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Section 1: 10-Q (QUARTERLY REPORT)

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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 September 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 Pursuant to Section 12(b) of the Act:

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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 October 31, 2019, the registrant had 33,583,928 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   7
  Notes to Consolidated Financial Statements   8
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   37
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   61
       
Item 4. Controls and Procedures   62
       
PART II. OTHER INFORMATION   62
       
Item 1. Legal Proceedings   62
       
Item 1A. Risk Factors   62
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   62
       
Item 3. Defaults Upon Senior Securities   62
       
Item 4. Mine Safety Disclosures   62
       
Item 5. Other Information   62
       
Item 6. Exhibits   62
       
Signatures     65

 

 

 

Item 1 – Financial Statements (Unaudited)

 

EAGLE BANCORP, INC. 

Consolidated Balance Sheets (Unaudited) 

(dollars in thousands, except per share data)

 

Assets  September 30, 2019   December 31, 2018 
Cash and due from banks  $6,657   $6,773 
Federal funds sold   27,711    11,934 
Interest bearing deposits with banks and other short-term investments   361,154    303,157 
Investment securities available-for-sale, at fair value   708,545    784,139 
Federal Reserve and Federal Home Loan Bank stock   28,725    23,506 
Loans held for sale   52,199    19,254 
Loans   7,559,161    6,991,447 
Less allowance for credit losses   (73,720)   (69,944)
Loans, net   7,485,441    6,921,503 
Premises and equipment, net   14,515    16,851 
Operating lease right-of-use assets   26,552     
Deferred income taxes   29,722    33,027 
Bank owned life insurance   74,726    73,441 
Intangible assets, net   104,915    105,766 
Other real estate owned   1,487    1,394 
Other assets   81,118    88,392 
Total Assets  $9,003,467   $8,389,137 
           
Liabilities and Shareholders’ Equity          
Liabilities          
Deposits:          
Noninterest bearing demand  $2,051,106   $2,104,220 
Interest bearing transaction   918,011    593,107 
Savings and money market   3,034,530    2,949,559 
Time, $100,000 or more   772,340    801,957 
Other time   626,526    525,442 
Total deposits   7,402,513    6,974,285 
Customer repurchase agreements   30,297    30,413 
Other short-term borrowings   100,000     
Long-term borrowings   217,589    217,296 
Operating lease liabilities   29,586     
Other liabilities   38,888    58,202 
Total Liabilities   7,818,873    7,280,196 
           
Shareholders’ Equity          
Common stock, par value $.01 per share; shares authorized 100,000,000, shares issued and outstanding 33,720,522 and 34,387,919, respectively   336    342 
Additional paid in capital   502,566    528,380 
Retained earnings   677,055    584,494 
Accumulated other comprehensive income (loss)   4,637    (4,275)
Total Shareholders’ Equity   1,184,594    1,108,941 
Total Liabilities and Shareholders’ Equity  $9,003,467   $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 September 30,   Nine Months Ended September 30, 
   2019   2018   2019   2018 
Interest Income                    
Interest and fees on loans  $102,297   $95,570   $302,007   $270,924 
Interest and dividends on investment securities   4,904    4,875    15,740    12,525 
Interest on balances with other banks and short-term investments   1,762    1,897    4,533    4,152 
Interest on federal funds sold   71    18    167    104 
Total interest income   109,034    102,360    322,447    287,705 
Interest Expense                    
Interest on deposits   24,576    16,719    67,937    39,896 
Interest on customer repurchase agreements   82    54    255    166 
Interest on short-term borrowings   408    1,317    1,983    3,425 
Interest on long-term borrowings   2,979    2,979    8,937    8,937 
Total interest expense   28,045    21,069    79,112    52,424 
Net Interest Income   80,989    81,291    243,335    235,281 
Provision for Credit Losses   3,186    2,441    10,146    6,060 
Net Interest Income After Provision For Credit Losses   77,803    78,850    233,189    229,221 
                     
Noninterest Income                    
Service charges on deposits   1,494    1,814    4,794    5,188 
Gain on sale of loans   2,563    1,434    5,874    4,632 
Gain on sale of investment securities   153        1,628    68 
Increase in the cash surrender value of bank owned life insurance   431    373    1,285    1,073 
Other income   1,673    2,019    5,384    5,536 
Total noninterest income   6,314    5,640    18,965    16,497 
Noninterest Expense                    
Salaries and employee benefits   19,095    17,157    60,482    51,827 
Premises and equipment expenses   3,503    3,889    11,007    11,691 
Marketing and advertising   1,210    1,191    3,626    3,419 
Data processing   2,183    2,423    7,161    7,144 
Legal, accounting and professional fees   3,625    2,130    8,074    7,282 
FDIC insurance   85    933    2,327    2,559 
Other expenses   3,772    3,891    12,459    11,102 
Total noninterest expense   33,473    31,614    105,136    95,024 
Income Before Income Tax Expense   50,644    52,876    147,018    150,694 
Income Tax Expense   14,149    13,928    39,531    38,735 
Net Income  $36,495   $38,948   $107,487   $111,959 
                     
Earnings Per Common Share                    
Basic  $1.07   $1.14   $3.12   $3.26 
Diluted  $1.07   $1.13   $3.12   $3.25 

 

See notes to consolidated financial statements.

 

 

  

EAGLE BANCORP, INC. 

Consolidated Statements of Comprehensive Income (Unaudited) 

(dollars in thousands)

  

               
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2019   2018   2019   2018 
Net Income  $36,495   $38,948   $107,487   $111,959 
                     
Other comprehensive income (loss), net of tax:                    
Unrealized gain (loss) on securities available for sale   1,174    (3,148)   13,140    (10,206)
Reclassification adjustment for net gains included in net income   (110)       (1,190)   (51)
Total unrealized gain (loss) on investment securities   1,064    (3,148)   11,950    (10,257)
Unrealized (loss) gain on derivatives   11    625    (1,664)   3,547 
Reclassification adjustment for amounts included in net income   (205)   (158)   (1,374)   (156)
Total unrealized (loss) gain on derivatives   (194)   467    (3,038)   3,391 
Other comprehensive income (loss)   870    (2,681)   8,912    (6,866)
Comprehensive Income  $37,365   $36,267   $116,399   $105,093 

 

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 July 1, 2019   34,539,853   $343   $532,585   $647,887   $3,767  $1,184,582 
                               
Net Income               36,495        36,495 
Other comprehensive income, net of tax                   870    870 
Stock-based compensation expense           3,147            3,147 
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes   (1,251)                    
Issuance of common stock related to employee stock purchase plan   4,120        213            213 
Cash dividends declared ($0.22 per share)               (7,327)       (7,327)
Common stock repurchased   (822,200)   (7)   (33,379)           (33,386)
Balance September 30, 2019   33,720,522   $336   $502,566   $677,055   $4,637   $1,184,594 
                               
Balance July 1, 2018   34,305,071   $341   $524,176   $505,229   $(6,609)  $1,023,137 
                               
Net Income               38,948        38,948 
Other comprehensive loss, net of tax                   (2,681)   (2,681)
Stock-based compensation expense           2,031            2,031 
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes   (320)                    
Issuance of common stock related to employee stock purchase plan   3,722        216            216 
Balance September 30, 2018   34,308,473   $341   $526,423   $544,177   $(9,290)  $1,061,651 
                        
Balance January 1, 2019   34,387,919   $342   $528,380   $584,494   $(4,275)  $1,108,941 
                               
Net Income               107,487        107,487 
Other comprehensive income, net of tax                   8,912    8,912 
Stock-based compensation expense           6,648            6,648 
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   (13,995)   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   11,723        585            585 
Cash dividends declared ($0.44 per share)               (14,926)       (14,926)
Common stock repurchased   (822,200)   (7)   (33,378)           (33,385)
Balance September 30, 2019   33,720,522   $336   $502,566   $677,055   $4,637   $1,184,594 
                               
Balance January 1, 2018   34,185,163   $340   $520,304   $431,544   $(1,750)  $950,438 
                               
Net Income               111,959        111,959 
Other comprehensive loss, net of tax                   (6,866)   (6,866)
Stock-based compensation expense           5,174            5,174 
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   (13,681)   1    (1)            
Time based stock awards granted   94,344                     
Issuance of common stock related to employee stock purchase plan   10,417        608            608 
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from AOCI (ASU 2018-02)               674    (674)    
Balance September 30, 2018   34,308,473   $341   $526,423   $544,177   $(9,290)  $1,061,651 

 

See notes to consolidated financial statements.

 

 

 

EAGLE BANCORP, INC. 

Consolidated Statements of Cash Flows (Unaudited) 

(dollars in thousands)

  

          
     
   Nine Months Ended September 30, 
   2019   2018 
Cash Flows From Operating Activities:          
Net Income  $107,487   $111,959 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for credit losses   10,146    6,060 
Depreciation and amortization   5,653    5,292 
Amortization of operating lease right-of-use assets   3,022     
Gains on sale of loans   (5,874)   (4,632)
Securities premium amortization (discount accretion), net   3,966    3,297 
Origination of loans held for sale   (437,525)   (325,109)
Proceeds from sale of loans held for sale   410,454    336,109 
Net increase in cash surrender value of BOLI   (1,285)   (1,073)
Deferred income tax expense (benefit)   3,305    (6,426)
Net gain on sale of investment securities   (1,628)   (68)
Stock-based compensation expense   6,648    5,174 
Net tax benefits from stock compensation   10    108 
Decrease (increase) in other assets   7,274    (11,894)
Decrease in other liabilities   (19,314)   (10,886)
Net cash provided by operating activities   92,339    107,911 
Cash Flows From Investing Activities:          
Purchases of available-for-sale investment securities   (130,693)   (246,501)
Proceeds from maturities of available-for-sale securities   129,879    68,901 
Proceeds from sale/call of available-for-sale securities   82,982    31,974 
Purchases of Federal Reserve and Federal Home Loan Bank stock   (90,219)   (47,811)
Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock   85,000    46,878 
Net increase in loans   (574,177)   (435,773)
Purchase of BOLI       (10,000)
Increase in premises and equipment   (2,171)   (727)
Net cash used in investing activities   (499,399)   (593,059)
Cash Flows From Financing Activities:          
Increase in deposits   428,228    518,321 
Decrease in customer repurchase agreements   (116)   (40,115)
Increase in short-term borrowings   100,000     
Proceeds from exercise of equity compensation plans   332    338 
Proceeds from employee stock purchase plan   585    608 
Common stock repurchased   (33,385)    
Cash dividends paid   (14,926)    
Net cash provided by financing activities   480,718    479,152 
Net Increase (Decrease) In Cash and Cash Equivalents   73,658    (5,996)
Cash and Cash Equivalents at Beginning of Period   321,864    190,473 
Cash and Cash Equivalents at End of Period  $395,522   $184,477 
Supplemental Cash Flows Information:          
Interest paid  $81,834   $53,405 
Income taxes paid  $43,250   $39,900 
Non-Cash Investing Activities          
Initial recognition of operating lease right-of-use assets  $29,574   $ 
Initial recognition of operating lease liabilities  $33,535   $ 
Transfers from loans to other real estate owned  $93   $ 

 

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 nine months ended September 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 digital 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. Our CECL model has been substantially developed and third party model validation is on-going. 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. We preliminarily expect this rule to increase the reserve for credit losses by 10-20% inclusive of the impact on commitments to lend upon implementation on January 1, 2020. This number may change as we finalize and validate our model and update our system of internal controls as a result of the rule change.

 

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.

 

 

 

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 
September 30, 2019  Amortized   Unrealized   Unrealized   Fair 
(dollars in thousands)  Cost   Gains   Losses   Value 
U. S. agency securities  $171,585   $941  $706   $171,820 
Residential mortgage backed securities   434,042    5,404    1,417    438,029 
Municipal bonds   61,680    2,278        63,958 
Corporate bonds   9,532    82        9,614 
U.S. Treasury   24,919    7        24,926 
Other equity investments   198            198 
   $701,956   $8,712   $2,123   $708,545 
                 
       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 September 30, 2019 and December 31, 2018 the Company held $28.7 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     
September 30, 2019  Number of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(dollars in thousands)  Securities   Value   Losses   Value   Losses   Value   Losses 
U. S. agency securities   32   $36,162   $132   $59,843   $574   $96,005   $706 
Residential mortgage backed securities   98    53,769    287    116,438    1,130    170,207    1,417 
Municipal bonds   1    30                30     
    131   $89,961   $419   $176,281   $1,704   $266,242   $2,123 

                             
       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 2.9 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, 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.

 

10 

 

 

The amortized cost and estimated fair value of investments available-for-sale at September 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.

 

   September 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  $78,924   $79,178   $128,148   $125,545 
After one year through five years   79,835    79,809    119,856    118,883 
Five years through ten years   12,826    12,833    12,146    11,917 
Residential mortgage backed securities   434,042    438,029    477,949    472,231 
Municipal bonds maturing:                    
One year or less   6,116    6,185    8,097    8,167 
After one year through five years   16,474    16,940    15,025    15,081 
Five years through ten years   36,028    37,540    21,626    21,385 
After ten years   3,062    3,293    1,066    1,136 
Corporate bonds maturing:                    
After one year through five years   8,032    8,114    8,003    8,076 
After ten years   1,500    1,500    1,500    1,500 
U.S. Treasury   24,919    24,926         
Other equity investments   198    198    218    218 
   $701,956   $745,343   $793,634   $784,139 

 

For the nine months ended September 30, 2019, gross realized gains on sales of investments securities were $1.6 million, primarily due to $829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations, and $20 thousand gross realized losses on sales of investment securities. 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

 

Proceeds from sales and calls of investment securities for the nine months ended September 30, 2019 were $129.9 million compared to $42.1 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 September 30, 2019 and December 31, 2018 was $439.4 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 September 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.

 

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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, 2019 the Bank had mortgage banking derivative financial instruments with a notional value of $134.3 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 September 30, 2019 was $313 thousand included in other assets and $3 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 nine months ended September 30, 2019 was a net gain of $30 thousand and a net gain $249 thousand, respectively, relating to mortgage banking derivative instruments as compared to a net loss of $10 thousand and net loss of $42 thousand as of September 30, 2018. The amount included in other noninterest income for the three and nine months ended September 30, 2019 pertaining to its mortgage banking hedging activities was a net realized gain of $277 thousand and a net realized gain of $228 thousand, respectively, as compared to a net realized gain of $56 thousand and no net realized gain as of September 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 September 30, 2019 and December 31, 2018 are summarized by type as follows:

 

                    
   September 30, 2019   December 31, 2018 
(dollars in thousands)  Amount   %   Amount   % 
Commercial  $1,466,862    19%  $1,553,112    22%
Income producing - commercial real estate   3,812,284    51%   3,256,900    46%
Owner occupied - commercial real estate   956,345    13%   887,814    13%
Real estate mortgage - residential   104,563    1%   106,418    2%
Construction - commercial and residential   1,053,789    14%   1,039,815    15%
Construction - C&I (owner occupied)   81,916    1%   57,797    1%
Home equity   81,117    1%   86,603    1%
Other consumer   2,285        2,988     
Total loans