Eagle Bancorp(EGBN) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, income statements, and cash flows Consolidated Balance Sheets The balance sheet shows total assets grew to $9.8 billion, driven by loan and deposit growth Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2020 | December 31, 2019 | Change (%) | | :----------------------------- | :------------ | :---------------- | :--------- | | Total Assets | $9,799,670 | $8,988,719 | 8.9% | | Total Liabilities | $8,611,775 | $7,798,038 | 10.4% | | Total Shareholders' Equity | $1,187,895 | $1,190,681 | -0.2% | | Loans, net | $7,912,965 | $7,472,090 | 5.9% | | Total Deposits | $7,935,972 | $7,224,391 | 9.9% | Consolidated Statements of Operations The income statement reflects a 22.5% decrease in quarterly net income due to a significant rise in credit loss provisions Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change (%) | | :----------------------------- | :------------------------------- | :------------------------------- | :--------- | | Net Income | $28,856 | $37,243 | -22.5% | | Net Interest Income | $81,363 | $81,329 | 0.04% | | Provision for Credit Losses | $19,737 | $3,600 | 448.3% | | Noninterest Income | $12,495 | $6,360 | 96.5% | | Basic EPS | $0.90 | $1.08 | -16.7% | | Diluted EPS | $0.90 | $1.08 | -16.7% | | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change (%) | | Net Income | $51,979 | $70,992 | -26.8% | | Basic EPS | $1.60 | $2.06 | -22.3% | | Diluted EPS | $1.60 | $2.05 | -22.0% | Consolidated Statements of Comprehensive Income Comprehensive income declined by 27.5% in the quarter, impacted by lower net income and unrealized gains Consolidated Statements of Comprehensive Income Highlights (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change (%) | | :----------------------------------- | :------------------------------- | :------------------------------- | :--------- | | Comprehensive Income | $30,459 | $42,002 | -27.5% | | Total unrealized gain on investment securities | $1,333 | $5,508 | -75.8% | | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change (%) | | Comprehensive Income | $63,688 | $79,034 | -19.4% | | Total unrealized gain on investment securities | $12,833 | $10,887 | 17.9% | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity slightly decreased due to the CECL adoption impact, share repurchases, and dividend payments Shareholders' Equity Changes (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :----------------------------------- | :------------ | :---------------- | | Total Shareholders' Equity | $1,187,895 | $1,190,681 | | Impact of adopting ASC 326 (CECL) on Retained Earnings (Jan 1, 2020) | $(10,931) | N/A | | Common stock repurchased (Six Months Ended June 30, 2020) | $(44,168) | N/A | | Cash dividends declared (Six Months Ended June 30, 2020) | $(14,180) | N/A | Consolidated Statements of Cash Flows Cash flows show a significant increase in financing activities, leading to a substantial rise in cash and cash equivalents Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, in thousands) | Metric | 2020 | 2019 | Change (%) | | :----------------------------------- | :----- | :----- | :--------- | | Net cash provided by operating activities | $48,317 | $48,805 | -1.0% | | Net cash used in investing activities | $(408,179) | $(369,004) | 10.6% | | Net cash provided by financing activities | $753,931 | $194,969 | 286.7% | | Net Increase (Decrease) In Cash and Cash Equivalents | $394,069 | $(125,230) | N/A | | Cash and Cash Equivalents at End of Period | $636,042 | $196,634 | 223.5% | Notes to Consolidated Financial Statements These notes provide detailed explanations of the accounting policies and financial statement line items Note 1. Summary of Significant Accounting Policies This note details the basis of financial statement presentation, key policies, and the adoption of the CECL standard - Eagle Bancorp, Inc. operates as a full-service community bank primarily in Northern Virginia, Suburban Maryland, and Washington, D.C., offering real estate, commercial, and consumer lending, as well as deposit products[26] - The COVID-19 pandemic has adversely impacted various industries, potentially reducing fee and interest income, and increasing credit losses. The Company has implemented loan modification programs and participated in the Paycheck Protection Program (PPP)[29][31][32][40][41] - Effective January 1, 2020, the Company adopted ASU 2016-13 (CECL), replacing the incurred loss methodology with an expected loss methodology for credit losses, resulting in an initial adjustment of $10.6 million to the allowance for credit losses and $4.1 million to the reserve for unfunded commitments, charged to retained earnings[44][85] - Short-term loan modifications made in good faith due to COVID-19 for current borrowers are not considered Troubled Debt Restructurings (TDRs) under the CARES Act. As of June 30, 2020, approximately 708 loans ($1.63 billion) were modified under this program[40][84] - The Company originated $456 million in PPP loans to over 1,400 businesses as of June 30, 2020, which are fully guaranteed by the U.S. government and do not carry an allowance for credit loss[41][116] - The Allowance for Credit Losses (ACL) is an estimate of expected credit losses on loans and available-for-sale debt securities, measured using a collective (pool) basis with a lifetime loss-rate model, adjusted for current conditions and reasonable forecasts, including regional unemployment as a loss driver[48][52][70] Provision for Credit Losses Breakdown (Six Months Ended June 30, 2020, in thousands) | Category | Amount | | :-------------------- | :------- | | Loans | $33,909 | | AFS Debt Securities | $138 | | Total | $34,047 | Note 2. Cash and Due from Banks This note details the Bank's reserve balances with the Federal Reserve and balances with other correspondent banks - The Bank maintains sufficient noninterest reserve balances with the Federal Reserve Bank to meet requirements, plus significant interest-bearing excess reserves[91] - Interest-bearing balances are held with the Federal Home Loan Bank of Atlanta, and noninterest-bearing balances with domestic correspondent banks for services[92] Note 3. Investment Securities Available-for-Sale This note details the composition and fair value of the available-for-sale investment securities portfolio Investment Securities Available-for-Sale (June 30, 2020, in thousands) | Category | Amortized Cost | Estimated Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Losses | | :----------------------------------- | :------------- | :------------------- | :--------------------- | :---------------------- | :-------------------------- | | U.S. agency securities | $116,223 | $117,054 | $1,580 | $749 | $— | | Residential mortgage backed securities | $516,297 | $531,528 | $15,346 | $115 | $— | | Municipal bonds | $86,374 | $90,694 | $4,333 | $— | $13 | | Corporate bonds | $31,561 | $32,920 | $1,562 | $78 | $125 | | Other equity investments | $198 | $198 | $— | $— | $— | | Total | $750,653 | $772,394 | $22,821 | $942 | $138 | - Total gross unrealized losses were primarily due to interest rate changes, not credit quality, for U.S. government agency securities. However, a $138 thousand allowance for credit losses was recorded for AFS corporate and municipal securities due to potential credit losses[97][79] - Proceeds from sales and calls of investment securities were $120.0 million for the six months ended June 30, 2020, up from $42.1 million for the same period in 2019[101] - The carrying value of securities pledged as collateral for certain government deposits, repurchase agreements, and lines of credit was $346 million at June 30, 2020[102] Note 4. Mortgage Banking Derivatives This note describes the Bank's use of derivatives in its mortgage banking activities and the impact of COVID-19 - The Bank uses interest rate lock commitments and forward sales contracts of mortgage-backed securities (MBS) as derivatives in its mortgage banking activities[103] - During the second quarter of 2020, the Company suspended mandatory locking of loans for sale due to significant market dislocation from COVID-19 and operational strain[107] - At June 30, 2020, there were no material mortgage banking derivative financial instruments. At June 30, 2019, the notional value of these instruments was $124.5 million[107] - A net loss of $(165) thousand related to mortgage banking derivative instruments was included in other noninterest income for the six months ended June 30, 2020, compared to a net gain of $219 thousand for the same period in 2019[108] Note 5. Loans and Allowance for Credit Losses This note provides a detailed breakdown of the loan portfolio, credit quality indicators, and allowance for credit losses Loan Portfolio Composition (June 30, 2020, in thousands) | Loan Type | Amount | % of Total Loans | | :----------------------------------- | :------- | :--------------- | | Commercial | $1,607,056 | 20% | | PPP loans | $456,476 | 6% | | Income producing - commercial real estate | $3,678,946 | 46% | | Owner occupied - commercial real estate | $964,077 | 12% | | Real estate mortgage - residential | $93,601 | 1% | | Construction - commercial and residential | $995,550 | 12% | | Construction - C&I (owner occupied) | $149,845 | 2% | | Home equity | $74,921 | 1% | | Other consumer | $1,289 | 0% | | Total Loans | $8,021,761 | 100% | Allowance for Credit Losses Activity (Six Months Ended June 30, 2020, in thousands) | Metric | 2020 | | :----------------------------------- | :----- | | Balance at beginning of period, prior to adoption of ASC 326 | $69,944 | | Impact of adopting ASC 326 | $10,614 | | Net loans charged-off | $(9,385) | | Provision for credit losses | $37,623 | | Ending balance | $108,796 | - PPP loans are included in the CECL model but do not carry an allowance for credit loss due to being fully guaranteed by the U.S. government[116] Nonaccrual Loans (June 30, 2020, in thousands) | Loan Type | Nonaccrual No Allowance | Nonaccrual with Allowance | Total Nonaccrual Loans | | :----------------------------------- | :---------------------- | :------------------------ | :--------------------- | | Commercial | $1,507 | $15,214 | $16,721 | | Income producing - commercial real estate | $8,544 | $8,735 | $17,279 | | Owner occupied - commercial real estate | $7,065 | $3,690 | $10,755 | | Real estate mortgage - residential | $5,503 | $2,713 | $8,216 | | Construction - commercial and residential | $2,298 | $3,087 | $5,385 | | Home equity | $50 | $550 | $600 | | Other consumer | $— | $6 | $6 | | Total | $24,967 | $33,995 | $58,962 | - As of June 30, 2020, there were 13 Troubled Debt Restructurings (TDRs) totaling approximately $20.3 million, with 10 of these loans ($12.3 million) performing under their modified terms. The CARES Act allows temporary suspension of TDR treatment for COVID-19 related modifications[152][149] Note 6. Leases This note discusses the Company's accounting for operating leases, primarily for real estate properties - As of June 30, 2020, the Company had $25.4 million of operating lease Right-of-Use (ROU) assets and $27.1 million of operating lease liabilities on its Consolidated Balance Sheet[156] Net Lease Cost (Six Months Ended June 30, in thousands) | Metric | 2020 | 2019 | | :----------- | :----- | :----- | | Net Lease Cost | $4,349 | $4,245 | - The weighted average lease term for operating leases was 4.62 years, and the weighted average discount rate was 4.00% as of June 30, 2020[160] Note 7. Other Derivatives This note explains the Company's use of interest rate swaps for hedging and customer risk management - As of June 30, 2020, the Company had one designated cash flow hedge notional interest rate swap transaction outstanding amounting to $100 million, associated with its variable rate deposits[165] - An estimated $1.3 million will be reclassified as an increase in interest expense from cash flow hedges over the next twelve months[166] - The Company uses non-designated derivatives to facilitate customer risk management strategies, which are simultaneously hedged by offsetting derivatives with third parties[167] - Derivative agreements contain credit risk contingent features, including collateral posting requirements and default provisions based on indebtedness or capital status[169][172] - As of June 30, 2020, the aggregate fair value of derivative contracts with credit risk contingent features in a net liability position totaled $6.1 million, requiring $1.9 million in posted collateral[173] Fair Value of Derivatives (June 30, 2020, in thousands) | Type | Notional Amount | Fair Value | Balance Sheet Category | | :----------------------------------- | :-------------- | :--------- | :--------------------- | | Designated Cash Flow Hedge (Interest Rate Product) | $100,000 | $1,330 | Other Liabilities | | Non-designated Hedges (Interest Rate Product) | $154,447 | $4,523 | Other Assets | | Non-designated Hedges (Interest Rate Product) | $154,447 | $4,818 | Other Liabilities | | Non-designated Hedges (Other Contracts) | $27,150 | $150 | Other Liabilities | Note 8. Other Real Estate Owned This note reports the activity and balance of properties acquired through foreclosure - The ending balance of Other Real Estate Owned (OREO) was $8,237 thousand at June 30, 2020[182] - Real estate acquired from borrowers totaled $6,750 thousand for the six months ended June 30, 2020[182] - There were no sales of OREO property for the three and six months ended June 30, 2020 and 2019[181][182] Note 9. Long-Term Borrowings This note details the Company's long-term borrowings, including subordinated notes and FHLB advances - Total long-term borrowings amounted to $267,882 thousand at June 30, 2020[184] - Long-term borrowings include $70.0 million of 5.75% subordinated notes due September 1, 2024, and $150.0 million of 5.00% Fixed-to-Floating Rate Subordinated Notes due August 1, 2026, both qualifying as Tier 2 capital[184][185] - On February 26, 2020, the Bank borrowed $50 million under an FHLB advance at a fixed rate of 1.81% with a maturity date of February 26, 2030, to support loan growth[186] Note 10. Net Income per Common Share This note provides the calculation of basic and diluted net income per common share Earnings Per Common Share (EPS) (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change (%) | | :----------------------------------- | :------------------------------- | :------------------------------- | :--------- | | Basic EPS | $0.90 | $1.08 | -16.7% | | Diluted EPS | $0.90 | $1.08 | -16.7% | | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change (%) | | Basic EPS | $1.60 | $2.06 | -22.3% | | Diluted EPS | $1.60 | $2.05 | -22.0% | Note 11. Other Comprehensive Income This note presents the components of other comprehensive income and changes in accumulated other comprehensive income Other Comprehensive Income (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change (%) | | :----------------------------------- | :------------------------------- | :------------------------------- | :--------- | | Other Comprehensive Income | $1,603 | $4,759 | -66.3% | | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change (%) | | Other Comprehensive Income | $11,709 | $8,042 | 45.6% | | Net unrealized gain on securities available-for-sale | $11,689 | $11,979 | -2.4% | - The balance of accumulated other comprehensive income (loss), net of tax, was $14,668 thousand at June 30, 2020[194] Note 12. Fair Value Measurements This note describes the fair value hierarchy and presents assets and liabilities measured at fair value - The fair value hierarchy categorizes inputs into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[198][199][200] Assets Measured at Fair Value on a Recurring Basis (June 30, 2020, in thousands) | Category | Level 1 | Level 2 | Level 3 | Total (Fair Value) | | :----------------------------------- | :------ | :------ | :------ | :----------------- | | Investment securities available-for-sale | $— | $719,276 | $33,118 | $752,394 | | Loans held for sale | $— | $68,433 | $— | $68,433 | | Interest Rate Caps | $— | $4,454 | $— | $4,454 | | Total Assets | $— | $792,163 | $33,118 | $825,281 | Liabilities Measured at Fair Value on a Recurring Basis (June 30, 2020, in thousands) | Category | Level 1 | Level 2 | Level 3 | Total (Fair Value) | | :----------------------------------- | :------ | :------ | :------ | :----------------- | | Interest rate swap derivatives | $— | $1,330 | $— | $1,330 | | Derivative liability | $— | $150 | $— | $150 | | Interest Rate Caps | $— | $4,748 | $— | $4,748 | | Total Liabilities | $— | $6,228 | $— | $6,228 | - Loans held for sale are carried at fair value ($68,433 thousand at June 30, 2020) and classified as Level 2[206][211] Assets Measured at Fair Value on a Nonrecurring Basis (June 30, 2020, in thousands) | Category | Level 1 | Level 2 | Level 3 | Total (Fair Value) | | :----------------------------------- | :------ | :------ | :------ | :----------------- | | Commercial | $— | $— | $18,047 | $18,047 | | Income producing - commercial real estate | $— | $— | $27,295 | $27,295 | | Owner occupied - commercial real estate | $— | $— | $10,815 | $10,815 | | Real estate mortgage - residential | $— | $— | $7,960 | $7,960 | | Construction - commercial and residential | $— | $— | $5,385 | $5,385 | | Home equity | $— | $— | $600 | $600 | | Other consumer | $— | $— | $6 | $6 | | Other real estate owned | $— | $— | $8,237 | $8,237 | | Total Assets | $— | $— | $78,345 | $78,345 | - The fair value of loans at June 30, 2020, was $7,828,639 thousand, compared to a carrying value of $7,912,965 thousand, with the fair value measurement classified as Level 3[226] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial performance, the impact of COVID-19, critical accounting policies, and capital adequacy GENERAL This section provides an overview of Eagle Bancorp, Inc as a community-focused bank in the Washington, D.C area - Eagle Bancorp, Inc. is a Bethesda, Maryland-headquartered bank holding company, operating through its wholly-owned subsidiary EagleBank, providing commercial and consumer banking services[230] - The Company primarily serves Northern Virginia, Suburban Maryland, and Washington, D.C., with twenty branch offices and various lending centers[230][26] - Services offered include business and personal checking, NOW accounts, money market and savings accounts, commercial, construction, and consumer loans, residential mortgages, cash management, and origination/sale of SBA and FHA loans[232] Impact of COVID-19 This section discusses the significant impact of the COVID-19 pandemic on the Company's operations and financial results - The COVID-19 pandemic has caused widespread economic and financial disruptions, impacting customer creditworthiness and business activity[233] - The Company has modified business practices, including directing employees to work from home and implementing business continuity plans[234] - As of June 30, 2020, the Bank had $456 million in outstanding Paycheck Protection Program (PPP) loans to over 1,400 businesses, with an average interest rate of 1.00% and an average yield of 2.91% (including fee amortization) for the second quarter of 2020[236] - As of June 30, 2020, temporary loan modifications were granted on approximately 708 loans, representing $1.63 billion (approximately 20% of total loans) in outstanding exposure, with deferred payments due at maturity. These modifications are not reflected as troubled debt restructurings (TDRs) due to provisions of the CARES Act[239][240] - The economic pressures and CECL implementation have contributed to an increased provision for credit losses for the first six months of 2020, and the Company suspended its share repurchase program[241] CRITICAL ACCOUNTING POLICIES This section highlights the adoption of the CECL standard for estimating credit losses and the assessment of goodwill - Effective January 1, 2020, the Company adopted the CECL standard, replacing the 'incurred loss' approach with an 'expected loss' approach for credit loss estimation, requiring significant management judgment and reliance on forecasts[244][245][247] - The Allowance for Credit Losses (ACL) and Reserve for Unfunded Commitments (RUC) are estimated based on past events, current conditions, and reasonable and supportable forecasts, with historical loss experience adjusted for asset-specific and environmental factors[246] - As of June 30, 2020, a goodwill impairment test was performed due to COVID-19, concluding that no impairment existed, though future events could lead to recording an impairment loss[250] RESULTS OF OPERATIONS This section analyzes financial performance for the three and six months ended June 30, 2020, compared to 2019 Earnings Summary This summary reviews financial performance, highlighting decreases in net income and EPS and increased credit loss provisions Earnings Summary Highlights (in millions, except EPS) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change (%) | | :----------------------------- | :------------------------------- | :------------------------------- | :--------- | | Net Income | $28.9 | $37.2 | -23% | | Basic EPS | $0.90 | $1.08 | -17% | | Provision for Credit Losses | $19.7 | $3.6 | 448% | | Net Interest Income | $81.4 | $81.3 | 0.1% | | Net Interest Margin | 3.26% | 3.91% | -65 bps | | Noninterest Income | $12.5 | $6.4 | 96% | | Efficiency Ratio | 37.18% | 38.04% | -0.86% | | Net Charge-offs | $7.1 | $1.5 | 373% | | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change (%) | | Net Income | $52.0 | $71.0 | -27% | | Basic EPS | $1.60 | $2.06 | -22% | | Total Assets (June 30) | $9,800 | $8,670 | 13% | | Total Loans (June 30) | $8,020 | $7,200 | 11% | | Total Deposits (June 30) | $7,940 | $7,220 | 10% | - The increase in provision for credit losses was primarily due to the implementation of the CECL accounting standard and increased reserves associated with the impact of COVID-19[254][270] - Net charge-offs in the second quarter of 2020 were primarily attributable to one commercial relationship to a personal services company that ceased business operations as a result of COVID-19[261] - Noninterest income increased significantly due to higher gains on the sale of residential mortgage loans, higher gains from FHA loan origination/securitization/sale/servicing, increased SBIC income, higher swap fee income, and higher prepayment fees[264][284] Net Interest Income and Net Interest Margin This section analyzes the components of net interest income and margin, highlighting the impact of interest rates and loan growth Net Interest Income and Margin Trends (in thousands, except percentages) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change (bps) | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------- | | Net Interest Income | $81,363 | $81,329 | N/A | | Net Interest Margin | 3.26% | 3.91% | -65 | | Average Earning Asset Yields | 3.91% | 5.21% | -130 | | Average Cost of Interest Bearing Liabilities | 1.01% | 2.06% | -105 | | Net Interest Spread | 2.90% | 3.15% | -25 | | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change (bps) | | Net Interest Income | $161,107 | $162,346 | N/A | | Net Interest Margin | 3.36% | 3.97% | -61 | | Net Interest Spread | 2.90% | 3.20% | -30 | - The addition of PPP loans (average yield of 2.91%) negatively impacted the overall yield of the total loan portfolio by approximately seven basis points in Q2 2020 and four basis points for the six months ended June 30, 2020[293][295][296] - Average loans increased by $754.9 million and average deposits increased by $1.59 billion for the three months ended June 30, 2020, compared to the same period in 2019[296] - Average liquidity for the second quarter of 2020 was $1.1 billion, significantly higher than $229 million for the second quarter of 2019, contributing to net interest margin compression[296] Provision for Credit Losses This section discusses the provision for credit losses, including the adoption of CECL and the effects of COVID-19 Provision for Credit Losses and Net Charge-offs (Six Months Ended June 30, in thousands) | Metric | 2020 | 2019 | Change (%) | | :----------------------------------- | :----- | :----- | :--------- | | Provision for Credit Losses- Loans | $33,909 | $6,960 | 387.2% | | Net Charge-offs | $9,385 | $4,818 | 94.8% | | Annualized ratio of net charge-offs to average loans | 0.24% | 0.13% | 84.6% | - The higher provisioning in 2020 is primarily due to the implementation of the CECL accounting standard and the impact of COVID-19 on actual and expected future credit losses[314] - Upon adoption of CECL on January 1, 2020, the allowance for credit losses was increased by $10.6 million, charged to retained earnings[314][318] - The allowance for credit losses represented 1.36% of loans outstanding at June 30, 2020, compared to 0.98% at December 31, 2019[263] FINANCIAL CONDITION This section reviews the Company's financial position, including assets, liabilities, equity, and capital ratios Summary This summary provides a high-level overview of the Company's financial position and key capital ratios Financial Condition Summary (in millions, except per share data) | Metric | June 30, 2020 | December 31, 2019 | Change (%) | | :----------------------------------- | :------------ | :---------------- | :--------- | | Total Assets | $9,800 | $8,990 | 9% | | Total Loans (excluding HFS) | $8,020 | $7,550 | 6% | | Total Deposits | $7,940 | $7,220 | 10% | | Total Shareholders' Equity | $1,190 | $1,190 | 0% | | Book Value Per Share | $36.86 | $35.82 | 3% | | Tangible Book Value Per Share | $33.62 | $32.67 | 3% | | Common Equity Tier 1 (CET1) Risk Based Capital Ratio | 12.80% | 12.87% | -0.07% | | Total Risk Based Capital Ratio | 16.26% | 16.20% | 0.06% | | Tier 1 Leverage Ratio | 10.63% | 11.62% | -0.99% | | Tangible Common Equity Ratio | 11.17% | 12.22% | -1.05% | - The Company's capital ratios remain substantially in excess of regulatory minimum and buffer requirements, with all ratios above well-capitalized levels[365] - The share repurchase program was placed on hold during the first quarter of 2020 due to heightened stock market volatility and uncertainty regarding COVID-19, with no shares repurchased in the second quarter[366] Loan Portfolio Exposures- COVID-19 This section details loan portfolio exposures to industries potentially impacted by COVID-19 Loan Portfolio Exposure to COVID-19 Impacted Industries (June 30, 2020, in thousands) | Industry | Principal Balance | % of Loan Portfolio | | :----------------------------------- | :---------------- | :------------------ | | Accommodation & Food Services | $840,961 | 10.5% | | Retail Trade | $106,544 | 1.3% | Commercial Real Estate (CRE) Loan Exposures by Property Type (June 30, 2020, in thousands) | Property Type | Principal Balance | % of Loan Portfolio | | :----------------------------------- | :---------------- | :------------------ | | Restaurant | $31,364 | 0.4% | | Hotel | $35,815 | 0.4% | | Retail | $405,918 | 5.1% | - The Bank is actively working with customers in impacted industries, providing PPP loans and payment deferrals or interest-only periods, and monitoring rent collections for CRE investor borrowers[374][376] Deposits and Other Borrowings This section describes the Company's funding sources, including deposits and borrowings - Noninterest bearing deposits increased by $351.7 million and interest bearing deposits increased by $359.9 million for the six months ended June 30, 2020, compared to December 31, 2019[378] - Brokered deposits (excluding CDARS and ICS two-way) totaled $1.79 billion (23% of total deposits) at June 30, 2020[379] - Noninterest bearing demand deposits reached $2.42 billion (30% of total deposits) at June 30, 2020, partly due to funding of PPP loans[380] - Time deposits decreased by $129.5 million to $1.15 billion at June 30, 2020, from December 31, 2019[384] - FHLB advances increased to $300.0 million at June 30, 2020, from $250 million at December 31, 2019, supporting loan growth[385] Liquidity Management This section outlines the Company's liquidity strategy and sources of funds - Primary liquidity sources include cash, excess Federal Reserve reserves, loan repayments, federal funds sold, investment maturities/sales, and new core deposits[387] - Secondary liquidity sources include FHLB borrowings, brokered deposits, and federal funds purchased lines of credit[387] - At June 30, 2020, the Company had $5.24 billion of primary and secondary liquidity sources, deemed adequate to meet current and projected funding needs[392] - Average short-term liquidity was $1.14 billion in the second quarter of 2020, exceeding average needs[391] - The Bank is eligible for FHLB advances up to $1.88 billion, with $300 million outstanding at June 30, 2020[387] Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk This section details strategies for managing interest rate risk, including simulation models and gap analysis Commitments and Contractual Obligations This section details the Company's off-balance sheet commitments and their associated risks Loan Commitments and Lines of Credit (June 30, 2020, in thousands) | Category | Amount | | :----------------------------------- | :------------- | | Unfunded loan commitments | $2,208,726 | | Unfunded lines of credit | $90,704 | | Letters of credit | $59,455 | | Total | $2,358,885 | - Unfunded loan commitments include $253.9 million related to short-term interest rate lock commitments on residential mortgage loans[393] - The total commitment amount does not necessarily represent future cash requirements as commitments may expire without being drawn[393][394] Interest Rate Risk Management This section describes the approach to managing interest rate risk through its Asset/Liability Committee (ALCO) - The net interest margin for the six months ended June 30, 2020, was 3.36%, compared to 3.97% for the same period in 2019[400] - The duration of the investment portfolio was 3.1 years, the loan portfolio was 1.5 years, the interest-bearing deposit portfolio was 3.3 years, and the borrowed funds portfolio was 6.3 years at June 30, 2020[402][403][404][411] - Fixed rate loans amounted to 44% of total loans, while variable and adjustable rate loans comprised 56% (offset by 3% from PPP loans) at June 30, 2020[403][405] - The net unrealized gain before income tax on the investment portfolio was $21.8 million at June 30, 2020, representing 3.0% of the portfolio's book value, primarily due to lower interest rates[406] Simulation Analysis: Percentage Change in Key Metrics (Next 12 Months, June 30, 2020) | Change in Interest Rates (basis points) | Percentage change in net interest income | Percentage change in net income | Percentage change in market value of portfolio equity | | :-------------------------------------- | :--------------------------------------- | :------------------------------ | :---------------------------------------------------- | | +400 | +17.4% | +31.6% | +17.3% | | +300 | +12.0% | +21.8% | +13.8% | | +200 | +6.7% | +12.1% | +10.0% | | +100 | +2.3% | +4.2% | +5.7% | | 0 | — | — | — | | -100 | -0.3% | -0.5% | -15.8% | | -200 | -0.8% | -1.4% | -28.1% | - Simulation results are within policy limits for net interest income, but down-rate scenarios exceeded limits due to the already low level of rates on non-maturing deposit instruments[412] GAP Analysis This section presents a static gap analysis to monitor interest rate sensitivity - At June 30, 2020, the Company had a positive gap position of approximately $476 million (5% of total assets) out to three months, and a positive cumulative gap position of $624 million (6% of total assets) out to twelve months[421] - This represents a shift from a negative gap position at March 31, 2019, and is within guideline limits established by the ALCO[421] - If interest rates increase by 100 basis points, net interest income and net interest margin are expected to increase modestly. If rates decline by 100 basis points, net interest income and margin are expected to decline modestly[423][424] Capital Resources and Adequacy This section discusses capital adequacy, regulatory requirements, and commercial real estate concentration risk - Non-owner-occupied commercial real estate (CRE) loans (including construction, land, and land development loans) represent 342% of total risk-based capital at June 30, 2020. Construction, land, and land development loans represent 106% of total risk-based capital[429] - The Company and the Bank meet all Basel III Rules regulatory capital requirements, including the capital conservation buffer of 2.5% of CET1 capital, and are considered well-capitalized[434] Company Capital Ratios (June 30, 2020, in thousands) | Ratio | Amount | Ratio | Minimum Required For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Regulations* | | :----------------------------------- | :----- | :---- | :--------------------------------------------- | :--------------------------------------------------------------- | | CET1 capital (to risk weighted assets) | $1,085,861 | 12.80% | 7.00% | 6.50% | | Total capital (to risk weighted assets) | $1,379,471 | 16.26% | 10.50% | 10.00% | | Tier 1 capital (to risk weighted assets) | $1,085,861 | 12.80% | 8.50% | 8.00% | | Tier 1 capital (to average assets) | $1,085,861 | 10.63% | 4.00% | 5.00% | - The Company elected to adopt the March 2020 interim final rule, which provides an alternative option to temporarily delay for two years the estimated impact of CECL adoption on regulatory capital, followed by a three-year phase-in period[443] - The share repurchase program was put on hold during the first quarter of 2020 due to heightened stock market volatility and uncertainty regarding COVID-19, with no shares repurchased in the second quarter[436] - A regular quarterly cash dividend of $0.22 per share was announced on June 24, 2020[437] Use of Non-GAAP Financial Measures This section explains the use of non-GAAP measures and provides a reconciliation to GAAP measures - The Company uses non-GAAP measures like tangible common equity to tangible assets, tangible book value per common share, and annualized return on average tangible common equity to evaluate capital adequacy and compare against other financial institutions[445] Non-GAAP Financial Measures (June 30, 2020, in thousands, except per share data) | Metric | Amount | | :----------------------------------- | :------------- | | Tangible common equity | $1,083,244 | | Tangible book value per common share | $33.62 | | Tangible common equity ratio | 11.17% | | Annualized Return on Average Tangible Common Equity (Three Months Ended June 30, 2020) | 10.80% | - These non-GAAP measures are derived by excluding intangible assets from common shareholders' equity and total assets, consistent with bank regulatory capital calculations[445][448] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section references the MD&A for detailed information on the company's market risk management - Detailed market risk disclosures are provided in Item 2, 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' under the caption 'Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk'[450] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and details the remediation of prior material weaknesses - Management concluded that the Company's disclosure controls and procedures were effective as of June 30, 2020, providing reasonable assurance for timely and accurate reporting[450] - Previously disclosed material weaknesses in internal control over financial reporting have been remediated through enhanced controls, including changes in leadership roles, Board restructuring, new committee appointments (e.g., Risk Committee), hiring a Chief Legal Officer, formalizing the ethics program, enhancing related party transaction policies, and reinforcing risk management[452][453] - No material changes in internal control over financial reporting occurred during the second quarter of 2020, other than the described remediation efforts[452] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section updates on ongoing legal matters, including a class action lawsuit and governmental investigations - A putative class action lawsuit was filed alleging materially false or misleading statements regarding internal controls and related party loans, causing a decline in stock value. The Company intends to vigorously defend against these claims[458] - The Company has received document requests and subpoenas from securities and banking regulators and U.S. Attorney's offices related to related party transactions, former officers' retirement, and relationships with a public official, and is cooperating with these ongoing investigations[459] - No regulatory restrictions have been placed on the Company's ability to fully engage in its banking business as a result of these ongoing investigations[459] - The duration, scope, or outcome of these investigations and litigation are unpredictable, but based on current information, the Company does not believe the liabilities will have a material effect on its financial position[457][459] Item 1A. Risk Factors This section highlights the significant adverse impacts of the COVID-19 pandemic on the company's business and operations - The COVID-19 pandemic and resulting containment measures have caused widespread economic and financial disruptions, with significant, adverse, and potentially material impacts on the Company's business, financial condition, liquidity, and results of operations[461] - Loan credit quality is expected to deteriorate, particularly in the Accommodation and Food Service industry (10.5% of loan portfolio) and Retail Trade industry (1.3%), and for real estate-secured loans (79% of the portfolio)[463] - Increased provisions for credit losses are expected due to CECL and COVID-19, with $19.7 million and $34.0 million increases for the three and six months ended June 30, 2020, respectively[464] - Increased demands on capital and liquidity are anticipated due to higher loan originations (e.g., PPP loans with lower rates), potential draws on existing credit lines, and reduced capital/liquidity for more profitable loans[465] - Operational risks are heightened by remote working strategies, including increased cybersecurity risks, potential disruptions to information technology infrastructure, and strain on risk management models[472] - Reliance on external vendors and service providers (e.g., real estate appraisers, recording offices) may lead to delays in loan origination and closings due to limited availability caused by containment measures[473] - Strategic and reputational risks include potential damage to the Company's brand if its response to the pandemic is perceived as inadequate, and an increased risk of litigation and regulatory scrutiny[474] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on shares purchased by the Company and the suspension of the share repurchase program - The Company purchased 58 shares of common stock at $44.60 per share during April 2020, primarily in connection with satisfying tax withholding obligations on vested restricted shares[476] - The share repurchase program was suspended during the first quarter of 2020 due to heightened stock market volatility and uncertainty regarding the impact of COVID-19, resulting in no shares repurchased during the second quarter of 2020[476] - As of June 30, 2020, 447,890 shares remained authorized for repurchase under the Repurchase Program[476] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[477] Item 4. Mine Safety Disclosures This section states that the disclosure item for mine safety is not applicable to the Company - This item is not applicable to the Company[477] Item 5. Other Information This section states that there are no required 8-K disclosures or changes in procedures for director nominations - No required 8-K disclosures were reported[477] - No changes in procedures for director nominations were reported[477] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and interactive data files - The exhibits include the Certificate of Incorporation, Bylaws, Subordinated Indentures, a Restricted Stock Award Agreement, Certifications from the CEO and CFO, and Interactive Data Files (XBRL) for the financial statements[478] Signatures This section contains the signatures of the President and CEO, and the EVP and CFO, certifying the report - The report was signed by Susan G. Riel, President and Chief Executive Officer, and Charles D. Levingston, Executive Vice President and Chief Financial Officer, on August 10, 2020[482]