4 unchanged sentences
This report contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions.
−Removed: In some cases, forward-looking statements can be identified by use of words such as “may,” “will,” “can,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “assume,"
−Removed: "probable,"
−Removed: "possible,"
−Removed: "continue,” “should,” “could,” “would,” “strive,"
−Removed: "seeks,"
−Removed: "deem,"
−Removed: "projections"
−Removed: "forecast,"
−Removed: "consider,"
−Removed: "indicative,"
−Removed: "uncertainty,"
−Removed: "likely,"
−Removed: "unknown,"
−Removed: "attributable,"
−Removed: "depends,"
−Removed: "intends,"
−Removed: "generally,"
−Removed: "feel"
−Removed: "typically,"
−Removed: "judgment,"
−Removed: "subjective"
−Removed: and similar words or phrases.
+Added: In some cases, forward-looking statements can be identified by use of words such as “may,” “will,” “can,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “assume," "probable," "possible," "continue,” “should,” “could,” “would,” “strive," "seeks," "deem," "projections," "forecast," "consider," "indicative," "uncertainty," "likely," "unlikely," ""likelihood," "unknown," "attributable," "depends," "intends," "generally," "feel" "typically," "judgment," "subjective" and similar words or phrases.
These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market (including the macroeconomic and other challenges and uncertainties resulting from the coronavirus (“COVID-19”) pandemic, including on our credit quality and business operations), interest rates and interest rate policy, competitive factors and other conditions, which by their nature are not susceptible to accurate forecast, and are subject to significant uncertainty.
−Removed: For details on factors that could affect these expectations, see the risk factors contained in this report and the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and in other periodic and current reports filed by the Company with the Securities and Exchange Commission.
+Added: For details on factors that could affect these expectations, see the risk factors contained in this report and the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company's Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 and in other periodic and current reports filed by the Company with the Securities and Exchange Commission.
Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein.
14 unchanged sentences
These services include the usual deposit functions of commercial banks, including business and personal checking accounts, “NOW” accounts and money market and savings accounts, business, construction, and commercial loans, residential mortgages and consumer loans, and cash management services.
−Removed: The Bank is also active in the origination and sale of residential mortgage loans and the origination of Small Business Administration ("SBA”) loans.
−Removed: The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under best efforts and mandatory delivery commitments with the investors to purchase the loans subject to compliance with pre-established criteria.
+Added: The Bank is also active in the origination and sale of residential mortgage loans and the origination of Small Business Administration ("SBA”) loans.
+Added: The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under best efforts and or mandatory delivery commitments with the investors to purchase the loans subject to compliance with pre-established criteria.
+Added: The decision whether to sell residential mortgage loans on a mandatory or best efforts lock basis is a function of multiple factors, including but not limited to overall market volumes of mortgage loan originations, forecasted “pull -through” rates of origination, loan closing operational considerations, pricing differentials between the two methods, and availability and pricing of various interest rate hedging strategies associated with the mortgage origination pipeline.
+Added: The Company continually monitors these factors to maximize profitability and minimize operational and interest rate risks.
The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated.
−Removed: The Company originates multifamily Federal Housing Administration ("FHA”) loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”).
+Added: The Company originates multifamily Federal Housing Administration ("FHA”) loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”).
The Company securitizes these loans through the Government National Mortgage Association (“Ginnie Mae”) MBS I program and sells the resulting securities in the open market to authorized dealers in the normal course of business, and periodically bundles and sells the servicing rights.
9 unchanged sentences
Our business and consumer customers are experiencing varying degrees of financial distress.
−Removed: In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including directing employees to work from home insofar as is possible and implementing our business continuity plans and protocols to the extent necessary.
+Added: In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including directing employees to work from home insofar as is possible, implementing our business continuity plans and protocols to the extent necessary, and our branches have modified hours and advanced safety measures.
+Added: We have established general guidelines for returning that include having employees maintain safe distances, staggered work schedules to limit the number of employees in a single location, more frequent cleaning of our facilities and other practices encouraging a safe working environment during this challenging time, including required COVID-19 training programs
On March 27, 2020, the CARES Act was signed into law.
It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic.
−Removed: The CARES Act created the Paycheck Protection Program (the "PPP"), a new program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks.
−Removed: These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.
−Removed: As an SBA preferred lender, the Bank is participating in the PPP program, and at June 30, 2020, had an outstanding balance of PPP loans of $456 million to just over 1,400 businesses.
−Removed: The average interest rate on these loans is 1.00% and the average yield, which includes fee amortization, was 2.91% for the second quarter of 2020.
−Removed: There have also been various governmental actions taken or proposed to provide forms of relief, such as limiting debt collections efforts, including foreclosures, and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees.
+Added: The CARES Act created the Paycheck Protection Program (the "PPP"), a program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks.
+Added: These loans are intended to guarantee payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.
+Added: As an SBA preferred lender, the Bank is participating in the PPP program, and at September 30, 2020, had an outstanding balance of PPP loans of $456.1 million to just over 1,400 businesses.
+Added: The statutory interest rate on these loans is 1.00% and the average yield, which includes fee amortization, was 2.41% for the third quarter of 2020.
+Added: There have also been various governmental actions taken or proposed to provide forms of relief, such as streamlining the application process for forgiveness of all PPP loans under $50,000, limiting debt collections efforts, including foreclosures, and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees.
Governmental actions taken in response to the COVID-19 pandemic have not always been coordinated or consistent across jurisdictions but, in general, have been expanding in scope and intensity.
1 unchanged sentence
In response to the COVID-19 pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications.
−Removed: Modifications under this program have predominantly been for a period of 90 days.
−Removed: The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan.
−Removed: As of June 30, 2020, we granted temporary modifications on approximately 708 loans representing $1.63 billion (approximately 20% of total loans) in outstanding exposure.
−Removed: Through July 31, 2020, we granted approximately 724 temporary modifications representing approximately $1.65 billion in outstanding exposure, including 20 temporary modifications representing $14.5 million that subsequently returned to pre-modification terms.
−Removed: Some of these deferrals may not have met the criteria for treatment under U.S.
−Removed: generally accepted accounting principles ("GAAP") as troubled debt restructurings ("TDRs").
+Added: Initial modifications under the program have predominantly been for 90 days, with a second 90 day modification if warran ted.
+Added: The de ferred payments along with interest accrued during the deferral period are due and payable on the existing maturity date of the existing loan.
+Added: As of September 30, 2020, we had ongoing temporary modifications on approximately 321 loans representing $851 million (approximately 10.8% of total loans) in outstanding balances.
+Added: Overall, as of September 30, 2020, the Bank's COVID-19 modification program has granted temporary modifications on approximately 740 loans representing approximately $1.63 billion in outstanding balances, including 419 temporary modifications representing $787 million that have or are expected to return to pre-modification terms.
+Added: Some of these deferrals may have met the criteria for treatment under U.S.
+Added: generally accepted accounting principles ("GAAP") as troubled debt restructurings ("TDRs").
Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e.
3 unchanged sentences
Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.
−Removed: Significant uncertainties as to future economic conditions exist, and we have taken deliberate actions in response, including maintaining record levels of on and off -balance sheet liquidity and have maintained well above well capitalized regulatory capital ratios.
+Added: Significant uncertainties as to future economic conditions exist, and we have taken deliberate actions in response, including maintaining record levels of on and off-balance sheet liquidity and have maintained regulatory capital ratios significantly above the well capitalized.
Furthermore, we suspended our share repurchase program during the first quarter of 2020.
Accordingly, we made no share repurchases in the second quarter of 2020.
−Removed: The Board of Directors and management continue to monitor this area and may enter the markets from time to time as determined appropriate.
−Removed: Additionally, the economic pressures, coupled with the implementation of the expected loss methodology for determining our provision for credit losses as required by CECL, have contributed to an increased provision for credit losses for the first six months of 2020.
+Added: The Company’s Board of Directors approved lifting the suspension of the Company’s share repurchase program in the third quarter of 2020;
+Added: however, no share repurchases were made in the third quarter of 2020.
+Added: The Board of Directors has authorized management through the current share repurchase program to continue to evaluate opportunities for share repurchases.
+Added: As a result, management may enter the markets from time to time as determined appropriate.
+Added: Additionally, the economic pressures, coupled with the implementation of the expected loss methodology for determining our provision for credit losses as required by the Current Expected Credit Loss ("CECL") standard described below, have contributed to an increased provision for credit losses for the first nine months of 2020.
We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act and other legislative and regulatory developments related to COVID-19;
11 unchanged sentences
Provision for Credit Losses and Provision for Unfunded Commitments
−Removed: A consequence of lending activities is that we may incur credit losses, so we record an allowance for credit losses ("ACL") with respect to loan receivables and a reserve for unfunded commitments (“RUC”) as estimates of those losses.
+Added: A consequence of lending activities is that we may incur credit losses, so we record an allowance for credit losses ("ACL") with respect to loan receivables and a reserve for unfunded commitments (“RUC”) as estimates of those losses.
The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as changes in interest rates, the financial performance of borrowers and unemployment rates.
1 unchanged sentence
2016-13, “ Measurement of Credit Losses on Financial Instruments, ” and its related amendments, our methodology for estimating these credit losses changed significantly from December 31, 2019.
−Removed: The standard replaced the “incurred loss” approach with an “expected loss” approach known as CECL.
+Added: The new standard replaced the “incurred loss” approach with an “current expected credit loss” approach known as CECL.
The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures).
7 unchanged sentences
Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for credit losses and the RUC.
−Removed: Our determination of the amount of the allowance for credit losses requires significant reliance on the credit risk rating we assign to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts.
+Added: Our determination of the amount of the allowance for credit losses requires significant reliance on estimates and significant judgment as to the amount and timing of expected future cash flows on loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts.
The Company uses the discounted cash flow (“DCF”) method to estimate expected credit losses for the commercial, income producing – commercial real estate, owner occupied – commercial real estate, real estate mortgage – residential, construction – commercial and residential, construction – C&I (owner occupied), home equity, and other consumer loan pools.
12 unchanged sentences
Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.
−Removed: For example, the COVID-19 pandemic has negatively impacted unemployment projections, which inform our CECL economic forecast and increased our loss reserve as of June 30, 2020.
+Added: For example, the COVID-19 pandemic has negatively impacted the performance outlook in the Accommodation & Food Service segment of our loan portfolio, which informs our CECL economic forecast and increased our loss reserve as of September 30, 2020.
See Notes 1 and 5 to the Consolidated Financial Statements, the “Provision for Credit Losses” section in Management’s Discussion and Analysis, and the COVID-19 risk factors in Item 1A for more information on the provision for credit losses.
3 unchanged sentences
These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables.
−Removed: Based on the results of the assessment of all reporting units, the Company concluded that no impairment existed as of June 30, 2020.
+Added: Based on the results of the assessment of all reporting units, the Company concluded that no goodwill impairment existed as of June 30, 2020.
However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss.
Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations.
+Added: Management did not consider a triggering event to have occurred during the third quarter of 2020.
+Added: Annual impairment testing of intangibles and goodwill as required by GAAP will be performed in the fourth quarter of 2020.
RESULTS OF OPERATIONS
Earnings Summary
−Removed: Net income for the three months ended June 30, 2020 was $28.9 million compared to $37.2 million net income for the three months ended June 30, 2019, a 23% decrease.
−Removed: Net income per basic and diluted common share for the three months ended June 30, 2020 was $0.90 compared to $1.08 per basic and diluted common share for the same period in 2019, a 17% decrease.
−Removed: Net income declined for the three months ended June 30, 2020 relative to the same period in 2019 due substantially to increased provisioning for credit losses offset by higher noninterest income (as discussed below).
−Removed: In particular, the provision for credit losses increased to $19.7 million for the three months ended June 30, 2020 compared to $3.6 million for the same period in 2019, a 448% increase, as the Company implemented CECL effective January 1, 2020 and increased reserves associated with the impact of COVID-19.
−Removed: See Note 1 and Note 5 for further detail on CECL.
−Removed: The provision for income taxes for the three months ended June 30, 2020 was $9.4 million, a decrease of $4.1 million, or 30%, compared to the same period in 2019.
−Removed: The decrease in income taxes was primarily due to a significant decline in pre-tax income for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due to increased credit reserves significantly attributable to COVID-19, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019.
+Added: Net income for the three months ended September 30, 2020 was $41.3 million compared to $36.5 million for the three months ended September 30, 2019, a 13% increase.
+Added: Net income per basic and diluted common share for the three months ended September 30, 2020 was $ 1.28 compared to $1.07 per basic and diluted common share for the same period in 2019, a 20% increase.
+Added: Net income for the nine months ended September 30, 2020 was $93.3 million compared to $107.5 million for the nine months ended September 30, 2019, a 13% decrease.
+Added: Net income per basic and diluted common share for the nine months ended September 30, 2020 was $ 2.88 compared to $3.12 for the same period in 2019, an 8% decrease.
+Added: Net income increased for the three months ended September 30, 2020 relative to the same period in 2019 due to higher noninterest income (as discussed below).
+Added: This was partially offset by an increase in provisioning for credit losses and lower net interest income.
+Added: In particular, the provision for credit losses increased to $6.6 million for the three months ended September 30, 2020 compared to $3.2 million for the same period in 2019, a 107% increase (see "Provision for Credit Losses" section below for further details on drivers of the change).
+Added: N et income declined for the nine months ended September 30, 2020 relative to the same period in 2019 due substantially to a decline in the net interest margin, and increased provisioning for credit losses (see "Provision for Credit Losses" section below, and Note 1 and Note 5 for further detail on CECL ), partially off set by higher noninterest income (as discussed in the "Noninterest Income" section below).
The most significant portion of revenue (i.e.
−Removed: net interest income plus noninterest income) is net interest income, which remained relatively stable for the three months ended June 30, 2020 over the same period in 2019 ($81.4 million as compared to $81.3 million).
−Removed: This was largely attributable to the growth in average earning assets effectively offset by a decline in the net interest margin.
−Removed: For the three months ended June 30, 2020, the Company reported an annualized return on average assets (“ROAA”) of 1.12% as compared to 1.74% for the three months ended June 30, 2019.
−Removed: Total shareholders’ equity was $1.19 billion at both June 30, 2020 and December 31, 2019, a decrease of less than 1%.
−Removed: The annualized return on average common equity (“ROACE”) for the three months ended June 30, 2020 was 9.84% as compared to 12.81% for the three months ended June 30, 2019.
−Removed: The annualized return on average tangible common equity (“ROATCE”) for the three months ended June 30, 2020 was 10.80% as compared to 14.08% for the three months ended June 30, 2019.
−Removed: Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
−Removed: The decline in these ratios was primarily due to the implementation of CECL and COVID-19 impacts and to a lower net interest margin.
+Added: net interest income plus noninterest income) is net interest income, which decreased to $79.0 million for the three months ended September 30, 2020 compared to $81.0 million for the same period in 2019.
+Added: The decrease resulted from a decline in the net interest margin substantially offset by growth in average earning assets of 17.9%.
The net interest margin, which measures the difference between interest income and interest expense (i.e.
−Removed: net interest income) as a percentage of earning assets, was 3.26% for the three months ended June 30, 2020 and 3.91% for the same period in 2019.
−Removed: Average earning asset yields decreased 130 basis points to 3.91% for the three months ended June 30, 2020, as compared to 5.21% for the same period in 2019.
−Removed: The average cost of interest bearing liabilities decreased by 105 basis points (to 1.01% from 2.06%) for the three months ended June 30, 2020 as compared to the same period in 2019.
−Removed: Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 25 basis points for the three months ended June 30, 2020 as compared to 2019 (2.90% as compared to 3.15%).
−Removed: The benefit of noninterest sources funding earning assets decreased by 40 basis points to 36 basis points from 76 basis points for the three months ended June 30, 2020 as compared to the same period in 2019, due to significantly lower market interest rates.
−Removed: The combination of a 25 basis point decrease in the net interest spread and a 40 basis point decrease in the value of noninterest sources resulted in a 65 basis point decrease in the net interest margin for the three months ended June 30, 2020 as compared to the same period in 2019.
−Removed: The provision for credit losses was $19.7 million for the three months ended June 30, 2020 as compared to $3.6 million for the three months ended June 30, 2019.
−Removed: The higher provisioning in the second quarter of 2020, as compared to the second quarter of 2019, is primarily due to the implementation of the CECL accounting standard for loan loss allowances, as well as COVID-19 impacts and higher net charge-offs primarily related to COVID-19 effects.
−Removed: Net charge-offs of $7.1 million in the second quarter of 2020 represented an annualized 0.36% of average loans, excluding loans held for sale, as compared to $1.5 million, or an annualized 0.08% of average loans, excluding loans held for sale, in the second quarter of 2019.
−Removed: Net charge-offs in the second quarter of 2020 were attributable primarily to one commercial relationship to a personal services company that ceased business operations as a result of COVID-19.
−Removed: At June 30, 2020 the allowance for credit losses represented 1.36% of loans outstanding, as compared to 0.98% at December 31, 2019.
−Removed: The allowance for credit losses represented 185% of nonperforming loans at June 30, 2020, as compared to 151% at December 31, 2019.
−Removed: The higher coverage ratio was due to an increase in the allowance at June 30, 2020, substantially due to the implementation of CECL and the impact of COVID-19 on our expected future credit losses.
−Removed: Total noninterest income for the three months ended June 30, 2020 increased to $12.5 million from $6.4 million for the three months ended June 30, 2019, a 96% increase.
−Removed: Service charges on deposits for the three months ended June 30, 2020 decreased to $942 thousand from $1.6 million for the three months ended June 30, 2019, a 41% decrease, due to lesser insufficient funds fees.
−Removed: Gain on sale of loans for the three months ended June 30, 2020 increased to $3.1 million from $1.9 million for the three months ended June 30, 2019, a 60% increase, due to higher gains on the sale of residential mortgage loans ($1.2 million).
−Removed: Other income for the three months ended June 30, 2020 increased to $6.9 million from $1.8 million for the three months ended June 30, 2019, a 277% increase, due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA loans ($2.5 million), $1.4 million higher small business investment company (“SBIC”) income related to a Community Reinvestment Act (“CRA”) qualified investment fund, $921 thousand higher swap fee income, and $591 thousand higher prepayment fees.
−Removed: Net investment gains on sale were $713 thousand for the three months ended June 30, 2020 compared to $563 thousand for the same period in 2019.
−Removed: Residential mortgage loans closed were $308 million for the second quarter of 2020 as compared to $152 million for the second quarter of 2019.
−Removed: The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 37.18% for the second quarter of 2020, as compared to 38.04% for the second quarter of 2019.
−Removed: Noninterest expenses totaled $34.9 million for the three months ended June 30, 2020, as compared to $33.4 million for the three months ended June 30, 2019, a 5% increase.
−Removed: Salaries and employee benefits were $17.1 million for the three months ended June 30, 2020, as compared to $17.7 million for the same period in 2019, a decrease of $639 thousand or 4%.
−Removed: Data processing expenses were $2.8 million for the three months ended June 30, 2020 compared to $2.6 million for the same period in 2019, a 6% increase.
−Removed: Legal, accounting and professional fees increased $1.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.
−Removed: The reasons for the decrease in salaries and employee benefits and the increase in legal, accounting and professional fees for the periods noted above are discussed in the “Noninterest Expense” section.
−Removed: FDIC expenses were $2.0 million for the three months ended June 30, 2020 compared to $1.1 million for the same period in 2019, a 76% increase, due to a higher assessment base resulting from growth in total assets.
−Removed: Other expenses were $4.5 million for the three months ended June 30, 2020 compared to $4.2 million for the same period in 2019, a 6% increase, due primarily to $940 thousand higher other real estate owned ("OREO") expense offset by lower broker fees ($497 thousand).
−Removed: Net income for the six months ended June 30, 2020 was $52.0 million compared to $71.0 million for the six months ended June 30, 2019, a 27% decrease.
−Removed: Net income per basic common share for the six months ended June 30, 2020 was $1.60 compared to $2.06 per basic common share for the same period in 2019, a 22% decrease.
−Removed: Net income per diluted common share for the six months ended June 30, 2020 was $1.60 compared to $2.05 per diluted common share for the same period in 2019, a 22% decrease.
−Removed: Net income declined for the six months ended June 30, 2020 relative to the same period in 2019 due substantially to increased provisioning for credit losses offset by higher noninterest income (as discussed below).
−Removed: In particular, the provision for credit losses increased to $34.0 million for the six months ended June 30, 2020 compared to $7.0 million for the same period in 2019, a 389% increase, as the Company implemented CECL effective January 1, 2020 and increased reserves associated with the impact of COVID-19 through the second quarter of 2020.
−Removed: See Note 1 and Note 5 for further detail on CECL.
−Removed: The provision for income taxes was $17.8 million for the six months ended June 30, 2020, a decrease of $7.6 million, or 30%, compared to the same period in 2019.
−Removed: The decrease was primarily due to a significant decline in pre-tax income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019.
−Removed: The decrease in the effective income tax rate was recorded in the second quarter of 2020 based on a reduced pre-tax income budget for the year due to increased credit reserves significantly attributable to COVID-19.
−Removed: Net interest income decreased by less than 1% for the six months ended June 30, 2020 over the same period in 2019 ($161.1 million as compared to $162.3 million).
−Removed: This was largely attributable to growth in average earning assets effectively offset by a decline in the net interest margin.
−Removed: For the six months ended June 30, 2020, the Company reported an annualized ROAA of 1.06% as compared to 1.68% for the six months ended June 30, 2019.
−Removed: The annualized ROACE for the six months ended June 30, 2020 was 8.82% as compared to 12.47% for the six months ended June 30, 2019.
−Removed: The annualized ROATCE for the six months ended June 30, 2020 was 9.67% as compared to 13.73% for the six months ended June 30, 2019.
−Removed: Refer to the "Use of Non-GAAP Financial Measures"
−Removed: section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
−Removed: The decline in these ratios was primarily due to the implementation of CECL and COVID-19 impacts and to a lower net interest margin.
−Removed: The net interest margin was 3.36% for the six months ended June 30, 2020 and 3.97% for the same period in 2019.
−Removed: Average earning asset yields decreased 100 basis points to 4.21% for the six months ended June 30, 2020, as compared to 5.21% for the same period in 2019.
−Removed: The average cost of interest bearing liabilities decreased by 70 basis points (to 1.31% from 2.01)% for the six months ended June 30, 2020 as compared to the same period in 2019.
−Removed: Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 25 basis points for the six months ended June 30, 2020 as compared to 2019 (2.90% as compared to 3.20)%.
−Removed: The benefit of noninterest sources funding earning assets decreased by 31 basis points to 46 basis points from 77 basis points for the six months ended June 30, 2020 as compared to the same period in 2019 due to significantly lower market interest rates.
−Removed: The combination of a 30 basis point decrease in the net interest spread and a 31 basis point decrease in the value of noninterest sources resulted in a 61 basis point decrease in the net interest margin for the six months ended June 30, 2020 as compared to the same period in 2019.
+Added: net interest income) as a percentage of earning assets, was 3.08% for the three months ended September 30, 2020 and 3.72% for the same period in 2019.
+Added: The net interest margin was 3.27% for the nine months ended September 30, 2020 and 3.88% for the same period in 2019.
+Added: The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below.
+Added: Total noninterest income for the three months ended September 30, 2020 increased to $17.8 million from $6.3 million for the three months ended September 30, 2019, a 183% increase.
+Added: Service charges on deposits for the three months ended September 30, 2020 decreased from $1.5 million to $1.1 million for the three months ended September 30, 2019, a 29.0% decrease, due to lesser insufficient funds fees.
+Added: Total noninterest income for the nine months ended September 30, 2020 increased to $35.8 million from $19.0 million for the nine months ended September 30, 2019, an 89% increase.
+Added: Service charges on deposits for the nine months ended September 30, 2020 decreased to $3.4 million from $4.8 million for the nine months ended September 30, 2019, a 28% decrease, due to lesse r insufficient funds fees.
+Added: F or further information on the components and drivers of these changes see "Noninterest Income" section below.
+Added: The benefit of noninterest sources funding earning assets decreased by 41 basis points to 33 basis points for the three months ended September 30, 2020 as compared to 74 basis points for the same period in 2019, due to significantly lower market interest rates.
+Added: The combination of a 23 basis point decrease in the net interest spread and a 41 basis point decrease in the value of noninterest sources resulted in a 64 basis point decrease in the net interest margin for the three months ended September 30, 2020 as compared to the same period in 2019.
+Added: T he benefit of noninterest sources funding earning assets decreased by 34 basis points to 42 basis points from 76 basis points for the nine months ended September 30, 2020 as compared to the same period in 2019 due to significantly lower market interest rates.
+Added: The combination of a 27 basis point decrease in the net interest spread and a 34 basis point decrease in the value of noninterest sources resulted in a 61 basis point decrease in the net interest margin for the nine months ended September 30, 2020 as compared to the same period in 2019.
Despite currently having lesser value resulting from lower interest rates, the Company continues to consider the value of its noninterest sources of funds as very significant to its business model and its overall profitability over the longer term.
+Added: Gain on sale of loans for the three months ended September 30, 2020 was $12.2 million compared to $2.6 million for the three months ended September 30, 2019, an increase of 377%.
+Added: Gain on sale of loans for the nine months ended September 30, 2020 increased to $16.2 million from $5.9 million for the nine months ended September 30, 2019, a 177% increase, due to higher gains on the sale of residential mortgage loans ($10.3 million).
+Added: Residential lending gains for the three and nine months ended September 30, 2020 are impacted by the change in strategy to almost exclusively lock loans on a best efforts basis during the third quarter of 2020 and an adjustment to the accounting methodology by which gains are recognized to align with GAAP, as described in the "Noninterest Income" section below.
+Added: Other income for the three months ended September 30, 2020 increased to $4.0 million from $1.7 million for the three months ended September 30, 2019, a 141% increase, due substantially to $1.2 million gain on the sale of an OREO property and $912 thousand higher gains associated with the origination, securitization, sale and servicing of FHA loans.
+Added: Other income for the nine months ended September 30, 2020 increased to $12.8 million from $5.4 million for the nine months ended September 30, 2019, a 138% increase due substantially to $3.4 million higher gains associated with the origination, securitization, sale, and servicing of FHA loans, $1.4 million higher small business investment company ("SBIC") income, $1.2 million gain on the sale of an OREO property, $1.2 million higher swap fee income, and $703 thousand higher commitment fees, partially offset by lower service charges on deposits of $1.4 million.
+Added: Gains on sale of investment securities were $115 thousand and $153 thousand for the three months ended September 30, 2020 and 2019, respectively.
+Added: Gains on sale of investment securities were $1.7 million and $1.6 million for the nine months ended September 30, 2020 and 2019, respectively.
+Added: Noninterest expenses totaled $36.9 million for the three months ended September 30, 2020, as compared to $33.5 million for the three months ended September 30, 2019, a 10% increase.
+Added: Noninterest expenses totaled $109.2 million for the nine months ended September 30, 2020, as compared to $105.1 million for the nine months ended September 30, 2019, a 4% increase.
+Added: See the "Noninterest Expense" section for further detail on the components and drivers of the change.
+Added: Income tax expense were $14.1 million for the three months ended September 30, 2020 a decrease of 0.4%, compared to the same period in 2019.
+Added: The provision for income taxes was $31.8 million for the nine months ended September 30, 2020, a decrease of $7.7 million compared to the same period in 2019.
+Added: The components and drivers of the change are discussed in the "Income Tax Expense" section below.
+Added: The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 38.10% for the third quarter of 2020, as compared to 38.34% for the third quarter of 2019, and was 39.56% for the nine months ended September 30, 2020 as compared to 40.08% for the same period in 2019.
The Company believes it has effectively managed its net interest income over the past twelve months as market interest rates have trended sharply lower.
−Removed: This factor has been significant to overall earnings performance over the past twelve months as net interest income represents 87% of the Company's total revenue for the three months ended June 30, 2020.
−Removed: For the first six months ended June 30, 2020, total loans grew 6% over December 31, 2019, and average loans were 10% higher in the first six months of 2020 as compared to the first six months of 2019.
−Removed: At June 30, 2020, total deposits were 10% higher than deposits at December 31, 2019, while average deposits were 17% higher for the first six months of 2020 compared with the first six months of 2019.
−Removed: In order to fund growth in average loans of 10% over the six months ended June 30, 2020 as compared to the same period in 2019, as well as sustain significant liquidity, the Company has relied on funding from interest bearing accounts primarily as a result of inflows from certain financial intermediary relationships as their clients moved to a more significant cash position in light of COVID-19 concerns.
−Removed: In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 81% and 87% of average earning assets for the first six months of 2020 and 2019, respectively.
−Removed: For the first six months of 2020, as compared to the same period in 2019, average loans, excluding loans held for sale, increased $683.1 million, or 10%, due primarily to growth in income producing - commercial real estate, commercial and PPP loans.
−Removed: Average investment securities for the six months ended June 30, 2020 and 2019 amounted to 2% and 3% of average earning assets, respectively.
−Removed: The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 10% and 4% of average earning assets for the first six months of 2020 and 2019, respectively.
−Removed: The provision for credit losses was $34.0 million for the six months ended June 30, 2020 as compared to $7.0 million for the six months ended June 30, 2019.
−Removed: The higher provisioning for the six months ended June 30, 2020, as compared to the same period in 2019, is primarily due to the implementation of CECL and the impact of COVID-19 on our actual and expected future credit losses.
−Removed: Net charge-offs of $9.4 million for the six months ended June 30, 2020 represented an annualized 0.24% of average loans, excluding loans held for sale, as compared to $4.8 million, or an annualized 0.13% of average loans, excluding loans held for sale, in the first six months of 2019.
−Removed: Net charge-offs in the first six months of 2020 were attributable to commercial loans ($7.1 million) and commercial real estate loans ($2.3 million).
−Removed: Total noninterest income for the six months ended June 30, 2020 increased to $18.0 million from $12.7 million for the six months ended June 30, 2019, a 42% increase.
−Removed: Service charges on deposits for the six months ended June 30, 2020 decreased to $2.4 million from $3.3 million for the six months ended June 30, 2019, a 28% decrease, due to lesser insufficient funds fees.
−Removed: Gain on sale of loans for the six months ended June 30, 2020 increased to $4.0 million from $3.3 million for the six months ended June 30, 2019, a 22% increase, due to higher gains on the sale of residential mortgage loans ($718 thousand).
−Removed: Residential lending gains for the first six months of 2020 are net of $2.6 million in hedge and mark to market losses incurred during the first quarter of 2020 attributable to the Federal Reserve’s market actions negatively impacting mortgage backed securities pricing combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19 at the end of March.
−Removed: Other income for the six months ended June 30, 2020 increased to $8.8 million from $3.7 million for the six months ended June 30, 2019, a 137% increase due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA loans ($2.5 million), $1.4 million higher SBIC income related to a CRA qualified investment fund, $1.1 million higher swap fee income, and $380 thousand higher prepayment fees.
−Removed: Net investment gains were $1.5 million for both the six months ended June 30, 2020 and 2019.
−Removed: Residential mortgage loans closed were $501 million for the first six months of 2020 as compared to $246 million for the first six months of 2019.
−Removed: For the first six months of 2020, the efficiency ratio was 40.34% as compared to 40.95% for the same period in 2019.
−Removed: Noninterest expenses totaled $72.2 million for the six months ended June 30, 2020, as compared to $71.7 million for the six months ended June 30, 2019, a 1% increase.
−Removed: Noninterest expenses in 2020 periods increased slightly from the 2019 amounts primarily because of increased legal expenses.
−Removed: This increase was almost entirely offset by not having the nonrecurring costs related to the former CEO retirement that were present in the 2019 period.
−Removed: Salaries and employee benefits were $34.9 million for the six months ended June 30, 2020, as compared to $41.4 million for the same period in 2019, a decrease of $6.5 million or 16%.
−Removed: Legal, accounting and professional fees increased $6.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.
−Removed: The reason for the decrease in salaries and employee benefits and increase in legal, accounting and professional fees for the periods noted above are further discussed in the “Noninterest Expense” section.
−Removed: Data processing expenses were $5.3 million for the six months ended June 30, 2020 compared to $5.0 million for the same period in 2019, a 6% increase.
−Removed: FDIC expenses were $3.4 million for the six months ended June 30, 2020 compared to $2.2 million for the same period in 2019, a 52% increase, due to a higher assessment base resulting from growth in total assets.
−Removed: Other expenses were $8.2 million for the six months ended June 30, 2020 compared to $8.7 million over the same period ended June 30, 2019, a 5% decrease, due primarily to lower broker fees ($1.6 million) partially offset by $940 thousand higher other real estate owned (“OREO”) expense.
−Removed: The ratio of common equity to total assets decreased to 12.12% at June 30, 2020 from 13.25% at December 31, 2019, due to total assets growing faster than common equity, including common equity reductions due to $44 million in share repurchase activity, the approximately $11 million charge to common equity due to implementation of CECL on January 1, 2020, and COVID-19’s impact on our loan loss provisioning as discussed in the “Earnings Summary” above.
+Added: This factor has been significant to overall earnings performance over the past twelve months as net interest income represents 87% of the Company's total revenue for the first nine months of 2020.
+Added: At September 30, 2020, total loans (including PPP loans) were 4.4% higher than they were at December 31, 2019, and average loans were 8.2% higher in the first nine months of 2020 as compared to the first nine months of 2019.
+Added: PPP loans represented $456.1 million of total loans at the end of the third quarter 2020.
+Added: Excluding PPP loans, the decrease in loan balance is mostly attributable to the successful completion of construction projects and the related construction loan payoffs.
+Added: In order to fund such loan increases and sustain significant liquidity, the Company has relied on funding from interest bearing accounts primarily as a result of inflows from certain financial intermediary relationships.
+Added: At September 30, 2020, total deposits were 13.2% higher than deposits at December 31, 2019, while average deposits were 16.8% higher for the first nine months of 2020 compared with the first nine months of 2019.
+Added: This has led the Company to be able to sustain strong primary and secondary sources of liquidity.
+Added: In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 80% and 87% of average earning assets for the first nine months of 2020 and 2019, respectively.
+Added: For the first nine months of 2020, as compared to the same period in 2019, average loans, excluding loans held for sale, increased $593 million, or 8.2%, due primarily to growth in PPP, income producing commercial real estate, and commercial loans.
+Added: Average investment securities for the nine months ended September 30, 2020 and 2019 both amounted to 9% average earning assets.
+Added: The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 11% and 4% of average earning assets for the first nine months of 2020 and 2019, respectively.
+Added: The ratio of common equity to total assets decreased to 12.11% at September 30, 2020 from 13.25% at December 31, 2019, due to total assets growing faster than common equity, including common equity reductions due to $44 million in share repurchase activity, the approximate $10.6 million charge to common equity due to implementation of CECL on January 1, 2020, and COVID-19’s impact on our loan loss provisioning as discussed in the “Earnings Summary” above.
As discussed later in “Capital Resources and Adequacy,” the regulatory capital ratios of the Bank and Company remain above well capitalized levels.
+Added: For the three months ended September 30, 2020, the Company reported an annualized return on average assets (“ROAA”) of 1.57%, as compared to 1.62% for the three months ended September 30, 2019.
+Added: Total shareholders’ equity was $1.22 billion and $1.19 billion at September 30, 2020 and December 31, 2019, respectively, an increase of 3%.
+Added: The annualized return on average common equity (“ROACE”) for the three months ended September 30, 2020 was 14.46% as compared to 12.09% for the three months ended September 30, 2019.
+Added: The annualized return on average tangible common equity (“ROATCE”) for the three months ended September 30, 2020 was 15.93% as compared to 13.25% for the three months ended September 30, 2019.
+Added: Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
+Added: The increase in these ratios was primarily due to substantially higher noninterest income.
+Added: For the nine months ended September 30, 2020, the Company reported an annualized ROAA of 1.24% as compared to 1.66% for the nine months ended September 30, 2019.
+Added: The annualized ROACE for the nine months ended September 30, 2020 was 10.44% as compared to 12.34% for the nine months ended September 30, 2019.
+Added: The annualized ROATCE for the nine months ended September 30, 2020 was 11.45% as compared to 13.57% for the nine months ended September 30, 2019.
+Added: Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
+Added: The decline in these ratios was primarily due to the implementation of CECL and COVID-19 impacts on loan loss provisioning, as well as a lower net interest margin.
Net Interest Income and Net Interest Margin
4 unchanged sentences
Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.
−Removed: Net interest income was $81.4 million for the three months ended June 30, 2020 and $81.3 million for the same period in 2019.
−Removed: The lack of growth was primarily the result of lesser average yields on loans (4.63% as compared to 5.61%) effectively offset by growth in average earning assets of 21%.
−Removed: The addition of the PPP loans at an average yield of 2.91% for the quarter negatively impacted the overall yield of the total loan portfolio by approximately seven basis points.
−Removed: For the six months ended June 30, 2020, net interest income decreased by $1.2 million, average loans increased by $683.1 million, and average deposits increased by $1.15 billion over the same period for 2019.
−Removed: The addition of the PPP loans at an average yield of 2.91% for the six months ended June 30, 2020 negatively impacted the overall yield of the total loan portfolio by approximately four basis points.
−Removed: The net interest margin was 3.26% for the second quarter of 2020 and 3.91% for the second quarter of 2019.
−Removed: In the second quarter of 2020, as average U.S.
−Removed: Treasury rates in the two to five year range declined significantly by about 80-90 basis points and the average yield curve remained fairly flat, we experienced 23 basis points of net interest margin compression (from 3.49% to 3.26%) as compared to the first quarter of 2020.
+Added: Net interest income was $79.0 million for the three months ended September 30, 2020 and $81.0 million for the same period in 2019, which reflects the impact of lower interest rates and higher cash balances given strong deposit flows, partially offset by improved funding mix and lower funding costs.
+Added: The lack of growth was primarily the result of a decline in the net interest margin, as explained below, substantially offset by growth in average earning assets of 17.9%.
+Added: For the nine months ended September 30, 2020, net interest income decreased by $3.2 million from the same period in prior year, resulting from net interest margin declines despite growth in average earning assets of 17.0%.
+Added: The net interest margin was 3.08% for the three months ended September 30, 2020 and 3.72% for the same period in 2019, which reflects the impact of lower interest rates and higher cash balances given strong deposit flows, partially offset by improved funding mix and lower funding costs.
+Added: The net interest margin was 3.27% for the nine months ended September 30, 2020 and 3.88% for the same period in 2019, owing in part to the COVID-19 pandemic, the sharply lower interest rate environment in 2020 as compared to 2019, together with a substantially higher on balance sheet liquidity position were the primary factors that negatively impacted the year to date net interest margin.
+Added: Additionally, the net interest margin for both the three and nine months ended September 30, 2020 was negatively impacted by approximately two basis points due to lower rates on PPP loans in 2020.
+Added: In the third quarter of 2020, as average U.S.
+Added: Treasury rates in the two to five year range declined by approximately 7 basis points and the average yield curve remained fairly flat, the Company experienced 18 basis points of net interest margin compression (from 3.26% to 3.08%) as compared to the second quarter of 2020.
In addition, our cost of funds declined 7 basis points (from 0.65% to 0.58%), while the yield on earning assets declined by 25 basis points (from 3.91% to 3.66%).
−Removed: At June 30, 2020, the Bank had $456 million of outstanding PPP loans with an average rate of 1.00% and an average yield, which includes fee amortization, of 2.91% for the second quarter of 2020.
−Removed: The lower loan yield on these PPP loans negatively affected second quarter loan portfolio yields by seven basis points.
−Removed: Substantially higher average liquidity in the second quarter compared to the first quarter of 2020 contributed to the net interest margin compression as average deposit growth outweighed average loan growth.
−Removed: For the three months ended June 30, 2020, average loans increased by $754.9 million and average deposits increased by $1.59 billion over the same period for 2019.
−Removed: Average liquidity for the second quarter was $1.1 billion as compared to $229 million for the second quarter of 2019.
−Removed: The yield on our substantial level of variable rate loans was negatively impacted by the much lower interest rate environment in the second quarter of 2020, including a 105 basis point decline in the average one-month LIBOR rate.
−Removed: A substantial portion of the variable rate loans portfolio has interest rate floors which cushioned the decline in loan yields.
−Removed: The net interest margin was 3.36% for the six months ended June 30, 2020 and 3.97% for the same period in 2019.
−Removed: The low interest rate environment in the second quarter of 2020 reduced interest income on floating-rate commercial loans as well as liquid assets and reduced depositor expectations concerning deposit rates.
−Removed: Because of the need to maintain higher levels of liquidity and delays in business investment activity due to COVID-19 disruptions, interest rates and margins can be expected to remain low.
−Removed: As business conditions adjust to the new operating environment, deposit competition is expected to be more of a factor in influencing deposit rates than it was in the period immediately following the COVID-19 outbreak.
−Removed: The tables below presents the average balances and rates of the major categories of the Company’s assets and liabilities for the three and six months ended June 30, 2020 and 2019.
+Added: Average liquidity for the third quarter was $1.3 billion versus $1.1 billion for the second quarter of 2020.
+Added: The yield on our loan assets was negatively impacted by the low interest rate environment in the third quarter of 2020, including a 19 basis point decline in the average one-month LIBOR rate.
+Added: A substantial portion of the variable rate loan portfolio has interest rate floors that cushioned the decline in loan yields.
+Added: Average earning asset yields decreased 134 basis points to 3.66% for the three months ended September 30, 2020, as compared to 5.00% for the same period in 2019.
+Added: The average cost of interest bearing liabilities decreased by 111 basis points (to 0.91% from 2.02%) for the three months ended September 30, 2020 as compared to the same period in 2019.
+Added: Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 23 basis points for the three months ended September 30, 2020 as compared to 2019 (2.75% as compared to 2.98%).
+Added: While the net interest income decreased by 1% to $240.1 million for the nine months ended September 30, 2020 as compared to $243.3 million over the same period in 2019.
+Added: This was largely the result of net interest margin declines despite growth in average earning assets of 17.0%.
+Added: Average earning asset yields decreased 112 basis points to 4.02% for the nine months ended September 30, 2020, as compared to 5.14% for the same period in 2019.
+Added: The average cost of interest bearing liabilities decreased by 85 basis points (to 1.17% from 2.02%) for the nine months ended September 30, 2020 as compared to the same period in 2019.
+Added: Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 27 basis points for the nine months ended September 30, 2020 as compared to 2019 (2.85% as compared to 3.12%).
+Added: The tables below present the average balances and rates of the major categories of the Company’s assets and liabilities for the three and nine months ended September 30, 2020 and 2019.
Included in the tables are measurements of interest rate spread and margin.
6 unchanged sentences
(dollars in thousands)
−Removed: Three Months Ended June 30,
+Added: Three Months Ended September 30,
+Added: Balance Interest Average
+Added: Yield/Rate Average
+Added: Balance Interest Average
Interest earning assets:
1 unchanged sentence
Loans held for sale (1)
+Added: 79,354 567 2.86 % 49,765 492 3.95 %
Loans (1) (2)
+Added: 7,910,260 88,730 4.46 % 7,492,816 101,805 5.39 %
Investment securities available for sale (2)
+Added: 906,990 4,141 1.82 % 741,907 4,904 2.62 %
Federal funds sold 33,403 11 0.13 % 25,855 71 1.09 %
3 unchanged sentences
Total noninterest earning assets 267,656 268,210
+Added: TOTAL ASSETS $ 10,473,595 $ 8,923,406
LIABILITIES AND SHAREHOLDERS’ EQUITY
19 unchanged sentences
(1) Loans placed on nonaccrual status are included in average balances.
−Removed: Net loan fees and late charges included in interest income on loans totaled $6.3 million and $4.7 million for the three months ended June 30, 2020 and 2019, respectively.
+Added: Net loan fees and late charges included in interest income on loans totaled $5.4 million and $4.3 million for the three months ended September 30, 2020 and 2019, respectively.
(2) Interest and fees on loans and investments exclude tax equivalent adjustments.
2 unchanged sentences
(dollars in thousands)
−Removed: Six Months Ended June 30,
+Added: Nine Months Ended September 30,
+Added: Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate
Interest earning assets:
1 unchanged sentence
Loans held for sale (1)
+Added: 66,158 1,605 3.23 % 34,265 1,041 4.05 %
Loans (1) (2)
+Added: 7,859,188 277,373 4.71 % 7,265,726 300,966 5.54 %
Investment securities available-for-sale (2)
+Added: 865,484 14,139 2.18 % 784,970 15,740 2.68 %
Federal funds sold 33,424 84 0.34 % 21,352 167 1.05 %
Total interest earning assets 9,814,305 295,305 4.02 % 8,391,463 322,447 5.14 %
+Added:
Total noninterest earning assets 368,974 339,355
1 unchanged sentence
Total noninterest earning assets 269,776 268,453
+Added: TOTAL ASSETS $ 10,084,081 $ 8,659,916
LIABILITIES AND SHAREHOLDERS’ EQUITY
8 unchanged sentences
Total interest bearing liabilities 6,298,912 55,162 1.17 % 5,245,645 79,112 2.02 %
+Added:
Noninterest bearing liabilities:
9 unchanged sentences
(1) Loans placed on nonaccrual status are included in average balances.
−Removed: Net loan fees and late charges included in interest income on loans totaled $10.7 million and $8.8 million for the six months ended June 30, 2020 and 2019, respectively.
+Added: Net loan fees and late charges included in interest income on loans totaled $16.1 million and $13.1 million for the nine months ended September 30, 2020 and 2019, respectively.
(2) Interest and fees on loans and investments exclude tax equivalent adjustments.
1 unchanged sentence
The provision for credit losses represents the amount of expense charged to current earnings to fund the ACL on loans and the ACL on available for sale investment securities.
−Removed: The amount of the allowance for credit losses on loans is based on many factors which reflect management’s assessment of the risk in the loan portfolio.
+Added: The amount of the allowance for credit losses on loans is based on many factors that reflect management’s assessment of the risk in the loan portfolio.
Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.
−Removed: The provision for unfunded commitments is presented separately on the Statement of Operations.
+Added: The provision for unfunded commitments is presented separately on the Statement of Income.
This provision considers the probability that unfunded commitments will fund.
3 unchanged sentences
Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors.
−Removed: Refer to additional detail regarding these forecasts in the “Discounted Cash Flow Method"
−Removed: section of Note 1 to the Consolidated Financial Statements.
+Added: Refer to additional detail regarding these forecasts in the “Discounted Cash Flow Method" section of Note 1 to the Consolidated Financial Statements.
The results of this process, in combination with conclusions of the Bank’s outside consultants’ review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date.
Please refer to the discussion under “Critical Accounting Policies” above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense.
−Removed: Also, refer to the table on page 57 which reflects activity in the allowance for credit losses.
−Removed: During the three months ended June 30, 2020, the ACL on loans reflected $19.6 million in provision for credit losses attributable to the ACL for loans and $7.1 million in net charge-offs, which were attributable primarily to one commercial relationship to a personal services company that ceased business operations as a result of COVID-19.
−Removed: The provision for credit losses on loans was $19.6 million for the three months ended June 30, 2020 as compared to $3.6 million for the same period in 2019.
−Removed: Net charge-offs of $7.1 million in the second quarter of 2020 represented an annualized 0.36% of average loans, excluding loans held for sale, as compared to $1.5 million, or an annualized 0.08% of average loans, excluding loans held for sale, in the second quarter of 2019.
−Removed: During the six months ended June 30, 2020, the ACL on loans reflected $33.9 million in provision for credit losses attributable to the ACL for loans, a day one CECL impact of $10.6 million charged to retained earnings, and $9.4 million in net charge-offs during the period.
−Removed: The provision for credit losses on loans was $33.9 million for the six months ended June 30, 2020 as compared to $7.0 million for the same period in 2019.
−Removed: Net charge-offs of $9.4 million in the first six months of 2020 represented an annualized 0.24% of average loans, excluding loans held for sale, as compared to $4.8 million, or an annualized 0.13% of average loans, excluding loans held for sale, in the first six months of 2019.
−Removed: As part of its comprehensive loan review process, internal loan and credit committees carefully evaluate loans which are past-due 30 days or more.
+Added: Also, refer to the table on the next page which reflects activity in the allowance for credit losses.
+Added: During the three months ended September 30, 2020, the ACL on loans reflected $6.6 million in provision for credit losses attributable to the ACL for loans and $5.2 million in net charge-offs, which were attributable primarily to two large commercial real estate relationships totaling $4.9 million.
+Added: The provision for credit losses on loans was $6.6 million for the three months ended September 30, 2020 as compared to $3.2 million for the same period in 2019.
+Added: The higher provisioning in the third quarter of 2020, as compared to the third quarter of 2019, was primarily due to the implementation of the CECL accounting standard for credit loss allowances and the impact of COVID-19 on our actual and expected future credit losses.
+Added: Net charge-offs of $5.2 million in the third quarter of 2020 represented an annualized 0.26% of average loans, excluding loans held for sale, as compared to $1.5 million, or an annualized 0.08% of average loans, excluding loans held for sale, in the third quarter of 2019.
+Added: During the nine months ended September 30, 2020, the ACL on loans reflected $40.7 million in provision for credit losses attributable to the ACL for loans, a day one CECL impact of $10.6 million charged to retained earnings, and $14.6 million in net charge-offs during the period.
+Added: The provision for credit losses on loans was $40.7 million for the nine months ended September 30, 2020 as compared to $10.1 million for the same period in 2019.
+Added: The higher provisioning for the nine months ended September 30, 2020, as compared to the same period in 2019, is primarily due to the implementation of CECL and the impact of COVID-19 on our actual and expected future credit losses.
+Added: Net charge-offs of $14.6 million in the first nine months of 2020 represented an annualized 0.25% of average loans, excluding loans held for sale, as compared to $6.4 million, or an annualized 0.12% of average loans, excluding loans held for sale, in the first nine months of 2019.
+Added: As part of its comprehensive loan review process, internal loan and credit committees carefully evaluate loans that are past-due 30 days or more.
The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan.
3 unchanged sentences
The following table sets forth activity in the allowance for credit losses for the periods indicated (unaudited).
−Removed: Six Months Ended June 30,
+Added: Nine Months Ended
+Added: September 30,
(dollars in thousands) 2020 2019
1 unchanged sentence
Impact of adopting CECL 10,614 —
+Added: Commercial 7,332 1,799
Income producing - commercial real estate 4,300 5,343
3 unchanged sentences
Construction - C&I (owner occupied) — —
+Added: Home equity 92 —
Other consumer — 2
Total charge-offs 14,691 7,144
+Added: Commercial 116 377
Income producing - commercial real estate — 302
3 unchanged sentences
Construction - C&I (owner occupied) — —
+Added: Home equity — —
Other consumer 20 38
6 unchanged sentences
The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category.
−Removed: Balances as of June 30, 2020 are calculated under CECL whereas balances as of December 31, 2019 are calculated under GAAP applicable at that time, the incurred loss model.
−Removed: June 30, 2020
−Removed: December 31, 2019
−Removed: (dollars in thousands)
+Added: Balances as of September 30, 2020 are calculated under CECL whereas balances as of December 31, 2019 are calculated under GAAP applicable at that time, the incurred loss model.
+Added: September 30, 2020 December 31, 2019
+Added: (dollars in thousands) Amount % (1) Amount % (1)
+Added: Commercial $ 27,224 25 % $ 18,169 20 %
+Added: PPP loans — — % — — %
Income producing - commercial real estate 55,440 49 % 28,527 50 %
3 unchanged sentences
Construction - C&I (owner occupied) 2,048 2 % 1,533 1 %
+Added: Home equity 1,007 1 % 575 1 %
Other consumer 42 — % 227 — %
Total allowance $ 110,215 100 % $ 73,720 100 %
+Added: _______________________________________________
(1) Represents the percent of loans in each category to total loans.
−Removed: For the three months ended June 30, 2020, after the initial adjustment to the allowance for credit losses on loans as of January 1, 2020, we further increased the allowance for credit losses on loans by $19.6 million and $33.9 million, respectively.
+Added: Under the CECL standard and based on the January 1, 2020 effective date, the Company made an initial adjustment to the allowance for credit losses of $10.6 million along with $4.1 million to the reserve for unfunded commitments.
+Added: This adjustment increased the ratio of the allowance to total loans to 1.12% at January 1, 2020 from 0.98% at December 31, 2019.
+Added: Based on our ongoing risk analysis and modeling under the CECL allowance methodology, the Company further increased the allowance for loan losses to 1.23% as of March 31, 2020 and again to 1.36% as of June 30, 2020, which included the assessment of COVID-19 risks as of March 31, 2020 and as of June 30, 2020, respectively.
+Added: Based on our ongoing risk analysis and modeling through September 30, 2020, under the CECL allowance methodology, the Company further increased the allowance for loan losses to 1.40% of total loans, which reflects COVID-19 risks assessments and an updated unemployment forecast for the Washington, D.C.
+Added: metropolitan area.
Nonperforming Assets
−Removed: As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, and nonaccrual loans, which includes the nonperforming portion of TDRs and OREO, totaled $67.2 million at June 30, 2020 representing 0.69% of total assets, as compared to $50.2 million of nonperforming assets, or 0.56% of total assets, at December 31, 2019.
−Removed: The Company had no accruing loans 90 days or more past due at June 30, 2020.
+Added: As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, and nonaccrual loans, which includes the nonperforming portion of TDRs and OREO, totaled $63.0 million at September 30, 2020 representing 0.62% of total assets, as compared to $50.2 million of nonperforming assets, or 0.56% of total assets, at December 31, 2019.
+Added: At September 30, 2020, the Company had no accruing loans 90 days or more past due.
Management remains attentive to early signs of deterioration in borrowers’ financial conditions and to taking the appropriate action to mitigate risk.
−Removed: Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.36% of total loans at June 30, 2020, is adequate to absorb expected credit losses within the loan portfolio at that date.
−Removed: The updated standard allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation.
+Added: Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.40% of total loans at September 30, 2020, is adequate to absorb expected credit losses within the loan portfolio at that date.
+Added: The updated CECL standard allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation.
This can occur due to credit deterioration, increased collateral dependency or other factors leading to impairment.
5 unchanged sentences
The continuing payments are discounted over the expected life at the loan’s original contract rate and include adjustments for risk of default.
−Removed: Under the incurred loss methodology that the Company applied as of December 31, 2019 included in nonperforming assets were loans that the Company considered to be impaired.
−Removed: Impaired loans were defined as those as to which we believed it is probable that we would not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms had been modified in a TDR that had not shown a period of performance as required under applicable accounting standards.
+Added: Under the incurred loss methodology that the Company applied as of December 31, 2019 nonperforming assets included loans that the Company considered to be impaired.
+Added: Impaired loans were defined as those as to which we believed it was probable that we would not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms had been modified in a TDR that had not shown a period of performance as required under applicable accounting standards.
Valuation allowances for those loans determined to be impaired were evaluated in accordance with ASC Topic 310—“ Receivables, ” and updated quarterly.
6 unchanged sentences
Such modifications are not considered to be TDRs, as the accommodation of a borrower's request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty.
−Removed: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business which suggests a temporary interest only period on an amortizing loan;
−Removed: (2) there may be delays in absorption on a real estate project which reasonably suggests extension of the loan maturity at market terms;
+Added: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business that suggests a temporary interest-only period on an amortizing loan;
+Added: (2) there may be delays in absorption on a real estate project that reasonably suggests extension of the loan maturity at market terms;
or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing.
The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the change in terms, and the exercise of prudent business judgment.
−Removed: The Company had thirteen TDRs at June 30, 2020 totaling approximately $20.3 million.
−Removed: Ten of these loans totaling approximately $12.3 million are performing under their modified terms.
−Removed: For the first six months of 2020 and 2019, there was one performing TDR loan totaling $5.5 million and one performing TDR loan totaling $2.3 million, respectively, that defaulted on its modified terms.
+Added: The Company had 11 TDRs at September 30, 2020 totaling approximately $19.4 million.
+Added: four of these loans totaling approximately $8.9 million are performing under their modified terms.
+Added: For the first nine months of 2020, there were two performing TDR loans totaling $6.3 million that defaulted on their modified terms.
+Added: For the first nine months of 2019, there was one performing TDR loan totaling $2.3 million that defaulted on its modified terms.
A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.
Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.
−Removed: If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further
+Added: If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment.
The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.
−Removed: For both the three months ended June 30, 2020 and 2019, there were no loans modified in a TDR.
−Removed: There is uncertainty regarding the region’s overall economic outlook given lack of clarity over how long COVID-19 will continue to impact our region.
+Added: For both the three months ended September 30, 2020 and 2019, there were no loans modified in a TDR.
+Added: There is uncertain ty regarding the region’s overall economic outlook given lack of clarity over how long COVID-19 will continue to impact our region.
Management has been working with customers on payment deferrals to assist companies in managing through this crisis.
−Removed: These deferrals amounted to 708 notes and $1.63 billion at June 30, 2020 (approximately 20% of total loans).
−Removed: Through July 31, 2020, we granted approximately 724 temporary modifications representing approximately $1.65 billion in outstanding exposure, including 20 temporary modifications representing $14.5 million that subsequently returned to pre-modification terms.
−Removed: Some of these deferrals may not have met the criteria for treatment under U.S.
−Removed: GAAP as TDRs.
+Added: These deferrals amounted to 321 notes and $851 million at September 30, 2020 (approximately 10.8% of total loans).
+Added: Through September 30, 2020, we granted approximately 740 temporary modifications representing approximately $1.6 billion in outstanding balances, including 419 temporary modifications representing $787 million that have or are expected to return to pre-modification terms.
+Added: We have also granted second deferrals totaling $665 million on 1 18 notes as of September 30, 2020.
+Added: Some of these deferrals may have met the criteria for treatment under GAAP as TDRs.
Additionally, none of the deferrals are reflected in the Company’s asset quality measures (i.e.
non-performing loans) due to the provision of the CARES Act that permits U.S.
−Removed: financial institutions to temporarily suspend the U.S.
−Removed: GAAP requirements to treat such short-term loan modifications as TDRs.
+Added: financial institutions to temporarily suspend the GAAP requirements to treat such short-term loan modifications as TDRs.
Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.
Other loan portfolio areas of concern and additional COVID-19 loan related matters are discussed below.
−Removed: Total nonperforming loans amounted to $59.0 million at June 30, 2020 (0.74% of total loans) compared to $48.7 million at December 31, 2019 (0.65% of total loans).
−Removed: Included in nonperforming assets at June 30, 2020 was $8.2 million of OREO consisting of five foreclosed properties.
+Added: The following table details the deferrals discussed above as of September 30, 2020:
+Added: Industry/Collateral Type Number of Notes Total Outstanding (in millions) Deferred Note Count Total Deferred Outstanding (in millions) Percentage Outstanding Deferred Weighted Avg LTV of RE Collateral Average Loan Size (in millions)
+Added: Hotels 43 $ 532 17 $ 387 72.7 % 60 % $ 22.8
+Added: Transportation & Warehousing 66 $ 173 34 $ 134 77.5 % 65 % $ 3.9
+Added: Restaurants 427 $ 274 127 $ 115 42.0 % 61 % $ 0.9
+Added: Retail 319 $ 475 17 $ 73 15.4 % 69 % $ 4.3
+Added: Other Real Estate 919 $ 3,752 21 $ 34 0.9 % 47 % $ 1.6
+Added: Healthcare 196 $ 249 8 $ 28 11.2 % 67 % $ 3.5
+Added: Art/Entertainment/Recreation 65 $ 138 8 $ 23 16.7 % 15 % $ 2.9
+Added: Other 2,992 $ 2,287 89 $ 57 2.5 % 60 % $ 0.6
+Added: Total 5,027 $ 7,880 321 $ 851 10.8 % 62 % $ 2.7
+Added: Total nonperforming loans amounted to $58.1 million at September 30, 2020 (0.74% of total loans) compared to $48.7 million at December 31, 2019 (0.65% of total loans).
+Added: Included in nonperforming assets at September 30, 2020 was $5.0 million of OREO consisting of four foreclosed properties.
This compared to $1.5 million of OREO, consisting of three foreclosed properties at December 31, 2019.
−Removed: The increase was due to foreclosures involving two ultra high-end residential properties located in Washington, D.C.
+Added: The increase was due to a foreclosure involving an ultra high-end residential property located in Washington, D.C.
The Company is continuing to see softness in the market for ultra high-end residential properties.
This is particularly true in light of COVID-19 and the related limitations in marketing residential properties.
−Removed: The Company had one foreclosed property with a net carrying value of $1.4 million at June 30, 2019.
+Added: The Company had three foreclosed properties with a net carrying value of $1.5 million at September 30, 2019.
OREO properties are carried at fair value less estimated costs to sell.
1 unchanged sentence
Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value.
−Removed: There were no sales of OREO property during the first six months of 2020 and 2019.
−Removed: The following table shows the amounts of nonperforming assets at the dates indicated (unaudited for June 30, 2020).
−Removed: (dollars in thousands)
+Added: There was one sale of an OREO property during the first nine months of 2020 and no sales during the first nine months of 2019.
+Added: The following table shows the amounts of nonperforming assets at the dates indicated (unaudited for September 30, 2020).
+Added: (dollars in thousands) September 30, 2020 December 31, 2019
Nonaccrual Loans:
+Added: Commercial $ 15,836 $ 14,928
Income producing - commercial real estate 20,068 9,711
3 unchanged sentences
Construction - C&I (owner occupied) — —
+Added: Home equity 109 487
Loans held for sale — —
Other consumer 8 —
−Removed: Accrual loans-past due 90 days
+Added: Accruing loans-past due 90 days — —
Total nonperforming loans (1) 58,060 48,729
4 unchanged sentences
Ratio of nonperforming assets to total assets 0.62 % 0.56 %
−Removed: Nonaccrual loans reported in the table above include one loan totaling $5.5 million that migrated from a performing TDR during the six months ended June 30, 2020, as compared to the six months ended June 30, 2019 when there was one loan totaling $2.3 million that migrated from a performing TDR.
+Added: ________________________________________________________
+Added: (1) Nonaccrual loans reported in the table above include two loans totaling $6.3 million that migrated from a performing TDR during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019 when there was one loan totaling $2.3 million that migrated from a performing TDR.
Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio.
−Removed: At June 30, 2020, there were $16.0 million of performing loans considered potential problem loans, defined as loans that are not included in the 90 days past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories.
−Removed: Potential problem loans decreased to $16.0 million at June 30, 2020 from $20.0 million at December 31, 2019.
+Added: At September 30, 2020, there were $24.9 million of performing loans considered to be potential problem loans, defined as loans that are not included in the 90 days past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories.
+Added: Potential problem loans increased to $24.9 million at September 30, 2020 from $20.0 million at December 31, 2019.
The Company has taken a conservative posture with respect to risk rating its loan portfolio.
2 unchanged sentences
Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from bank owned life insurance (“BOLI”) and other income.
−Removed: Total noninterest income for the three months ended June 30, 2020 increased to $12.5 million from $6.4 million for the three months ended June 30, 2019, a 96% increase.
−Removed: Service charges on deposits for the three months ended June 30, 2020 decreased to $942 thousand from $1.6 million for the three months ended June 30, 2019, a 41% decrease, due to lesser insufficient funds fees.
−Removed: Gain on sale of loans for the three months ended June 30, 2020 increased to $3.1 million from $1.9 million for the three months ended June 30, 2019, a 60% increase, due to higher gains on the sale of residential mortgage loans ($1.2 million).
−Removed: Residential mortgage loans closed were $308 million for the second quarter of 2020 as compared to $152 million for the second quarter of 2019.
−Removed: Other income for the three months ended June 30, 2020 increased to $6.9 million from $1.8 million for the three months ended June 30, 2019, a 277% increase, due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA loans ($2.5 million), $1.4 million higher small business investment company (“SBIC”) income related to a Community Reinvestment Act (“CRA”) qualified investment fund, $921 thousand higher swap fee income, and $591 thousand higher prepayment fees.
−Removed: Net investment gains on sale were $713 thousand for the three months ended June 30, 2020 compared to $563 thousand for the same period in 2019.
−Removed: Total noninterest income for the six months ended June 30, 2020 increased to $18.0 million from $12.7 million for the six months ended June 30, 2019, a 42% increase.
−Removed: Service charges on deposits for the six months ended June 30, 2020 decreased to $2.4 million from $3.3 million for the six months ended June 30, 2019, a 28% decrease, due to lesser insufficient funds fees.
−Removed: Gain on sale of loans for the six months ended June 30, 2020 increased to $4.0 million from $3.3 million for the six months ended June 30, 2019, a 22% increase, due to higher gains on the sale of residential mortgage loans ($718 thousand).
−Removed: Residential mortgage loans closed were $501 million for the first six months of 2020 as compared to $246 million for the first six months of 2019.
−Removed: Residential lending gains for the first six months of 2020 include $2.6 million in hedge and mark to market losses incurred during the first quarter of 2020 attributable to the Federal Reserve’s market actions negatively impacting mortgage backed securities pricing combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19 at the end of March.
−Removed: Other income for the six months ended June 30, 2020 increased to $8.8 million from $3.7 million for the six months ended June 30, 2019, a 137% increase due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA loans ($2.5 million), $1.4 million higher SBIC income related to a CRA qualified investment fund, $1.1 million higher swap fee income, and $380 thousand higher prepayment fees.
−Removed: Net investment gains were $1.5 million for both the six months ended June 30, 2020 and 2019.
+Added: Total noninterest income for the three months ended September 30, 2020 increased to $17.8 million from $6.3 million for the three months ended September 30, 2019, a 183% increase.
+Added: Gain on sale of loans for the three months ended September 30, 2020 increased to $12.2 million from $2.6 million for the three months ended September 30, 2019, a 377% increase, due to higher gains on the sale of residential mortgage loans ($9.5 million) and an accounting adjustment, as further discussed below.
+Added: Owing to the historically low interest rate environment and refinance activity, residential mortgage loan locked commitments were $593.0 million for the third quarter of 2020 as compared to $282.1 million for the third quarter of 2019.
+Added: Partially offsetting these increases were service charges on deposits for the three months ended September 30, 2020 decreased to $1.1 million from $1.5 million for the three months ended September 30, 2019, a 29% decrease, due to lesser insufficient funds fees.
+Added: The decision whether to sell residential mortgage loans on a mandatory or best efforts lock basis is a function of multiple factors, including but not limited to overall market volumes of mortgage loan originations, forecasted “pull -through” rates of origination, loan underwriting and closing operational considerations, pricing differentials between the two methods, and availability and pricing of various interest rate hedging strategies associated with the mortgage origination pipeline.
+Added: The Company continually monitors these factors to maximize profitability and minimize operational and interest rate risks.
+Added: As a result of elevated origination volumes and market dislocations associated with the current COVID-19 pandemic, beginning in the second quarter of 2020, and continuing through the third quarter of 2020, the Company began to shift its pipeline strategy towards a best efforts lock basis, and for the three months ended September 30, 2020 our residential mortgage loans have been sold almost entirely on a best efforts basis.
+Added: Prior to the third quarter, revenue associated with residential real estate best efforts loans was recognized at closing.
+Added: In connection with this shift in pipeline strategy from mandatory to best efforts, beginning in the third quarter of 2020, the Company, adjusted its accounting treatment of loans sold on a best efforts basis which accelerated revenue recognition associated with the pipeline to when the loans are committed, in order be accordance with GAAP.
+Added: The change reflects the timely recognition of non-interest income associated with the gains and fees attributable to the best efforts sale and aligns the accounting treatment of best efforts with the accounting treatment of loans sold on a mandatory basis.
+Added: Under the adjustment to the accounting for best efforts implemented in the third quarter of 2020, the Company recognized an additional $1.6 million in noninterest income associated with the residential mortgage operations.
+Added: Had the company utilized the adjusted accounting method for best efforts in prior quarters, non-interest income would have been higher by an immaterial amount in those quarters.
+Added: Other income for the three months ended September 30, 2020 increased to $4.0 million from $1.7 million for the three months ended September 30, 2019, a 141% increase, primarily due to a $1.2 million gain on the sale of an OREO property and $912 thousand higher gains associated with the origination, securitization, sale and servicing of FHA loans.
+Added: Gain on sale of investment securities were $115 thousand for the three months ended September 30, 2020 compared to $153 thousand for the same period in 2019.
+Added: Total noninterest income for the nine months ended September 30, 2020 increased to $35.8 million from $19.0 million for the nine months ended September 30, 2019, an 89% increase.
+Added: Gain on sale of loans for the nine months ended September 30, 2020 increased to $16.2 million from $5.9 million for the nine months ended September 30, 2019, a 177% increase, due to higher gains on the sale of residential mortgage loans ($10.3 million).
+Added: Owing to the historically low interest rate environment, refinance activity and the adjustment to the accounting described above, residential mortgage loan locked commitments were $1.4 billion for the first nine months ended September 30, 2020 as compared to $674.2 million for the first nine months of 2019.
+Added: Residential lending gains for the first nine months of 2020 include the $1.6 million change in accounting treatment discussed above and $2.6 million in hedge and mark to market losses incurred during the first quarter of 2020 attributable to the Federal Reserve’s market actions negatively impacting mortgage backed securities pricing combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19 at the end of March 2020.
+Added: Service charges on deposits for the nine months ended September 30, 2020 decreased to $3.4 million from $4.8 million for the nine months ended September 30, 2019, a 28% decrease, due t o lesser insufficient funds fees .
+Added: Other income for the nine months ended September 30, 2020 increased to $12.8 million from $5.4 million for the nine months ended September 30, 2019, a 138% increase due substantially to $3.4 million higher gains associated with the origination, securitization, sale, and servicing of FHA loans, $1.4 million higher SBIC income, $1.2 million gain on the sale of an OREO property, $1.2 million higher swap fee income, and $703 thousand higher commitment fees, partially offset by less service charges on deposits of $1.4 million.
+Added: Gains on sale of investment securities were $1.7 million and $1.6 million for the nine months ended September 30, 2020 and 2019, respectively.
Servicing agreements relating to the Ginnie Mae mortgage-backed securities program require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers.
3 unchanged sentences
In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan.
−Removed: At June 30, 2020, the Company had no funds advanced outstanding under FHA mortgage loan servicing agreements.
+Added: At September 30, 2020, the Company had no funds advanced outstanding under FHA mortgage loan servicing agreements.
To the extent the mortgage loans underlying the Company’s servicing portfolio experience delinquencies, the Company would be required to dedicate cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.
−Removed: The Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to sell those loans, servicing released.
+Added: The Company originates residential mortgage loans and, pending market conditions and other factors outlined above, may utilize either or both "mandatory delivery" and “best efforts” forward loan sale commitments to sell those loans, servicing released.
Loans sold are subject to repurchase in circumstances where documentation is deficient, the underlying loan becomes delinquent, or there is fraud by the borrower.
1 unchanged sentence
The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under GAAP for possible repurchases.
−Removed: There were no repurchases due to fraud by the borrower during the three months ended June 30, 2020.
−Removed: The reserve amounted to $150 thousand at June 30, 2020 and is included in other liabilities on the Consolidated Balance Sheets.
+Added: There were no repurchases due to fraud by the borrower during the three or nine months ended September 30, 2020.
+Added: The reserve amounted to $169 thousand at September 30, 2020 and is included in other liabilities on the Consolidated Balance Sheets.
Beyond the participation in the PPP program, the Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium.
−Removed: There was no income from this source for the three months ended June 30, 2020 compared to $16 thousand for the same period in 2019.
−Removed: Income from this source was $119 thousand for the six months ended June 30, 2020 compared to $124 thousand for the same period in 2019.
+Added: There was $169 thousand of income from this source for the three months ended September 30, 2020 compared to $47 thousand for the same period in 2019.
+Added: Income from this source was $288 thousand for the nine months ended September 30, 2020 compared to $171 thousand for the same period in 2019.
Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter.
−Removed: Refer to page 10 for details regarding the Company’s participation in the PPP program.
+Added: Summary of Significant Accounting Policies" for details regarding the Company’s participation in the PPP program.
Noninterest Expense
Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional, FDIC insurance, and other expenses.
−Removed: Total noninterest expenses totaled $34.9 million for the three months ended June 30, 2020, as compared to $33.4 million for the three months ended June 30, 2019, a 5% increase due substantially to higher legal fees as discussed below.
−Removed: Total noninterest expenses totaled $72.2 million for the six months ended June 30, 2020, as compared to $71.7 million for the six months ended June 30, 2019, a 1% increase.
−Removed: Noninterest expenses in 2020 periods increased slightly from the 2019 amounts primarily because of increased legal expenses.
−Removed: This increase was almost entirely offset by not having the nonrecurring costs related to the former CEO retirement that were present in the 2019 period.
−Removed: Salaries and employee benefits were $17.1 million for the three months ended June 30, 2020, as compared to $17.7 million for the same period in 2019, a decrease of $639 thousand or 4%.
−Removed: The decrease was primarily due to a lower accrual for incentive bonuses and the release of a portion of an accrual related to the charges for share based compensation awards for our former CEO and Chairman in the second quarter of 2020.
−Removed: The decrease was partially offset by higher salaries and increased headcount in the second quarter of
−Removed: Salaries and employee benefits were $34.9 million for the six months ended June 30, 2020, as compared to $41.4 million for the same period in 2019, a decrease of $6.5 million or 16%.
−Removed: The decrease was primarily due to the $6.2 million of largely nonrecurring charges accrued in the first quarter of 2019 related to share based compensation awards and the resignation of our former CEO and Chairman in March 2019, as well as a lower accrual for incentive bonuses and the release of a portion of an accrual related to the charges for share based compensation awards for our former CEO and Chairman in the first half of 2020.
−Removed: The decrease was partially offset by higher salaries and increased headcount in the first half of 2020.
−Removed: At June 30, 2020, the Company’s full time equivalent staff numbered 506 as compared to 492 at December 31, 2019, and 496 at June 30, 2019.
−Removed: Premises and equipment expenses amounted to $3.5 million and $3.7 million for the three months ended June 30, 2020 and 2019, respectively, a 5% decrease.
−Removed: For the three months ended June 30, 2020, the Company recognized $120 thousand of sublease revenue as compared to $126 thousand for the same period in 2019.
−Removed: For the six months ended June 30, 2020, the Company recognized $224 thousand of sublease revenue as compared to $256 thousand for the same period in 2019.
−Removed: Sublease revenue is accounted for as a reduction to premises and equipment expenses.
−Removed: Marketing and advertising expenses totaled $1.1 million for the three months ended June 30, 2020 and $1.3 million for the same period in 2019.
−Removed: Marketing and advertising expenses totaled $2.2 million for the six months ended June 30, 2020 and $2.4 million for the same period in 2019.
−Removed: Data processing expense increased to $2.8 million for the three months ended June 30, 2020 from $2.6 million for the same period in 2019, a 6% increase.
−Removed: Data processing expense increased to $5.3 million for the six months ended June 30, 2020 from $5.0 million for the same period in 2019, a 6% increase.
−Removed: Legal, accounting and professional fees increased $1.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.
−Removed: Legal fees and expenditures of $2.5 million for the second quarter of 2020 were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit.
−Removed: Legal, accounting and professional fees increased $6.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.
−Removed: Legal fees and expenditures of $7.1 million for the first six months of 2020 were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit.
−Removed: The amount of legal fees and expenditures for the three and six month periods ended June 30, 2020 are net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies, but do not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time.
−Removed: FDIC expenses were $2.0 million for the three months ended June 30, 2020 compared to $1.1 million for the same period in 2019, a 76% increase.
−Removed: FDIC expenses were $3.4 million for the six months ended June 30, 2020 compared to $2.2 million for the same period in 2019, 52% increase.
−Removed: The increases for both the three and six months periods in 2020 compared to the same periods in 2019 were due to a higher assessment base resulting from growth in total assets.
+Added: Total noninterest expenses totaled $36.9 million for the three months ended September 30, 2020, as compared to $33.5 million for the three months ended September 30, 2019, a 10% increase due substantially to higher FDIC fees and rent expense as discussed below.
+Added: Total noninterest expenses totaled $109.2 million for the nine months ended September 30, 2020, as compared to $105.1 million for the nine months ended September 30, 2019, a 4% increase.
+Added: Salaries and employee benefits were $19.4 million for the three months ended September 30, 2020, as compared to $19.1 million for the same period in 2019, an increase of $293 thousand or 2%.
+Added: The increase was primarily due to higher salaries and increased headcount in the third quarter of 2020, partially offset by lower share based compensation expenses.
+Added: Salaries and employee benefits were $54.3 million for the nine months ended September 30, 2020, as compared to $60.5 million for the same period in 2019, a decrease of $6.2 million or 10%.
+Added: The decrease was primarily due to the $6.2 million of largely nonrecurring charges accrued in the first quarter of 2019 related to share based compensation awards and the resignation of our former CEO and Chairman in March 2019, of which a portion was reversed in the second quarter of 2020.
+Added: The decrease was partially offset by higher salaries attributable to merit increases and increased headcount in the first nine months of 2020.
+Added: At September 30, 2020, the Company’s full time equivalent staff numbered 515 as compared to 492 at December 31, 2019, and 482 at September 30, 2019.
+Added: Premises and equipment expenses amounted to $5.1 million and $3.5 million for the three months ended September 30, 2020 and 2019, respectively, a 46% increase.
+Added: For the first nine months of September 30, 2020 and 2019 premises and equipment expenses amounted to $12.4 million and $11.0 million, respectively, a 13% increase.
+Added: In accordance with ASC 842 on Leases, a $1.7 million adjustment to rent expense was recorded during the third quarter as our internal review process identified a lease extension that was not originally recorded in the lease balances reflected in the Statement of Condition upon implementation of the new lease accounting standard.
+Added: Marketing and advertising expenses totaled $ 928 thousand for the three months ended September 30, 2020 and $1.2 million for the same period in 2019.
+Added: Marketing and advertising expenses totaled $3.1 million for the nine months ended September 30, 2020 and $3.6 million for the same period in 2019.
+Added: The decrease for the nine months was due to repurposing of marketing initiatives due to COVID-19, which resulted in a cutback of print, digital and radio advertising, as well as, a reduction in event-related sponsorships due to cancellations and virtual modifications to the event structures.
+Added: Data processing expense increased to $2.7 million for the three months ended September 30, 2020 from $2.2 million for the same period in 2019, a 24% increase related to an increase in licensing fees.
+Added: Data processing expense increased to $8.0 million for the nine months ended September 30, 2020 from $7.2 million for the same period in 2019, a 11% increase.
+Added: The nine month increase was a result of an increase in licensing fees and network expenses.
+Added: Legal, accounting and professional fees decreased $528 thousand for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, as the Bank recognized receivables on legal expenditures associated with insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies.
+Added: The Bank does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time.
+Added: Legal fees and expenditures of $957 thousand for the third quarter of 2020 were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit.
+Added: Legal, accounting and professional fees increased $6.0 million to $14.1 million for the nine months ended September 30, 2020 compared to $8.0 million for the nine months ended September 30, 2019, primarily as a result of the previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit, where we filed a motion to dismiss on April 2, 2020.
+Added: Briefing on our motion is now complete and is under consideration by the court.
+Added: The amount of legal fees and expenditures for the year is net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies but does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time.
+Added: See Part II, Item 1 for more information.
+Added: FDIC expenses were $2.2 million for the three months ended September 30, 2020 compared to $85 thousand for the same period in 2019, a 2,432% increase.
+Added: FDIC expenses were $5.6 million for the nine months ended September 30, 2020 compared to $2.3 million for the same period in 2019, a 139% increase.
+Added: The increases for both the three and nine months periods in 2020 compared to the same periods in 2019 were due to a nonrecurring $1.1 million regulatory credit in the third quarter of 2019 and a higher assessment base resulting from growth in total assets.
The major components of other expenses include broker fees, franchise taxes, core deposit intangible amortization and insurance expense.
−Removed: Other expenses increased to $4.5 million for the three months ended June 30, 2020 from $4.2 million for the same period in 2019, a 6% increase, due primarily to $940 thousand higher other real estate owned (“OREO”) expense offset by lower broker fees ($497 thousand).
−Removed: Other expenses decreased to $8.2 million for the six months ended June 30, 2020 from $8.7 million for the same period June 30, 2019, a 5% decrease, due primarily to lower broker fees ($1.6 million) partially offset by $940 thousand higher OREO expense.
−Removed: The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 37.18% for the second quarter of 2020, as compared to 38.04% for the second quarter of 2019.
−Removed: For the first six months of 2020, the efficiency ratio was 40.34% as compared to 40.95% for the same period in 2019.
−Removed: As a percentage of average assets, total noninterest expense (annualized) was 1.35% for the three months ended June 30, 2020 as compared to 1.55% for the same period in 2019.
−Removed: As a percentage of average assets, total noninterest expense (annualized) was 1.46% for the six months ended June 30, 2020 as compared to 1.68% for the same period in 2019.
+Added: Other expenses decreased to $3.5 million for the three months ended September 30, 2020 from $3.8 million for the same period in 2019, a 7% decrease.
+Added: Other expenses decreased to $11.8 million for the nine months ended September 30, 2020 from $12.5 million for the same period in 2019, a 6% decrease, primarily due to $2.3 million lower broker fees, offset by $931 thousand higher OREO property tax expense on a single relationship, and $378 thousand higher franchise taxes.
+Added: The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 38.10% for the third quarter of 2020, as compared to 38.34% for the third quarter of 2019.
+Added: For the first nine months of 2020, the efficiency ratio was 39.56% as compared to 40.08% for the same period in 2019.
+Added: As a percentage of average assets, total noninterest expense (annualized) was 1.41% for the three months ended September 30, 2020 as compared to 1.50% for the same period in 2019.
+Added: As a percentage of average assets, total noninterest expense (annualized) was 1.44% for the nine months ended September 30, 2020 as compared to 1.62% for the same period in 2019.
Income Tax Expense
−Removed: The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) for the second quarter of 2020 was 24.6% as compared to 26.6% for the second quarter of 2019.
−Removed: The decrease in the effective income tax rate largely relates to a significant decline in pre-tax income for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due to increased credit reserves significantly attributable to COVID-19, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019.
−Removed: The effective income tax rate for the six months ended June 30, 2020 was 25.5% as compared to 26.3% for the six months ended June 30, 2019.
−Removed: The decrease in the effective income tax rate largely relates to a significant decline in pre-tax income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019.
−Removed: The decrease in the effective income tax rate was recorded in the second quarter of 2020 based on a reduced pre-tax income budget for the year due to increased credit reserves significantly attributable to COVID-19.
+Added: The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) for the third quarter of 2020 was 25.4% as compared to 27.9% for the third quarter of 2019.
+Added: The decrease was due to disallowed compensation deductions in respect of compensation for key executives in 2020, as well as, additional tax credits in 2020 compared to 2019.
+Added: On an interim basis, tax expense is recorded using an annual forecasted effective tax rate.
+Added: The forecasted rate for 2020 is lower than 2019 as a result of lower pre-tax income due to increased credit reserves significantly attributable to COVID-19 along with the impact of the reduction in permanent differences and increased tax credits.
+Added: As a result, the annual effective tax rate recorded on an interim basis declined.
+Added: The Company's effective tax rate for the nine months ended September 30, 2020 was 25.4% as compared to 26.9% for the nine months ended September 30, 2019.
+Added: The decrease in the effective tax rate was mainly attributable to a decrease in disallowed compensation de ductions in respect of compensation for key executives, mainly related to the compensation of our former CEO and Chairman who resigned in March 2019 as well as additional tax credits in 2020 as compared to 2019.
+Added: On an interim basis tax expense is recorded using an annual forecasted effective tax rate.
+Added: The forecasted rate for 2020 is lower than 2019 as result of lower pre-tax income due to increased credit reserves significantly attributable to COVID-19 along with the impact of the reduction in permanent differences and increased tax credits.
+Added: As a result, the annual effective tax rate on an interim basis declined.
FINANCIAL CONDITION
−Removed: Total assets at June 30, 2020 were $9.80 billion, a 9% increase as compared to $8.99 billion at December 31, 2019.
−Removed: Total loans (excluding loans held for sale) were $8.02 billion at June 30, 2020, a 6% increase as compared to $7.55 billion at December 31, 2019.
−Removed: Loans held for sale amounted to $68.4 million at June 30, 2020 and $56.7 million at December 31, 2019, a 21% increase.
−Removed: The investment portfolio totaled $772.4 million at June 30, 2020.
−Removed: As compared to December 31, 2019, the investment portfolio at June 30, 2020 decreased by $71.0 million, or 8%.
−Removed: Total deposits at June 30, 2020 were $7.94 billion, a 10% increase compared to deposits of $7.22 billion at December 31, 2019.
+Added: Total assets at September 30, 2020 were $10.1 billion, a 12.4% increase as compared to $9.0 billion at December 31, 2019.
+Added: Total loans (excluding loans held for sale) were $7.9 billion at September 30, 2020, a 4.4% increase as compared to $7.6 billion at December 31, 2019, primarily due to PPP loans, which represented $456.1 million of total loans at the end of third quarter.
+Added: Loans held for sale amounted to $79.1 million at September 30, 2020 and $56.7 million at December 31, 2019, a 39.5% increase.
+Added: The investment portfolio totaled $977.6 million at September 30, 2020.
+Added: As compared to December 31, 2019, the investment portfolio at September 30, 2020 increased by $134.2 million, or 15.9%, primarily due to the deployment of deposit inflows in to higher yielding assets.
+Added: Total deposits at September 30, 2020 were $8.2 billion, a 13.2% increase compared to deposits of $7.22 billion at December 31, 2019.
We continue to work on expanding the breadth and depth of our existing relationships while we pursue building new relationships.
−Removed: Total borrowed funds (excluding customer repurchase agreements) were $567.9 million at June 30, 2020, as compared to $467.7 million at December 31, 2019.
−Removed: Total shareholders’ equity was $1.19 billion at both June 30, 2020 and December 31, 2019.
−Removed: During the six months ended June 30, 2020, growth in retained earnings, $11.7 million in unrealized gains on AFS securities, and $2.8 million in additional paid in capital attributable to share based compensation, were effectively offset by $44 million in stock repurchases, dividends declared of $14.2 million, and the day one CECL entry of $10.9 million net of taxes.
−Removed: The Company’s capital ratios remain substantially in excess of regulatory minimum and buffer requirements, with a total risk based capital ratio of 16.26% at June 30, 2020, as compared to 16.20% at December 31, 2019, both common equity tier 1 (“CET1”) risk based capital and tier 1 risk based capital ratios of 12.80% at June 30, 2020, as compared to 12.87% at December 31, 2019, and a tier 1 leverage ratio of 10.63% at June 30, 2020, as compared to 11.62% at December 31, 2019.
−Removed: The ratio of common equity to total assets was 12.12% at June 30, 2020, as compared to 13.25% at December 31, 2019.
−Removed: Book value per share was $36.86 at June 30, 2020, a 3% increase over $35.82 at December 31, 2019.
−Removed: In addition, the tangible common equity ratio was 11.17% at June 30, 2020, as compared to 12.22% at December 31, 2019.
−Removed: Tangible book value per share was $33.62 at June 30, 2020, a 3% increase over $32.67 at December 31, 2019.
+Added: Total borrowed funds (excluding customer repurchase agreements) were $568.0 million at September 30, 2020, as compared to $467.7 million at December 31, 2019.
+Added: Total shareholders’ equity was $1.22 billion and $1.19 billion September 30, 2020 and December 31, 2019, respectively.
+Added: During the nine months ended September 30, 2020, growth in retained earnings, $11.3 million in unrealized gains on AFS securities (net of taxes), and $3.9 million in additional paid in capital attributable to share based compensation, were partially offset by $44.2 million in stock repurchases, dividends declared of $21.3 million, and the day one CECL entry of $10.9 million net of taxes.
+Added: The Company’s capital ratios remain substantially in excess of regulatory minimum and buffer requirements, with a total risk based capital ratio of 16.72% at September 30, 2020, as compared to 16.20% at December 31, 2019, both common equity tier 1 (“CET1”) risk based capital and tier 1 risk based capital ratios of 13.19% at September 30, 2020, as compared to 12.87% at December 31, 2019, and a tier 1 leverage ratio of 10.82% at September 30, 2020, as compared to 11.62% at December 31, 2019.
+Added: The ratio of common equity to total assets was 12.11% at September 30, 2020, as compared to 13.25% at December 31, 2019.
+Added: Book value per share was $37.96 at September 30, 2020, a 6% increase over $35.82 at December 31, 2019.
+Added: In addition, the tangible common equity ratio was 11.18% at September 30, 2020, as compared to 12.22% at December 31, 2019.
+Added: Tangible book value per share was $34.70 at September 30, 2020, a 6% increase over $32.67 at December 31, 2019.
Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
−Removed: While the Company’s capital position remains above regulatory well capitalized levels, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19, the Board decided to place the Company’s remaining authorization to repurchase shares on hold during the first quarter of 2020.
−Removed: Accordingly, no shares were repurchased during the second quarter of 2020.
−Removed: The Board of Directors and Management continue to monitor this area and may enter the markets from time to time as determined appropriate.
+Added: While the Company’s capital position remains above regulatory well-capitalized levels, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19 just following the outbreak, the Board decided to place the Company’s remaining authorization to repurchase shares on hold during the first quarter of 2020.
+Added: Accordingly, no shares were repurchased in the second and third quarters of 2020, although the Company’s Board of Directors approved lifting the suspension of the Company’s share repurchase program in the third quarter of 2020.
+Added: The Board of Directors has authorized management through the current share repurchase program to continue to evaluate opportunities for share repurchases.
Under the capital rules applicable to the Company and Bank, in order to be considered well-capitalized, the Bank must have a CET1 risk based capital ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%.
−Removed: The Company and the Bank meet all these requirements and satisfy the requirement to maintain the capital conservation buffer
−Removed: of 2.5% of CET1 capital for capital adequacy purposes.
+Added: The Company and the Bank exceed all these requirements and satisfy the capital conservation buffer of 2.5% of CET1 capital required to engage in capital distribution.
Failure to maintain the required capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.
−Removed: Loans, net of amortized deferred fees and costs, at June 30, 2020 (unaudited) and December 31, 2019 by major category are summarized below.
−Removed: June 30, 2020
−Removed: December 31, 2019
−Removed: (dollars in thousands)
+Added: Loans, net of amortized deferred fees and costs, at September 30, 2020 (unaudited) and December 31, 2019 by major category are summarized below.
+Added: September 30, 2020 December 31, 2019
+Added: (dollars in thousands) Amount % Amount %
+Added: Commercial $ 1,524,613 19 % $ 1,545,906 20 %
+Added: PPP loans 456,115 6 % — — %
Income producing - commercial real estate 3,724,839 47 % 3,702,747 50 %
3 unchanged sentences
Construction - C&I (owner occupied) 140,357 2 % 89,490 1 %
+Added: Home equity 72,648 1 % 80,061 1 %
Other consumer 2,509 — % 2,160 — %
+Added: Total loans 7,880,255 100 % 7,545,748 100 %
allowance for credit losses ( 110,215 ) (73,658)
−Removed: (1) Excludes accrued interest receivable of $36.2 million and $21.3 million at June 30, 2020 and December 31, 2019, respectively, which is recorded in other assets.
+Added: Net loans (1)
+Added: $ 7,770,040 $ 7,472,090
+Added: (1) Excludes accrued interest receivable of $ 43.7 million and $21.3 million at September 30, 2020 and December 31, 2019, respectively, which is recorded in other assets.
In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank.
Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality.
−Removed: Loans outstanding reached $8.02 billion at June 30, 2020, an increase of $476.0 million, or 6%, as compared to $7.55 billion at December 31, 2019.
−Removed: Loan growth during the six months ended June 30, 2020 was predominantly in PPP loans.
−Removed: Despite a continued level of in-market competition for business, the Bank continued to experience organic loan production and modest portfolio growth.
−Removed: Notwithstanding increased supply of units, multi-family commercial real estate leasing in the Bank’s market area has held up well, particularly for well-located close-in projects.
−Removed: While as a general comment there has been some softening in the Suburban Maryland office leasing market, in certain well located pockets and submarkets, the sector has evidenced some positive absorption.
−Removed: Overall, commercial real estate values have generally held up well with price escalation in prime pockets, but we continue to be cautious of the cap rates at which some assets are trading and we are being careful with valuations as a result.
−Removed: While the ultra high-end real estate market has softened, the moderately priced housing market has remained stable to increasing, with well-located, Metro accessible properties garnering a premium.
+Added: Loans outstanding reached $7.9 billion at September 30, 2020, an increase of $334.5 million, or 4%, as compared to $7.6 billion at December 31, 2019.
+Added: Loan growth during the nine months ended September 30, 2020 was predominantly in PPP loans.
+Added: Despite a continued level of in-market competition for business, the Bank continued to experience organic loan production and modest portfolio growth, driven mostly by PPP loans.
+Added: Not withstanding increased supply of units, multi-family commercial real estate leasing in the Bank’s market area has held up well, particularly for well-located close-in projects.
+Added: While as a general comment, there has been some softening in the Suburban Maryland office leasing market in certain well located pockets and submarkets.
+Added: Overall, commercial real estate values have generally held up well with price escalation in prime pockets, but we continue to be cautious of the capitalization rates at which some assets are trading and we are being careful with valuations as a result.
+Added: While the ultra high-end residential real estate market has softened, the moderately priced housing market has remained stable to increasing, with well-located, Metro accessible properties garnering a premium.
However, the potential impact from COVID-19 has not yet been fully reflected in the market.
1 unchanged sentence
Loan Portfolio Exposures- COVID-19:
−Removed: Industry areas of potential concern within the Loan Portfolio are presented below as of June 30, 2020 (unaudited):
−Removed: Principal Balance
+Added: Industry areas of potential concern within the Loan Portfolio are presented below as of September 30, 2020 (unaudited):
+Added: Industry Principal Balance
+Added: (in 000’s) % of Loan Portfolio
Accommodation & Food Services $ 804,712 (1 )
+Added: Retail Trade $ 99,202 (2 )
1 Includes $81,983 of PPP loans.
2 Includes $13,561 of PPP loans.
−Removed: Concerns over exposures to the Accommodation and Food Service industry and retail are the most immediate at this time.
−Removed: Accommodation and Food Service exposure represents 10.5% of the Bank’s loan portfolio as of June 30, 2020 among 485 customers.
−Removed: Retail trade exposure represents 1.3% of the Bank’s loan portfolio.
−Removed: The Bank has ongoing extensive outreach to these customers and is
−Removed: assisting where necessary with PPP loans and payment deferrals or interest only periods in the short term while customers work with the Bank to develop longer term stabilization strategies as the landscape of the COVID-19 pandemic evolves.
+Added: Concerns over exposures to the Accommodation and Food Service industry and Retail Trade are the most immediate at this time.
+Added: Accommodation and Food Service exposure represents 10.2% of the Bank’s loan portfolio as of September 30, 2020 among 331 customers.
+Added: Retail Trade exposure represents 1.3% of the Bank’s loan portfolio and represented 155 customers.
+Added: The Bank has ongoing extensive outreach to these customers and is assisting where necessary with PPP loans and payment deferrals or interest-only periods in the short term while customers work with the Bank to develop longer term stabilization strategies as the landscape of the COVID-19 pandemic evolves.
The uncertain duration and severity of the pandemic will likely impact future credit challenges in these areas.
−Removed: The table below is collateral driven and shows exposures on loans secured by commercial real estate (“CRE”) by property type as of June 30, 2020 (unaudited).
+Added: The table below is collateral-based and shows exposures on loans secured by commercial real estate (“CRE”) by property type as of September 30, 2020 (unaudited).
This table excludes loans disclosed in the industry table above.
−Removed: Principal Balance
−Removed: Property Type
−Removed: Although not evidenced at June 30, 2020, it is anticipated that some portion of the CRE loans secured by the above property types could be impacted by the tenancies associated with impacted industries.
−Removed: The Bank is working with CRE investor borrowers and monitoring rent collections as part of our portfolio management process.
+Added: Property Type Principal Balance (in 000’s) % of Loan
+Added: Restaurant $ 46,710 0.6 %
+Added: Hotel 35,782 0.5 %
+Added: Retail 389,485 4.9 %
+Added: Although not evidenced at September 30, 2020, it is anticipated that some portion of the CRE loans secured by the above property types could be impacted by the tenancies associated with impacted industries.
+Added: The Bank is working with CRE investor borrowers and monitoring rent collections as part of our portfolio management oversight.
Deposits and Other Borrowings
1 unchanged sentence
The deposit base includes transaction accounts, time and savings accounts, which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds.
−Removed: To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the Federal Home Loan Banks (the “FHLB”), federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and Promontory Interfinancial Network, LLC (“Promontory”).
−Removed: For the six months ended June 30, 2020, noninterest bearing deposits increased $351.7 million as compared to December 31, 2019, while interest bearing deposits increased by $359.9 million during the same period.
−Removed: From time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from national brokerage networks, including Promontory.
−Removed: Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep product (“ICS”), which provide for reciprocal (“two-way”) transactions among banks facilitated by Promontory for the purpose of maximizing FDIC insurance.
−Removed: The Bank also is able to obtain one-way CDARS deposits and participates in Promontory’s Insured Network Deposit (“IND”).
−Removed: At June 30, 2020, total deposits included $1.79 billion of brokered deposits (excluding the CDARS and ICS two-way) which represented 23% of total deposits.
+Added: To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the Federal Home Loan Banks (the “FHLB”), federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and IntraFi Network, LLC (“IntraFi”).
+Added: For the nine months ended September 30, 2020, noninterest bearing deposits increased $319.7 million as compared to December 31, 2019, while interest bearing deposits increased by $634.7 million during the same period.
+Added: From time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from national brokerage networks, including IntraFi.
+Added: Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep product (“ICS”), which provide for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance.
+Added: The Bank also is able to obtain one-way CDARS deposits and participates in IntraFi’s Insured Network Deposit (“IND”).
+Added: At September 30, 2020, total deposits included $1.74 billion of brokered deposits (excluding the CDARS and ICS two-way) which represented 21% of total deposits.
At December 31, 2019, total brokered deposits (excluding the CDARS and ICS two-way) were $1.80 billion, or 25% of total deposits.
−Removed: The CDARS and ICS two-way component represented $489.7 million, or 6%, of total deposits and $502.9 million, or 7%, of total deposits at June 30, 2020 and December 31, 2019, respectively.
+Added: The CDARS and ICS two-way component represented $581.0 million, or 7%, of total deposits and $502.9 million, or 7%, of total deposits at September 30, 2020 and December 31, 2019, respectively.
These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank.
1 unchanged sentence
In that event, we would be required to obtain alternate sources for funding.
−Removed: At June 30, 2020, the Company had $2.42 billion in noninterest bearing demand deposits, representing 30% of total deposits, compared to $2.06 billion of noninterest bearing demand deposits at December 31, 2019, or 29% of total deposits.
−Removed: A portion of the growth in noninterest bearing demand deposits in the second quarter was the result of funding PPP loans into operating accounts at the Bank.
−Removed: Average noninterest bearing deposits were 30% of total deposits for the first six months of 2020 and 32% for the first six months of 2019.
+Added: At September 30, 2020, the Company had $2.4 billion in noninterest bearing demand deposits, representing 29% of total deposits, compared to $2.1 billion of noninterest bearing demand deposits at December 31, 2019, or 29% of total deposits.
+Added: A portion of the growth in noninterest bearing demand deposits was the result of funding PPP loans into operating accounts at the Bank during the second quarter of 2020.
+Added: Average noninterest bearing deposits of total deposits for the first nine months of 2020 and for the first nine months of 2019 were both 31%.
The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets.
−Removed: As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds which are not suited for either a certificate of deposit or a money market account.
−Removed: The balances in these accounts were $31.2 million at June 30, 2020 compared to $31.0 million at December 31, 2019.
−Removed: Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized
+Added: As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds that are not suited for either a certificate of deposit or a money market account.
+Added: The balances in these accounts were $24.3 million at September 30, 2020 compared to $31.0 million at December 31, 2019.
+Added: Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S.
agency securities and/or U.S.
3 unchanged sentences
This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.
−Removed: At June 30, 2020 the Company had $1.15 billion in time deposits.
+Added: At September 30, 2020 the Company had $1.01 billion in time deposits.
Time deposits decreased by $268.5 million from year end December 31, 2019.
−Removed: The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered CDs to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning.
−Removed: The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at June 30, 2020 and December 31, 2019.
−Removed: At June 30, 2020, the Company had $300.0 million of FHLB advances borrowed as part of the overall asset liability strategy and to support loan growth, as compared to $250 million at December 31, 2019.
+Added: The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered certificates of deposits ("CDs") to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning.
+Added: The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at September 30, 2020 and December 31, 2019.
+Added: At September 30, 2020, the Company had $300 million of FHLB advances borrowed as part of the overall asset liability strategy and to support loan growth, as compared to $250 million at December 31, 2019.
Outstanding FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank’s commercial mortgage, residential mortgage and home equity loan portfolios.
−Removed: Long-term borrowings outstanding at June 30, 2020 included the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024, and the Company’s July 26, 2016 issuance of $150.0 million of subordinated notes, due August 1, 2026.
−Removed: At June 30, 2020, the Company had $50 million of FHLB long-term advances borrowed as part of the overall asset liability strategy and to support loan growth.
+Added: Long-term borrowings outstanding at September 30, 2020 included the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024, and the Company’s July 26, 2016 issuance of $150.0 million of subordinated notes, due August 1, 2026.
+Added: At September 30, 2020, the Company had $50 million of FHLB long-term advances borrowed as part of the overall asset liability strategy and to support loan growth.
For additional information on the subordinated notes, please refer to Note 9 to the Consolidated Financial Statements included in this report.
4 unchanged sentences
These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial.
−Removed: Additionally, the Bank can purchase up to $172.5 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at June 30, 2020, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.47 billion, against which there was $2.1 million outstanding at June 30, 2020.
−Removed: The Bank also has a commitment from Promontory to place up to $700 million of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of $565 million at June 30, 2020.
−Removed: At June 30, 2020, the Bank was also eligible to make advances from the FHLB up to $1.88 billion based on collateral at the FHLB, of which there was $300 million outstanding at June 30, 2020.
+Added: Additionally, the Bank can purchase up to $155 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at September 30, 2020, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.47 billion, against which there was nothing outstanding at September 30, 2020.
+Added: The Bank also has a commitment from IntraFi to place up to $1 billion of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of $719.5 million at September 30, 2020.
+Added: At September 30, 2020, the Bank was also eligible to make advances from the FHLB up to $1.3 billion based on loans pledged as collateral to the FHLB, of which there was $350 million outstanding at September 30, 2020.
The Bank may enter into repurchase agreements as well as obtain additional borrowing capabilities from the FHLB, provided adequate collateral exists to secure these lending relationships.
11 unchanged sentences
The Asset Liability Committee of the Bank (the “ALCO”) and the full Board of Directors of the Bank have adopted policy guidelines which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan.
−Removed: Additionally, as noted above, if the condition, regulatory treatment or reputation of the Company or Bank deteriorates, we
−Removed: may experience an outflow of brokered deposits as a result of our inability to attract them or to accept or renew them.
+Added: Additionally, as noted above, if the condition, regulatory treatment or reputation of the Company or Bank deteriorates, we may experience an outflow of brokered deposits as a result of our inability to attract them or to accept or renew them.
In that event, we would be required to obtain alternate sources for funding.
Our primary and secondary sources of liquidity remain strong.
−Removed: Average deposits increased 10% for the second quarter of 2020 as compared to the first quarter of 2020.
+Added: Average deposits increased 1.3% for the third quarter of 2020 as compared to the second quarter of 2020.
We maintain a very liquid investment portfolio, including significant overnight liquidity.
−Removed: Average short term liquidity was $1.14 billion in second quarter of 2020, which is above EagleBank’s average needs.
+Added: Average short term liquidity was $1.3 billion in third quarter of 2020, which is above EagleBank’s average needs.
Secondary sources of liquidity amount to $2.7 billion.
−Removed: At June 30, 2020, under the Bank’s liquidity formula, it had $5.24 billion of primary and secondary liquidity sources.
+Added: At September 30, 2020, under the Bank’s liquidity formula, it had $4.5 billion of primary and secondary liquidity sources.
The amount is deemed adequate to meet current and projected funding needs.
Commitments and Contractual Obligations
−Removed: Loan commitments outstanding and lines and letters of credit at June 30, 2020 are as follows (unaudited):
+Added: Loan commitments outstanding and lines and letters of credit at September 30, 2020 are as follows (unaudited):
(dollars in thousands)
2 unchanged sentences
Letters of credit 70,087
+Added: Total $ 2,377,129
Unfunded loan commitments are agreements whereby the Bank has made a commitment and the borrower has accepted the commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract.
2 unchanged sentences
Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.
−Removed: As of June 30, 2020, unfunded loan commitments included $253.9 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature.
+Added: As of September 30, 2020, unfunded loan commitments included $410 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature.
+Added: Average unfunded loan commitments declined in the third quarter 2020 from the previous seven quarters, from an average of $2.3 billion to just below $2.0 billion primarily attributable primarily to a decrease in unfunded commitments in accordance with CECL.
Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract.
2 unchanged sentences
The pipeline of loan commitments remains strong.
−Removed: The Bank did see additional draws on committed lines of credit during the second half of the first quarter which were largely paid back down in the second quarter.
+Added: The Bank did see additional draws on committed lines of credit during the second half of the first quarter which were largely paid back down in the second and third quarters.
Letters of credit include standby and commercial letters of credit.
10 unchanged sentences
Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives.
−Removed: During the six months ended June 30, 2020, as compared to the same period in 2019, the Company was able to produce a net interest margin of 3.36% as compared to 3.97%, and continue to manage its overall interest rate risk position.
+Added: During the nine months ended September 30, 2020, the Company was able to produce a net interest margin of 3.27% as compared to 3.88% during the same period in 2019, and continue to manage its overall interest rate risk position.
+Added: The Company, along with many other banks, has been challenged in 2020 during a period of extremely low interest rates together with a relatively flat yield curve.
The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits.
3 unchanged sentences
agency investment portfolio.
−Removed: During the three months ended June 30, 2020, the average investment portfolio balances increased by $12 million, or 1.6%, as compared to average balance for the three months ended June 30, 2019.
+Added: During the three months ended September 30, 2020, the average investment portfolio balance increased by $165.1 million, or 22%, as compared to average balance for the three months ended September 30, 2019.
The cash received from deposit growth along with cash flows from the investment portfolio were deployed into loans, the purchase of replacement investments and held in cash.
−Removed: The percentage mix of municipal securities was 12% of total investments at June 30, 2020 and 9% at June 30, 2019.
−Removed: The portion of the portfolio invested in mortgage backed securities was 68% at June 30, 2020 and 59% at June 30, 2019.
+Added: The percentage mix of municipal securities was 10% of total investments at September 30, 2020 and 9% at September 30, 2019.
+Added: The portion of the portfolio invested in mortgage backed securities was 73% at both September 30, 2020 and 2019.
The portion of the portfolio invested in U.S.
−Removed: agency investments was 7% at June 30, 2020 and 20% at June 30, 2019.
−Removed: Shorter duration floating rate corporate bonds were 4% of total investments at June 30, 2020 and 1% at June 30, 2019, and SBA bonds, which are included in mortgage backed securities, were 9% and 10% of total investments at June 30, 2020 and June 30, 2019, respectively.
−Removed: The duration of the investment portfolio remained relatively consistent at 3.1 years at June 30, 2020 from 3.0 years at June 30, 2019.
−Removed: The re-pricing duration of the loan portfolio was 18 months at June 30, 2020 as compared to 19 months at June 30, 2020, with fixed rate loans amounting to 44% of total loans at June 30, 2020 and 39% at June 30, 2019.
−Removed: Variable and adjustable rate loans comprised 56% (offset by 3% from the dilution impact of PPP loans) and 61% of total loans at both June 30, 2020 and 2019, respectively.
+Added: agency investments was 7% at September 30, 2020 and 14% at September 30, 2019.
+Added: Shorter duration floating rate corporate bonds were 1% of total investments both at September 30, 2020 and September 30, 2019, and SBA bonds, which are included in mortgage backed securities, were 8% and 10% of total investments at September 30, 2020 and September 30, 2019, respectively.
+Added: The duration of the investment portfolio remained relatively consistent at 3.2 years at September 30, 2020 from 3.3 years at September 30, 2019.
+Added: The re-pricing duration of the loan portfolio was 19 months at September 30, 2020 as compared to 2 0 mon ths at September 30, 2019 with fixed rate loans amounting to 45% of total loans at September 30, 2020 and 40% at September 30, 2019.
+Added: Variable and adjustable rate loans comprised 55% (offset by 3% from the dilution impact of PPP loans) and 60% of total loans at September 30, 2020 and 2019, respectively.
Variable rate loans are generally indexed to either the one month LIBOR interest rate, or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S.
Treasury interest rate.
−Removed: The duration of the deposit portfolio increased to 39 months at June 30, 2020 from 33 months at March 31, 2020.
−Removed: The increase since March was due substantially to a change in the deposit mix and the duration of money market accounts as deposit competition waned with rates at all-time lows.
−Removed: The Company has continued its emphasis on funding loans in its marketplace, although competition for new loans has diminished.
−Removed: A disciplined approach to loan pricing, with variable and adjustable rate loans comprising 56% of total loans (offset by 3% from the dilution impact of PPP loans) at June 30, 2020, has resulted in a loan portfolio yield of 4.84% for the six months ended June 30, 2020 as compared to 5.62% for the same period in 2019.
+Added: The duration of the deposit portfolio increased to 44 months at September 30, 2020 from 39 months at June 30, 2020.
+Added: The increase since June was due substantially to a change in the deposit mix and the duration of money market accounts as deposit competition waned with rates at all-time lows and the additions of some four and five year CDs at historically low rates.
+Added: The Company has continued its emphasis on funding loans in its marketplace, although demand for new loans during the COVID-19 pandemic has diminished.
+Added: A disciplined approach to loan pricing, with variable and adjustable rate loans comprising 55% of total loans (offset by 3% from the dilution impact of PPP loans) at September 30, 2020, has resulted in a loan portfolio yield of 4.71% for the nine months ended September 30, 2020 as compared to 5.54% for the same period in 2019.
Variable and adjustable rate loans provide additional income opportunities should interest rates rise from current levels.
−Removed: The net unrealized gain before income tax on the investment portfolio was $21.8 million at June 30, 2020 as compared to a net unrealized gain before tax of $20.1 million at March 31, 2019.
−Removed: The increase in the net unrealized gain on the investment portfolio was due primarily to lower interest rates at June 30, 2020.
−Removed: At June 30, 2020, the net unrealized gain position represented 3.0% of the investment portfolio’s book value.
+Added: The net unrealized gain before income tax on the investment portfolio was $20.9 million at September 30, 2020 as compared to a net unrealized gain before tax of $6.6 million at September 30, 2019.
+Added: The increase in the net unrealized gain on the investment portfolio was due primarily to lower interest rates at September 30, 2020.
+Added: At September 30, 2020, the net unrealized gain position represented 2.3% of the investment portfolio’s book value.
There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, as a result of competitive pressures, customer preferences and the inability to perfectly forecast future interest rates and movements.
3 unchanged sentences
The data is then subjected to a “shock test” which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield curve, but not below zero.
−Removed: The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from June 30, 2020.
+Added: The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from September 30, 2020.
In addition to analysis of simultaneous changes in interest rates along the yield curve, changes based on interest rate “ramps” is also performed.
This analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes.
−Removed: For the analysis presented below, at June 30 , 2020, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor of 10 basis points in the same analysis as of March 31, 2020), and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.
+Added: For the analysis presented below, at September 30, 2020, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor of 0 basis points and 10 basis points in the same analysis as of June 30, 2020 and March 31, 2020, respectively), and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.
The floor rate in the analysis was lowered due to the fact that in the current interest rate environment, there are interest bearing accounts with current rates less than 10 basis points.
−Removed: As quantified in the table below, the Company’s analysis at June 30, 2020 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points.
+Added: The Company’s analysis at September 30, 2020 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points.
This moderate impact is due substantially to the significant level of variable rate and repriceable assets and liabilities and related shorter relative durations.
−Removed: The repricing duration of the investment portfolio at June 30, 2020 is 3.1 years, the loan portfolio 1.5 years, the interest bearing deposit portfolio 3.3 years, and the borrowed funds portfolio 6.3 years.
−Removed: The following table reflects the result of simulation analysis on the June 30, 2020 asset and liabilities balances:
−Removed: Percentage change in
+Added: The repricing duration of the investment portfolio at September 30, 2020 is 3.2 years, the loan portfolio 1.6 years, the interest bearing deposit portfolio 3.6 years, and the borrowed funds portfolio 6.1 years.
+Added: The following table reflects the result of simulation analysis on the September 30, 2020 asset and liabilities balances:
Change in interest
−Removed: Percentage change in net
−Removed: Percentage change in
+Added: rates (basis points) Percentage change in net
+Added: interest income Percentage change in
+Added: net income Percentage change in
market value of portfolio
−Removed: rates (basis points)
−Removed: interest income
+Added: + 400 16.3% 27.0% 9.8%
+Added: + 300 11.2% 18.5% 7.7%
+Added: + 200 6.0% 10.0% 5.5%
+Added: + 100 1.9% 3.2% 3.1%
+Added: - 100 (1.3)% (2.2)% (12.1)%
+Added: - 200 (2.0)% (3.3)% (20.2)%
The results of the simulation are within the relevant policy limits adopted by the Company for percentage change in net interest income.
1 unchanged sentence
For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change.
−Removed: The amounts in the second quarter exceeded these limits due to the already low level of rates on non-maturing deposit instruments.
−Removed: Management has determined that due to the level of market rates at June 30, 2020, interest rate shocks of -100, -200, -300 and -400 basis points leave the Bank with near zero down to negative rate instruments and are not considered practical or informative.
−Removed: The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at June 30, 2020 are not considered to be excessive.
+Added: The amounts in the third quarter exceeded these limits due to the already low level of rates on non-maturing deposit instruments.
+Added: Management has determined that due to the level of market rates at September 30, 2020, interest rate shocks of -100, -200, -300 and -400 basis points leave the Bank with near zero down to negative rate instruments and are not considered practical or informative.
+Added: The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at September 30, 2020 are not considered to be excessive.
The impact of -1.3% in net interest income and -2.2% in net income given a 100 basis point decrease in market interest rates reflects in large measure the impact of variable rate loans and fed funds sold repricing downward while deposits remain at expected floor rates and are not expected to have lower interest rates.
−Removed: In the second quarter of 2020, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above.
−Removed: The interest rate risk position at June 30, 2020, was relatively similar to the March 31, 2020 position for the up rate scenarios, but the down rate scenarios are now limited by the already low interest rate environment.
−Removed: Certain shortcomings are inherent in the method of analysis presented in the foregoing table.
−Removed: For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates.
+Added: In the third quarter of 2020, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above.
+Added: The interest rate risk position at September 30, 2020, was relatively similar to the June 30, 2020 position for both the up and down rate scenarios.
+Added: Although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates.
Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan.
−Removed: Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables.
+Added: Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in modeling.
Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.
−Removed: During the second quarter of 2020, average market interest rates decreased across the yield curve.
−Removed: Overall, there was a slight steepening of the yield curve as compared to the second quarter of 2019 with rate decreases being generally more significant at the shorter end of the yield curve.
−Removed: As compared to the second quarter of 2019, the average two-year U.S.
−Removed: Treasury rate decreased by 194 basis points from 2.13% to 0.19%, the average five year U.S.
+Added: During the third quarter of 2020, average market interest rates decreased across the yield curve.
+Added: Overall, there was a slight steepening of the yield curve as compared to the third quarter of 2019 with rate decreases being generally more significant at the shorter end of the yield curve.
+Added: As compared to the third quarter of 2019, the average two-year U.S.
+Added: Treasury rate decreased by 155 basis points from 1.69 % t o 0.14%, the average five year U.S.
Treasury rate decreased by 136 basis points from 1.63% to 0.27% and the average ten year U.S.
Treasury rate decreased by 115 basis points from 1.80% to 0.65%.
−Removed: The Company’s net interest margin was 3.26% for the second quarter of 2020 and 3.91% in the second quarter of 2019.
−Removed: The Company believes that the net interest margin in the most recent quarter as compared to 2019’s second quarter has been consistent with its interest rate risk analysis.
+Added: The Company’s net interest margin was 3.08% for the third quarter of 2020 and 3.72% in the third quarter of 2019.
+Added: The Company believes that the net interest margin in the most recent quarter as compared to 2019’s third quarter has been consistent with its interest rate risk analysis.
Banks and other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities.
−Removed: This revenue represented 87% and 93% of the Company’s revenue for the second quarter of 2020 and 2019, respectively.
+Added: This revenue represented 87% and 93% of the Company’s revenue for the third quarter of 2020 and 2019, respectively.
In falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by lower yielding short-term funds, or what is referred to as a negative mismatch or gap.
3 unchanged sentences
A negative gap indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods.
−Removed: At June 30, 2020, the Company had a positive gap position of approximately $476 million, or 5% of total assets, out to three months, and a positive cumulative gap position of $624 million, or 6% of total assets out to twelve months;
−Removed: as compared to a negative gap position of approximately $370 million or 4% of total assets out to three months, and a negative cumulative gap position of $269 million or 3% of total assets out to twelve months at March 31, 2019.
−Removed: The change in the gap position at June 30, 2020, as compared to March 31, 2020, was due to expected rate sensitivity of non-interest bearing accounts and the time frame in which they might migrate interest bearing accounts.
−Removed: The change in the gap position at June 30, 2020 as compared to March 31, 2020 is not deemed material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis which captures the full optionality within the balance sheet.
+Added: At September 30, 2020, the Company had a positive gap position of approximately $425 million, or 4% of total assets, out to three months, and a positive cumulative gap position of $457 million, or 5% of total assets out to twelve months;
+Added: as compared to a positive gap position of approximately $420 million or 5% of total assets out to three months and a positive cumulative gap position of $384 million of 4% of total assets out to 12 months at September 30, 2019.
+Added: The change in the gap position at September 30, 2020 as compared to June 30, 2020 was due to term deposits moving into overnight deposits in the low and flat interest rate environment..
+Added: Such a change in gap position is no t deemed material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis that captures the full optionality within the balance sheet.
The current position is within guideline limits established by the ALCO.
6 unchanged sentences
If this were to occur, the effects of a declining interest rate environment may not be in accordance with management’s expectations.
−Removed: June 30, 2020
+Added: September 30, 2020
(dollars in thousands)
Repricible in:
+Added: months Over 60
+Added: Sensitive Non Sensitive Total
RATE SENSITIVE ASSETS:
Investment securities $ 207,873 $ 103,032 $ 202,216 $ 152,709 $ 311,740 $ 977,570
+Added: 3,973,982 818,269 1,543,850 873,128 750,110 7,959,339
Fed funds and other short-term investments 849,549 — — — — 849,549
Other earning assets 76,326 — — — — 76,326
+Added: Total $ 5,107,730 $ 921,301 $ 1,746,066 $ 1,025,837 $ 1,061,850 $ 9,862,784 243,510 $ 10,106,294
+Added:
RATE SENSITIVE LIABILITIES:
+Added:
Noninterest bearing demand $ 85,494 $ 237,819 $ 516,240 $ 380,872 $ 1,163,683 $ 2,384,108
4 unchanged sentences
Other borrowings — 148,420 — 69,559 350,000 567,979
+Added: Total $ 4,782,548 $ 789,374 $ 848,100 $ 508,796 $ 1,842,239 $ 8,771,057 111,835 $ 8,882,892
+Added: GAP $ 325,182 $ 131,927 $ 897,966 $ 517,041 $ (780,389) $ 1,091,727
Cumulative GAP $ 325,182 $ 457,109 $ 1,355,075 $ 1,872,116 $ 1,091,727
3 unchanged sentences
Interest Rate Swaps - Fed Funds based 100,000 (100,000)
+Added: Total $ 100,000 $ (100,000) $ — $ — $ — $ — — $ —
+Added: GAP $ 425,182 $ 31,927 $ 897,966 $ 517,041 $ (780,389) $ 1,091,727
Cumulative GAP $ 425,182 $ 457,109 $ 1,355,075 $ 1,872,116 $ 1,091,727 $ —
11 unchanged sentences
The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years.
−Removed: At June 30, 2020, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represent 342% of total risk based capital.
+Added: At September 30, 2020, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represent 328% of total risk based capital.
Construction, land and land development loans represent 100% of total risk based capital.
2 unchanged sentences
Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns.
−Removed: The Company has an extensive Capital Plan and Policy, which includes pro-forma
−Removed: projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.
+Added: The Company has an extensive Capital Plan and Policy, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.
The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies.
8 unchanged sentences
Under the Basel III Rules, the Company and Bank are required to maintain, inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of 7.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%, a minimum total capital to risk-weighted assets ratio of 10.5%, and a minimum leverage ratio of 4.0%.
−Removed: At June 30, 2020, the Company and the Bank meet all these requirements, and satisfy the requirement to maintain a capital conservation buffer of 2.5% of CET1 capital for capital adequacy purposes.
+Added: At September 30, 2020, the Company and the Bank meet all these requirements, and satisfy the requirement to maintain a capital conservation buffer of 2.5% of CET1 capital for capital adequacy purposes.
During the fourth quarter of 2019, the Company extended the Repurchase Program.
Under the Board approval in December, the Company may repurchase up to an aggregate of 1,641,000 shares of its common stock (inclusive of shares remaining under the initial authorization), through December 31, 2020, subject to earlier termination by the Board of Directors (the “Repurchase Program Extension”).
−Removed: While the Company’s capital position remains well above regulatory well capitalized levels, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19, the Company’s remaining authorization to repurchase shares was put on hold during the first quarter of 2020 and there were no shares repurchased during the second quarter of 2020.
−Removed: The Board of Directors and Management continue to monitor this area and may enter the markets from time to time as determined appropriate.
−Removed: The Company announced a regular quarterly cash dividend on June 24, 2020 of $0.22 per share to shareholders of record on July 15, 2020 and payable July 31, 2020.
−Removed: The actual capital amounts and ratios for the Company and Bank as of June 30, 2020 (unaudited) and December 31, 2019 are presented in the table below.
−Removed: (dollars in thousands)
−Removed: As of June 30, 2020
+Added: While the Company’s capital position remains well above regulatory well capitalized levels, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19, the Company’s remaining authorization to repurchase shares was put on hold during the first quarter of 2020 and there were no share repurchases in the second and third quarters of 2020.
+Added: The Company’s Board of Directors approved lifting the suspension of the Company’s share repurchase program in the third quarter of 2020.
+Added: The Board of Directors have authorized management through the current share repurchase program to continue to evaluate opportunities for share repurchases.
+Added: The Company announced a regular quarterly cash dividend on September 24, 2020 of $0.22 per share to shareholders of record on September 15, 2020 and payable on the first business day following October 31, 2020.
+Added: The actual capital amounts and ratios for the Company and Bank as of September 30, 2020 (unaudited) and December 31, 2019 are presented in the table below.
+Added: Company Bank Minimum
+Added: Capital To Be Well
+Added: Actual Actual Adequacy Action
+Added: (dollars in thousands) Amount Ratio Amount Ratio Purposes Regulations*
+Added: As of September 30, 2020
CET1 capital (to risk weighted assets) $ 1,121,616 13.19 % $ 1,290,062 15.19 % 7.00 % 6.50 %
2 unchanged sentences
Tier 1 capital (to average assets) 1,121,616 10.82 % 1,290,062 12.47 % 4.00 % 5.00 %
+Added:
As of December 31, 2019
4 unchanged sentences
* Applies to Bank only
−Removed: The regulatory capital ratios presented above vary slightly from what was presented in our second quarter earnings release, reflecting adjustments to fully capture the delay in reflecting the impact of the adoption of the CECL methodology provided by the federal banking regulators in March 2020, as described below.
Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company.
−Removed: At June 30, 2020 the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above.
+Added: At September 30, 2020 the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above.
In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020.
5 unchanged sentences
The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP.
−Removed: Tangible common equity to tangible assets (the "tangible common equity ratio"), tangible book value per common share, the annualized return on average tangible common equity, and efficiency ratio are non-GAAP financial measures derived from GAAP-based amounts.
+Added: Tangible common equity to tangible assets (the "tangible common equity ratio"), tangible book value per common share, the annualized return on average tangible common equity, and efficiency ratio are non-GAAP financial measures derived from GAAP-based amounts.
The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets.
7 unchanged sentences
Three Months Ended
−Removed: Six Months Ended
−Removed: Three Months Ended
−Removed: Six Months Ended
−Removed: June 30, 2020
−Removed: June 30, 2020
−Removed: December 31, 2019
−Removed: June 30, 2019
−Removed: June 30, 2019
+Added: September 30, 2020 Nine Months Ended
+Added: September 30, 2020 Year Ended
+Added: December 31, 2019 Three Months Ended
+Added: September 30, 2019 Nine Months Ended
+Added: September 30, 2019
Common shareholders’ equity $ 1,223,402 $ 1,190,681 $ 1,184,594
4 unchanged sentences
Tangible book value per common share $ 34.70 $ 32.67 $ 32.02
+Added: Total assets $ 10,106,294 $ 8,988,719 $ 9,003,467
Intangible assets (105,165) (104,739) (104,915)
7 unchanged sentences
Annualized Return on Average Tangible Common Equity
+Added: 15.93 % 11.45 % 13.40 % 13.25 % 13.57 %
Quantitative and Qualitative Disclosures about Market Risk
1 unchanged sentence
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.