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Section 1: 10-Q (QUARTERLY REPORT)

 

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  
  OF THE SECURITIES EXCHANGE ACT OF 1934  
     
  For the Quarterly Period Ended June 30, 2019  
     
  OR  
     
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  
  OF THE SECURITIES EXCHANGE ACT OF 1934  

 

For the transition period from to_________

 

Commission File Number 0-25923

 

Eagle Bancorp, Inc. 

(Exact name of registrant as specified in its charter)

 

Maryland   52-2061461
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
7830 Old Georgetown Road, Third Floor, Bethesda, Maryland   20814
(Address of principal executive offices)   (Zip Code)

 

(301) 986-1800 

(Registrant’s telephone number, including area code) 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities Registered under Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol(s)   Name of Each Exchange on Which Registered
Common Stock, $0.01 par value   EGBN   The Nasdaq Stock Market, LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer Accelerated filer
  Non-accelerated filer   Smaller Reporting Company
    Emerging Growth Company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act 

Yes ☐ No ☒

 

As of July 31, 2019, the registrant had 34,542,796 shares of Common Stock outstanding.

 

 

 

 

 

 

EAGLE BANCORP, INC. 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION    
       
Item 1. Financial Statements (Unaudited)   3
  Consolidated Balance Sheets   3
 

Consolidated Statements of Operations

  4
  Consolidated Statements of Comprehensive Income   5
  Consolidated Statements of Changes in Shareholders’ Equity   6
  Consolidated Statements of Cash Flows   8
  Notes to Consolidated Financial Statements   9
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   38
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   62
       
Item 4. Controls and Procedures   62
       
PART II. OTHER INFORMATION   63
       
Item 1. Legal Proceedings   63
       
Item 1A. Risk Factors   63
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   63
       
Item 3. Defaults Upon Senior Securities   63
       
Item 4. Mine Safety Disclosures   63
       
Item 5. Other Information   63
       
Item 6. Exhibits   63
       
Signatures     66

 

 

 

Item 1 – Financial Statements (Unaudited)

 

EAGLE BANCORP, INC. 

Consolidated Balance Sheets (Unaudited) 

(dollars in thousands, except per share data)

 

Assets  June 30, 2019   December 31, 2018 
Cash and due from banks  $6,735   $6,773 
Federal funds sold   17,914    11,934 
Interest bearing deposits with banks and other short-term investments   171,985    303,157 
Investment securities available-for-sale, at fair value   745,343    784,139 
Federal Reserve and Federal Home Loan Bank stock   33,993    23,506 
Loans held for sale   37,506    19,254 
Loans   7,392,615    6,991,447 
Less allowance for credit losses   (72,086)   (69,944)
Loans, net   7,320,529    6,921,503 
Premises and equipment, net   15,176    16,851 
Operating lease right-of-use assets   28,214     
Deferred income taxes   30,220    33,027 
Bank owned life insurance   74,295    73,441 
Intangible assets, net   105,219    105,766 
Other real estate owned   1,394    1,394 
Other assets   81,480    88,392 
Total Assets  $8,670,003   $8,389,137 
           
Liabilities and Shareholders’ Equity          
Liabilities          
Deposits:          
Noninterest bearing demand  $1,873,902   $2,104,220 
Interest bearing transaction   862,553    593,107 
Savings and money market   2,712,143    2,949,559 
Time, $100,000 or more   801,469    801,957 
Other time   699,825    525,442 
Total deposits   6,949,892    6,974,285 
Customer repurchase agreements   31,669    30,413 
Other short-term borrowings   225,000     
Long-term borrowings   217,491    217,296 
Operating lease liabilities   31,659     
Other liabilities   29,710    58,202 
Total Liabilities   7,485,421    7,280,196 
           
Shareholders’ Equity          
Common stock, par value $.01 per share; shares authorized 100,000,000, shares issued and outstanding 34,539,853 and 34,387,919, respectively   343    342 
Additional paid in capital   532,585    528,380 
Retained earnings   647,887    584,494 
Accumulated other comprehensive income (loss)   3,767    (4,275)
Total Shareholders’ Equity   1,184,582    1,108,941 
Total Liabilities and Shareholders’ Equity  $8,670,003   $8,389,137 

 

See notes to consolidated financial statements.

 

 

 

EAGLE BANCORP, INC. 

Consolidated Statements of Operations (Unaudited) 

(dollars in thousands, except per share data)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
Interest Income                    
Interest and fees on loans  $101,889   $90,924   $199,710   $175,354 
Interest and dividends on investment securities   5,238    4,058    10,836    7,650 
Interest on balances with other banks and short-term investments   1,105    1,274    2,771    2,255 
Interest on federal funds sold   47    40    96    86 
Total interest income   108,279    96,296    213,413    185,345 
Interest Expense                    
Interest on deposits   22,461    14,048    43,361    23,177 
Interest on customer repurchase agreements   75    62    173    112 
Interest on short-term borrowings   1,435    997    1,575    2,108 
Interest on long-term borrowings   2,979    2,979    5,958    5,958 
Total interest expense   26,950    18,086    51,067    31,355 
Net Interest Income   81,329    78,210    162,346    153,990 
Provision for Credit Losses   3,600    1,650    6,960    3,619 
Net Interest Income After Provision For Credit Losses   77,729    76,560    155,386    150,371 
                     
Noninterest Income                    
Service charges on deposits   1,606    1,760    3,300    3,374 
Gain on sale of loans   1,923    1,675    3,311    3,198 
Gain on sale of investment securities   563    26    1,475    68 
Increase in the cash surrender value of bank owned life insurance   429    356    854    700 
Other income   1,839    1,736    3,711    3,517 
Total noninterest income   6,360    5,553    12,651    10,857 
Noninterest Expense                    
Salaries and employee benefits   17,743    17,812    41,387    34,670 
Premises and equipment expenses   3,652    3,873    7,504    7,802 
Marketing and advertising   1,268    1,291    2,416    2,228 
Data processing   2,603    2,404    4,978    4,721 
Legal, accounting and professional fees   2,740    2,179    4,449    5,152 
FDIC insurance   1,126    951    2,242    1,626 
Other expenses   4,227    3,779    8,687    7,211 
Total noninterest expense   33,359    32,289    71,663    63,410 
Income Before Income Tax Expense   50,730    49,824    96,374    97,818 
Income Tax Expense   13,487    12,528    25,382    24,807 
Net Income  $37,243   $37,296   $70,992   $73,011 
                     
Earnings Per Common Share                    
Basic  $1.08   $1.09   $2.06   $2.13 
Diluted  $1.08   $1.08   $2.05   $2.12 

 

See notes to consolidated financial statements.

 

 

  

EAGLE BANCORP, INC. 

Consolidated Statements of Comprehensive Income (Unaudited) 

(dollars in thousands)

  

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
Net Income  $37,243   $37,296   $70,992   $73,011 
                     
Other comprehensive income (loss), net of tax:                    
Unrealized gain (loss) on securities available for sale   5,925    (1,935)   11,979    (7,058)
Reclassification adjustment for net gains included in net income   (417)   (20)   (1,092)   (51)
Total unrealized gain (loss) on investment securities   5,508    (1,955)   10,887    (7,109)
Unrealized (loss) gain on derivatives   (513)   692    (1,665)   2,925 
Reclassification adjustment for amounts included in net income   (236)   64    (1,180)   (1)
Total unrealized (loss) gain on derivatives   (749)   756    (2,845)   2,924 
Other comprehensive income (loss)   4,759    (1,199)   8,042    (4,185)
Comprehensive Income  $42,002   $36,097   $79,034   $68,826 

 

See notes to consolidated financial statements.

 

 

 

EAGLE BANCORP, INC. 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) 

(dollars in thousands except share data)

 

   Common   Additional Paid   Retained  

Accumulated

Other Comprehensive

   Total Shareholders’ 
   Shares   Amount   in Capital   Earnings   Income (Loss)   Equity 
Balance April 1, 2019   34,537,193   $343   $530,894   $618,243   $(992)  $1,148,488 
                               
Net Income               37,243        37,243 
Other comprehensive income, net of tax                   4,759    4,759 
Stock-based compensation expense           1,471            1,471 
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes   750        37            37 
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes   (1,800)                    
Issuance of common stock related to employee stock purchase plan   3,710        183            183 
Cash dividends declared ($0.22 per share)               (7,599)       (7,599)
Balance June 30, 2019   34,539,853   $343   $532,585   $647,887   $3,767   $1,184,582 
                               
Balance April 1, 2018   34,303,056   $341   $522,316   $467,933   $(5,410)  $985,180 
                               
Net Income               37,296        37,296 
Other comprehensive loss, net of tax                   (1,199)   (1,199)
Stock-based compensation expense           1,667            1,667 
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes   (1,255)                    
Issuance of common stock related to employee stock purchase plan   3,270        193            193 
Balance June 30, 2018   34,305,071   $341   $524,176   $505,229   $(6,609)  $1,023,137 

 

See notes to consolidated financial statements.

 

 

 

EAGLE BANCORP, INC. 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) 

(dollars in thousands except share data)

  

   Common   Additional Paid   Retained  

Accumulated

Other

Comprehensive

   Shareholders’ 
   Shares   Amount   in Capital   Earnings   Income (Loss)   Equity 
Balance January 1, 2019   34,387,919   $342   $528,380   $584,494   $(4,275)  $1,108,941 
                               
Net Income               70,992        70,992 
Other comprehensive income, net of tax                   8,042    8,042 
Stock-based compensation expense           3,501            3,501 
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes   26,784        332            332 
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes   (12,744)   1    (1)            
Vesting of performance based stock awards, net of shares withheld for payroll taxes   17,655                     
Time based stock awards granted   112,636                     
Issuance of common stock related to employee stock purchase plan   7,603        373            373 
Cash dividends declared ($0.22 per share)               (7,599)       (7,599)
Balance June 30, 2019   34,539,853   $343   $532,585   $647,887   $3,767   $1,184,582 
                               
Balance January 1, 2018   34,185,163   $340   $520,304   $431,544   $(1,750)  $950,438 
                               
Net Income               73,011        73,011 
Other comprehensive loss, net of tax                   (4,185)   (4,185)
Stock-based compensation expense           3,143            3,143 
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes   32,230        338            338 
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes   (13,361)   1    (1)            
Time based stock awards granted   94,344                     
Issuance of common stock related to employee stock purchase plan   6,695        392            392 
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from AOCI (ASU 2018-02)               674    (674)    
Balance June 30, 2018   34,305,071   $341   $524,176   $505,229   $(6,609)  $1,023,137 

 

See notes to consolidated financial statements.

 

 

 

EAGLE BANCORP, INC. 

Consolidated Statements of Cash Flows (Unaudited) 

(dollars in thousands)

  

   Six Months Ended June 30, 
   2019   2018 
Cash Flows From Operating Activities:          
Net Income  $70,992   $73,011 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for credit losses   6,960    3,619 
Depreciation and amortization   3,567    3,561 
Amortization of operating lease right-of-use assets   1,360     
Gains on sale of loans   (3,311)   (3,198)
Gains on sale of GNMA loans   (71)    
Securities premium amortization (discount accretion), net   2,519    2,169 
Origination of loans held for sale   (230,865)   (224,643)
Proceeds from sale of loans held for sale   215,995    222,444 
Net increase in cash surrender value of BOLI   (854)   (700)
Deferred income tax expense (benefit)   2,807    1,533 
Net gain on sale of investment securities   (1,475)   (68)
Stock-based compensation expense   3,501    3,143 
Net tax benefits from stock compensation   10    108 
Decrease (increase) in other assets   6,912    (12,644)
Decrease in other liabilities   (29,242)   (14,254)
Net cash provided by operating activities   48,805    54,081 
Cash Flows From Investing Activities:          
Purchases of available-for-sale investment securities   (63,572)   (150,528)
Proceeds from maturities of available-for-sale securities   67,223    42,144 
Proceeds from sale/call of available-for-sale securities   42,143    28,974 
Purchases of Federal Reserve and Federal Home Loan Bank stock   (76,150)   (42,179)
Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock   65,663    42,628 
Net increase in loans   (405,986)   (241,944)
Decrease (increase) in premises and equipment   1,675    (936)
Net cash used in investing activities   (369,004)   (321,841)
Cash Flows From Financing Activities:          
(Decrease) increase in deposits   (24,393)   414,774 
Increase (decrease) in customer repurchase agreements   1,256    (47,426)
Increase (decrease) in short-term borrowings   225,000    (25,000)
Proceeds from exercise of equity compensation plans   332    338 
Proceeds from employee stock purchase plan   373    392 
Cash dividends paid   (7,599)    
Net cash provided by financing activities   194,969    343,078 
Net (Decrease) Increase In Cash and Cash Equivalents   (125,230)   75,318 
Cash and Cash Equivalents at Beginning of Period   321,864    190,473 
Cash and Cash Equivalents at End of Period  $196,634   $265,791 
Supplemental Cash Flows Information:          
Interest paid  $51,735   $30,242 
Income taxes paid  $31,850   $31,200 
Non-Cash Investing Activities          
Initial recognition of operating lease right-of-use assets  $29,574   $ 
Initial recognition of operating lease liabilities  $33,535   $ 

 

See notes to consolidated financial statements. 

 

 

 

EAGLE BANCORP, INC. 

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”). Active subsidiaries include: EagleBank (the “Bank”), Eagle Insurance Services, LLC, Bethesda Leasing, LLC, and Landroval Municipal Finance, Inc., 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, 2018 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, 2018. 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, 2018 except as indicated in the “Accounting Standards Adopted in 2019” section below. 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, 2018. Operating results for the three and six months ended June 30, 2019 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. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.

 

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 2019

 

ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 has, among other things, required lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments, measured on a discounted basis; and a right-of-use (“ROU”) 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. ASU 2016-02 did not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 became effective for us on January 1, 2019 and initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) – Targeted Improvements,” which, among other things, provides an additional transition method that allows entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon adoption of ASU 2016-02, ASU 2018-11 and ASU 2018-20 on January 1, 2019, we recognized ROU assets of $29.6 million and related lease liabilities of $33.5 million which reduced the March 31, 2019 total risk based capital ratio by six basis points. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we did not reassess (i) whether any expired or existing contracts were or contained leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also elected to not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). We utilized the modified-retrospective transition approach prescribed by ASU 2018-11.

 

Accounting Standards Pending Adoption

 

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. 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 third parties to develop and evaluate a model to comply with CECL requirements. We have entered our data into the model and are working on the qualitative and forecasting aspects of the methodology. 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.

 

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 2019, 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.

 

10 

 

 

Note 3. Investment Securities Available-for-Sale

 

Amortized cost and estimated fair value of securities available-for-sale are summarized as follows:

 

       Gross   Gross   Estimated 
June 30, 2019  Amortized   Unrealized   Unrealized   Fair 
(dollars in thousands)  Cost   Gains   Losses   Value 
U. S. agency securities  $225,389   $940  $659   $225,670 
Residential mortgage backed securities   440,243    5,186    1,884    443,545 
Municipal bonds   67,835    1,503        69,338 
Corporate bonds   6,502    70        6,572 
Other equity investments   218            218 
   $740,187   $7,699   $2,543   $745,343 

 

       Gross   Gross   Estimated 
December 31, 2018  Amortized   Unrealized   Unrealized   Fair 
(dollars in thousands)  Cost   Gains   Losses   Value 
U. S. agency securities  $260,150   $228  $4,033   $256,345 
Residential mortgage backed securities   477,949    1,575    7,293    472,231 
Municipal bonds   45,814    439    484    45,769 
Corporate bonds   9,503    79    6    9,576 
Other equity investments   218            218 
   $793,634   $2,321   $11,816   $784,139 

 

In addition, at June 30, 2019 and December 31, 2018 the Company held $34.0 million and $23.5 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 
       Estimated       Estimated       Estimated     
June 30, 2019  Number of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(dollars in thousands)  Securities   Value   Losses   Value   Losses   Value   Losses 
U. S. agency securities   39   $26,149   $50   $99,252   $609   $125,401   $659 
Residential mortgage backed securities   103    4,234    13    174,316    1,871    178,550    1,884 
Municipal bonds   2    1,500                1,500     
    144   $31,883   $63   $273,568   $2,480   $305,451   $2,543 

                             
       Less than   12 Months         
       12 Months   or Greater   Total 
       Estimated       Estimated       Estimated     
December 31, 2018  Number of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(dollars in thousands)  Securities   Value   Losses   Value   Losses   Value   Losses 
U. S. agency securities   58   $72,679   $533   $144,636   $3,500   $217,315   $4,033 
Residential mortgage backed securities   151    61,199    527    225,995    6,766    287,194    7,293 
Municipal bonds   11    4,299    50    17,041    434    21,340    484 
Corporate bonds   1    1,494    6            1,494    6 
    221   $139,671   $1,116   $387,672   $10,700   $527,343   $11,816 

  

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 3.0 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 June 30, 2019 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.

 

11 

 

 

The amortized cost and estimated fair value of investments available-for-sale at June 30, 2019 and December 31, 2018 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.

 

   June 30, 2019   December 31, 2018 
   Amortized   Estimated   Amortized   Estimated 
(dollars in thousands)  Cost   Fair Value   Cost   Fair Value 
U. S. agency securities maturing:                    
One year or less  $114,260   $114,564   $128,148   $125,545 
After one year through five years   103,105    103,042    119,856    118,883 
Five years through ten years   8,024    8,064    12,146    11,917 
Residential mortgage backed securities   440,243    443,545    477,949    472,231 
Municipal bonds maturing:                    
One year or less   6,947    6,977    8,097    8,167 
After one year through five years   13,426    13,694    15,025    15,081 
Five years through ten years   46,399    47,468    21,626    21,385 
After ten years   1,063    1,199    1,066    1,136 
Corporate bonds maturing:                    
After one year through five years   5,002    5,072    8,003    8,076 
After ten years   1,500    1,500    1,500    1,500 
Other equity investments   218    218    218    218 
   $740,187   $745,343   $793,634   $784,139 

 

For the six months ended June 30, 2019, gross realized gains on sales of investments securities were $1.5 million, primarily due to $829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations, and there were no gross realized losses on sales of investment securities. For the six months ended June 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. 

 

Proceeds from sales and calls of investment securities for the three months ended June 30, 2019 were $42.1 million compared to $29.0 million for the same period in 2018.

 

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 June 30, 2019 and December 31, 2018 was $460.6 million and $528.2 million, respectively, which is well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of June 30, 2019 and December 31, 2018, 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.

 

12 

 

 

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 June 30, 2019 the Bank had mortgage banking derivative financial instruments with a notional value of $124.5 million related to its forward contracts as compared to $49.6 million at December 31, 2018. The fair value of these mortgage banking derivative instruments at June 30, 2019 was $387 thousand included in other assets and $309 thousand included in other liabilities as compared to $229 thousand included in other assets and $269 thousand included in other liabilities at December 31, 2018.

 

Included in other noninterest income for the three and six months ended June 30, 2019 was a net gain of $84 thousand and a net gain $219 thousand, respectively, relating to mortgage banking derivative instruments as compared to a net gain of $55 thousand and net loss of $31 thousand as of June 30, 2018. The amount included in other noninterest income for the three and six months ended June 30, 2019 pertaining to its mortgage banking hedging activities was a net realized loss of $94 thousand and a net realized loss of $49 thousand, respectively, as compared to a net realized loss of $147 thousand and a net realized loss of $56 thousand as of June 30, 2018.

 

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 June 30, 2019 and December 31, 2018 are summarized by type as follows:

 

   June 30, 2019   December 31, 2018 
(dollars in thousands)  Amount   %   Amount   % 
Commercial  $1,475,201    20%  $1,553,112    22%
Income producing - commercial real estate   3,666,815    50%   3,256,900    46%
Owner occupied - commercial real estate   970,850    13%   887,814    13%
Real estate mortgage - residential   105,191    1%   106,418    2%
Construction - commercial and residential   1,012,789    14%   1,039,815    15%
Construction - C&I (owner occupied)   76,324    1%   57,797    1%
Home equity   83,447    1%   86,603    1%
Other consumer   1,998        2,988     
Total loans   7,392,615    100%   6,991,447    100%
Less: allowance for credit losses   (72,086)        (69,944)     
Net loans  $7,320,529        $6,921,503      

 

Unamortized net deferred fees amounted to $25.2 million and $26.5 million at June 30, 2019 and December 31, 2018, respectively.

 

As of June 30, 2019 and December 31, 2018, the Bank serviced $101.8 million and $111.1 million, respectively, of multifamily FHA loans, SBA loans and other loan participations which are not reflected as loan balances on the Consolidated Balance Sheets.

 

13 

 

 

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 June 30, 2019, owner occupied - commercial real estate and construction - C&I (owner occupied) represent approximately 14% of the loan portfolio. At June 30, 2019, non-owner occupied commercial real estate and real estate construction represented approximately 64% of the loan portfolio. The combined owner occupied and commercial real estate loans represent approximately 78% 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 20% of the loan portfolio at June 30, 2019 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 as well as potential repairs to the SBA guarantees. 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 June 30, 2019 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 1% of the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was 20 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.

 

14 

 

 

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 $1.62 billion at June 30, 2019. 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 71% of the outstanding ADC loan portfolio at June 30, 2019. 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 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.

 

15 

 

 

The following tables detail activity in the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2019 and 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

      

Income

Producing -

Commercial

  

Owner

Occupied - Commercial

  

Real Estate

Mortgage -

  

Construction -

Commercial and

   Home   Other     
(dollars in thousands)  Commercial   Real Estate   Real Estate   Residential   Residential   Equity   Consumer   Total 
                                 
Three Months Ended June 30, 2019                                        
Allowance for credit losses:                                        
Balance at beginning of period  $17,195   $26,765   $5,980   $681   $18,469   $605   $248   $69,943 
Loans charged-off   (1)   (1,847)                   (2)   (1,850)
Recoveries of loans previously charged-off   37    302    2    2    37        13    393 
Net loans charged-off   36    (1,545)   2    2    37        11    (1,457)
Provision for credit losses   905    1,790    (226)   672    500    (24)   (17)   3,600 
Ending balance  $18,136   $27,010   $5,756   $1,355   $19,006   $581   $242   $72,086 
                                         
Six Months Ended June 30, 2019                                        
Allowance for credit losses:                                        
Balance at beginning of period  $15,857   $28,034   $6,242   $965   $18,175   $599   $72   $69,944 
Loans charged-off   (5)   (5,343)                   (2)   (5,350)
Recoveries of loans previously charged-off   167    302    2    3    37        21    532 
Net loans (charged-off) recoveries   162    (5,041)   2    3    37        19    (4,818)
Provision for credit losses   2,117    4,017    (488)   387    794    (18)   151    6,960 
Ending balance  $18,136   $27,010   $5,756   $1,355   $19,006   $581   $242   $72,086 
                                         
As of June 30, 2019                                        
Allowance for credit losses:                                        
Individually evaluated for impairment  $7,905   $1,000   $475   $650   $   $   $   $10,030 
Collectively evaluated for impairment   10,231    26,010    5,281    705    19,006    581    242    62,056 
Ending balance  $18,136   $27,010   $5,756   $1,355   $19,006   $581   $242   $72,086 
                                         
Three Months Ended June 30, 2018                                        
Allowance for credit losses:                                        
Balance at beginning of period  $13,358   $26,468   $5,471   $734   $18,742   $699   $335   $65,807 
Loans charged-off   (408)               (517)           (925)
Recoveries of loans previously charged-off   23    2    1    1    35    10    5    77 
Net loans (charged-off) recoveries   (385)   2    1    1    (482)   10    5    (848)
Provision for credit losses   (767)   1,518    531    22    391    (36)   (9)   1,650 
Ending balance  $12,206   $27,988   $6,003   $757   $18,651   $673   $331   $66,609 
                                         
Six Months Ended June 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   (1,261)   (121)   (132)       (517)           (2,031)
Recoveries of loans previously charged-off   26    2    2    3    95    127    8    263 
Net loans (charged-off) recoveries   (1,235)   (119)   (130)   3    (422)   127    8    (1,768)
Provision for credit losses   339    2,731    199    (190)   581    (224)   183    3,619 
Ending balance  $12,206   $27,988   $6,003   $757   $18,651   $673   $331   $66,609 
                                         
As of June 30, 2018                                        
Allowance for credit losses:                                        
Individually evaluated for impairment  $4,506   $3,543   $500   $   $   $   $80   $8,629 
Collectively evaluated for impairment   7,700    24,445    5,503    757    18,651    673    251    57,980 
Ending balance  $12,206   $27,988   $6,003   $757   $18,651   $673   $331   $66,609 

 

16

 

 

The Company’s recorded investments in loans as of June 30, 2019 and December 31, 2018 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:

 

       Income Producing -   Owner Occupied -   Real Estate   Construction -             
       Commercial   Commercial   Mortgage -   Commercial and   Home   Other     
(dollars in thousands)  Commercial   Real Estate   Real Estate   Residential   Residential   Equity   Consumer   Total 
                                 
June 30, 2019                                        
Recorded investment in loans:                                        
Individually evaluated for impairment  $26,980   $37,900   $3,879   $5,367   $9,155   $487   $   $83,768 
Collectively evaluated for impairment   1,448,221    3,628,915    966,971    99,824    1,079,958    82,960    1,998    7,308,847 
Ending balance  $1,475,201   $3,666,815   $970,850   $105,191   $1,089,113   $83,447   $1,998   $7,392,615 
                                         
December 31, 2018                                        
Recorded investment in loans:                                        
Individually evaluated for impairment  $8,738   $61,747   $5,307   $1,228   $7,012   $487   $   $84,519 
Collectively evaluated for impairment   1,544,374    3,195,153    882,507    105,190    1,090,600    86,116    2,988    6,906,928 
Ending balance  $1,553,112   $3,256,900   $887,814   $106,418   $1,097,612   $86,603   $2,988   $6,991,447 

 

At June 30, 2019, nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia Heritage Bank (“Virginia Heritage”) have a carrying value of $273 thousand and $155 thousand, respectively, and an unpaid principal balance of $323 thousand and $968 thousand, respectively, and were evaluated separately in accordance with ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” At December 31, 2018, nonperforming loans acquired from Fidelity and Virginia Heritage had a carrying value of $282 thousand and $202 thousand, respectively, and an unpaid principal balance of $332 thousand and $995 thousand, 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.

 

17

 

 

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.

 

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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 June 30, 2019 and December 31, 2018.

 

       Watch and           Total 
(dollars in thousands)  Pass   Special Mention   Substandard   Doubtful   Loans 
                     
June 30, 2019                         
Commercial  $1,398,098   $50,123   $26,980   $   $1,475,201 
Income producing - commercial real estate   3,611,968    16,947    37,900        3,666,815 
Owner occupied - commercial real estate   924,643    42,328    3,879        970,850 
Real estate mortgage – residential   99,188    636    5,367        105,191 
Construction - commercial and residential   1,079,958        9,155        1,089,113 
Home equity   82,274    686    487        83,447 
Other consumer   1,998                1,998 
          Total  $7,198,127   $110,720   $83,768   $   $7,392,615 
                          
December 31, 2018                         
Commercial  $1,505,477   $25,584   $22,051   $   $1,553,112 
Income producing - commercial real estate   3,172,479    1,536    82,885        3,256,900 
Owner occupied - commercial real estate   844,286    38,221    5,307        887,814 
Real estate mortgage – residential   104,543    647    1,228        106,418 
Construction - commercial and residential   1,090,600        7,012        1,097,612 
Home equity   85,434    682    487        86,603 
Other consumer   2,988                2,988 
          Total  $6,805,807   $66,670   $118,970   $   $6,991,447 

 

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.

 

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The following table presents, by class of loan, information related to nonaccrual loans as of June 30, 2019 and December 31, 2018.

 

(dollars in thousands)  June 30,
2019
   December 31,
2018
 
         
  Commercial  $16,053   $7,115 
  Income producing - commercial real estate   4,563    1,766 
  Owner occupied - commercial real estate   1,510    2,368 
  Real estate mortgage - residential   5,640    1,510 
  Construction - commercial and residential   9,155    3,031 
  Home equity   487    487 
  Total nonaccrual loans (1)(2)  $37,408   $16,277 

 

(1)Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling $8.6 million at June 30, 2019 and $24.0 million at December 31, 2018.

(2)Gross interest income of $1.2 million and $321 thousand would have been recorded for the six months ended June 30, 2019 and 2018, 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 $86 thousand and $6 thousand for the six months ended June 30, 2019 and 2018, 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 June 30, 2019 and December 31, 2018.

 

   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 
                         
June 30, 2019                              
Commercial  $4,784   $1,112   $16,053   $21,949   $1,453,252   $1,475,201 
Income producing - commercial real estate   2,253    4,656    4,563    11,472    3,655,343    3,666,815 
Owner occupied - commercial real estate   445    3,654    1,510    5,609    965,241    970,850 
Real estate mortgage – residential           5,640    5,640    99,551    105,191 
Construction - commercial and residential   2,011    1,866    9,155    13,032    1,076,081    1,089,113 
Home equity   1,413    47    487    1,947    81,500    83,447 
Other consumer   21    10        31    1,967    1,998 
Total  $10,927   $11,345   $37,408   $59,680   $7,332,935   $7,392,615 
                               
December 31, 2018                              
Commercial  $4,535   $2,870   $7,115   $14,520   $1,538,592   $1,553,112 
Income producing - commercial real estate   5,855    27,479    1,766    35,100    3,221,800    3,256,900 
Owner occupied - commercial real estate   5,051    2,370    2,368    9,789    878,025    887,814 
Real estate mortgage – residential   2,456    1,698    1,510    5,664    100,754    106,418 
Construction - commercial and residential   4,392        3,031    7,423    1,090,189    1,097,612 
Home equity   630    47    487    1,164    85,439    86,603 
Other consumer                   2,988    2,988 
Total  $22,919   $34,464   $16,277   $73,660   $6,917,787   $6,991,447 

 

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.

 

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The following table presents, by class of loan, information related to impaired loans for the periods ended June 30, 2019 and December 31, 2018.

 

   Unpaid   Recorded