis if the commitment is $1.0 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status, foreclosure or repossession of the collateral to minimize economic loss to the Company.
During the first quarter of 2023, the Bank had seven new loan restructurings totaling approximately $108.3 million (1.4% of the loan portfolio). These loans received extensions of three to twelve months, and are performing under their modified terms.
Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring 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.
Total nonperforming loans amounted to $6.8 million at March 31, 2023 (0.09% of total loans) compared to $6.5 million at December 31, 2022 (0.08% of total loans).
OREO properties are carried at the lower of cost or 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. OREO properties had a lower of cost or fair market value of $2.0 million at March 31, 2023 and December 31, 2022. There were no sales of OREO property during the three months ended March 31, 2023 or March 31, 2022.
The following table shows the amounts of nonperforming assets at the dates indicated.
| (dollars in thousands) | March 31, 2023 | December 31, 2022 | ||||||||||||
| Nonaccrual Loans: | ||||||||||||||
| Commercial | $ | 2,294 | $ | 2,488 | ||||||||||
| Income producing - commercial real estate | 2,000 | 2,000 | ||||||||||||
| Owner occupied - commercial real estate | 14 | 17 | ||||||||||||
| Real estate mortgage - residential | 1,915 | 1,913 | ||||||||||||
| Construction - commercial and residential | 533 | — | ||||||||||||
| Other consumer | — | 50 | ||||||||||||
| Accruing loans-past due 90 days | — | — | ||||||||||||
| Total nonperforming loans | 6,756 | 6,468 | ||||||||||||
| Other real estate owned | 1,962 | 1,962 | ||||||||||||
| Total nonperforming assets | $ | 8,718 | $ | 8,430 | ||||||||||
| Coverage ratio, allowance for credit losses to total nonperforming loans | 1,160 | % | 1,151 | % | ||||||||||
| Ratio of nonperforming loans to total loans | 0.09 | % | 0.08 | % | ||||||||||
| Ratio of nonperforming assets to total assets | 0.08 | % | 0.08 | % | ||||||||||
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.
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At March 31, 2023, there were $88.0 million of Substandard loans. Substandard loans are considered potential or actual problem loans due to known information about possible or actual credit problems which 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 the reclassification to the past due, nonaccrual or restructured loan categories, as appropriate. Based upon their status as potential or actual problem loans, these loans receive heightened scrutiny and ongoing intensive risk management.
Noninterest Income
Total noninterest income includes service charges on deposits, gain on sale of loans, gains and losses on sale of investment securities, FHA multi-family income, income from bank owned life insurance ("BOLI") and other income.
Total noninterest income for the three months ended March 31, 2023 decreased to $3.7 million from $7.5 million for the three months ended March 31, 2022, a 50.4% decrease.
Service charges on deposits for the three months ended March 31, 2023 increased to $1.5 million from $1.3 million for the three months ended March 31, 2022
Gain on sale of loans for the three months ended March 31, 2023 decreased to $305 thousand from $1.5 million for the three months ended March 31, 2022, a 79.6% decrease. This decrease was primarily driven by a reduction in the volume of residential mortgage loan commitments. Residential mortgage loan locked commitments were $32.8 million for the three months ended March 31, 2023 as compared to $136.7 million for the same period in 2022, a 76.0% decrease.
The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the three months ended March 31, 2023. The residential mortgage loans were originated for sale to third-party investors subject to compliance with pre-established criteria. The Company currently anticipates that the exit of the residential mortgage origination and secondary sale banking activities will be completed in the third quarter of 2023 following the expected sale of all of the remaining residential mortgage loans held for sale by the end of the third quarter of 2023.
For the three months ended March 31, 2023, the loss on the sale of investments was $21 thousand compared to a loss of $25 thousand for the three months ended March 31, 2022. The loss was due to the sale of 12 securities for a loss of $26 thousand which was partially offset by $5 thousand in gains on partial calls.
Other income for the three months ended March 31, 2023 decreased to $1.3 million from $4.1 million for the three months ended March 31, 2022, a 69.3% decrease. This decrease was primarily attributable to reductions in mortgage servicing fees of $887 thousand, FHA fees of $614 thousand, mark-to-market rate cap of $744 thousand, other loan income of $497 thousand and credit card income of $304 thousand, which was partially offset by an increase of BOLI income of $531 thousand.
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. To the extent the mortgage loans underlying the Company's servicing portfolio experience delinquencies, the Company would be required to dedicate cash resources to comply with its obligation to advance funds, as well as incur additional administrative costs related to increases in collection efforts.
The Company is a long-time originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium. There was $45 thousand of income from this source for the three months ended March 31, 2023 compared to $181 thousand for the three months ended March 31, 2022. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter.
Noninterest Expense
Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional, FDIC insurance, and other expenses.
Total noninterest expense totaled $40.6 million for the three months ended March 31, 2023, as compared to $31.0 million for the three months ended March 31, 2022, a 30.9% increase.
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Salaries and employee benefits were $24.2 million for the three months ended March 31, 2023, as compared to $17.0 million for the same period in 2022, an increase of $7.2 million or 42.0%. The primary reason for the difference between quarters was the one-time accrual reduction in the first three months of 2022 of $5.0 million related to stock-based compensation awards and deferred compensation for our former CEO and Chairman. At March 31, 2023, the Company's full time equivalent staff numbered 486 as compared to 509 at March 31, 2022.
Premises and equipment for the three months ended March 31, 2023 and 2022, were $3.3 million compared to $3.1 million, respectively, of which premises expenses were $2.8 million compared to $2.6 million, respectively.
Marketing and advertising expenses totaled $636 thousand for the three months ended March 31, 2023 and $1.1 million for the same period in 2022. The decrease for the three month period was due to a reduction in advertising and promotions.
Data processing expenses were $3.1 million for the three months ended March 31, 2023, compared to $2.9 million for the same period in 2022.
Legal, accounting and professional fees were $3.3 million for the three months ended March 31, 2023, compared to $1.6 million for the three months ended March 31, 2022, an increase of $1.7 million. Legal fees and expenditures were $1.6 million and $205 thousand for the three months ended March 31, 2023 and 2022, respectively. The increase was primarily due to a $959 thousand reversal of legal fees receivable relating to the previously settled litigations and investigations as Directors & Officers insurance for the 2016-2017 years was fully depleted.
FDIC insurance expenses were $1.5 million for the three months ended March 31, 2023 compared to $1.1 million for the same period in 2022, a 40.5% increase.
The major components of other expenses include franchise taxes, director compensation and insurance expense. Other expenses increased to $4.6 million for the three months ended March 31, 2023, from $4.3 million for the same period in 2022, an increase of 7.3%.
The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 51.55% for the first quarter of 2023, as compared to 35.28% for the first quarter of 2022. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. The adverse change in the efficiency ratio for the three months ended March 31, 2023 as compared to the same three month period in 2022 was driven by increased interest expense due to higher interest rates and an increase in noninterest expense which is partially associated with the salary accrual reduction in the first quarter of 2022 of $5.0 million related to stock-based compensation awards and deferred compensation for our former CEO and Chairman.
As a percentage of average assets, total noninterest expense (annualized) was 1.44% for the three months ended March 31, 2023 as compared to 0.99% for the same period in 2022. The increase from the first quarter of 2022 was primarily due to the salary accrual reduction in the first quarter of 2022 of $5.0 million related to stock-based compensation awards and deferred compensation for our former CEO and Chairman.
Income Tax Expense
The Company's ratio of income tax expense to pre-tax income ("effective tax rate") for the three months ended March 31, 2023 and 2022 was 22.1% and 23.4%, respectively. The total tax provision for the three months ended March 31, 2023 was $6.9 million, compared to $13.9 million for the three months ended March 31, 2022.
The decreases in the effective tax rate and tax provision over the comparative three months ended March 31, 2023 and 2022 were due to a reduction in earnings before taxes and an update to our apportionment of revenues among the states in which we operate.
The Inflation Reduction Act of 2022 was signed into law by president Biden on August 16, 2022 which makes significant changes to the U.S. tax law, including the introduction of a corporate alternative minimum tax of 15% of the “adjusted financial statement income” of certain domestic corporations as well as a 1% excise tax on the fair market value of stock repurchases by certain domestic corporations, effective for tax years beginning in 2023. The Company currently does not expect the tax-related provisions of the Inflation Reduction Act to have a material impact on our financial results.
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FINANCIAL CONDITION
Summary
Total assets at March 31, 2023 and December 31, 2022 were $11.1 billion and $11.2 billion, respectively. The decrease in total assets over the three months ended March 31, 2023 was primarily due to the decrease in total interest-bearing deposits with banks and other short-term investments. The largest component of assets, total loans (excluding loans held for sale), had an amortized cost basis of $7.7 billion at March 31, 2023, a 1.3% increase from the balance at December 31, 2022. The increase in loans over the three months ended March 31, 2023, was driven by growth from CRE loans and commercial and residential construction loans. Additionally, the Bank reduced its PPP loans from $3.3 million at December 31, 2022 to $709 thousand at March 31, 2023 through the forgiveness process. Loans held for sale were $6.5 million at March 31, 2023, compared to $6.7 million at December 31, 2022, a 3.7% decrease due to a decline in production.
Investment securities, at amortized cost net of the allowance for credit losses, totaled $2.8 billion at March 31, 2023 as compared to $2.9 billion at December 31, 2022, a decrease of $58.6 million, or 2%, primarily driven by the pay down of principal on mortgage-backed securities and sales and calls of securities. During the first quarter of 2022, we evaluated our securities portfolio and determined that certain securities will be maintained for the life of the instrument and made a decision to transfer $1.1 billion of securities designated as available-for-sale ("AFS") to held-to-maturity ("HTM"), including $237.0 million of securities acquired in the first quarter of 2022 for which the intention to hold to maturity was finalized. The securities transferred with unrealized losses of $66.2 million, and, as of March 31, 2023, $57.1 million remains in accumulated other comprehensive loss, and will be accreted ratably over the remaining lives of the securities through accumulated other comprehensive loss. The securities transferred were generally municipal bonds, corporate bonds, bonds that qualify for Community Reinvestment Act credit, and mortgage-backed securities with longer final maturity dates. At quarter-end, $1.1 billion, or 40.5% of the securities portfolio, was classified as securities HTM. The fair value of HTM securities was $111.5 million less than carrying value at March 31, 2023 compared to a difference of $125.4 million at December 31, 2022.
In terms of funding, total deposits at March 31, 2023 were $7.5 billion down from $8.7 billion at December 31, 2022, a decline of 14.3%. Total borrowed funds (excluding customer repurchase agreements) were $2.2 billion and $1.0 billion at March 31, 2023 and December 31, 2022, respectively. The increase in borrowings was primarily to meet funding needs, including to fund loan growth, given the decrease in deposits.
Total shareholders' equity was $1.2 billion as of March 31, 2023, and December 31, 2022.
The Company's capital ratios remain substantially in excess of regulatory minimum and buffer requirements. Regulatory ratios based on risk-weighted assets declined from the prior quarter as zero percent-risk weighted cash was moved into higher risk-weighted securities and loans. The total risk based capital ratio was 14.74% at March 31, 2023, as compared to 14.94% at December 31, 2022. The common equity tier 1 ("CET1") risk based capital ratio was 13.75% at March 31, 2023, as compared to 14.03% at December 31, 2022. The tier 1 risk based capital ratio was 13.75% at March 31, 2023, as compared to 14.03% at December 31, 2022. The tier 1 leverage ratio was 11.42% at March 31, 2023, as compared to 11.63% at December 31, 2022.
The ratio of common equity to total assets was 11.20% at March 31, 2023, as compared to 11.02% at December 31, 2022 as common equity levels remained almost constant while total assets decreased as a result of decreases in deposits and other short-term investments over the three months ended March 31, 2023. Book value per share was $39.92 at March 31, 2023, a 1.9% increase over $39.18 at December 31, 2022 owing to adjustments to unrealized losses on investment securities AFS in the period. In addition, the tangible common equity ratio was 10.36% at March 31, 2023, as compared to 10.18% at December 31, 2022. Tangible book value per share was $36.57 at March 31, 2023, a 2.0% decrease from $35.86 at December 31, 2022. At March 31, 2023 and December 31, 2022, excluding the impact of the balance of accumulated other comprehensive losses, adjusted book value per share was $45.73 and $45.54, respectively, and adjusted tangible book value per share was $42.38 and $42.22, respectively. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
In order to be considered well-capitalized, the Bank must have a CET1 risk based capital ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. The Company and the Bank exceed all these requirements and satisfy the capital conservation buffer of 2.5% of CET1 capital. 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.
45
Loan Portfolio
Loans, net of amortized deferred fees and costs, at March 31, 2023 and December 31, 2022 by major category are summarized below.
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| (dollars in thousands, except amounts in the footnote) | Amount | % | Amount | % | ||||||||||||||||||||||
| Commercial | $ | 1,482,983 | 19 | % | $ | 1,487,349 | 19 | % | ||||||||||||||||||
| PPP loans | 709 | — | % | 3,256 | — | % | ||||||||||||||||||||
| Income producing - commercial real estate | 3,970,903 | 51 | % | 3,919,941 | 51 | % | ||||||||||||||||||||
| Owner occupied - commercial real estate | 1,095,699 | 14 | % | 1,110,325 | 15 | % | ||||||||||||||||||||
| Real estate mortgage - residential | 73,677 | 1 | % | 73,001 | 1 | % | ||||||||||||||||||||
| Construction - commercial and residential | 948,877 | 13 | % | 877,755 | 12 | % | ||||||||||||||||||||
| Construction - C&I (owner occupied) | 109,013 | 1 | % | 110,479 | 1 | % | ||||||||||||||||||||
| Home equity | 53,829 | 1 | % | 51,782 | 1 | % | ||||||||||||||||||||
| Other consumer | 1,986 | — | % | 1,744 | — | % | ||||||||||||||||||||
| Total loans | 7,737,676 | 100 | % | 7,635,632 | 100 | % | ||||||||||||||||||||
| Less: allowance for credit losses | (78,377) | (74,444) | ||||||||||||||||||||||||
Net loans (1) | $ | 7,659,299 | $ | 7,561,188 | ||||||||||||||||||||||
(1)Excludes accrued interest receivable of $43.9 million and $43.5 million at March 31, 2023 and December 31, 2022, respectively, which is recorded in other assets.
In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank. Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality.
Loans outstanding were $7.7 billion at March 31, 2023, an increase of $102.0 million, or 1.3%, from the balance at December 31, 2022. PPP loans outstanding were $709 thousand at March 31, 2023, a decrease of $2.5 million, or 78.2%, from the $3.3 million outstanding at December 31, 2022.
The loan portfolio continued to grow in the first quarter of 2023, due primarily to our income producing and commercial and residential construction CRE loan originations and fundings. Market interest rates continue to increase in connection with rate increases implemented by the Federal Reserve. Multi-family commercial real estate leasing in the Bank's market area have held up well. Although, commercial real estate values have generally held up well, we continue to be cautious of the capitalization rates at which some assets are trading and as a result we are being cautious with our valuations. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Valuations associated with the moderately priced housing market have generally been increasing albeit at a slower pace. Well-located and Metro-accessible properties continue to garner a premium. We continue to see opportunities for growth in the commercial real estate market; as always we prudently evaluate each of these transactions.
The Company's loan portfolio is substantially concentrated with borrowers or on collateral located in the Washington, D.C. metro area, including "Suburban Washington, D.C.," which comprises Prince George's and Montgomery counties in Maryland and Alexandria, Arlington, Fairfax, Frederick, Loudoun and Prince William counties in Virginia. At March 31, 2023, 50.7%, 32.5%, 5.5% and 11.2% of the loan portfolio, as a percentage of total principal, was concentrated in Suburban Washington, D.C., Washington, D.C., other Maryland counties and other locations in the United States, respectively. At December 31, 2022, 49.5%, 33.3%, 5.8% and 11.5% of the loan portfolio was concentrated in Suburban Washington, D.C., Washington, D.C., other Maryland counties and other locations in the United States, respectively.
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The following table sets forth the time to contractual maturity of the loan portfolio as of March 31, 2023:
| March 31, 2023 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | Total | One Year or Less | Over One Year to Five Years | Over Five Years to Fifteen Years | Over Fifteen Years | |||||||||||||||||||||||||||
| Commercial | $ | 1,482,983 | $ | 607,311 | $ | 711,872 | $ | 160,119 | $ | 3,681 | ||||||||||||||||||||||
| PPP loans | 709 | — | 709 | — | — | |||||||||||||||||||||||||||
| Income producing - commercial real estate | 3,970,903 | 1,384,881 | 2,104,085 | 481,937 | — | |||||||||||||||||||||||||||
| Owner occupied - commercial real estate | 1,095,699 | 54,169 | 455,676 | 438,808 | 147,046 | |||||||||||||||||||||||||||
| Real estate mortgage - residential | 73,677 | 16,213 | 42,918 | 3,286 | 11,260 | |||||||||||||||||||||||||||
| Construction - commercial and residential | 948,877 | 489,208 | 392,370 | 44,144 | 23,155 | |||||||||||||||||||||||||||
| Construction - C&I (owner occupied) | 109,013 | 9,107 | 10,414 | 36,351 | 53,141 | |||||||||||||||||||||||||||
| Home equity | 53,829 | 4,393 | 3,764 | 1,827 | 43,845 | |||||||||||||||||||||||||||
| Other consumer | 1,986 | 1,099 | 235 | — | 652 | |||||||||||||||||||||||||||
| Total loans | $ | 7,737,676 | $ | 2,566,381 | $ | 3,722,043 | $ | 1,166,472 | $ | 282,780 | ||||||||||||||||||||||
| Loans with: | ||||||||||||||||||||||||||||||||
| Predetermined fixed interest rate | $ | 2,855,610 | $ | 644,917 | $ | 1,432,612 | $ | 677,562 | $ | 100,519 | ||||||||||||||||||||||
| Floating or Adjustable interest rate | 4,882,066 | 1,921,464 | 2,289,431 | 488,910 | 182,261 | |||||||||||||||||||||||||||
| Total loans | $ | 7,737,676 | $ | 2,566,381 | $ | 3,722,043 | $ | 1,166,472 | $ | 282,780 | ||||||||||||||||||||||
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 deposits. The deposit base includes transaction accounts, time and savings accounts, which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs, including during periods of high loan demand and seasonal variations in core deposits, the Bank regularly 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. Additionally, the Bank has participated in borrowing from the BTFP established by Federal Reserve Bank in March 2023.
For the three months ended March 31, 2023, total deposits decreased by $1.2 billion as compared to December 31, 2022. The decline consists of $903.0 million in noninterest bearing deposits and $346.9 million in interest bearing deposits as a result of an increase of disintermediation driven primarily by an increase in interest rates. Deposits have stabilized as of April 30, 2023 compared to March 31, 2023.
No single depositor represented more than 10% of total deposits as of March 31, 2023. The ten largest depositors not associated with brokered pass-through relationships represented approximately 11% of total deposits in the aggregate as of March 31, 2023. The Company maintains a significant deposit relationship with a third-party payments processor, whose business results in deposit inflows and outflows on an ongoing basis, which contributes to variations in period end compared to average deposit balances.
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From time to time, when appropriate in order to fund strong loan demand or account for increased deposit outflow, 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 IntraFi. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (the "CDARS") and the Insured Cash Sweep product ("ICS"), which provide for reciprocal ("two-way") transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance. The total of reciprocal deposits at March 31, 2023 was $841.8 million (11.3% of total deposits) as compared to $782.2 million (9.0% of total deposits) at December 31, 2022. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank, but there can be no assurance that they will continue to be adequate or appropriate to meet our liquidity needs. The Bank also is able to obtain one-way CDARS deposits and participates in IntraFi's Insured Network Deposit ("IND"). The Bank had $702.4 million and $1.1 billion of IND brokered deposits as of March 31, 2023 and December 31, 2022, respectively. However, to the extent that the condition or reputation of the Company or Bank deteriorates, to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, or if aggregate funding available to banks change due to changes in the marketplace, we may experience an outflow of brokered deposits or difficulty in obtaining them in the future. In that event we would be required to obtain alternate sources for funding, which may increase our cost of funds and negatively impact our net interest margin.
At March 31, 2023 and December 31, 2022, total deposits included $2.1 billion and $2.3 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 28.5% and 26.5% of total deposits, respectively.
At March 31, 2023 and December 31, 2022, total deposits included estimated totals of $3.2 billion and $4.4 billion of uninsured deposits, which represented 43% and 51% of total deposits, respectively. The decrease in the percentage of the Bank's deposits that are uninsured was in part due to customers' increased use of the products facilitated by IntraFi that enable customers to maximize FDIC deposit insurance coverage for their deposits.
At March 31, 2023, the Company had $2.2 billion in noninterest bearing demand deposits, representing 30.1% of total deposits, compared to $3.2 billion of noninterest bearing demand deposits at December 31, 2022, or 36.2% of total deposits. The decrease was primarily attributable to outflows from noninterest bearing deposits and savings/money market accounts which was partially offset by the increase in time deposits. Average noninterest bearing deposits of total deposits for the three months ended March 31, 2023 and 2022 were 37.4% and 36.1%, respectively. The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets.
As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or "customer repurchase agreement," allowing qualifying businesses to earn interest on short-term excess funds that are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $37.9 million at March 31, 2023 compared to $35.1 million at December 31, 2022. 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 March 31, 2023 the Company had $1.3 billion in time deposits an increase of $554.3 million from year end December 31, 2022. The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered certificates of deposits ("CDs") to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning. Throughout the year, the Bank raised rates in most of its time deposit accounts in response to the increased disintermediation of deposits, and the current rate environment with continued rate increases.
The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at March 31, 2023 and December 31, 2022. At March 31, 2023 and December 31, 2022, the Company had $1.3 billion and $975.0 million, respectively, of FHLB short-term advances borrowed as well as an $800.0 million one year fixed rate advance, maturing on March 26, 2024 from the BTFP as part of the overall asset liability strategy and to support loan growth. Outstanding FHLB advances are secured by collateral consisting of specifically pledged marketable investment securities and a blanket lien on qualifying loans in the Bank's commercial mortgage, residential mortgage and home equity loan portfolios. Outstanding BTFP advances are secured by collateral consisting of specifically pledged qualifying investment securities.
Long-term borrowings outstanding at March 31, 2023 and December 31, 2022 included the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024.
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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. Approximately 59% of the Company'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. Investment securities that are classified as held-to-maturity can also be used as collateral to pledge against additional borrowings. 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.
The following table summarizes the Company's secondary sources of liquidity in use and available at March 31, 2023:
| (dollars in thousands, except amount in the footnotes) | Secondary Sources of Liquidity in Use | Secondary Sources of Liquidity Available | ||||||||||||
| March 31, 2023: | ||||||||||||||
Unsecured brokered deposits (1) | $ | 1,069,510 | $ | 1,688,929 | ||||||||||
| FHLB secured borrowings | 1,313,801 | 653,946 | ||||||||||||
| FRB: | ||||||||||||||
| BTFP secured borrowings | 800,000 | 37,182 | ||||||||||||
| Discount window secured borrowings | — | 606,201 | ||||||||||||
| Federal funds lines | — | 155,000 | ||||||||||||
| Customer repurchase agreements | 37,854 | — | ||||||||||||
| Raymond James repurchase agreement | — | 18,050 | ||||||||||||
Unpledged assets: (2) | ||||||||||||||
| Interest-bearing deposits with banks | N/A | 41,731 | ||||||||||||
| Investment securities | N/A | 1,075,303 | ||||||||||||
| Total | $ | 3,221,165 | $ | 4,276,342 | ||||||||||
(1)The available liquidity from the unsecured brokered deposits represents unsecured funds under one-way CDARS and ICS brokered deposits that would require then current market rates and be dependent on the availability of funds in those networks.
(2)Comprise unencumbered assets that could be liquidated or used as collateral to obtain additional liquidity through debt financing.
The Bank can purchase up to $155 million in federal funds on an unsecured basis from its correspondents, against which there was no outstanding amount at March 31, 2023, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.7 billion, against which there was $53.2 million outstanding at March 31, 2023. The Bank also has custodial agreements with various broker-dealers through IntraFi's IND program which provided $702.4 million of brokered deposits at March 31, 2023. At March 31, 2023, the Bank was also eligible to draw on advances from the FHLB up to $2.0 billion based on assets pledged as collateral to the FHLB, of which there was $1.3 billion outstanding at March 31, 2023. The Bank had posted additional collateral to the FHLB in the first quarter of 2023 to increase its eligibility for advances to meet its ongoing liquidity needs and expects to continue to utilize and expand this source of funding in the future.
In March 2023, the Federal Reserve Board announced that it would make available additional funding to eligible depository institutions through the creation of the BTFP. The BTFP provides eligible depository institutions, including the Bank, an additional source of liquidity. At March 31, 2023, the Bank had eligible collateral and borrowing capacity with the BTFP of $837.2 million on assets that have been pledged, of which $800.0 million was outstanding. This alternative source of liquidity will be utilized for balance sheet optimization. The program permits advances to be requested until March 2024, unless extended by the Federal Reserve Bank. There can be no assurance, however, that the opportunity to further borrow from the BTFP will continue to be available beyond March 2024. Once the BTFP program terminates, we may be required to rely on other, potentially more expensive, sources of liquidity.
49
The Bank's aggregate borrowing capacity at March 31, 2023 was $1.7 billion which consists of $688.9 million of additional aggregate capacity to borrow from the Federal Home Loan Bank of Atlanta ("FHLB") and Bank Term Funding Program ("BTFP") on assets that have been pledged. The Bank also has unencumbered securities totaling approximately $1.1 billion available for pledging to the FHLB or the BTFP for additional borrowing capacity.
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. This facility, which amounts to approximately $606.2 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 from alternative savings and investment sources. The Bank makes competitive deposit interest rate comparisons weekly and makes adjustments from time to time to ensure its interest rate offerings are competitive.
There is, however, a risk that the cost of funds will increase significantly as the Bank competes for deposits or 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, but the use of such sources may negatively impact our net interest margin and our earnings, as the use of such sources did in the first quarter of 2023, and there can be no assurance that they will be adequate to meet our liquidity needs. However, the market for customer and brokered deposits is highly competitive and the risk of disintermediation is high, particularly in a rising or high interest rate environment. Most of our noninterest bearing deposits are operating deposits or compensating balances that are held in connection with lending relationships.. The potential outflow of such deposits is a risk unless we pay a more competitive rate of interest on them, which could significantly and negatively impact the Bank’s interest expense and net interest margin, as the transfer of some noninterest-bearing deposits to interest-bearing deposits did in the first quarter of 2023. 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 ALCO has adopted policy guidelines, which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan.
The Company believes it maintains sufficient primary and secondary sources of liquidity to fund its operations. We maintain a liquid investment portfolio outside of our held-to-maturity investments, including overnight liquidity. In the first three months of 2023, average short term liquidity was $2.2 billion, which is above the Bank's average needs. Secondary sources of liquidity at March 31, 2023 were $4.3 billion, which include the FHLB, BTFP, other insured brokered deposit sweep programs, unpledged securities, Fed funds lines, and the FRB Discount Window. At March 31, 2023, the Company held total unpledged securities with a fair value of $1.1 billion, including $488.8 million of available-for-sale securities and $630.5 million of held-to-maturity securities.
Commitments and Contractual Obligations
Loan commitments outstanding and lines and letters of credit at March 31, 2023 are as follows:
| (dollars in thousands) | ||||||||
| Unfunded loan commitments | $ | 2,332,199 | ||||||
| Unfunded lines of credit | 110,355 | |||||||
| Letters of credit | 93,469 | |||||||
| Total | $ | 2,536,023 | ||||||
Unfunded loan commitments are agreements whereby the Bank has made a commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract and the borrower has accepted the commitment. 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 March 31, 2023, unfunded loan commitments included $2.2 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature. The pipeline of loan commitments remains strong.
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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. Lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since lines of credit may expire without being drawn, the total unfunded line of credit 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 overseen by the Audit Committee and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows to provide net interest income growth consistent with the Company's profit objectives.
During the three months ended March 31, 2023, the Company was able to produce a net interest margin of 2.77% as compared to 2.65% during the same period in 2022 and continues to manage its overall interest rate risk position.
The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits. In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and risk in its portfolio of mortgage-backed securities. Further, the Company has been principally collecting cash flows off of the investment portfolio to provide liquidity. Additionally, the Company has limited call risk in its U.S. agency investment portfolio. At March 31, 2023, the amortized cost less allowance of the investment portfolio decreased by $58.6 million, or 2.0%, as compared to the balance at December 31, 2022.
The percentage mix of municipal securities was 5% of total investments at March 31, 2023 and December 31, 2022. The portion of the portfolio invested in mortgage-backed securities was 63% at March 31, 2023 and December 31, 2022. The portion of the portfolio invested in U.S. agency investments was 26% and 25% at March 31, 2023 and December 31, 2022, respectively. Shorter duration floating rate corporate bonds were 5% of total investments at March 31, 2023 and December 31, 2022. At March 31, 2023, these corporate bonds included $95.8 million of subordinated debt issued by 23 banking organizations. If any of these banking organizations were to enter into bankruptcy or other insolvency proceedings, we could experience losses that may be material to our results of operations and financial condition. U.S. treasury bonds were 2% of total investments at March 31, 2023 and December 31, 2022. The duration of the investment portfolio decreased to 4.7 years at March 31, 2023 from 4.8 years at December 31, 2022.
The re-pricing duration of the loan portfolio was 13 months at March 31, 2023 and 13 months at December 31, 2022 with fixed rate loans amounting to 37% of total loans at March 31, 2023 and 38% at December 31, 2022. Variable and adjustable rate loans comprised 63% of total loans at March 31, 2023 and 62% at December 31, 2022, respectively. Variable rate loans are generally indexed to either the one month LIBOR interest rate, SOFR, or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate.
The duration of the deposit portfolio increased as rates rose, measuring 36 months at March 31, 2023 and 29 months at December 31, 2022.
The net unrealized loss before income tax on the investment securities available-for-sale portfolio was $181.2 million and $205.2 million at March 31, 2023 and December 31, 2022, respectively. The change is primarily due to improved market conditions and related economic factors. At March 31, 2023, the net unrealized loss position represented 10.3% of the investment portfolio's book value.
51
Management relies on the use of models in order to measure the expected future impact on interest income of various interest rate environments, as described above. Through its modeling, the Company makes certain estimates that may vary from actual results. There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, given competitive pressures, customer preferences and the inability to forecast future interest rates and movements with complete accuracy.
Although the Company has experienced net interest margin compression during the three months ended March 31, 2023, the Company's interest rate risk modeling shows net interest margin expansion in an increasing rate environment. The model's prediction is the result of increases in both interest income on variable and adjustable rate loans and interest expense on its deposit liabilities, based on our funding needs, market conditions and certain contractual obligations with no changes in the mix of assets or liabilities. Interest rate floors on certain of the Company's variable and adjustable rate loans may provide asset yield protection in a low-interest rate environment; however, they are also expected to delay the impact of increases to market rates on interest income until such floors have been exceeded. The weighted average rate of the Company's variable rate loans increased by approximately 41 basis points from December 31, 2022 to March 31, 2023 in connection with the 50 basis points in Fed Funds rate hikes caused by actions taken by the Federal Reserve Bank. At December 31, 2022, the Company had a portfolio of $3.1 billion of variable and adjustable rate loans that were subject to interest rate floors with a weighted average rate of 7.08%. At March 31, 2023, only $233.0 million of loans held by the Company were earning interest at their floor rate, and the majority of those are expected to reset at rates higher than their floor at their next rate reset date. Additionally, the Company’s cost of interest bearing deposits increased by 91 basis points across its interest-bearing deposits, which comprise 70% of its total deposits, at March 31, 2023.
The Company 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, deposit decay 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, 200, and 300 basis points, 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 period from March 31, 2023. 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 March 31, 2023, the simulation assumes a 45 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor of 10 basis points in the same analysis as of March 31, 2022), and assumes a 45 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario. The Bank does have deposits with contractual terms which means these deposits will change 100 basis points for every 100 basis points change in market rates. Thus, the overall measure of the correlation between deposit costs and market rate changes was approximately 70%.
The Company's analysis at March 31, 2023 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 down 100, 200, and 300 basis points and up 100, 200, 300, and 400 basis points. This moderate impact is due substantially to the significant level of variable rate and repriceable assets and liabilities and related shorter relative durations. The repricing duration of the investment portfolio at March 31, 2023 is 4.7 years, the loan portfolio 1.1 years, the interest bearing deposit portfolio 3.0 years, and the borrowed funds portfolio 0.4 years.
52
The following table reflects the result of simulation analysis on the March 31, 2023 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 | 26.9% | 56.4% | 2.6% | |||||||||||||||||||
| + | 300 | 20.9% | 43.7% | 2.5% | |||||||||||||||||||
| + | 200 | 15% | 31.4% | 2.3% | |||||||||||||||||||
| + | 100 | 9% | 18.7% | 1.5% | |||||||||||||||||||
| — | — | — | — | ||||||||||||||||||||
| - | 100 | (1.3)% | (2.6)% | (2.5)% | |||||||||||||||||||
| - | 200 | (4.3)% | (8.8)% | (7.2)% | |||||||||||||||||||
| - | 300 | (6.4)% | (13.3)% | (15.2)% | |||||||||||||||||||
The results of the simulation are within the relevant policy limits adopted by the Company for percentage change in net interest income. For net interest income, the Company has adopted a policy limit of -10% for a 100 basis point change, -12% for a 200 basis point change, -18% for a 300 basis point change and -24% for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change. The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at March 31, 2023 are not believed to be excessive. The impact of -1.3% in net interest income and -2.6% in net income given a 100 basis point decrease in market interest rates reflects in large measure the ability to quickly reprice deposits downward while recently booked loans would take time to re-price. In the first three quarters of 2023, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above.
Although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in modeling. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.
During the first quarter of 2023, average market interest rates increased across the yield curve as compared to the 2022 year end.
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.
53
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 focused on commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At March 31, 2023, we did exceed the construction, land development, and other land acquisitions regulatory concentration threshold, and we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators. Construction, land and land development loans represent 109% 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, as our commercial real estate concentration fluctuates each quarter, we may be required to maintain higher levels of capital, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive Capital Plan and Capital Policy, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.
The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy 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 FRB and the FDIC have adopted rules (the "Basel III Rules") implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. Under the Basel III Rules, the Company and Bank are required to maintain, inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of 7.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%, a minimum total capital to risk-weighted assets ratio of 10.5%, and a minimum leverage ratio of 4.0%. At March 31, 2023, the Company and the Bank meet all these requirements.
The Company’s capital position remained strong for the three months ended March 31, 2023 as a result of good earnings, improved economic conditions and strong asset quality. As a result of the Company’s strong capital position and earnings, we were able to continue our quarterly dividend. Additionally, the Company was active in share repurchase activity as we repurchased 400,000 shares at an average price of $45.65 per share during three months ended March 31, 2023.
On December 13, 2022, the Company's Board of Directors authorized a new share repurchase program to take effect starting January 2, 2023, after the expiration of the previous repurchase program on December 31, 2022. The Board of Directors authorized the repurchase of 1,600,000 shares of common stock, or approximately 5% of the Company's outstanding shares of common stock, under the 2023 Repurchase Program, which will expire on December 31, 2023, unless earlier terminated by the Board of Directors.
The 2023 Repurchase Program does not limit the number of shares that can be repurchased each quarter. Though the Company repurchased 400,000 shares of its common stock in the quarter ended March 31, 2023, we expect the pace of share repurchases to increase beginning in the second quarter of 2023.
The Company announced a regular quarterly cash dividend on March 16, 2023 of $0.45 per share to shareholders of record on April 6, 2023 and was paid on April 28, 2023.
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The capital amounts and ratios for the Company and Bank as of March 31, 2023 and December 31, 2022 are presented in the table below.
| Company | Bank | Minimum Required Basel III | To Be Well-Capitalized Under Prompt Corrective Action Regulations (1) | |||||||||||||||||||||||||||||||||||
| Actual | Actual | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||
March 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| CET1 capital (to risk weighted assets) | $ | 1,322,895 | 13.75 | % | $ | 1,309,828 | 13.68 | % | 7.00 | % | 6.50 | % | ||||||||||||||||||||||||||
| Total capital (to risk weighted assets) | 1,417,883 | 14.74 | % | 1,389,370 | 14.51 | % | 10.50 | % | 10.00 | % | ||||||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 1,322,895 | 13.75 | % | 1,309,828 | 13.68 | % | 8.50 | % | 8.00 | % | ||||||||||||||||||||||||||||
| Tier 1 capital (to average assets) | 1,322,895 | 11.42 | % | 1,309,828 | 11.36 | % | 4.00 | % | 5.00 | % | ||||||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| CET1 capital (to risk weighted assets) | $ | 1,329,971 | 14.03 | % | $ | 1,341,347 | 14.23 | % | 7.00 | % | 6.50 | % | ||||||||||||||||||||||||||
| Total capital (to risk weighted assets) | 1,415,854 | 14.94 | % | 1,412,904 | 14.99 | % | 10.50 | % | 10.00 | % | ||||||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 1,329,971 | 14.03 | % | 1,341,347 | 14.23 | % | 8.50 | % | 8.00 | % | ||||||||||||||||||||||||||||
| Tier 1 capital (to average assets) | 1,329,971 | 11.63 | % | 1,341,347 | 11.78 | % | 4.00 | % | 5.00 | % | ||||||||||||||||||||||||||||
(1)Applies to the 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 March 31, 2023 the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above.
In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020. In March 2020, the federal banking regulators issued an interim final rule that provides banking organizations with an alternative option to temporarily delay for two years the estimated impact of the adoption of the CECL methodology on regulatory capital, followed by the three-year phase-in period. The cumulative amount that is not recognized in regulatory capital will be phased in at 25 percent per year beginning January 1, 2022. We have elected to adopt the option provided by the March 2020 interim final rule.
Use of Non-GAAP Financial Measures
The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP.
Tangible common equity to tangible assets (the "tangible common equity ratio"), tangible book value per common share, tangible book value per common share excluding accumulated other comprehensive loss ("AOCI"), the annualized return on average tangible common equity, and efficiency ratio are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders' equity by common shares outstanding. To calculate the tangible book value per common share excluding the AOCI, tangible common equity is reduced by the loss on the AOCI before dividing by common shares outstanding. The Company calculates the ROATCE by dividing net income available to common shareholders by average tangible common equity which is calculated by excluding the average balance of intangible assets from the average common shareholders' equity. The Company calculates the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income. The efficiency ratio measures a bank's overhead as a percentage of its revenue. The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions.
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GAAP Reconciliation
| (dollars in thousands except per share data) | March 31, 2023 | December 31, 2022 | ||||||||||||
| Common shareholders' equity | $ | 1,241,958 | $ | 1,228,321 | ||||||||||
| Less: Intangible assets | (104,226) | (104,233) | ||||||||||||
| Tangible common equity | $ | 1,137,732 | $ | 1,124,088 | ||||||||||
| Book value per common share | $ | 39.92 | $ | 39.18 | ||||||||||
| Less: Intangible book value per common share | (3.35) | (3.32) | ||||||||||||
| Tangible book value per common share | $ | 36.57 | $ | 35.86 | ||||||||||
| Book value per common share | $ | 39.92 | $ | 39.18 | ||||||||||
| Add: AOCI book value per common share | 5.81 | 6.36 | ||||||||||||
| Adjusted book value excluding AOCI per common share | $ | 45.73 | $ | 45.54 | ||||||||||
| Tangible book value per common share | $ | 36.57 | $ | 35.86 | ||||||||||
| Add: AOCI book value per common share | 5.81 | 6.36 | ||||||||||||
| Adjusted tangible book value excluding AOCI per common share | $ | 42.38 | $ | 42.22 | ||||||||||
| Total assets | $ | 11,088,867 | $ | 11,150,854 | ||||||||||
| Less: Intangible assets | (104,226) | (104,233) | ||||||||||||
| Tangible assets | $ | 10,984,641 | $ | 11,046,621 | ||||||||||
| Tangible common equity ratio | 10.36 | % | 10.18 | % | ||||||||||
Three Months Ended March 31, | ||||||||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||||||||
| Average common shareholders' equity | $ | 1,240,978 | $ | 1,341,785 | ||||||||||
| Less: Average intangible assets | (104,231) | (104,246) | ||||||||||||
| Average tangible common equity | $ | 1,136,747 | $ | 1,237,539 | ||||||||||
| Net income available to common shareholders | $ | 24,234 | $ | 45,744 | ||||||||||
| Average tangible common equity | 1,136,747 | 1,237,539 | ||||||||||||
| Annualized return on average tangible common equity | 8.65 | % | 14.99 | % | ||||||||||
| Three Months Ended March 31, | ||||||||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||||||||
| Net interest income | $ | 75,024 | $ | 80,452 | ||||||||||
| Noninterest income | 3,700 | 7,453 | ||||||||||||
| Revenue | $ | 78,724 | $ | 87,905 | ||||||||||
| Noninterest expense | $ | 40,584 | $ | 31,012 | ||||||||||
| Efficiency ratio | 51.55 | % | 35.28 | % | ||||||||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Please refer to Item 2 of this report, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption "Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk."
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Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. The Company's management, under the supervision and with the participation of the Chief Executive Officer, Executive Chairman 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(e) under the Exchange Act. Based on that evaluation, the Chief Executive Officer, Executive Chairman and the Chief Financial Officer concluded that the Company's disclosure controls and procedures as of March 31, 2023 were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that it is accumulated and communicated to our management, including the Chief Executive Officer, Executive Chairman and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the first quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
Refer to "Note 12. Legal Contingencies" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 1A. - Risk Factors
We are subject to various risks and uncertainties, including those described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022, which could adversely affect our business, financial performance and results of operations. There have been no material changes to our risk factors from those risks included in our Annual Report on Form 10-K.
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities. | None | ||||
(b) Use of Proceeds. | Not Applicable | ||||
(c) Issuer Purchases of Securities. | |||||
| Period | Total Number of Shares Purchased (2) | Average Price (3) Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||||||||||||
| January 1, 2023 | — | n/a | n/a | 1,600,000 | ||||||||||||||||||||||
| January 3 - 31, 2023 | 360,000 | $ | 45.45 | 360,000 | 1,240,000 | |||||||||||||||||||||
| February 1- 28, 2023 | 85,216 | $ | 47.43 | 40,000 | 1,200,000 | |||||||||||||||||||||
| March 1- 31, 2023 | — | — | — | 1,200,000 | ||||||||||||||||||||||
| Total | 445,216 | $ | 45.65 | 400,000 | 1,200,000 | |||||||||||||||||||||
(1)On December 13, 2022, the Company's Board of Directors authorized a new share repurchase program (the "2023 Repurchase Program") to take effect starting January 2, 2023, after the expiration of the previous repurchase program on December 31, 2022. The Board of Directors authorized the repurchase of 1,600,000 shares of common stock, or approximately 5% of the Company's outstanding shares of common stock, under 2023 Repurchase Program, which will expire on December 31, 2023, unless earlier terminated by the Board of Directors. The 2023 Repurchase Program does not limit the number of shares that can be repurchased each quarter. Though the Company repurchased 400,000 shares of its common stock in the quarter ended March 31, 2023, we expect the pace of share repurchases to increase beginning in the second quarter of 2023.
(2)Includes shares of the Company’s common stock acquired by the Company in connection with satisfaction of tax withholding obligations on vested restricted shares or restricted share units and certain forfeitures and terminations of employment-related awards and for potential re-issuance to certain employees under equity incentive plans.
(3)Average price paid per share includes commission costs associated with the repurchases.
Item 3. - Defaults Upon Senior Securities
None.
Item 4. - Mine Safety Disclosures
Not Applicable.
Item 5. - Other Information
None.
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Item 6. - Exhibits
| Certification of Susan G. Riel | ||||||||
| Certification of Norman R. Pozez | ||||||||
| Certification of Charles D. Levingston | ||||||||
| Certification of Susan G. Riel | ||||||||
| Certification of Norman R. Pozez | ||||||||
| Certification of Charles D. Levingston | ||||||||
| 101 | Interactive data files pursuant to Rule 405 of Regulation S-T: | |||||||
(i) Consolidated Balance Sheets at March 31, 2023 and December 31, 2022 | ||||||||
(ii) Consolidated Statement of Income for the three months ended March 31, 2023 and 2022 | ||||||||
(iii) Consolidated Statement of Comprehensive (Loss) Income for the three months ended March 31, 2023 and 2022 | ||||||||
(iv) Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2023 and 2022 | ||||||||
(v) Consolidated Statement of Cash Flows for the three months ended March 31, 2023 and 2022 | ||||||||
| (vi) Notes to the Consolidated Financial Statements | ||||||||
| 104 | The cover page of this Quarterly Report on Form 10-Q, formatted in Inline XBRL | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| EAGLE BANCORP, INC. | |||||||||||
| Date: | May 10, 2023 | By: | /s/ [Susan G. Riel] | ||||||||
| Susan G. Riel, President and Chief Executive Officer of the Company | |||||||||||
| Date: | May 10, 2023 | By: | /s/ [Charles D. Levingston] | ||||||||
| Charles D. Levingston, Executive Vice President and Chief Financial Officer of the Company | |||||||||||
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