NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting
Policies
Basis of Presentation
The Consolidated Financial
Statements include the accounts of Eagle Bancorp, Inc. and its subsidiaries (the “Company”), EagleBank (the “Bank”),
Eagle Commercial Ventures, LLC (“ECV”), Eagle Insurance Services, LLC, and Bethesda Leasing, LLC, with all significant
intercompany transactions eliminated.
The Consolidated Financial
Statements of the Company included herein are unaudited. The Consolidated Financial Statements reflect all adjustments, consisting
of normal recurring accruals that in the opinion of management, are necessary to present fairly the results for the periods presented.
The amounts as of and for the year ended December 31, 2017 were derived from audited Consolidated Financial Statements. Certain
information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission. 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, 2017. 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, 2017. The Company believes that the disclosures are adequate to make the information presented not misleading. Certain reclassifications
have been made to amounts previously reported to conform to the current period presentation.
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, 2017. Operating results for the three and nine months ended September 30, 2018
are not necessarily indicative of the results of operations to be expected for the remainder of the year, or for any other period.
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 and sale of residential mortgage loans, 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 twenty banking offices, five lending centers and various electronic capabilities, including remote deposit
services and mobile banking services. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products
and services through a referral program with a third party insurance broker. Eagle Commercial Ventures, LLC, a direct subsidiary
of the Company, has provided subordinated financing for the acquisition, development and construction of real estate projects;
these transactions involve higher levels of risk, together with commensurate higher returns.
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 financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be
material to the financial statements.
New Authoritative Accounting Guidance
Accounting Standards Adopted in 2018
ASU 2014-09,
“Revenue
from Contracts with Customers (Topic 606).”
The amendments in ASU 2014-09 supersede the revenue recognition requirements
in Topic 605, Revenue Recognition, and most industry-specific guidance. The general principle of the amendments require an entity
to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The guidance sets forth a five step approach
to be utilized for revenue recognition. The Company completed its overall assessment of revenue streams and review of related contracts
potentially affected by the ASU, including deposit related fees, interchange fees, and merchant income. Based on this assessment,
the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for
these revenue streams. The Company also completed its evaluation of certain costs related to these revenue streams to determine
whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). Based on its evaluation, the Company
did not identify revenue streams within the scope of ASC 606 that required a material change in their presentation under the gross
vs. net requirement of ASC 606. The Company adopted ASU 2014-09 and its related amendments on its required effective date of January
1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance,
a cumulative effect adjustment to opening retained earnings was not deemed necessary. Consistent with the modified retrospective
approach, the Company did not adjust prior period amounts.
The majority of our
revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our
loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities,
as these activities are subject to other GAAP discussed elsewhere within our disclosures. Substantially all of the Company’s
revenue is generated from contracts with customers. Descriptions of our revenue-generating activities that are within the scope
of ASC 606, which are presented in our income statements as components of noninterest income are as follows:
|
●
|
Service charges on deposit accounts - these represent general service fees for monthly account
maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period),
item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed
which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer).
Payment for such performance obligations are generally received at the time the performance obligations are satisfied.
|
|
●
|
Other Fees – generally, the Company receives compensation when a customer that it refers
opens an account with certain third-parties. This category includes credit card, investment advisory, and interchange fees. The
timing and amount of revenue recognition is not materially impacted by the new standard.
|
|
●
|
Sale of OREO – ASU 2014-09 prescribes derecognition requirements for the sale of OREO that
are less prescriptive than existing derecognition requirements. Previously, the Company was required to assess 1) the adequacy
of a buyer’s initial and continuing investments and 2) the seller’s continuing involvement with the property. ASU 2014-09
requires an entity to assess whether it is “probable” that it will collect the consideration to which it will be entitled
in exchange for transferring the asset to the customer. The new requirements could result in earlier revenue recognition; however,
such sales are infrequent and the impact of this change is not expected to be material to our financial statements.
|
A contract asset balance
occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable)
or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer
a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s
noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals based on fee schedules.
Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized.
The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not have contract balances
material to our financial statements. As of September 30, 2018 and December 31, 2017, the Company did not have any significant
contract balances.
In connection with
the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs
of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract
are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had
not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately
expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized
in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.
ASU 2016-01, “
Financial
Instruments—(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
” ASU 2016-01
addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted
improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting
or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net
income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus
impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or
a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable
fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment
exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value
of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement
for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required
to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities
to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity
to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting
from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance
with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities
by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the
accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance
on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
ASU No. 2016-01 was effective for us effective January 1, 2018 and did not have a material impact on our Consolidated Financial
Statements. Refer to Note 11 for the valuation of the loan portfolio using the exit price notion.
ASU 2016-15
“Statement
of Cash Flows (Topic 230)”
is intended to reduce the diversity in practice around how certain transactions are classified
within the statement of cash flows. ASU 2016-15 became effective for us on January 1, 2018 and did not have a significant impact
on our financial statements.
ASU 2017-12,
“Derivatives
and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.”
ASU 2017-12 amends the hedge accounting
recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed
to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting
for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of
hedge accounting. The Company early adopted ASU 2017-12 effective January 1, 2018. The new standard did not have a material impact
to our Consolidated Financial Statements.
ASU 2018-02, “
Income
Statement - Reporting Comprehensive Income (Topic 220)- Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income.
” ASU 2018-02 allows a reclassification from accumulated other comprehensive income (loss) (“AOCI”) to
retained earnings for the tax effects caused by the revaluation of deferred taxes resulting from the newly enacted corporate tax
rate in the Tax Cuts and Jobs Act of 2017. The ASU is effective in years beginning after December 15, 2018, but permits early adoption
in a period for which financial statements have not yet been issued. We elected to early adopt the ASU as of January 1, 2018. The
adoption of the guidance resulted in a $674 thousand cumulative-effect adjustment, done on a portfolio basis, to reclassify the
income tax effects resulting from tax reform from AOCI to retained earnings. The adjustment increased retained earnings and decreased
AOCI in the first quarter of 2018.
Accounting Standards Pending Adoption
ASU 2016-02,
“Leases
(Topic 842).”
Under the new guidance, lessees will be required to recognize the following for all leases (with the exception
of short-term leases): (1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and (2)
a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for
the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing
guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although
lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were
made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify
leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required
by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty
of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial
statements so that users can understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective
for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required
to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative
period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The
Company is currently evaluating the provisions of ASU 2016-02, researching software to aid in the transition to the new leasing
guidance, and will be closely monitoring developments and additional guidance to determine the potential impact the new standard
will have on the Company’s Consolidated Financial Statements.
ASU 2016-13,
“Measurement
of Credit Losses on Financial Instruments (Topic 326).”
This ASU significantly changes how entities will measure credit
losses for most financial assets and certain other instruments that are not measured at fair value through net income. In issuing
the standard, the FASB is responding to criticism that today’s guidance for determining the allowance for credit losses delays
recognition of expected future credit losses. The standard will replace today’s “incurred loss” approach with
an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model,
will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet
credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial
guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with
unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be
recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting
model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an
entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will
need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the
year of origination. ASU No. 2016-13 is effective for the Company beginning on January 1, 2020; early adoption is permitted for
us beginning on January 1, 2019. Entities will apply any changes resulting from the application of the new standard’s provisions
as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance
is effective (i.e., modified retrospective approach). We have substantially concluded our data gap analysis and have contracted
with a third party to develop a model to comply with CECL requirements. We have established a steering committee with representation
from various departments across the enterprise. The committee has agreed to a project plan and has regular meetings to ensure adherence
to our implementation timeline. The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential
impact the new standard will have on the Company’s Consolidated Financial Statements.
ASU 2017-04, “
Intangibles
- Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.”
ASU 2017-04 eliminates Step 2 from
the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity
should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying
amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04
will be effective for the Company on January 1, 2020, with early adoption permitted for interim or annual impairment tests beginning
in 2017, and is not expected to have a significant impact on our consolidated financial statements. We expect to implement ASU
2017-04 prior to 2018 year-end.
Note 2. Cash and Due from Banks
Regulation D of the
Federal Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank based principally on
the type and amount of their deposits. During 2018, the Bank maintained balances at the Federal Reserve sufficient to meet reserve
requirements, as well as significant excess reserves, on which interest is paid.
Additionally, the Bank
maintains interest bearing balances with the Federal Home Loan Bank of Atlanta and noninterest bearing balances with domestic correspondent
banks as compensation for services they provide to the Bank.
Note 3. Investment Securities Available-for-Sale
Amortized
cost and estimated fair value of securities available-for-sale are summarized as follows:
September 30, 2018
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
U. S. agency securities
|
|
$
|
236,853
|
|
|
$
|
—
|
|
|
$
|
6,528
|
|
|
$
|
230,325
|
|
Residential mortgage backed securities
|
|
|
448,335
|
|
|
|
140
|
|
|
|
12,126
|
|
|
|
436,349
|
|
Municipal bonds
|
|
|
48,203
|
|
|
|
391
|
|
|
|
858
|
|
|
|
47,736
|
|
Corporate bonds
|
|
|
8,004
|
|
|
|
61
|
|
|
|
19
|
|
|
|
8,046
|
|
Other equity investments
|
|
|
218
|
|
|
|
—
|
|
|
|
—
|
|
|
|
218
|
|
|
|
$
|
741,613
|
|
|
$
|
592
|
|
|
$
|
19,531
|
|
|
$
|
722,674
|
|
December 31, 2017
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
U. S. agency securities
|
|
$
|
198,115
|
|
|
$
|
283
|
|
|
$
|
2,414
|
|
|
$
|
195,984
|
|
Residential mortgage backed securities
|
|
|
322,067
|
|
|
|
187
|
|
|
|
4,418
|
|
|
|
317,836
|
|
Municipal bonds
|
|
|
60,976
|
|
|
|
1,295
|
|
|
|
214
|
|
|
|
62,057
|
|
Corporate bonds
|
|
|
13,010
|
|
|
|
163
|
|
|
|
—
|
|
|
|
13,173
|
|
Other equity investments
|
|
|
218
|
|
|
|
—
|
|
|
|
—
|
|
|
|
218
|
|
|
|
$
|
594,386
|
|
|
$
|
1,928
|
|
|
$
|
7,046
|
|
|
$
|
589,268
|
|
In addition, at September
30, 2018 and December 31, 2017 the Company held $37.3 million and $36.3 million, respectively, in equity securities in a combination
of Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stocks, which are required to be held
for regulatory purposes and which are not marketable, and therefore are carried at cost.
Gross unrealized
losses and fair value by length of time that the individual available-for-sale securities have been in a continuous unrealized
loss position are as follows:
|
|
|
|
|
Less than
12 Months
|
|
|
12 Months
or Greater
|
|
|
Total
|
|
September 30, 2018
(dollars in thousands)
|
|
Number of
Securities
|
|
|
Estimated
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
Unrealized
Losses
|
|
U. S. agency securities
|
|
|
61
|
|
|
$
|
111,702
|
|
|
$
|
1,909
|
|
|
$
|
115,678
|
|
|
$
|
4,619
|
|
|
$
|
227,380
|
|
|
$
|
6,528
|
|
Residential mortgage backed securities
|
|
|
184
|
|
|
|
237,720
|
|
|
|
3,938
|
|
|
|
190,668
|
|
|
|
8,188
|
|
|
|
428,388
|
|
|
|
12,126
|
|
Municipal bonds
|
|
|
16
|
|
|
|
16,388
|
|
|
|
352
|
|
|
|
10,440
|
|
|
|
506
|
|
|
|
26,828
|
|
|
|
858
|
|
Corporate bonds
|
|
|
2
|
|
|
|
2,981
|
|
|
|
19
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,981
|
|
|
|
19
|
|
|
|
|
263
|
|
|
$
|
368,791
|
|
|
$
|
6,218
|
|
|
$
|
316,786
|
|
|
$
|
13,313
|
|
|
$
|
685,577
|
|
|
$
|
19,531
|
|
|
|
|
|
|
Less than
12 Months
|
|
|
12 Months
or Greater
|
|
|
Total
|
|
December 31, 2017
(dollars in thousands)
|
|
Number of
Securities
|
|
|
Estimated
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
Unrealized
Losses
|
|
U. S. agency securities
|
|
|
38
|
|
|
$
|
102,264
|
|
|
$
|
1,073
|
|
|
$
|
55,093
|
|
|
$
|
1,341
|
|
|
$
|
157,357
|
|
|
$
|
2,414
|
|
Residential mortgage backed securities
|
|
|
137
|
|
|
|
152,350
|
|
|
|
1,306
|
|
|
|
147,953
|
|
|
|
3,112
|
|
|
|
300,303
|
|
|
|
4,418
|
|
Municipal bonds
|
|
|
8
|
|
|
|
17,446
|
|
|
|
214
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,446
|
|
|
|
214
|
|
|
|
|
183
|
|
|
$
|
272,060
|
|
|
$
|
2,593
|
|
|
$
|
203,046
|
|
|
$
|
4,453
|
|
|
$
|
475,106
|
|
|
$
|
7,046
|
|
The unrealized losses that exist are generally the result of changes in market interest rates and interest
spread relationships since original purchases. The weighted average duration of debt securities, which comprise 99.9% of total
investment securities, is relatively short at 3.9 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 does not believe that the
investment securities that were in an unrealized loss position as of September 30, 2018 represent an other-than-temporary impairment.
The Company does not intend 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.
The amortized cost
and estimated fair value of investments available-for-sale at September 30, 2018 and December 31, 2017 by contractual maturity
are shown in the table below. Expected maturities for residential mortgage backed securities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
U. S. agency securities maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
119,017
|
|
|
$
|
114,692
|
|
|
$
|
109,893
|
|
|
$
|
108,198
|
|
After one year through five years
|
|
|
104,464
|
|
|
|
102,953
|
|
|
|
74,106
|
|
|
|
73,916
|
|
Five years through ten years
|
|
|
13,372
|
|
|
|
12,680
|
|
|
|
14,116
|
|
|
|
13,870
|
|
Residential mortgage backed securities
|
|
|
448,335
|
|
|
|
436,349
|
|
|
|
322,067
|
|
|
|
317,836
|
|
Municipal bonds maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
|
9,882
|
|
|
|
9,969
|
|
|
|
5,068
|
|
|
|
5,171
|
|
After one year through five years
|
|
|
15,579
|
|
|
|
15,541
|
|
|
|
19,405
|
|
|
|
19,879
|
|
Five years through ten years
|
|
|
21,675
|
|
|
|
21,094
|
|
|
|
35,432
|
|
|
|
35,846
|
|
After ten years
|
|
|
1,067
|
|
|
|
1,132
|
|
|
|
1,071
|
|
|
|
1,161
|
|
Corporate bonds maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year through five years
|
|
|
6,504
|
|
|
|
6,546
|
|
|
|
11,510
|
|
|
|
11,673
|
|
After ten years
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
1,500
|
|
Other equity investments
|
|
|
218
|
|
|
|
218
|
|
|
|
218
|
|
|
|
218
|
|
|
|
$
|
741,613
|
|
|
$
|
722,674
|
|
|
$
|
594,386
|
|
|
$
|
589,268
|
|
For the nine months
ended September 30, 2018, gross realized gains on sales of investments securities were $93 thousand and gross realized losses on
sales of investment securities were $25 thousand. For the nine months ended September 30, 2017, gross realized gains on sales
of investments securities were $795 thousand and gross realized losses on sales of investment securities were $254 thousand.
Proceeds from sales
and calls of investment securities for the nine months ended September 30, 2018 were $32.0 million compared to $70.1 million for
the same period in 2017.
The carrying 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 September 30, 2018 and December 31, 2017 was $486.9 million and $465.4 million, respectively,
which is well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As
of September 30, 2018 and December 31, 2017, 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. Mortgage Banking Derivative
As part of its mortgage
banking activities, the Bank enters 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 mortgage backed securities (“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.
At September 30, 2018
the Bank had mortgage banking derivative financial instruments with a notional value of $39.9 million related to its forward contracts
as compared to $37.1 million at December 31, 2017. The fair value of these mortgage banking derivative instruments at September
30, 2018 was $80 thousand included in other assets and $28 thousand included in other liabilities as compared to $43 thousand included
in other assets and $10 thousand included in other liabilities at December 31, 2017.
Included in other noninterest
income for the three and nine months ended September 30, 2018 was a net gain of $10 thousand and a net loss of $42 thousand, respectively,
relating to mortgage banking derivative instruments as compared to a net gain of $71 thousand and a net gain of $335 thousand,
respectively, as of September 30, 2017. The amount included in other noninterest income for the three and nine months ended September
30, 2018 pertaining to its mortgage banking hedging activities was a net realized gain of $56 thousand and no net realized gain,
respectively, as compared to a net realized loss of $14 thousand and a net realized loss of $912 thousand, respectively, as of
September 30, 2017.
Note 5. 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 September 30, 2018 and December 31, 2017 are summarized by type as follows:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
(dollars in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Commercial
|
|
$
|
1,493,577
|
|
|
|
22
|
%
|
|
$
|
1,375,939
|
|
|
|
21
|
%
|
Income producing - commercial real estate
|
|
|
3,189,910
|
|
|
|
46
|
%
|
|
|
3,047,094
|
|
|
|
48
|
%
|
Owner occupied - commercial real estate
|
|
|
863,162
|
|
|
|
13
|
%
|
|
|
755,444
|
|
|
|
12
|
%
|
Real estate mortgage - residential
|
|
|
104,864
|
|
|
|
2
|
%
|
|
|
104,357
|
|
|
|
2
|
%
|
Construction - commercial and residential
|
|
|
1,047,591
|
|
|
|
15
|
%
|
|
|
973,141
|
|
|
|
15
|
%
|
Construction - C&I (owner occupied)
|
|
|
56,572
|
|
|
|
1
|
%
|
|
|
58,691
|
|
|
|
1
|
%
|
Home equity
|
|
|
86,525
|
|
|
|
1
|
%
|
|
|
93,264
|
|
|
|
1
|
%
|
Other consumer
|
|
|
2,471
|
|
|
|
—
|
|
|
|
3,598
|
|
|
|
—
|
|
Total loans
|
|
|
6,844,672
|
|
|
|
100
|
%
|
|
|
6,411,528
|
|
|
|
100
|
%
|
Less: allowance for credit losses
|
|
|
(68,189
|
)
|
|
|
|
|
|
|
(64,758
|
)
|
|
|
|
|
Net loans
|
|
$
|
6,776,483
|
|
|
|
|
|
|
$
|
6,346,770
|
|
|
|
|
|
Unamortized net deferred
fees amounted to $24.5 million and $23.9 million at September 30, 2018 and December 31, 2017, respectively.
As of September 30,
2018 and December 31, 2017, the Bank serviced $207.3 million and $195.3 million, respectively, of multifamily FHA loans, SBA loans
and other loan participations which are not reflected as loan balances on the Consolidated Balance Sheets.
Loan Origination / Risk Management
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.
Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system
is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.
The composition of
the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing
real estate. At September 30, 2018, owner occupied - commercial real estate and construction - C&I (owner occupied) represent
approximately 14% of the loan portfolio. At September 30, 2018, non-owner occupied commercial real estate and real estate construction
represented approximately 61% of the loan portfolio. The combined owner occupied and commercial real estate loans represent approximately
75% of the loan portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in 84% of all loans
being secured by real estate. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines
in real estate values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan
to value of 80% and minimum cash flow debt service coverage of 1.15 to 1.0. Personal guarantees may be required, but may be limited. In
making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five
years.
The Company is also
an active traditional commercial lender providing loans for a variety of purposes, including working capital, equipment and account
receivable financing. This loan category represents approximately 22% of the loan portfolio at September 30, 2018 and was generally
variable or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash
flow necessary to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent approximately
2% of the commercial loan category. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion
of the credit. The Company generally sells the guaranteed portion of the loan generating noninterest income from the gains on sale,
as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial
loans. SBA loans are subject to a maximum loan size established by the SBA as well as internal loan size guidelines.
Approximately 1% of
the loan portfolio at September 30, 2018 consists of home equity loans and lines of credit and other consumer loans. These credits,
while making up a small portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other
types of loans advanced by the Bank.
Approximately 2% of
the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was 21 months. These credits represent
first liens on residential property loans originated by the Bank. While the Bank’s general practice is to originate and sell
(servicing released) loans made by its Residential Lending department, from time to time certain loan characteristics do not meet
the requirements of third party investors and these loans are instead maintained in the Bank’s portfolio until they are resold
to another investor at a later date or mature.
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 Loan Committee. 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 which 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 ADC real estate loans including both investment and owner occupied projects. ADC loans amounted to $1.46
billion at September 30, 2018. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest
reserves at origination. ADC loans that provide for the use of interest reserves represent approximately 77% of the outstanding
ADC loan portfolio at September 30, 2018. 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) borrower equity
contribution; and (5) the level of collateral protection. When appropriate, an interest reserve provides an effective means of
addressing the cash flow characteristics of a properly underwritten ADC loan. The Company does not significantly utilize interest
reserves in other loan products. 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 this
inherent risk, 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 which are monitored on an ongoing basis which 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 includes monitoring of current and projected
real estate market conditions. If a project has not performed as expected, it is not 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 and nine months ended September 30, 2018
and 2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability 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 September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
12,206
|
|
|
$
|
27,988
|
|
|
$
|
6,003
|
|
|
$
|
757
|
|
|
$
|
18,651
|
|
|
$
|
673
|
|
|
$
|
331
|
|
|
$
|
66,609
|
|
Loans charged-off
|
|
|
(1,174
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(643
|
)
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
(1,832
|
)
|
Recoveries of loans previously charged-off
|
|
|
60
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
899
|
|
|
|
6
|
|
|
|
5
|
|
|
|
971
|
|
Net loans (charged-off) recoveries
|
|
|
(1,114
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
256
|
|
|
|
6
|
|
|
|
(10
|
)
|
|
|
(861
|
)
|
Provision for credit losses
|
|
|
4,557
|
|
|
|
(601
|
)
|
|
|
(72
|
)
|
|
|
(9
|
)
|
|
|
(1,368
|
)
|
|
|
(48
|
)
|
|
|
(18
|
)
|
|
|
2,441
|
|
Ending balance
|
|
$
|
15,649
|
|
|
$
|
27,387
|
|
|
$
|
5,931
|
|
|
$
|
749
|
|
|
$
|
17,539
|
|
|
$
|
631
|
|
|
$
|
303
|
|
|
$
|
68,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
13,102
|
|
|
$
|
25,376
|
|
|
$
|
5,934
|
|
|
$
|
944
|
|
|
$
|
18,492
|
|
|
$
|
770
|
|
|
$
|
140
|
|
|
$
|
64,758
|
|
Loans charged-off
|
|
|
(2,435
|
)
|
|
|
(121
|
)
|
|
|
(132
|
)
|
|
|
—
|
|
|
|
(1,160
|
)
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
(3,863
|
)
|
Recoveries of loans previously charged-off
|
|
|
86
|
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
994
|
|
|
|
133
|
|
|
|
13
|
|
|
|
1,234
|
|
Net loans (charged-off) recoveries
|
|
|
(2,349
|
)
|
|
|
(119
|
)
|
|
|
(130
|
)
|
|
|
4
|
|
|
|
(166
|
)
|
|
|
133
|
|
|
|
(2
|
)
|
|
|
(2,629
|
)
|
Provision for credit losses
|
|
|
4,896
|
|
|
|
2,130
|
|
|
|
127
|
|
|
|
(199
|
)
|
|
|
(787
|
)
|
|
|
(272
|
)
|
|
|
165
|
|
|
|
6,060
|
|
Ending balance
|
|
$
|
15,649
|
|
|
$
|
27,387
|
|
|
$
|
5,931
|
|
|
$
|
749
|
|
|
$
|
17,539
|
|
|
$
|
631
|
|
|
$
|
303
|
|
|
$
|
68,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
6,271
|
|
|
$
|
3,043
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56
|
|
|
$
|
9,870
|
|
Collectively evaluated for impairment
|
|
|
9,378
|
|
|
|
24,344
|
|
|
|
5,431
|
|
|
|
749
|
|
|
|
17,539
|
|
|
|
631
|
|
|
|
247
|
|
|
|
58,319
|
|
Ending balance
|
|
$
|
15,649
|
|
|
$
|
27,387
|
|
|
$
|
5,931
|
|
|
$
|
749
|
|
|
$
|
17,539
|
|
|
$
|
631
|
|
|
$
|
303
|
|
|
$
|
68,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
14,225
|
|
|
$
|
23,308
|
|
|
$
|
4,189
|
|
|
$
|
1,081
|
|
|
$
|
16,727
|
|
|
$
|
1,216
|
|
|
$
|
301
|
|
|
$
|
61,047
|
|
Loans charged-off
|
|
|
(522
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(39
|
)
|
|
|
—
|
|
|
|
(32
|
)
|
|
|
(593
|
)
|
Recoveries of loans previously charged-off
|
|
|
407
|
|
|
|
30
|
|
|
|
—
|
|
|
|
2
|
|
|
|
146
|
|
|
|
1
|
|
|
|
6
|
|
|
|
592
|
|
Net loans (charged-off) recoveries
|
|
|
(115
|
)
|
|
|
30
|
|
|
|
—
|
|
|
|
2
|
|
|
|
107
|
|
|
|
1
|
|
|
|
(26
|
)
|
|
|
(1
|
)
|
Provision for credit losses
|
|
|
(2,266
|
)
|
|
|
(963
|
)
|
|
|
1,273
|
|
|
|
(126
|
)
|
|
|
4,052
|
|
|
|
(120
|
)
|
|
|
71
|
|
|
|
1,921
|
|
Ending balance
|
|
$
|
11,844
|
|
|
$
|
22,375
|
|
|
$
|
5,462
|
|
|
$
|
957
|
|
|
$
|
20,886
|
|
|
$
|
1,097
|
|
|
$
|
346
|
|
|
$
|
62,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
14,700
|
|
|
$
|
21,105
|
|
|
$
|
4,010
|
|
|
$
|
1,284
|
|
|
$
|
16,487
|
|
|
$
|
1,328
|
|
|
$
|
160
|
|
|
$
|
59,074
|
|
Loans charged-off
|
|
|
(659
|
)
|
|
|
(1,470
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(39
|
)
|
|
|
—
|
|
|
|
(98
|
)
|
|
|
(2,266
|
)
|
Recoveries of loans previously charged-off
|
|
|
675
|
|
|
|
80
|
|
|
|
2
|
|
|
|
5
|
|
|
|
491
|
|
|
|
4
|
|
|
|
18
|
|
|
|
1,275
|
|
Net loans (charged-off) recoveries
|
|
|
16
|
|
|
|
(1,390
|
)
|
|
|
2
|
|
|
|
5
|
|
|
|
452
|
|
|
|
4
|
|
|
|
(80
|
)
|
|
|
(991
|
)
|
Provision for credit losses
|
|
|
(2,872
|
)
|
|
|
2,660
|
|
|
|
1,450
|
|
|
|
(332
|
)
|
|
|
3,947
|
|
|
|
(235
|
)
|
|
|
266
|
|
|
|
4,884
|
|
Ending balance
|
|
$
|
11,844
|
|
|
$
|
22,375
|
|
|
$
|
5,462
|
|
|
$
|
957
|
|
|
$
|
20,886
|
|
|
$
|
1,097
|
|
|
$
|
346
|
|
|
$
|
62,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
3,246
|
|
|
$
|
1,378
|
|
|
$
|
1,005
|
|
|
$
|
—
|
|
|
$
|
2,900
|
|
|
$
|
90
|
|
|
$
|
81
|
|
|
$
|
8,700
|
|
Collectively evaluated for impairment
|
|
|
8,598
|
|
|
|
20,997
|
|
|
|
4,457
|
|
|
|
957
|
|
|
|
17,986
|
|
|
|
1,007
|
|
|
|
265
|
|
|
|
54,267
|
|
Ending balance
|
|
$
|
11,844
|
|
|
$
|
22,375
|
|
|
$
|
5,462
|
|
|
$
|
957
|
|
|
$
|
20,886
|
|
|
$
|
1,097
|
|
|
$
|
346
|
|
|
$
|
62,967
|
|
The Company’s
recorded investments in loans as of September 30, 2018 and December 31, 2017 related to each balance in the allowance for loan
losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
27,370
|
|
|
$
|
9,404
|
|
|
$
|
5,312
|
|
|
$
|
1,236
|
|
|
$
|
3,030
|
|
|
$
|
487
|
|
|
$
|
92
|
|
|
$
|
46,931
|
|
Collectively evaluated for impairment
|
|
|
1,466,207
|
|
|
|
3,180,506
|
|
|
|
857,850
|
|
|
|
103,628
|
|
|
|
1,101,133
|
|
|
|
86,038
|
|
|
|
2,379
|
|
|
|
6,797,741
|
|
Ending balance
|
|
$
|
1,493,577
|
|
|
$
|
3,189,910
|
|
|
$
|
863,162
|
|
|
$
|
104,864
|
|
|
$
|
1,104,163
|
|
|
$
|
86,525
|
|
|
$
|
2,471
|
|
|
$
|
6,844,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
8,726
|
|
|
$
|
10,192
|
|
|
$
|
5,501
|
|
|
$
|
478
|
|
|
$
|
4,709
|
|
|
$
|
494
|
|
|
$
|
91
|
|
|
$
|
30,191
|
|
Collectively evaluated for impairment
|
|
|
1,367,213
|
|
|
|
3,036,902
|
|
|
|
749,943
|
|
|
|
103,879
|
|
|
|
1,027,123
|
|
|
|
92,770
|
|
|
|
3,507
|
|
|
|
6,381,337
|
|
Ending balance
|
|
$
|
1,375,939
|
|
|
$
|
3,047,094
|
|
|
$
|
755,444
|
|
|
$
|
104,357
|
|
|
$
|
1,031,832
|
|
|
$
|
93,264
|
|
|
$
|
3,598
|
|
|
$
|
6,411,528
|
|
At September 30, 2018,
nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia Heritage Bank
(“Virginia Heritage”) have a carrying value of $287 thousand and $394 thousand, and an unpaid principal balance of
$337 thousand and $1.2 million, respectively, and were evaluated separately in accordance with ASC Topic 310-30,
“Loans
and Debt Securities Acquired with Deteriorated Credit Quality
.” At December 31, 2017, nonperforming loans acquired from
Fidelity and Virginia Heritage had a carrying value of $297 thousand and $479 thousand, respectively, and an unpaid principal balance
of $347 thousand and $1.5 million, respectively, and were evaluated separately in accordance with ASC Topic 310-30. The various
impaired loans were recorded at estimated fair value with any excess being charged-off or treated as a non-accretable discount.
Subsequent downward adjustments to the valuation of impaired loans acquired will result in additional loan loss provisions and
related allowance for credit losses.
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 are to use
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 which 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 which 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.
|
Watch:
|
Loan paying as agreed with generally acceptable asset quality; however the obligor’s performance
has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not
sustain any further setbacks. Credit is expected to be strengthened through improved obligor performance and/or additional collateral
within a reasonable period of time.
|
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 updated generally on a quarterly basis, but no less frequently than annually. The following
table presents by class and by credit quality indicator, the recorded investment in the Company's loans and leases as of September
30, 2018 and December 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Pass
|
|
|
Watch and
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,444,780
|
|
|
$
|
21,427
|
|
|
$
|
27,370
|
|
|
$
|
—
|
|
|
$
|
1,493,577
|
|
Income producing - commercial real estate
|
|
|
3,156,777
|
|
|
|
23,729
|
|
|
|
9,404
|
|
|
|
—
|
|
|
|
3,189,910
|
|
Owner occupied - commercial real estate
|
|
|
821,647
|
|
|
|
36,203
|
|
|
|
5,312
|
|
|
|
—
|
|
|
|
863,162
|
|
Real estate mortgage – residential
|
|
|
102,979
|
|
|
|
649
|
|
|
|
1,236
|
|
|
|
—
|
|
|
|
104,864
|
|
Construction - commercial and residential
|
|
|
1,101,133
|
|
|
|
—
|
|
|
|
3,030
|
|
|
|
—
|
|
|
|
1,104,163
|
|
Home equity
|
|
|
85,352
|
|
|
|
686
|
|
|
|
487
|
|
|
|
—
|
|
|
|
86,525
|
|
Other consumer
|
|
|
2,379
|
|
|
|
—
|
|
|
|
92
|
|
|
|
—
|
|
|
|
2,471
|
|
Total
|
|
$
|
6,715,047
|
|
|
$
|
82,694
|
|
|
$
|
46,931
|
|
|
$
|
—
|
|
|
$
|
6,844,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,333,050
|
|
|
$
|
34,163
|
|
|
$
|
8,726
|
|
|
$
|
—
|
|
|
$
|
1,375,939
|
|
Income producing - commercial real estate
|
|
|
3,033,046
|
|
|
|
3,856
|
|
|
|
10,192
|
|
|
|
—
|
|
|
|
3,047,094
|
|
Owner occupied - commercial real estate
|
|
|
696,754
|
|
|
|
53,189
|
|
|
|
5,501
|
|
|
|
—
|
|
|
|
755,444
|
|
Real estate mortgage – residential
|
|
|
103,220
|
|
|
|
659
|
|
|
|
478
|
|
|
|
—
|
|
|
|
104,357
|
|
Construction - commercial and residential
|
|
|
1,027,123
|
|
|
|
—
|
|
|
|
4,709
|
|
|
|
—
|
|
|
|
1,031,832
|
|
Home equity
|
|
|
92,084
|
|
|
|
686
|
|
|
|
494
|
|
|
|
—
|
|
|
|
93,264
|
|
Other consumer
|
|
|
3,505
|
|
|
|
2
|
|
|
|
91
|
|
|
|
—
|
|
|
|
3,598
|
|
Total
|
|
$
|
6,288,782
|
|
|
$
|
92,555
|
|
|
$
|
30,191
|
|
|
$
|
—
|
|
|
$
|
6,411,528
|
|
Nonaccrual
and Past Due Loans
Loans
are considered past due if the required principal and interest payments have not been received as of the date such payments were
due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations
as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of
whether or not such loans are considered past due. Interest income is subsequently recognized only to the extent cash payments
are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually
due are brought current and future payments are reasonably assured.
The
following table presents, by class of loan, information related to nonaccrual loans as of September 30, 2018 and December 31,
2017.
(dollars in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
7,529
|
|
|
$
|
3,493
|
|
Income producing - commercial real estate
|
|
|
48
|
|
|
|
832
|
|
Owner occupied - commercial real estate
|
|
|
2,370
|
|
|
|
5,501
|
|
Real estate mortgage - residential
|
|
|
1,522
|
|
|
|
775
|
|
Construction - commercial and residential
|
|
|
3,030
|
|
|
|
2,052
|
|
Home equity
|
|
|
487
|
|
|
|
494
|
|
Other consumer
|
|
|
91
|
|
|
|
91
|
|
Total nonaccrual loans (1)(2)
|
|
$
|
15,077
|
|
|
$
|
13,238
|
|
(1)
|
Excludes
troubled debt restructurings (“TDRs”) that were performing under their restructured
terms totaling $17.5 million at September 30, 2018 and $12.3 million at December 31,
2017.
|
(2)
|
Gross
interest income of $707 thousand and $802 thousand would have been recorded
for the nine months ended September 30, 2018 and 2017, respectively, if nonaccrual loans
shown above had been current and in accordance with their original terms, while the interest
actually recorded on such loans was $193 thousand and $56 thousand for the nine
months ended September 30, 2018 and 2017, respectively. See Note 1 to the Consolidated
Financial Statements for a description of the Company’s policy for placing loans
on nonaccrual status.
|
The
following table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of September 30,
2018 and December 31, 2017.
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
|
|
|
|
|
|
Total Recorded
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days or
|
|
|
Total Past
|
|
|
Current
|
|
|
Investment in
|
|
(dollars in thousands)
|
|
Past Due
|
|
|
Past Due
|
|
|
More Past Due
|
|
|
Due Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,297
|
|
|
$
|
1,247
|
|
|
$
|
7,529
|
|
|
$
|
13,073
|
|
|
$
|
1,480,504
|
|
|
$
|
1,493,577
|
|
Income producing - commercial real estate
|
|
|
763
|
|
|
|
398
|
|
|
|
48
|
|
|
|
1,209
|
|
|
|
3,188,701
|
|
|
|
3,189,910
|
|
Owner occupied - commercial real estate
|
|
|
4,500
|
|
|
|
4,806
|
|
|
|
2,370
|
|
|
|
11,676
|
|
|
|
851,486
|
|
|
|
863,162
|
|
Real estate mortgage – residential
|
|
|
—
|
|
|
|
—
|
|
|
|
1,522
|
|
|
|
1,522
|
|
|
|
103,342
|
|
|
|
104,864
|
|
Construction - commercial and residential
|
|
|
21,947
|
|
|
|
1,849
|
|
|
|
3,030
|
|
|
|
26,826
|
|
|
|
1,077,337
|
|
|
|
1,104,163
|
|
Home equity
|
|
|
326
|
|
|
|
—
|
|
|
|
487
|
|
|
|
813
|
|
|
|
85,712
|
|
|
|
86,525
|
|
Other consumer
|
|
|
4
|
|
|
|
—
|
|
|
|
91
|
|
|
|
95
|
|
|
|
2,376
|
|
|
|
2,471
|
|
Total
|
|
$
|
31,837
|
|
|
$
|
8,300
|
|
|
$
|
15,077
|
|
|
$
|
55,214
|
|
|
$
|
6,789,458
|
|
|
$
|
6,844,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,705
|
|
|
$
|
748
|
|
|
$
|
3,493
|
|
|
$
|
6,946
|
|
|
$
|
1,368,993
|
|
|
$
|
1,375,939
|
|
Income producing - commercial real estate
|
|
|
4,398
|
|
|
|
6,930
|
|
|
|
832
|
|
|
|
12,160
|
|
|
|
3,034,934
|
|
|
|
3,047,094
|
|
Owner occupied - commercial real estate
|
|
|
522
|
|
|
|
3,906
|
|
|
|
5,501
|
|
|
|
9,929
|
|
|
|
745,515
|
|
|
|
755,444
|
|
Real estate mortgage – residential
|
|
|
6,993
|
|
|
|
1,244
|
|
|
|
775
|
|
|
|
9,012
|
|
|
|
95,345
|
|
|
|
104,357
|
|
Construction - commercial and residential
|
|
|
—
|
|
|
|
5,268
|
|
|
|
2,052
|
|
|
|
7,320
|
|
|
|
1,024,512
|
|
|
|
1,031,832
|
|
Home equity
|
|
|
307
|
|
|
|
—
|
|
|
|
494
|
|
|
|
801
|
|
|
|
92,463
|
|
|
|
93,264
|
|
Other consumer
|
|
|
45
|
|
|
|
6
|
|
|
|
91
|
|
|
|
142
|
|
|
|
3,456
|
|
|
|
3,598
|
|
Total
|
|
$
|
14,970
|
|
|
$
|
18,102
|
|
|
$
|
13,238
|
|
|
$
|
46,310
|
|
|
$
|
6,365,218
|
|
|
$
|
6,411,528
|
|
Impaired
Loans
Loans
are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all
amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest
payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other
loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at
the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment
is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability
of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions
thereof, are charged off when deemed uncollectible.
The
following table presents, by class of loan, information related to impaired loans for the periods ended September 30, 2018 and
December 31, 2017.
|
|
Unpaid
Contractual
|
|
|
Recorded
Investment
|
|
|
Recorded
Investment
|
|
|
Total
|
|
|
|
|
|
Average
Recorded Investment
|
|
|
Interest
Income Recognized
|
|
|
|
Principal
|
|
|
With
No
|
|
|
With
|
|
|
Recorded
|
|
|
Related
|
|
|
Quarter
|
|
|
Year
|
|
|
Quarter
|
|
|
Year
|
|
(dollars
in thousands)
|
|
Balance
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Allowance
|
|
|
To
Date
|
|
|
To
Date
|
|
|
To
Date
|
|
|
To
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
12,943
|
|
|
$
|
—
|
|
|
$
|
12,471
|
|
|
$
|
12,471
|
|
|
$
|
6,271
|
|
|
$
|
10,234
|
|
|
$
|
8,431
|
|
|
$
|
277
|
|
|
$
|
316
|
|
Income
producing - commercial real estate
|
|
|
9,260
|
|
|
|
—
|
|
|
|
9,260
|
|
|
|
9,260
|
|
|
|
3,043
|
|
|
|
9,292
|
|
|
|
9,277
|
|
|
|
120
|
|
|
|
361
|
|
Owner
occupied - commercial real estate
|
|
|
5,761
|
|
|
|
449
|
|
|
|
5,312
|
|
|
|
5,761
|
|
|
|
500
|
|
|
|
5,940
|
|
|
|
6,104
|
|
|
|
125
|
|
|
|
149
|
|
Real
estate mortgage – residential
|
|
|
1,522
|
|
|
|
1,522
|
|
|
|
—
|
|
|
|
1,522
|
|
|
|
—
|
|
|
|
1,749
|
|
|
|
1,747
|
|
|
|
—
|
|
|
|
2
|
|
Construction
- commercial and residential
|
|
|
3,030
|
|
|
|
3,030
|
|
|
|
—
|
|
|
|
3,030
|
|
|
|
—
|
|
|
|
1,515
|
|
|
|
1,694
|
|
|
|
68
|
|
|
|
68
|
|
Home
equity
|
|
|
487
|
|
|
|
487
|
|
|
|
—
|
|
|
|
487
|
|
|
|
—
|
|
|
|
491
|
|
|
|
492
|
|
|
|
—
|
|
|
|
—
|
|
Other
consumer
|
|
|
92
|
|
|
|
—
|
|
|
|
92
|
|
|
|
92
|
|
|
|
56
|
|
|
|
92
|
|
|
|
91
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
33,095
|
|
|
$
|
5,488
|
|
|
$
|
27,135
|
|
|
$
|
32,623
|
|
|
$
|
9,870
|
|
|
$
|
29,313
|
|
|
$
|
27,836
|
|
|
$
|
590
|
|
|
$
|
896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
5,644
|
|
|
$
|
1,777
|
|
|
$
|
3,748
|
|
|
$
|
5,525
|
|
|
$
|
3,259
|
|
|
$
|
5,764
|
|
|
$
|
5,765
|
|
|
$
|
48
|
|
|
$
|
145
|
|
Income
producing - commercial real estate
|
|
|
10,044
|
|
|
|
781
|
|
|
|
9,263
|
|
|
|
10,044
|
|
|
|
2,380
|
|
|
|
10,068
|
|
|
|
10,127
|
|
|
|
120
|
|
|
|
493
|
|
Owner
occupied - commercial real estate
|
|
|
6,596
|
|
|
|
1,095
|
|
|
|
5,501
|
|
|
|
6,596
|
|
|
|
1,382
|
|
|
|
6,743
|
|
|
|
5,210
|
|
|
|
27
|
|
|
|
73
|
|
Real
estate mortgage – residential
|
|
|
775
|
|
|
|
775
|
|
|
|
—
|
|
|
|
775
|
|
|
|
—
|
|
|
|
538
|
|
|
|
423
|
|
|
|
17
|
|
|
|
17
|
|
Construction
- commercial and residential
|
|
|
2,052
|
|
|
|
1,534
|
|
|
|
518
|
|
|
|
2,052
|
|
|
|
500
|
|
|
|
3,491
|
|
|
|
3,731
|
|
|
|
(14
|
)
|
|
|
—
|
|
Home
equity
|
|
|
494
|
|
|
|
494
|
|
|
|
—
|
|
|
|
494
|
|
|
|
—
|
|
|
|
544
|
|
|
|
346
|
|
|
|
—
|
|
|
|
2
|
|
Other
consumer
|
|
|
91
|
|
|
|
—
|
|
|
|
91
|
|
|
|
91
|
|
|
|
80
|
|
|
|
92
|
|
|
|
93
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
25,696
|
|
|
$
|
6,456
|
|
|
$
|
19,121
|
|
|
$
|
25,577
|
|
|
$
|
7,601
|
|
|
$
|
27,240
|
|
|
$
|
25,695
|
|
|
$
|
198
|
|
|
$
|
730
|
|
Modifications
A
modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes
a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified
in a TDR 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 TDR 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 TDR may also involve extending the interest-only payment period. As of September 30, 2018, all
performing TDRs were categorized as interest-only modifications.
Loans
modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan.
An allowance for impaired consumer and commercial loans that have been modified in a TDR 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.
The
following table presents by class, the recorded investment of loans modified in TDRs held by the Company for the periods ended
September 30, 2018 and December 31, 2017.
|
|
For the Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
Income
Producing -
|
|
|
Owner
Occupied -
|
|
|
Construction -
|
|
|
|
|
(dollars in thousands)
|
|
Number of
Contracts
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Total
|
|
Troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured accruing
|
|
|
10
|
|
|
$
|
4,942
|
|
|
$
|
9,212
|
|
|
$
|
3,391
|
|
|
$
|
—
|
|
|
$
|
17,545
|
|
Restructured nonaccruing
|
|
|
4
|
|
|
|
723
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
723
|
|
Total
|
|
|
14
|
|
|
$
|
5,665
|
|
|
$
|
9,212
|
|
|
$
|
3,391
|
|
|
$
|
—
|
|
|
$
|
18,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific allowance
|
|
|
|
|
|
$
|
2,000
|
|
|
$
|
3,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured and subsequently defaulted
|
|
|
|
|
|
$
|
—
|
|
|
$
|
937
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
Income
Producing -
|
|
|
Owner
Occupied -
|
|
|
Construction -
|
|
|
|
|
(dollars in thousands)
|
|
Number of
Contracts
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Total
|
|
Troubled debt restructings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured accruing
|
|
|
9
|
|
|
$
|
2,032
|
|
|
$
|
9,212
|
|
|
$
|
1,095
|
|
|
$
|
—
|
|
|
$
|
12,339
|
|
Restructured nonaccruing
|
|
|
5
|
|
|
|
867
|
|
|
|
121
|
|
|
|
—
|
|
|
|
—
|
|
|
|
988
|
|
Total
|
|
|
14
|
|
|
$
|
2,899
|
|
|
$
|
9,333
|
|
|
$
|
1,095
|
|
|
$
|
—
|
|
|
$
|
13,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific allowance
|
|
|
|
|
|
$
|
595
|
|
|
$
|
2,350
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured and subsequently defaulted
|
|
|
|
|
|
$
|
237
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
237
|
|
The
Company had fourteen TDR’s at September 30, 2018 totaling approximately $18.3 million. Ten of these loans totaling approximately
$17.5 million are performing under their modified terms. There were two performing TDRs totaling $937 thousand that defaulted
on their modified terms which were reclassified to nonperforming loans during the nine months ended September 30, 2018, as compared
to the same period in 2017, which had one default on a $237 thousand restructured loan which was charged off. A default is considered
to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. Commercial and consumer loans
modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in
a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments
may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of
the loan. For the three months ended September 30, 20108, there was one loan totaling $2.4 million modified in a TDR, as compared
to the three months ended September 30, 2017 which had two loans totaling $251 thousand modified in a TDR. For the nine months
ended September 31, 2018, there were three loans totaling $6.4 million modified in a TDR, as compared to the nine months ended
September 30, 2017 which had three loans totaling $5.1 million modified in a TDR.
Note
6. Interest Rate Swap Derivatives
The
Company uses interest rate swap agreements to assist in its interest rate risk management. The Company’s objective in using
interest rate derivatives designated as cash flow hedges is to add stability to interest expense and to better manage its exposure
to interest rate movements. To accomplish this objective, the Company entered into forward starting interest rate swaps in April
2015 as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on
the Bank’s cost of funds. The notional amounts of the interest rate swaps designated as cash flow hedges do not represent
amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative,
the amounts to be exchanged between the counterparties. The interest rate swaps are designated as cash flow hedges and involve
the receipt of variable rate amounts from two counterparties in exchange for the Company making fixed payments beginning in April
2016. The Company’s intent is to hedge its exposure to the variability in potential future interest rate conditions on existing
financial instruments.
As
of September 30, 2018, the Company had three forward starting designated cash flow hedge interest rate swap transactions outstanding
that had an aggregate notional amount of $250 million associated with the Company’s variable rate deposits. The net unrealized
gain before income tax on the swaps was $6.4 million at September 30, 2018 compared to a net unrealized gain before income tax
of $2.3 million at December 31, 2017. The unrealized gain in value since year end 2017 is due to the increase in expected net
cash inflows from the swap over its remaining term due to higher market interest rates.
For
derivatives designated as cash flow hedges, changes in the fair value of the derivative are initially reported in other comprehensive
income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings.
The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging
instrument with the changes in cash flows of the designated hedged transactions.
Amounts
reported in accumulated other comprehensive income related to designated cash flow hedge derivatives will be reclassified to interest
income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities.
During the
three and nine months ended September 30, 2018, the Company reclassified $214 and $230 thousand, respectively, related to designated
cash flow hedge derivatives from accumulated other comprehensive income to decrease interest expense. During the three and nine
months ended September 30, 2017, the Company reclassified $307 and $1.3 million, respectively, related to designated cash flow
hedge derivatives from accumulated other comprehensive income to increase interest expense.
During
the next twelve months, the Company estimates (based on existing interest rates) that $2.1 million will be reclassified as a decrease
in interest expense.
The Company is exposed to credit risk in the event of nonperformance by the interest rate swap 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 swaps. The
Company monitors counterparty risk in accordance with the provisions of ASC Topic 815,
“Derivatives and Hedging.”
In addition, the interest rate swap agreements contain language outlining collateral-pledging requirements for each counterparty.
Collateral must be posted when the market value exceeds certain threshold limits.
The
designated cash flow hedge interest rate swap 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.
As
of September 30, 2018, the aggregate fair value of all designated cash flow hedge derivative contracts with credit risk contingent
features (i.e., those containing collateral posting or termination provisions based on our capital status) that were in a net
asset position totaled $5.8 million (none of these contracts were in a net liability position as of September 30, 2018). The Company
has minimum collateral posting thresholds with certain of its derivative counterparties. As of September 30, 2018, the Company
was not required to post collateral with its derivative counterparties against its obligations under these agreements because
these agreements were in a net asset position. If the Company had breached any provisions under the agreements at September 30,
2018, it could have been required to settle its obligations under the agreements at the termination value.
During
the third quarter of 2018, 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. These derivatives are not designated as hedges, are not speculative, and have a
notional value of $27.5 million as of September 30. 2018. The changes in fair value for these contracts are recognized directly
in earnings.
The
table below identifies the balance sheet category and fair values of the Company’s designated cash flow hedge derivative
instruments and non-designated hedges as of September 30, 2018 and December 31, 2017.
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
Swap
|
|
|
Notional
|
|
|
|
|
|
Balance Sheet
|
|
Notional
|
|
|
|
|
|
Balance Sheet
|
|
|
Number
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Category
|
|
Amount
|
|
|
Fair Value
|
|
|
Category
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
|
(1
|
)
|
|
$
|
75,000
|
|
|
$
|
1,240
|
|
|
Other Assets
|
|
$
|
75,000
|
|
|
$
|
598
|
|
|
Other Assets
|
Interest rate swap
|
|
|
(2
|
)
|
|
|
100,000
|
|
|
|
2,539
|
|
|
Other Assets
|
|
|
100,000
|
|
|
|
821
|
|
|
Other Assets
|
Interest rate swap
|
|
|
(3
|
)
|
|
|
75,000
|
|
|
|
2,648
|
|
|
Other Assets
|
|
|
75,000
|
|
|
|
837
|
|
|
Other Assets
|
|
|
|
Total
|
|
|
$
|
250,000
|
|
|
$
|
6,427
|
|
|
|
|
$
|
250,000
|
|
|
$
|
2,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Contracts
|
|
|
(1
|
)
|
|
|
27,500
|
|
|
|
29
|
|
|
Other Liabilities
|
|
|
—
|
|
|
|
—
|
|
|
Other Liabilities
|
|
|
|
Total
|
|
|
$
|
27,500
|
|
|
$
|
29
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
The
table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the three and nine
months ended September 30, 2018 and 2017.
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
Amount of
|
|
|
Reclassified from AOCI into Income
|
|
|
Amount of
|
|
|
Reclassified from AOCI into Income
|
|
|
|
Swap
|
|
|
Pre-tax gain
|
|
|
|
|
Amount of
|
|
|
Pre-tax (loss)
|
|
|
|
|
Amount of
|
|
|
|
Number
|
|
|
Recognized in OCI
|
|
|
Category
|
|
Gain (Loss)
|
|
|
Recognized in OCI
|
|
|
Category
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
|
(1
|
)
|
|
$
|
111
|
|
|
Interest Expense
|
|
$
|
90
|
|
|
$
|
26
|
|
|
Interest Expense
|
|
$
|
(72
|
)
|
Interest rate swap
|
|
|
(2
|
)
|
|
|
426
|
|
|
Interest Expense
|
|
|
73
|
|
|
|
(8
|
)
|
|
Interest Expense
|
|
|
(122
|
)
|
Interest rate swap
|
|
|
(3
|
)
|
|
|
312
|
|
|
Interest Expense
|
|
|
51
|
|
|
|
(56
|
)
|
|
Interest Expense
|
|
|
(113
|
)
|
|
|
|
Total
|
|
|
$
|
849
|
|
|
|
|
$
|
214
|
|
|
$
|
(38
|
)
|
|
|
|
$
|
(307
|
)
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Reclassified from AOCI into Income
|
|
|
|
|
|
Reclassified from AOCI into Income
|
|
|
|
|
Swap Number
|
|
|
Amount of
Pre-tax gain
Recognized in OCI
|
|
Category
|
|
Amount of
Gain (Loss)
|
|
|
Amount of
Pre-tax (loss)
Recognized in OCI
|
|
|
Category
|
|
Amount of
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
|
(1
|
)
|
|
$
|
791
|
|
|
Interest Expense
|
|
$
|
148
|
|
|
$
|
(26
|
)
|
|
Interest Expense
|
|
$
|
(338
|
)
|
Interest rate swap
|
|
|
(2
|
)
|
|
|
1,769
|
|
|
Interest Expense
|
|
|
51
|
|
|
|
(35
|
)
|
|
Interest Expense
|
|
|
(525
|
)
|
Interest rate swap
|
|
|
(3
|
)
|
|
|
1,841
|
|
|
Interest Expense
|
|
|
31
|
|
|
|
(400
|
)
|
|
Interest Expense
|
|
|
(458
|
)
|
|
|
|
Total
|
|
|
$
|
4,401
|
|
|
|
|
$
|
230
|
|
|
$
|
(461
|
)
|
|
|
|
$
|
(1,321
|
)
|
The
table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations
for the three and nine months ended September 30, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
|
|
|
|
Three Months Ended September 30, 2018
|
|
Three Months Ended September 30, 2017
|
|
(dollars in thousands)
|
|
Interest Income (Expense)
|
|
|
Other Income (Expense)
|
|
|
Interest Income (Expense)
|
|
|
Other Income (Expense)
|
|
Total amounts of income and expense line items presented in the Consolidated
Statements of Operations in which the effects of cash flow hedges are recorded
|
|
$
|
214
|
|
|
$
|
—
|
|
|
$
|
(307
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effects of cash flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other
comprehensive income into income
|
|
$
|
214
|
|
|
$
|
—
|
|
|
$
|
(307
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Nine Months Ended September 30, 2017
|
|
(dollars in thousands)
|
|
Interest Income (Expense)
|
|
|
Other Income (Expense)
|
|
|
Interest Income (Expense)
|
|
|
Other Income (Expense)
|
|
Total amounts of income and expense line items presented in
the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
|
|
$
|
230
|
|
|
$
|
—
|
|
|
$
|
(1,321
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effects of cash flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (loss) on
cash flow hedging relationships in Subtopic 815-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income
|
|
$
|
230
|
|
|
$
|
—
|
|
|
$
|
(1,321
|
)
|
|
$
|
—
|
|
Balance
Sheet Offsetting
: Our designated cash flow hedge interest rate swap derivatives are eligible for offset in the Consolidated
Balance Sheets and are subject to master netting arrangements. Our derivative transactions with counterparties are generally executed
under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off”
provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention
to settle such amounts on a net basis. The Company generally offsets such financial instruments for financial reporting purposes.
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s cash flow
hedge derivatives as of September 30, 2018 and December 31, 2017.
As of September 30, 2018
|
Offsetting of Derivative Assets
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Balance Sheet
|
|
|
|
Gross Amounts of Recognized Assets
|
|
|
Gross Amounts Offset in the Balance Sheet
|
|
|
Net Amounts of Assets presented in the Balance Sheet
|
|
|
Financial Instruments
|
|
|
Cash Collateral Posted
|
|
|
Net Amount
|
|
Counterparty 1
|
|
$
|
5,220
|
|
|
$
|
—
|
|
|
$
|
5,220
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,220
|
|
Counterparty 2
|
|
|
1,270
|
|
|
|
—
|
|
|
$
|
1,270
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
1,270
|
|
Counterparty 3
|
|
|
(29
|
)
|
|
|
—
|
|
|
$
|
(29
|
)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
(29
|
)
|
|
|
$
|
6,461
|
|
|
$
|
—
|
|
|
$
|
6,461
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,461
|
|
As of December 31, 2017
|
Offsetting of Derivative Assets
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Balance Sheet
|
|
|
|
Gross Amounts of Recognized Assets
|
|
|
Gross Amounts Offset in the Balance Sheet
|
|
|
Net Amounts of Assets presented in the Balance Sheet
|
|
|
Financial Instruments
|
|
|
Cash Collateral Posted
|
|
|
Net Amount
|
|
Counterparty 1
|
|
$
|
1,619
|
|
|
$
|
—
|
|
|
$
|
1,619
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,619
|
|
Counterparty 2
|
|
|
582
|
|
|
|
—
|
|
|
|
582
|
|
|
|
—
|
|
|
|
—
|
|
|
|
582
|
|
|
|
$
|
2,201
|
|
|
$
|
—
|
|
|
$
|
2,201
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,201
|
|
Note
7. Other Real Estate Owned
The
activity within Other Real Estate Owned (“OREO”) for the three and nine months ended September 30, 2018 and 2017 is
presented in the table below. There were no residential real estate loans in the process of foreclosure as of September 30, 2018. For
the three and nine months ended September 30, 2018, there were no sales of OREO property. For the three months ended September
30, 2017, proceeds on sale of OREO were $1.2 million from the sale of two OREO properties with a total carrying value of $1.1
million resulting in a net gain of $60 thousand. For the nine months ended September 30, 2017, proceeds on sale of OREO were $2.1
million from the sale of three OREO properties with a total carrying value of $2.5 million resulting in a net loss of $301 thousand.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1,
|
|
$
|
1,394
|
|
|
$
|
1,394
|
|
|
$
|
1,394
|
|
|
$
|
2,694
|
|
Real estate acquired from borrowers
|
|
|
—
|
|
|
|
1,145
|
|
|
|
—
|
|
|
|
1,145
|
|
Properties sold
|
|
|
—
|
|
|
|
(1,145
|
)
|
|
|
—
|
|
|
|
(2,445
|
)
|
Ending balance
|
|
$
|
1,394
|
|
|
$
|
1,394
|
|
|
$
|
1,394
|
|
|
$
|
1,394
|
|
Note
8. Long-Term Borrowings
The
following table presents information related to the Company’s long-term borrowings as of September 30, 2018 and December
31, 2017.
(dollars in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Subordinated Notes, 5.75%
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
Subordinated Notes, 5.0%
|
|
|
150,000
|
|
|
|
150,000
|
|
Less: unamortized debt issuance costs
|
|
|
(2,802
|
)
|
|
|
(3,095
|
)
|
Long-term borrowings
|
|
$
|
217,198
|
|
|
$
|
216,905
|
|
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 includes
$1.2 million in deferred financing costs which are being amortized over the life of the 2024 Notes.
On
July 26, 2016, the Company completed the sale of $150.0 million of its 5.00% Fixed-to-Floating Rate Subordinated Notes, due August
1, 2026 (the “2026 Notes”). The 2026 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 $147.35
million, which includes $2.6 million in deferred financing costs which are being amortized over the life of the 2026 Notes.
Note
9. Net Income per Common Share
The
calculation of net income per common share for the three months ended September 30, 2018 and 2017 was as follows.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(dollars and shares in thousands, except per share data)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
38,948
|
|
|
$
|
29,874
|
|
|
$
|
111,959
|
|
|
$
|
84,663
|
|
Average common shares outstanding
|
|
|
34,309
|
|
|
|
34,174
|
|
|
|
34,292
|
|
|
|
34,124
|
|
Basic net income per common share
|
|
$
|
1.14
|
|
|
$
|
0.87
|
|
|
$
|
3.26
|
|
|
$
|
2.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
38,948
|
|
|
$
|
29,874
|
|
|
$
|
111,959
|
|
|
$
|
84,663
|
|
Average common shares outstanding
|
|
|
34,309
|
|
|
|
34,174
|
|
|
|
34,292
|
|
|
|
34,124
|
|
Adjustment for common share equivalents
|
|
|
152
|
|
|
|
164
|
|
|
|
152
|
|
|
|
192
|
|
Average common shares outstanding-diluted
|
|
|
34,461
|
|
|
|
34,338
|
|
|
|
34,444
|
|
|
|
34,316
|
|
Diluted net income per common share
|
|
$
|
1.13
|
|
|
$
|
0.87
|
|
|
$
|
3.25
|
|
|
$
|
2.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Note 10. Other Comprehensive Income
The following table presents the components of other
comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017.
(dollars in thousands)
|
|
Before Tax
|
|
|
Tax Effect
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on securities available-for-sale
|
|
$
|
(4,253
|
)
|
|
$
|
1,105
|
|
|
$
|
(3,148
|
)
|
Less: Reclassification adjustment for net gains included in net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total unrealized loss
|
|
|
(4,253
|
)
|
|
|
1,105
|
|
|
|
(3,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivatives
|
|
|
846
|
|
|
|
221
|
|
|
|
625
|
|
Less: Reclassification adjustment for losses included in net income
|
|
|
(211
|
)
|
|
|
(53
|
)
|
|
|
(158
|
)
|
Total unrealized gain
|
|
|
635
|
|
|
|
168
|
|
|
|
467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss
|
|
$
|
(3,618
|
)
|
|
$
|
1,273
|
|
|
$
|
(2,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale
|
|
$
|
25
|
|
|
$
|
10
|
|
|
$
|
15
|
|
Less: Reclassification adjustment for net gains included in net income
|
|
|
(11
|
)
|
|
|
(4
|
)
|
|
|
(7
|
)
|
Total unrealized gain
|
|
|
14
|
|
|
|
6
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on derivatives
|
|
|
557
|
|
|
|
210
|
|
|
|
347
|
|
Less: Reclassification adjustment for losses included in net income
|
|
|
(289
|
)
|
|
|
(106
|
)
|
|
|
(183
|
)
|
Total unrealized loss
|
|
|
268
|
|
|
|
104
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
$
|
282
|
|
|
$
|
110
|
|
|
$
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale
|
|
$
|
(13,079
|
)
|
|
$
|
2,873
|
|
|
$
|
(10,206
|
)
|
Less: Reclassification adjustment for net gains included in net income
|
|
|
(68
|
)
|
|
|
(17
|
)
|
|
|
(51
|
)
|
Total unrealized loss
|
|
|
(13,147
|
)
|
|
|
2,856
|
|
|
|
(10,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivatives
|
|
|
4,380
|
|
|
|
833
|
|
|
|
3,547
|
|
Less: Reclassification adjustment for losses included in net income
|
|
|
(209
|
)
|
|
|
(53
|
)
|
|
|
(156
|
)
|
Total unrealized gain
|
|
|
4,171
|
|
|
|
780
|
|
|
|
3,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss
|
|
$
|
(8,976
|
)
|
|
$
|
3,636
|
|
|
$
|
(6,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale
|
|
$
|
2,080
|
|
|
$
|
837
|
|
|
$
|
1,243
|
|
Less: Reclassification adjustment for net gains included in net income
|
|
|
(542
|
)
|
|
|
(202
|
)
|
|
|
(340
|
)
|
Total unrealized gain
|
|
|
1,538
|
|
|
|
635
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivatives
|
|
|
2,186
|
|
|
|
836
|
|
|
|
1,350
|
|
Less: Reclassification adjustment for losses included in net income
|
|
|
(1,308
|
)
|
|
|
(487
|
)
|
|
|
(821
|
)
|
Total unrealized gain
|
|
|
878
|
|
|
|
349
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
$
|
2,416
|
|
|
$
|
984
|
|
|
$
|
1,432
|
|
The following table presents the changes in each
component of accumulated other comprehensive loss, net of tax, for the three and nine months ended September 30, 2018 and 2017.
(dollars in thousands)
|
|
Securities
Available For Sale
|
|
|
Derivatives
|
|
|
Accumulated
Other
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
(10,914
|
)
|
|
$
|
4,305
|
|
|
$
|
(6,609
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(3,148
|
)
|
|
|
625
|
|
|
|
(2,523
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
—
|
|
|
|
(158
|
)
|
|
|
(158
|
)
|
Total other comprehensive income (loss)
|
|
|
(3,148
|
)
|
|
|
467
|
|
|
|
(2,681
|
)
|
Balance at End of Period
|
|
$
|
(14,062
|
)
|
|
$
|
4,772
|
|
|
$
|
(9,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
(1,060
|
)
|
|
$
|
(61
|
)
|
|
$
|
(1,121
|
)
|
Other comprehensive income before reclassifications
|
|
|
15
|
|
|
|
347
|
|
|
|
362
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(7
|
)
|
|
|
(183
|
)
|
|
|
(190
|
)
|
Net other comprehensive income during period
|
|
|
8
|
|
|
|
164
|
|
|
|
172
|
|
Balance at End of Period
|
|
$
|
(1,052
|
)
|
|
$
|
103
|
|
|
$
|
(949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
(3,131
|
)
|
|
$
|
1,381
|
|
|
$
|
(1,750
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(10,206
|
)
|
|
|
3,547
|
|
|
|
(6,659
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(51
|
)
|
|
|
(156
|
)
|
|
|
(207
|
)
|
Total other comprehensive income (loss)
|
|
|
(10,257
|
)
|
|
|
3,391
|
|
|
|
(6,866
|
)
|
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI
|
|
|
(674
|
)
|
|
|
—
|
|
|
|
(674
|
)
|
Balance at End of Period
|
|
$
|
(14,062
|
)
|
|
$
|
4,772
|
|
|
$
|
(9,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
(1,955
|
)
|
|
$
|
(426
|
)
|
|
$
|
(2,381
|
)
|
Other comprehensive income before reclassifications
|
|
|
1,243
|
|
|
|
1,350
|
|
|
|
2,593
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(340
|
)
|
|
|
(821
|
)
|
|
|
(1,161
|
)
|
Net other comprehensive income during period
|
|
|
903
|
|
|
|
529
|
|
|
|
1,432
|
|
Balance at End of Period
|
|
$
|
(1,052
|
)
|
|
$
|
103
|
|
|
$
|
(949
|
)
|
The following table presents the amounts reclassified
out of each component of accumulated other comprehensive (loss) income for the three and nine months ended September 30, 2018 and
2017.
Details about Accumulated Other
|
|
Amount Reclassified from
|
|
|
Affected Line Item in
|
Comprehensive Income Components
|
|
Accumulated Other
|
|
|
the Statement Where
|
(dollars in thousands)
|
|
Comprehensive (Loss) Income
|
|
|
Net Income is Presented
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Realized gain on sale of investment securities
|
|
$
|
—
|
|
|
$
|
(11
|
)
|
|
Gain on sale of investment securities
|
Interest expense derivative deposits
|
|
|
(211
|
)
|
|
|
(289
|
)
|
|
Interest expense on deposits
|
Income tax benefit (expense)
|
|
|
53
|
|
|
|
110
|
|
|
Tax expense
|
Total Reclassifications for the Period
|
|
$
|
(158
|
)
|
|
$
|
(190
|
)
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other
|
|
Amount Reclassified from
|
|
|
Affected Line Item in
|
Comprehensive Income Components
|
|
Accumulated Other
|
|
|
the Statement Where
|
(dollars in thousands)
|
|
Comprehensive (Loss) Income
|
|
|
Net Income is Presented
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
Realized gain on sale of investment securities
|
|
$
|
(68
|
)
|
|
$
|
(542
|
)
|
|
Gain on sale of investment securities
|
Interest expense derivative deposits
|
|
|
(209
|
)
|
|
|
(1,308
|
)
|
|
Interest expense on deposits
|
Income tax benefit (expense)
|
|
|
70
|
|
|
|
689
|
|
|
Tax expense
|
Total Reclassifications for the Period
|
|
$
|
(207
|
)
|
|
$
|
(1,161
|
)
|
|
Net Income
|
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 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.
|
Assets and Liabilities Recorded at Fair Value
on a Recurring Basis
The table below presents the
recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31,
2017.
(dollars in thousands)
|
|
Quoted Prices
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Other
Unobservable
Inputs (Level 3)
|
|
|
Total
(Fair Value)
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. agency securities
|
|
$
|
—
|
|
|
$
|
230,325
|
|
|
$
|
—
|
|
|
$
|
230,325
|
|
Residential mortgage backed securities
|
|
|
—
|
|
|
|
436,349
|
|
|
|
—
|
|
|
|
436,349
|
|
Municipal bonds
|
|
|
—
|
|
|
|
47,736
|
|
|
|
—
|
|
|
|
47,736
|
|
Corporate bonds
|
|
|
—
|
|
|
|
6,546
|
|
|
|
1,500
|
|
|
|
8,046
|
|
Other equity investments
|
|
|
—
|
|
|
|
—
|
|
|
|
218
|
|
|
|
218
|
|
Loans held for sale
|
|
|
—
|
|
|
|
18,728
|
|
|
|
—
|
|
|
|
18,728
|
|
Mortgage banking derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
80
|
|
|
|
80
|
|
Interest rate swap derivatives
|
|
|
—
|
|
|
|
6,427
|
|
|
|
—
|
|
|
|
6,427
|
|
Total assets measured at fair value on a recurring basis as of
September 30, 2018
|
|
$
|
—
|
|
|
$
|
746,111
|
|
|
$
|
1,798
|
|
|
$
|
747,909
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking derivatives
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28
|
|
|
$
|
28
|
|
Total liabilities measured at fair value on a recurring basis
as of September 30, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28
|
|
|
$
|
28
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. agency securities
|
|
$
|
—
|
|
|
$
|
195,984
|
|
|
$
|
—
|
|
|
$
|
195,984
|
|
Residential mortgage backed securities
|
|
|
—
|
|
|
|
317,836
|
|
|
|
—
|
|
|
|
317,836
|
|
Municipal bonds
|
|
|
—
|
|
|
|
62,057
|
|
|
|
—
|
|
|
|
62,057
|
|
Corporate bonds
|
|
|
—
|
|
|
|
11,673
|
|
|
|
1,500
|
|
|
|
13,173
|
|
Other equity investments
|
|
|
—
|
|
|
|
—
|
|
|
|
218
|
|
|
|
218
|
|
Loans held for sale
|
|
|
—
|
|
|
|
25,096
|
|
|
|
—
|
|
|
|
25,096
|
|
Mortgage banking derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
43
|
|
|
|
43
|
|
Interest rate swap derivatives
|
|
|
—
|
|
|
|
2,256
|
|
|
|
—
|
|
|
|
2,256
|
|
Total assets measured at fair value on a recurring basis as of
December 31, 2017
|
|
$
|
—
|
|
|
$
|
614,902
|
|
|
$
|
1,761
|
|
|
$
|
616,663
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking derivatives
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
10
|
|
Total liabilities measured at fair value on a recurring basis
as of December 31, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
10
|
|
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 those traded on an active
exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter
markets and money market funds. Level 2 securities include U.S. agency debt securities, mortgage backed securities issued by Government
Sponsored Entities (“GSE’s”) and municipal bonds. Securities classified as Level 3 include securities in less
liquid markets, 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 Operations and better aligns with the management of the portfolio from a business perspective. Fair value is derived
from secondary market quotations for similar instruments. Gains and losses on sales of residential mortgage loans are recorded
as a component of noninterest income in the Consolidated Statements of Operations. Gains and losses on sales of multifamily FHA
securities are recorded as a component of noninterest income in the Consolidated Statements of Operations. As such, the Company
classifies loans subjected to fair value adjustments as Level 2 valuation.
The following table summarizes
the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at
fair value as of September 30, 2018 and December 31, 2017.
|
|
September 30, 2018
|
|
|
|
|
|
|
Aggregate Unpaid
|
|
|
|
|
(dollars in thousands)
|
|
Fair Value
|
|
Principal Balance
|
|
Difference
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans held for sale
|
|
$
|
18,728
|
|
$
|
18,488
|
|
$
|
240
|
|
FHA mortgage loans held for sale
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Aggregate Unpaid
|
|
|
|
|
(dollars in thousands)
|
|
Fair Value
|
|
Principal Balance
|
|
Difference
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans held for sale
|
|
$
|
25,096
|
|
$
|
24,674
|
|
$
|
422
|
|
FHA mortgage loans held for sale
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
No residential mortgage loans
held for sale were 90 or more days past due or on nonaccrual status as of September 30, 2018 or December 31, 2017.
Interest rate swap derivatives:
These derivative instruments consist of forward starting interest rate swap agreements, which are accounted for as cash flow
hedges under ASC 815. The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued
using models generally accepted in the financial services industry and that use actively quoted or observable market input values
from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined
using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract
along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility. Derivative
contracts are executed with a Credit Support Annex, which is a bilateral agreement that requires collateral postings when the market
value exceeds certain threshold limits. These agreements protect the interests of the Company and its counterparties should either
party suffer a credit rating deterioration.
Credit Risk Participation
Agreements
: The Company enters 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. Accordingly, RPAs fall within Level 2.
Mortgage banking derivatives:
The Company relies 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 includes 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.
The following is a reconciliation
of activity for assets and liabilities measured at fair value based on Significant Other Unobservable Inputs (Level 3):
|
|
Investment
|
|
|
Mortgage Banking
|
|
|
|
|
(dollars in thousands)
|
|
Securities
|
|
|
Derivatives
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2018
|
|
$
|
1,718
|
|
|
$
|
43
|
|
|
$
|
1,761
|
|
Realized gain included in earnings - net mortgage
banking derivatives
|
|
|
—
|
|
|
|
37
|
|
|
|
37
|
|
Purchases of available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Principal redemption
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ending balance at September 30, 2018
|
|
$
|
1,718
|
|
|
$
|
80
|
|
|
$
|
1,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2018
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
10
|
|
Realized loss included in earnings - net mortgage banking derivatives
|
|
|
—
|
|
|
|
18
|
|
|
|
18
|
|
Principal redemption
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ending balance at September 30, 2018
|
|
$
|
—
|
|
|
$
|
28
|
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
Mortgage Banking
|
|
|
|
|
|
(dollars in thousands)
|
|
Securities
|
|
|
Derivatives
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2017
|
|
$
|
1,718
|
|
|
$
|
114
|
|
|
$
|
1,832
|
|
Realized loss included in earnings - net mortgage banking derivatives
|
|
|
—
|
|
|
|
(71
|
)
|
|
|
(71
|
)
|
Purchases of available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Principal redemption
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ending balance at December 31, 2017
|
|
$
|
1,718
|
|
|
$
|
43
|
|
|
$
|
1,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2017
|
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
55
|
|
Realized loss included in earnings - net mortgage banking derivatives
|
|
|
—
|
|
|
|
(45
|
)
|
|
|
(45
|
)
|
Principal redemption
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ending balance at December 31, 2017
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
10
|
|
The other equity securities
classified as Level 3 consist of equity investments in the form of common stock of two local banking companies which are not publicly
traded, and for which the carrying amount approximates fair value.
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.
Impaired loans
: The Company
does not record loans at fair value on a recurring basis; however, from time to time, a loan is considered impaired and an allowance
for loan loss is established. The Company considers a loan impaired when it is probable that the Company will be unable to collect
all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management
has determined that nonaccrual loans and loans that have had their terms restructured in a troubled debt restructuring meet this
impaired loan definition. Once a loan is identified as individually impaired, management measures impairment in accordance with
ASC Topic 310,
“Receivables.”
The fair value of impaired loans is estimated using one of several methods, including
the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired
loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the
recorded investment in such loans. At September 30, 2018, substantially all of the Company’s impaired loans were evaluated
based upon the fair value of the collateral. In accordance with ASC Topic 820, impaired loans where an allowance is established
based on the fair value of collateral 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. For individually evaluated
impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s
effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company
classifies as a Level 3 valuation.
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. 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)
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,200
|
|
|
$
|
6,200
|
|
Income producing - commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
6,217
|
|
|
|
6,217
|
|
Owner occupied - commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
5,261
|
|
|
|
5,261
|
|
Real estate mortgage - residential
|
|
|
—
|
|
|
|
—
|
|
|
|
1,522
|
|
|
|
1,522
|
|
Construction - commercial and residential
|
|
|
|
|
|
|
|
|
|
|
3,030
|
|
|
|
3,030
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
|
|
487
|
|
|
|
487
|
|
Other consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
36
|
|
|
|
36
|
|
Other real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
1,394
|
|
|
|
1,394
|
|
Total assets measured at fair value on a nonrecurring basis as of September 30, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,147
|
|
|
$
|
24,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Quoted Prices
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Other
Unobservable
Inputs (Level 3)
|
|
|
Total
(Fair Value)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,266
|
|
|
$
|
2,266
|
|
Income producing - commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
7,664
|
|
|
|
7,664
|
|
Owner occupied - commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
5,214
|
|
|
|
5,214
|
|
Real estate mortgage - residential
|
|
|
—
|
|
|
|
—
|
|
|
|
775
|
|
|
|
775
|
|
Construction - commercial and residential
|
|
|
—
|
|
|
|
—
|
|
|
|
1,552
|
|
|
|
1,552
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
|
|
494
|
|
|
|
494
|
|
Other consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
|
|
11
|
|
Other real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
1,394
|
|
|
|
1,394
|
|
Total assets measured at fair value on a nonrecurring basis as of December 31, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,370
|
|
|
$
|
19,370
|
|
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.
The following methods and assumptions
were used to estimate the fair value of each category of financial instrument for which it is practicable to estimate value:
Cash due from banks and federal
funds sold:
For cash and due from banks and federal funds sold the carrying amount approximates fair value.
Interest bearing deposits
with other banks:
For interest bearing deposits with other banks the carrying amount approximates fair value.
Investment securities:
For these instruments, fair values are 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.
Federal Reserve and Federal
Home Loan Bank stock:
The carrying amounts approximate the fair values at the reporting date.
Loans held for sale:
As the Company has elected the fair value option, the fair value of loans held for sale is the carrying value and is based on commitments
outstanding from investors as well as what secondary markets are currently offering for portfolios with similar characteristics
for residential mortgage loans held for sale since such loans are typically committed to be sold (servicing released) at a profit.
The fair value of multifamily FHA loans held for sale is the carrying value and is based on commitments outstanding from investors
as well as what secondary markets are currently offering for portfolios with similar characteristics for multifamily FHA loans
held for sale since such loans are typically committed to be securitized and sold (servicing retained) at a profit.
Loans:
The loan portfolio is valued using
an exit price notion. The present value of cash flows projection is established for each loan in the portfolio projecting contractual
payments, default adjusted payments, cash flows in the event of default (including deferred timing of recoveries), and pre-payments.
These expected cash flows are then discounted to present value using the note interest rate and an established market rate which,
if different from the note rate, allows the Bank to isolate the amount above or below par a potential acquirer would pay to acquire
the Bank’s portfolio.
Bank owned life insurance:
The fair value of bank owned life insurance is the current cash surrender value, which is the carrying value.
Annuity investment:
The
fair value of the annuity investments is the carrying amount at the reporting date.
Mortgage banking derivatives:
The Company enters into interest rate lock commitments with prospective residential mortgage
borrowers. These commitments are carried at fair value based on the fair value of the underlying mortgage loans which are based
on market data. These commitments are classified as Level 3 in the fair value disclosures, as the valuations are based on market
unobservable inputs. The Company hedges the risk of the overall change in the fair value of loan commitments to borrowers by selling
forward contracts on securities of GSEs. These forward settling contracts are classified as Level 3, as valuations are based on
market unobservable inputs. See Note 4 to the Consolidated Financial Statements for additional detail.
Credit Risk Participation
Agreements
: The Company enters 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. Accordingly, RPAs fall within Level 2.
Interest rate swap derivatives:
These derivative instruments consist of forward starting interest rate swap agreements, which are accounted for as cash flow
hedges. The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued using models generally
accepted in the financial services industry and that use actively quoted or observable market input values from external market
data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash
flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant
observable inputs, including interest rates, yield curves, nonperformance risk and volatility. Derivative contracts are executed
with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings when the market
value exceeds certain threshold limits. These agreements protect the interests of the Company and its counterparties should either
party suffer a credit rating deterioration.
Noninterest bearing deposits:
The fair value of these deposits is the amount payable on demand at the reporting date, since generally accepted accounting standards
do not permit an assumption of core deposit value.
Interest bearing deposits:
The fair value of interest bearing transaction, savings, and money market deposits with no defined maturity is the amount payable
on demand at the reporting date, since generally accepted accounting standards do not permit an assumption of core deposit value.
Certificates of deposit:
The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar
deposits with remaining maturities would be accepted.
Customer repurchase agreements:
The carrying amount approximate the fair values at the reporting date.
Borrowings:
The carrying
amount for variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate FHLB advances
and the subordinated notes are estimated by computing the discounted value of contractual cash flows payable at current interest
rates for obligations with similar remaining terms. The fair value of variable rate FHLB advances is estimated to be carrying value
since these liabilities are based on a spread to a current pricing index.
Off-balance sheet items:
Management has reviewed the unfunded portion of commitments to extend credit, as well as standby and other letters of credit, and
has determined that the fair value of such instruments is equal to the fee, if any, collected and unamortized for the commitment
made.
The estimated fair values of
the Company’s financial instruments at September 30, 2018 and December 31, 2017 are as follows:
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
(dollars in thousands)
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Quoted
Price
s
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Input
s
(Level 3)
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
4,459
|
|
|
$
|
4,459
|
|
|
$
|
—
|
|
|
$
|
4,459
|
|
|
$
|
—
|
|
Federal funds sold
|
|
|
17,284
|
|
|
|
17,284
|
|
|
|
—
|
|
|
|
17,284
|
|
|
|
—
|
|
Interest bearing deposits with other banks
|
|
|
162,734
|
|
|
|
162,734
|
|
|
|
—
|
|
|
|
162,734
|
|
|
|
—
|
|
Investment securities
|
|
|
722,674
|
|
|
|
722,674
|
|
|
|
—
|
|
|
|
720,956
|
|
|
|
1,718
|
|
Federal Reserve and Federal Home Loan Bank stock
|
|
|
37,257
|
|
|
|
37,257
|
|
|
|
—
|
|
|
|
37,257
|
|
|
|
—
|
|
Loans held for sale
|
|
|
18,728
|
|
|
|
18,728
|
|
|
|
—
|
|
|
|
18,728
|
|
|
|
—
|
|
Loans
(1)
|
|
|
6,776,483
|
|
|
|
6,713,861
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,713,861
|
|
Bank owned life insurance
|
|
|
73,007
|
|
|
|
73,007
|
|
|
|
—
|
|
|
|
73,007
|
|
|
|
—
|
|
Annuity investment
|
|
|
12,375
|
|
|
|
12,375
|
|
|
|
—
|
|
|
|
12,375
|
|
|
|
—
|
|
Mortgage banking derivatives
|
|
|
80
|
|
|
|
80
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80
|
|
Interst rate swap derivatives
|
|
|
6,427
|
|
|
|
6,427
|
|
|
|
—
|
|
|
|
6,427
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
2,057,886
|
|
|
|
2,057,886
|
|
|
|
—
|
|
|
|
2,057,886
|
|
|
|
—
|
|
Interest bearing deposits
|
|
|
3,032,713
|
|
|
|
3,032,713
|
|
|
|
—
|
|
|
|
3,032,713
|
|
|
|
—
|
|
Certificates of deposit
|
|
|
1,281,706
|
|
|
|
1,279,407
|
|
|
|
—
|
|
|
|
1,279,407
|
|
|
|
—
|
|
Customer repurchase agreements
|
|
|
36,446
|
|
|
|
36,446
|
|
|
|
—
|
|
|
|
36,446
|
|
|
|
—
|
|
Borrowings
|
|
|
542,198
|
|
|
|
533,304
|
|
|
|
—
|
|
|
|
533,304
|
|
|
|
—
|
|
Mortgage banking derivatives
|
|
|
28
|
|
|
|
28
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
7,445
|
|
|
$
|
7,445
|
|
|
$
|
—
|
|
|
$
|
7,445
|
|
|
$
|
—
|
|
Federal funds sold
|
|
|
15,767
|
|
|
|
15,767
|
|
|
|
—
|
|
|
|
15,767
|
|
|
|
—
|
|
Interest bearing deposits with other banks
|
|
|
167,261
|
|
|
|
167,261
|
|
|
|
—
|
|
|
|
167,261
|
|
|
|
—
|
|
Investment securities
|
|
|
589,268
|
|
|
|
589,268
|
|
|
|
—
|
|
|
|
587,550
|
|
|
|
1,718
|
|
Federal Reserve and Federal Home Loan Bank stock
|
|
|
36,324
|
|
|
|
36,324
|
|
|
|
—
|
|
|
|
36,324
|
|
|
|
—
|
|
Loans held for sale
|
|
|
25,096
|
|
|
|
25,096
|
|
|
|
—
|
|
|
|
25,096
|
|
|
|
—
|
|
Loans
(2)
|
|
|
6,346,770
|
|
|
|
6,381,213
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,381,213
|
|
Bank owned life insurance
|
|
|
60,947
|
|
|
|
60,947
|
|
|
|
—
|
|
|
|
60,947
|
|
|
|
—
|
|
Annuity investment
|
|
|
11,632
|
|
|
|
11,632
|
|
|
|
—
|
|
|
|
11,632
|
|
|
|
—
|
|
Mortgage banking derivatives
|
|
|
43
|
|
|
|
43
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43
|
|
Interst rate swap derivatives
|
|
|
2,256
|
|
|
|
2,256
|
|
|
|
—
|
|
|
|
2,256
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
1,982,912
|
|
|
|
1,982,912
|
|
|
|
—
|
|
|
|
1,982,912
|
|
|
|
—
|
|
Interest bearing deposits
|
|
|
3,041,563
|
|
|
|
3,041,563
|
|
|
|
—
|
|
|
|
3,041,563
|
|
|
|
—
|
|
Certificates of deposit
|
|
|
829,509
|
|
|
|
829,886
|
|
|
|
—
|
|
|
|
829,886
|
|
|
|
—
|
|
Customer repurchase agreements
|
|
|
76,561
|
|
|
|
76,561
|
|
|
|
—
|
|
|
|
76,561
|
|
|
|
—
|
|
Borrowings
|
|
|
541,905
|
|
|
|
533,162
|
|
|
|
—
|
|
|
|
533,162
|
|
|
|
—
|
|
Mortgage banking derivatives
|
|
|
10
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
(1)
|
Carrying amount is net of unearned income and the allowance for credit losses. In accordance with
the prospective adoption of ASU No. 2016-01, the fair value of loans was measured using an exit price notion.
|
(2)
|
Carrying amount is net of unearned income and the allowance for credit losses. The fair value of
loans was measured using an entry price notion.
|
Note 12. Supplemental Executive Retirement
Plan
The Bank has entered into Supplemental
Executive Retirement and Death Benefit Agreements (the “SERP Agreements”) with certain of the Bank’s executive
officers other than Mr. Paul, which upon the executive’s retirement, will provide for a stated monthly payment for such executive’s
lifetime subject to certain death benefits described below. The retirement benefit is computed as a percentage of each executive’s
projected average base salary over the five years preceding retirement, assuming retirement at age 67. The SERP Agreements provide
that (a) the benefits vest ratably over six years of service to the Bank, with the executive receiving credit for years of service
prior to entering into the SERP Agreement, (b) death, disability and change-in-control shall result in immediate vesting, and (c)
the monthly amount will be reduced if retirement occurs earlier than age 67 for any reason other than death, disability or change-in-control.
The SERP Agreements further provide for a death benefit in the event the retired executive dies prior to receiving 180 monthly
installments, paid either in a lump sum payment or continued monthly installment payments, such that the executive’s beneficiary
has received payment(s) sufficient to equate to a cumulative 180 monthly installments.
The SERP Agreements are unfunded
arrangements maintained primarily to provide supplemental retirement benefits and comply with Section 409A of the Internal Revenue
Code. The Bank financed the retirement benefits by purchasing fixed annuity contracts with four insurance carriers in 2013 totaling
$11.4 million that have been designed to provide a future source of funds for the lifetime retirement benefits of the SERP Agreements.
The primary impetus for utilizing fixed annuities is a substantial savings in compensation expenses for the Bank as opposed to
a traditional SERP Agreement. For the three months ended September 30, 2018 and 2017, the annuity contracts accrued $56 thousand
and $54 thousand of income, respectively, which were included in other noninterest income on the Consolidated Statement of Operations.
The cash surrender value of the annuity contracts was $12.4 million and $11.6 million at September 30, 2018 and December 31, 2017,
respectively, and is included in other assets on the Consolidated Balance Sheet. For the three and nine months ended September
30, 2018, the Company recorded benefit expense accruals of $100 thousand and $586 thousand, respectively, for this post retirement
benefit. For the three and nine months ended September 30, 2017, the Company recorded benefit expense accruals of $103 thousand
and $308 thousand, respectively, for this post retirement benefit.
Upon death of a named executive,
the annuity contract related to such executive terminates. The Bank has purchased additional bank owned life insurance contracts,
which would effectively finance payments (up to a 15 year certain amount) to the executives’ named beneficiaries.