SANDY SPRING BANCORP, INC. The Company
Sandy Spring Bancorp, Inc. (the "Company") is the bank holding company forSandy Spring Bank (the "Bank"). The Company is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area. AtJune 30, 2020 , the Company had$13.3 billion in assets which increased during the current quarter by approximately$4.4 billion . TheApril 1, 2020 acquisition ofRevere Bank ("Revere") was responsible for$2.8 billion of this growth and participation in the Paycheck Protection Program ("PPP" or "PPP program") was responsible for an additional$1.1 billion in asset growth. The Company, which began operating in 1988, is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. As such, the Company is subject to supervision and regulation by theBoard of Governors of theFederal Reserve System (the "Federal Reserve"). The Bank traces its origin to 1868, making it among the oldest institutions in the region. Independent and community-oriented,Sandy Spring Bank offers a broad range of commercial banking, retail banking, mortgage and trust services throughout centralMaryland ,Northern Virginia , and the greaterWashington, D.C. market. Through its subsidiaries,Sandy Spring Insurance Corporation ,West Financial Services, Inc. andRembert Pendleton and Jackson ("RPJ"),Sandy Spring Bank also offers a variety of comprehensive insurance and wealth management services. The Bank is a state chartered bank subject to supervision and regulation by theFederal Reserve and theState of Maryland . The Bank's deposit accounts are insured by theDeposit Insurance Fund administered by theFederal Deposit Insurance Corporation (the "FDIC") to the maximum amount permitted by law. The Bank is a member of theFederal Reserve System and is anEqual Housing Lender. The Company, the Bank, and its other subsidiaries are Affirmative Action/Equal Opportunity Employers. Beginning in 2018, the Company has completed a series of strategic acquisitions in its market area. The Company completed the acquisition of Revere, headquartered inRockville, Maryland onApril 1, 2020 ("Acquisition Date"). The acquisition resulted in the addition of 11 banking offices and more than$2.8 billion in assets as of the Acquisition Date. At the Acquisition Date, Revere had loans of$2.5 billion and deposits of$2.3 billion . The all-stock transaction resulted in the issuance of 12.8 million common shares and was valued at approximately$293 million . In addition, onFebruary 1, 2020 the Company acquired RPJ, a wealth advisory firm located inFalls Church, Virginia with approximately$1.5 billion in assets under management on the date the acquisition closed. During 2018, the Company completed the acquisition ofWashingtonFirst Bankshares, Inc. , the parent company forWashingtonFirst Bank (collectively referred to as "WashingtonFirst"). At the date of acquisition, WashingtonFirst had more than$2.1 billion in assets, loans of$1.7 billion and deposits of$1.6 billion . The all-stock transaction resulted in the issuance of 11.4 million common shares valued at approximately$447 million . The results of operations from the Revere and RPJ acquisitions have been included in the consolidated results of operations from the date of the acquisitions. As a result of the growth, the statement of condition, interest and non-interest income and expense increased from the prior year's quarter. Cost savings from the synergies resulting from the combination of the institutions are expected to be realized throughout 2020 and into 2021.
Current State and Response
The widespread outbreak of the novel coronavirus ("COVID-19" or "pandemic") late
in the first quarter of 2020 has profoundly affected, and will likely continue
to adversely affect, the Company's business, financial condition, and results of
operations. This pandemic has resulted in negative impacts on economic and
commercial activity and financial markets, both globally and within the United
States . Within our market area, the governors of Maryland and Virginia and the
mayor of the District of Columbia have issued directives that, among other
things, advised residents to restrict their activities outside the home and
permit them to conduct or participate in certain activities while observing
specific guidelines and behaviors. Non-essential businesses continue to observe
and modify their activities and behaviors to remain in compliance with the
governmental directives while concurrently providing consumers with goods and
services. These restrictions - and similar directives imposed across the United
States to restrict the spread of COVID-19 - have resulted in significant
business and operational disruptions, including business closures, supply chain
disruptions, and layoffs and furloughs. Certain actions taken by U.S. or other
governmental authorities, including the Federal Reserve , that are intended to
ameliorate the macroeconomic effects of COVID-19 may cause additional harm to
our business. Decreases in short-term interest rates, such as those announced by
the Federal Reserve during the first fiscal quarter of 2020, have a negative
impact on our results, as we have certain assets and liabilities that are
sensitive to changes in interest rates. Management continually monitors
developments, evaluates strategic and tactical initiatives and solutions and
allocates the necessary resources to mitigate the
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negative impact of this significant market disruption caused by the pandemic.
For a description of the potential impacts of COVID-19 on the Company, see "Item
1A-Risk Factors."
As an essential business, the Company has implemented business continuity plans
and continues to provide financial services to clients. In response to COVID-19,
the Company began implementing its business continuity plan in early March,
which led to the implementation of numerous actions to address the health and
safety of employees and clients and to assist clients that have been impacted by
the pandemic. A substantial majority of non-branch employees continue to work
remotely and clients are served at branches primarily through drive-thru
facilities and limited lobby access. As area jurisdictions relax their stay at
home orders, the Company is cautiously executing the first phase of its return
to work plan.
The Company processed and approved over 5,100 PPP loans for a total of $1.1
billion at June 30, 2020 to assist borrowers in maintaining their payroll of an
estimated 112,000 employees and cover applicable overhead. The Company funded
the PPP loans with borrowings through the Federal Reserve's Paycheck Protection
Program Liquidity Facility ("PPPLF"). Loans under the PPP have an interest rate
of 1.00% while the borrowings under the PPPLF bear interest at a rate of 0.35%.
The Company received processing fees of approximately $34 million from the SBA
that will be recognized over the life of the PPP loans.
As a further relief to qualified commercial, mortgage and consumer loan
customers, the Company developed guidelines to provide for deferment of certain
loan payments up to 180 days. From March through June 30, 2020 , the Company
granted approvals for payment modifications/deferrals on over 2,400 loans with
an aggregate balance of $2.0 billion of which more than 1,500 loans with an
aggregate balance of $1.5 billion were still in deferral as of June 30, 2020 .
The Company made the decision to waive certain transaction fees, penalties on
early certificate of deposit withdrawals and eliminate specific processing fees
for business clients to ease their financial burden during the COVID-19
pandemic.
Current Quarter Financial Overview
As a result of a combination of merger and acquisition expense, the impact of the current economic forecast in the determination of the allowance for credit losses and the additional provision for credit losses associated with the acquisition of Revere, the Company recorded a$14.3 million net loss ($0.31 per share). The 2020 second quarter's result compares to net income of$28.3 million ($0.79 per diluted share) for the second quarter of 2019 and$10.0 million ($0.28 per diluted share) for the first quarter of 2020. Operating earnings on an after-tax basis for the current quarter, which exclude the impact of merger and acquisition expense, the provision for credit losses and the effects from the PPP program, were$42.0 million ($0.88 per diluted share), a 42% increase, compared to$29.5 million ($0.82 per diluted share) for the quarter endedJune 30, 2019 . The current quarter's results included$22.5 million for merger and acquisition expense related to the Revere acquisition. Additionally, earnings for the second quarter were negatively impacted by a$58.7 million provision for credit losses. Of this amount, approximately$33.8 million was related to the change in the current quarter's economic forecast. In addition, as required by generally accepted accounting principles ("GAAP"), the initial allowance for credit losses on Revere's acquired non-purchased credit deteriorated loans ("non-PCD" or "non-PCD loans") was recognized through provision for credit losses in the amount of$17.5 million . Comparatively, the provision for credit losses for the first quarter of 2020 was$24.5 million . The Company's participation in the PPP program and the associated funding program had a net positive impact of$4.1 million , net of tax, in the current quarter.
The second quarter's results reflect the following events:
?Total assets atJune 30, 2020 , grew 58% to$13.3 billion compared toJune 30, 2019 , as a result of the Revere acquisition and participation in the PPP. Loans and deposits also each grew by 58%. Revere's loans and deposits on the Acquisition Date were$2.5 billion and$2.3 billion , respectively. Additionally, the Company's participation in the PPP resulted in the addition of$1.1 billion in commercial business loans during the second quarter of 2020. ?The net interest margin for the second quarter of 2020 was 3.47%, compared to 3.54% for the second quarter of 2019 and 3.29% for the first quarter of 2020. Excluding the impact of the amortization of the fair value marks derived from acquisitions, the current quarter's net interest margin would have been 3.19%, compared to 3.49% 41
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for the second quarter of 2019 and 3.27% for the first quarter of 2020.
?The provision for credit losses of$58.7 million for the second quarter reflected the change in economic forecast for the current quarter, resulting in an addition of$33.8 million , and the$17.5 million initial provision for credit losses on the acquired Revere non-PCD loans. ?Non-interest income increased 38% from the prior year quarter, driven by income from mortgage banking activities, which benefited from higher refinance activity, and growth in wealth management income as a result of the acquisition of RPJ in the first quarter of 2020. ?Non-interest expense grew 95% or$41.6 million from the prior year quarter. Excluding the impact of merger and acquisition expense and early prepayment of acquired FHLB advances, the year-over-year growth rate of in non-interest expense would have been 27%. ?Tangible book value per share declined by 4% to$20.61 atJune 30, 2020 compared to$21.54 atJune 30, 2019 . During this period, the Company recorded additional goodwill and intangible assets in connection with the acquisitions of Revere and RPJ and, prior to the current quarter, repurchased$50 million of common stock.
Summary of Second Quarter Results
Balance Sheet and Credit Quality
Total assets grew 58% to$13.3 billion atJune 30, 2020 , as compared to$8.4 billion atJune 30, 2019 , primarily as a result of the acquisition of Revere during the current quarter. In addition, the Company's participation in the PPP program had a further positive impact on the asset growth year-over-year. During this period, total loans grew by 58% to$10.3 billion atJune 30, 2020 , compared to$6.6 billion atJune 30, 2019 . Excluding PPP loans, total loans grew 42% to$9.3 billion atJune 30, 2020 . Commercial loans, excluding PPP loans, grew 58% or$2.7 billion while the remainder of the total loan portfolio grew 2%. The majority of the commercial loan growth was driven by the acquisition of Revere. The year-over-year decline in the mortgage loan portfolio resulted from mortgage loan refinance activity, driven by the low interest rate environment and the continued sale of the majority of new mortgage loan production. Consumer loans grew 14% due to the Revere acquisition. However, organic consumer loans experienced a 10% decline as borrowers eliminated their home equity borrowings through the refinancing of their associated mortgage loans. The investment portfolio grew to$1.4 billion atJune 30, 2020 from$955.7 million atJune 30, 2019 and remained level at 11% of total assets. The Company's liquidity position continued to remain strong as a result of its operational cash flows, in addition to the available borrowing lines with theFederal Home Loan Bank of Atlanta ("FHLB"), theFederal Reserve Bank and other sources, and the size and composition of the available-for-sale investment portfolio. Deposit growth was 58% fromJune 30, 2020 toJune 30, 2019 , as noninterest-bearing deposits experienced growth of 70% and interest-bearing deposits grew 52%. This growth was driven by the combination of the Revere acquisition and the PPP program, as loan funds were placed into customer deposit accounts at the Bank. Stockholders' equity grew 24% to$1.4 billion compared toJune 30, 2019 due to the equity issuance associated with the Revere acquisition in addition to net earnings over the preceding twelve months. This growth occurred even as the Company repurchased$50 million in common stock and increased the dividend 7% during this period. Tangible common equity increased to$968.6 million atJune 30, 2020 , compared to$767.0 million atJune 30, 2019 , as a result of the equity issuance associated with the Revere acquisition. The year-over-year change in tangible common equity also reflects the effects of the repurchase of$50 million of common stock, an increase in dividends beginning in the second quarter of 2019 and the increase in intangible assets and goodwill associated with the two acquisitions during the past twelve months. AtJune 30, 2020 , the Company had a total risk-based capital ratio of 13.79%, a common equity tier 1 risk-based capital ratio of 10.23%, a tier 1 risk-based capital ratio of 10.23% and a tier 1 leverage ratio of 8.35%. The level of non-performing loans to total loans increased to 0.77% atJune 30, 2020 , compared to 0.58% atJune 30, 2019 , and 0.80% atMarch 31, 2020 . AtJune 30, 2020 , non-performing loans totaled$79.9 million , compared to$37.7 million atJune 30, 2019 , and$54.0 million atMarch 31, 2020 . Non-performing loans include accruing loans 90 days or more past due and restructured loans. The year-over-year growth in non-performing loans was driven by three major components: loans placed in non-accrual status, acquired Revere non-accrual loans, and loans previously accounted for as purchased credit impaired loans that have been designated as non-accrual loans as a result of the Company's adoption of the accounting standard for expected credit losses at the beginning of the year. Loans placed on non-accrual during the current quarter amounted to$27.3 million compared to$3.4 million for the prior year quarter and$2.4 million for the first quarter of 2020. Acquired Revere non-accrual loans were$11.3 million . Excluding the impact of the acquisition of Revere, the current 42 --------------------------------------------------------------------------------
quarter's growth in non-accrual loans was primarily the result of three large relationships, none of which was the result of the COVID-19 pandemic.
The Company recorded net recoveries of$0.4 million for the second quarter of 2020 as compared to net charge-offs of$0.7 million and$0.5 million for the second quarter of 2019 and the first quarter of 2020, respectively. The allowance for credit losses was$163.5 million or 1.58% of outstanding loans and 205% of non-performing loans atJune 30, 2020 , compared to$85.8 million or 1.28% of outstanding loans and 159% of non-performing loans atMarch 31, 2020 . The acquisition of Revere's PCD loans resulted in an increase to the allowance for credit losses of$18.6 million , which did not affect the current quarter's provision expense. The remaining growth in the allowance was attributable to the provision for credit losses during the current quarter.
Quarterly Results of Operations
Net interest income for the second quarter of 2020 increased 53% compared to the second quarter of 2019, due to the acquisition of Revere. The PPP program and its associated funding contributed a net of$5.5 million to net interest income for the quarter. The net interest margin declined to 3.47% for the second quarter of 2020 compared to 3.54% for the second quarter of 2019. Excluding the net$8.3 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin would have been 3.19%. Included in the current quarter is the accelerated amortization of the$5.8 million purchase premium on FHLB advances as a result of the prepayment of those borrowings. The effect of the accelerated amortization accounts for approximately 20 basis points in the current quarter's net interest margin. The provision for credit losses was$58.7 million for the second quarter of 2020, compared to$1.7 million for the second quarter of 2019 and$24.5 million for the first quarter of 2020. The provision for credit losses during the quarter reflects the results of the impact of economic developments during the quarter ($33.8 million ), the initial allowance required on non-purchased credit deteriorated loans ($17.5 million ) and various qualitative adjustments to the allowance ($3.6 million ). The change in the portfolio mix adjustments resulted in the remainder of provision increase for the period. Non-interest income increased$6.4 million or 38% from the prior year quarter. Income from mortgage banking activities increased$5.2 million as a result of a high level of refinancing activity, while wealth management income increased$2.1 million as a result of the first quarter acquisition of RPJ. This growth more than compensated for the$1.4 million of the combined decline in service and bank card fees as compared to the prior year quarter as a result the decline in consumer activity and the decision to waive certain transaction fees to ease the burden of the pandemic on customers. Non-interest expense grew 95% or$41.6 million from the prior year quarter. Merger and acquisition expense accounted for$22.5 million of the growth of non-interest expense. The non-interest expense growth also included$5.9 million in prepayment penalties from the liquidation of the acquired FHLB advances. Excluding the impact of these non-core expenses, the year-over-year growth rate would have been 27% as a result of the operational cost of the Revere and RPJ acquisitions, increased compensation expense related to the high level of mortgage loan originations and annual employee merit increases. The GAAP efficiency ratio in the second quarter of 2020 was 68.66% compared to 53.04% for the second quarter of 2019, as non-interest expense increased due to merger and acquisition expense and the previously mentioned prepayment penalties on FHLB advances. The non-GAAP efficiency ratio was 43.85% for the current quarter as compared to 51.71% for the second quarter of 2019 and 54.76% for the first quarter of 2020. The decrease in the efficiency ratio (reflecting greater efficiency) from the second quarter of last year to the current year was the result of the rate of growth in non-GAAP revenue, at 50%, outpacing the non-GAAP non-interest expense growth of 27%.
Acquisition of
Revere was acquired onApril 1, 2020 and had assets of$2.8 billion , loans of$2.5 billion and deposits of$2.3 billion . This acquisition resulted in the growth of the balance sheet, interest and non-interest income and expense from the prior year's quarter. The Company identified$974.8 million of acquired loans that were classified as purchased credit deteriorated loans ("PCD" or "PCD loans"). An initial allowance for credit losses of$18.6 million was recorded through a gross up adjustment to fair values of PCD loans. A fair value premium related to other factors totaled$4.5 million and will amortize to interest income over the remaining life of each loan. As a result of these fair value marks, total fair value of PCD loans as of the Acquisition Date was$960.7 million . Of the PCD loans,$11.3 million were non-accruing at the time of acquisition. Refer to Note 1 for more details on factors considered in the PCD assessment. The amount of PCD loans was directly attributable to the current market conditions in the economy. Acquired loans that had not experienced a more-than-insignificant credit deterioration since origination totaled$1.5 billion . The Company recorded a net fair value premium of$2.1 million on 43 -------------------------------------------------------------------------------- non-PCD loans, which will amortize to interest income over the remaining life of each loan. In addition, the acquired assets included a core deposit intangible asset valued at approximately$18.4 million . The determination of the fair value of interest-bearing liabilities resulted in a$20.8 million premium. The provisional amount of goodwill recognized as of the Acquisition Date was approximately$0.8 million .
The change in estimated goodwill from the time of announcement to the Acquisition Date is presented in the following table:
(In thousands)
Amount
Preliminary goodwill at transaction announcement$ 157,344 Changes in consideration paid due to: Change in Sandy Spring share price (151,614) Change in Revere shares 1,123 Change in fair value of Revere options (7,863) Cash paid for fractional shares 11 Net change in consideration paid (158,343) Changes in fair value of assets acquired due to: Cash and cash equivalents (140,126) Investments available-for-sale (1,944) Loans 139,873 Fair value of loans 2,656 Net change in loans 142,529 Core deposit intangible asset (4,370) Other assets 11,951 Net change in assets 8,040 Changes in fair value of liabilities assumed due to: Deposits (29,739) Fair value of deposits 13,742 Net change in deposits (15,997) Advances from FHLB 19,973 Fair value of advances from FHLB 2,820 Net change in advances from FHLB 22,793 Fair value of subordinated debt 449 Other liabilities 2,633 Net change in liabilities 9,878 Net change in fair value of assets acquired and liabilities assumed (1,838) Net change in preliminary goodwill (156,505) Provisional goodwill at transaction closing $ 839 44
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Results of Operations
For the Six Months Ended
For the six months endedJune 30, 2020 , the Company recorded a$4.4 million net loss ($0.11 per share) as a result of the combination of merger and acquisition expense, the impact of the current economic forecast in the determination of the allowance for credit losses and the additional provision for credit losses associated with the Revere acquisition. The year-to-date 2020 result compares to net income of$58.6 million ($1.63 per diluted share) for the first six months of 2019. The year-to-date pre-tax results included$23.9 million for merger and acquisition expense related to the 2020 acquisitions. Additionally, earnings were negatively impacted by an$83.2 million provision for credit losses. Of this amount, approximately$53.8 million was related to changes in the economic forecast during the first six months of 2020. In addition, as required by GAAP, the initial allowance for credit losses on Revere's acquired non-purchased credit deteriorated loans was recognized through provision for credit losses in the amount of$17.5 million . The Company's participation in the PPP and the associated funding program had a net positive impact of$5.5 million , year-to-date. Operating earnings on an after-tax basis for the six months endedJune 30, 2020 , which exclude the impact of merger and acquisition expense, the provision for credit losses and the effects from the PPP program, were$71.3 million ($1.73 per diluted share), compared to$59.7 million ($1.66 per diluted share) for the six months endedJune 30, 2019 .
Net Interest Income
Net interest income for the first six months of 2020 was$165.8 million compared to$132.9 million for the first six months of 2019. On a tax-equivalent basis, net interest income for the first six months of 2020 was$168.3 million compared to$135.4 million for the first six months of 2019, a 24% increase driven primarily by the Revere acquisition. The growth in net interest income benefited from$8.7 million in net amortization of the fair value marks derived from acquisitions. The fair value marks resulted in a reduction in interest income of$0.1 million and a reduction of interest expense of$8.8 million . The majority of the decrease in interest expense was due to the impact of the$5.8 million in the accelerated premium amortization from the prepayment of the acquired FHLB advances. In addition to the impact of the amortization of the fair value marks on net interest income for the six months endedJune 30, 2020 , the PPP program generated interest income, net of its associated funding cost, of$5.5 million . Overall, year-to-date, interest income increased 13% while interest expense decreased 22%. The following tables provide an analysis of net interest income performance that reflects a net interest margin that has declined to 3.39% for the first six months of 2020 compared to 3.58% for the first six months of 2019. Included in the current period is the accelerated amortization of the$5.8 million purchase premium on FHLB advances as a result of the prepayment of those borrowings. The positive effect of this accelerated amortization accounts for a 10 basis point benefit in the net interest margin for the six months endedJune 30, 2020 . Additionally, year-over-year, the average yield on earning assets declined 64 basis points while the average rate paid on interest-bearing liabilities declined 66 basis points resulting in margin compression. The current margin reflects the positive impact from the inclusion of the net$8.7 million amortization of the fair value marks derived from acquisitions. The exclusion of the impact of amortization of fair value marks and the net impact of the PPP program would have resulted in a net interest margin of 3.22%. 45
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Consolidated Average Balances, Yields and Rates
Six Months Ended June 30,
2020 2019
Annualized Annualized
Average (1) Average Average (1) Average
(Dollars in thousands and Balances Interest Yield/Rate
Balances Interest Yield/Rate
tax-equivalent)
Assets:
Residential mortgage loans$ 1,174,176 $ 22,000
3.75 %
154,122 3,252 4.24 181,864 3,836 4.25
loans
Total mortgage loans 1,328,298 25,252 3.80 1,419,105 27,595 3.89 Commercial AD&C loans 814,372 19,215 4.74 681,271 20,148 5.96 Commercial investor real 2,825,672 63,691 4.53 1,962,799 50,086 5.15 estate loans Commercial owner occupied 1,483,465 35,000 4.74 1,211,737 29,226 4.86 real estate loans Commercial business loans 1,359,199 29,603 4.38 768,390 21,129 5.55 Total commercial loans 6,482,708 147,509 4.58 4,624,197 120,589 5.26 Consumer loans 520,524 10,497 4.06 510,411 12,665 5.00 Total loans (2) 8,331,530 183,258 4.42 6,553,713 160,849 4.94 Loans held for sale 44,171 696 3.15 27,537 573 4.17 Taxable securities 1,068,549 13,367 2.50 756,613 11,665 3.09 Tax-exempt securities (3) 220,286 3,561 3.23 231,161 4,132 3.57 Total investment securities 1,288,835 16,928 2.63 987,774 15,797 3.20
(4)
Interest-bearing deposits 293,001 335 0.23 53,543 622 2.34 with banks Federal funds sold 338 1 0.53 624 6 1.97 Total interest-earning 9,957,875 201,218 4.06 7,623,191 177,847 4.70
assets
Less: allowance for credit (90,412) (53,081)
losses
Cash and due from banks 125,805 64,264 Premises and equipment, net 59,445 61,294 Other assets 747,127 580,933 Total assets$ 10,799,840 $ 8,276,601 Liabilities and Stockholders' Equity: Interest-bearing demand$ 953,951 1,154 0.24 %$ 725,816 760 0.21 %
deposits
Regular savings deposits 349,155 146 0.08 332,138 211 0.13 Money market savings 2,369,566 8,046 0.68 1,674,608 12,896 1.55
deposits
Time deposits 1,949,039 16,456 1.70 1,625,469 16,759 2.08 Total interest-bearing 5,621,711 25,802 0.92 4,358,031 30,626 1.42 deposits Other borrowings 475,386 1,180 0.50 164,043 688 0.85 Advances from FHLB 653,878 1,022 0.32 773,856 10,167 2.65 Subordinated debentures 218,508 4,933 4.52 37,394 981 5.25 Total borrowings 1,347,772 7,135 1.07 975,293 11,836 2.45 Total interest-bearing 6,969,483 32,937 0.95 5,333,324 42,462 1.61
liabilities
Noninterest-bearing demand 2,402,225 1,740,076
deposits
Other liabilities 167,834 116,945 Stockholders' equity 1,260,298 1,086,256 Total liabilities and$ 10,799,840 $ 8,276,601 stockholders' equity Net interest income and 168,281 3.11 % 135,385 3.09 % spread Less: tax-equivalent 2,433 2,450 adjustment Net interest income$ 165,848 $ 132,935 Interest income/earning 4.06 % 4.70 % assets Interest expense/earning 0.67 1.12 assets Net interest margin 3.39 % 3.58 %
(1) Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.45% for both 2020 and 2019. The
annualized taxable-equivalent
adjustments utilized in the above table to compute yields aggregated to
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--------------------------------------------------------------------------------Effect of Volume and Rate Changes on Net Interest Income
The following table analyzes the reasons for the changes from year-to-year in the principal elements that comprise net interest income:
2020 vs. 2019 2019 vs. 2018
Increase Increase
Or Due to Change In Average:* Or Due to Change In Average:*
(Dollars in thousands and tax
equivalent) (Decrease) Volume Rate (Decrease) Volume Rate
Interest income from earning assets:
Residential mortgage loans $ (1,759) $ (1,205) $ (554) $ 3,964 $ 3,075 $ 889
Residential construction loans (584) (575) (9) (207) (540) 333
Commercial AD&C loans (933) 3,581 (4,514) 3,741 2,995 746
Commercial investor real estate
loans 13,605 20,181 (6,576) 3,997 150 3,847
Commercial owner occupied real
estate loans 5,774 6,504 (730) 4,659 3,566 1,093
Commercial business loans 8,474 13,668 (5,194) 4,273 2,857 1,416
Consumer loans (2,168) 248 (2,416) 1,366 (536) 1,902
Loans held for sale 123 287 (164) (74) (65) (9)
Taxable securities 1,702 4,198 (2,496) 1,116 (66) 1,182
Tax exempt securities (571) (188) (383) (1,088) (1,131) 43
Interest-bearing deposits with
banks (287) 696 (983) (249) (514) 265
Federal funds sold (5) (2) (3) (14) (20) 6
Total interest income 23,371 47,393 (24,022) 21,484 9,771 11,713
Interest expense on funding of
earning assets:
Interest-bearing demand deposits 394 271 123 334 (10) 344
Regular savings deposits (65) 12 (77) (184) (70) (114)
Money market savings deposits (4,850) 4,098 (8,948) 5,198 1,214 3,984
Time deposits (303) 3,045 (3,348) 9,468 2,915 6,553
Other borrowings 492 874 (382) 472 33 439
Advances from FHLB (9,145) (1,371) (7,774) (249) (3,195) 2,946
Subordinated debentures 3,952 4,106 (154) 31 (4) 35
Total interest expense (9,525) 11,035 (20,560) 15,070 883 14,187
Net interest income $ 32,896 $ 36,358 $ (3,462) $ 6,414 $ 8,888 $ (2,474) * Variances that are the combined effect of volume and rate, but cannot be separately identified, are allocated to the volume and rate variances based on their respective relative amounts.
Interest Income
The Company's total tax-equivalent interest income increased 13% for the first
six months of 2020 compared to the prior year period. During this period, the
yield on interest-earning assets decreased 64 basis points to 4.06%. The
previous tables reflect that the increase in interest income has been driven
predominantly by the 31% growth in average interest-earning assets as a result
of the Revere acquisition and to a lesser extent, the loans associated with the
PPP program. The income growth has occurred despite the overall decline in the
associated interest rates over the previous twelve months driven by concerns
over slowing growth and the impact of the pandemic.
During the first six months of 2020 the average loans outstanding increased 27%
compared to the first six months of 2019. Essentially all the growth in the loan
portfolio occurred due to the 40% increase in all categories of the commercial
loan portfolio, with notable increases in investor real estate loans (44%) and
commercial business loans (77%). Consumer loans remained level and the
residential mortgage portfolio declined 6% during the same time period. The
decrease in average residential mortgages was the direct result of the increased
refinancing activity due to the decline in interest rates coupled with the
continued sale of the majority of new originations. Compared to the prior year,
the yield on average loans decreased 52 basis points. The average yield on total
investment securities decreased 57 basis points as the average balance of the
portfolio increased 30% for the first six months of 2020 compared to the first
six months of 2019. This resulted in 7% growth in interest income from
investment securities. Composition of the average investment portfolio shifted
to 83% in taxable securities in the current period as compared to 77% for the
prior year period. During the same period, the average yield for taxable
securities decreased 59 basis points versus the average yield on tax-exempt
securities, which decreased 34 basis points. The PPP program had a two basis
point negative impact on the yield on interest-earning assets.
47
--------------------------------------------------------------------------------Interest Expense For the first six months of 2020 interest expense decreased$9.5 million or 22% compared to the first six months of 2019. A significant portion of the decrease in interest expense was due to impact of the$5.8 million in the accelerated amortization of the fair value premium from the prepayment of the acquired FHLB advances. The fair value premium amortization on time deposits was responsible for an additional$2.8 million reduction in interest expense for the first six months of 2020. Excluding these items, interest expense decreased 2% compared to the prior year period, driven primarily by the decrease in interest expense on money market accounts as market rates have experienced a decline from the prior year. The cost of interest-bearing deposits, including the fair value amortization on time deposits, declined 50 basis points for the first six months of 2020 compared to the first six months of 2019. The 87 basis point decline in money market rates during this time period, in addition to the fair value amortization on time deposits, were the drivers in the decline in the total average rate paid on interest-bearing deposits. The exclusion of the amortization of the time deposit premium would result in a decline of 39 basis points in the average rate paid on interest-bearing deposits compared to the prior year. The time deposit amortization adjustment benefited the net interest margin by five basis points for the first six months of 2020. The other significant portion of the decrease in interest expense, as previously discussed, was the$5.8 million the accelerated amortization from the prepayment of the acquired FHLB advances. The effect of the accelerated amortization accounts for a further 10 basis point benefit to the net interest margin for the first six months of 2020. The impact of the amortization of the fair value marks was a 25 basis point reduction in the rate paid on interest-bearing liabilities. Non-interest Income Non-interest income amounts and trends are presented in the following table for the periods indicated: Six Months Ended June 30, 2020/2019 2020/2019 (Dollars in thousands) 2020 2019 $ Change % Change Securities gains $ 381 $ 5$ 376 n/m % Service charges on deposit accounts 3,476
4,749 (1,273) (26.8)
Mortgage banking activities 11,459
6,133 5,326 86.8
Wealth management income 14,570
10,775 3,795 35.2
Insurance agency commissions 3,317 3,165 152 4.8
Income from bank owned life insurance 1,454 1,843 (389) (21.1)
Bank card fees 2,577 2,719 (142) (5.2)
Other income 3,858 4,136 (278) (6.7)
Total non-interest income $ 41,092 $ 33,525 $ 7,567 22.6
Total non-interest income increased $7.6 million or 23% for the first six months
of 2020 to $41.1 million . The current period included $0.4 million in securities
gains, while the prior year period included life insurance mortality proceeds of
$0.6 million . Excluding the items, non-interest income increased 24% from the
prior year. This increase was driven primarily by income from mortgage banking
activities, which increased $5.3 million and to a lesser degree, wealth
management income, which increased $3.8 million . These increases more than
offset declines in deposit and bank card fees. Further detail by type of
non-interest income follows:
?Service charges on deposit accounts decreased 27% in the first six months of
2020, compared to the first six months of 2019 due to the decline in consumer
activity and the decision to waive certain transaction fees to ease the burden
on customers.
?Income from mortgage banking activities increased 87% in the first six months
of 2020, compared to the first six months of 2019. Origination volume as a
result of refinancing activity, was responsible for the growth in mortgage
banking income for the first six months of 2020. Sales of originated mortgage
loans rose 94% during the current period compared to the same period for 2019.
?Wealth management income, comprised of income from trust and estate services
and investment management fees earned by the Company's investment management
subsidiaries, increased 35% for the first six months of 2020 compared to the
same period of the prior year. This $3.8 million growth was the direct result of
the acquisition of RPJ on February 1 of the current year. Trust services fees
increased 13% for the first six months of 2020 compared to the prior year period
as a result of post-mortem estate management fees earned in the first quarter of
2020. Overall total assets under management increased to $4.5 billion at June
30, 2020 compared to $3.2 billion at June 30, 2019 , primarily as a result of the
RPJ acquisition.
?Insurance agency commissions increased 5% for the first six months of 2020 as
compared to the first six months of 2019, driven by an increase in contingent
fee income compared to the prior year.
48
--------------------------------------------------------------------------------
?Bank-owned life insurance income decreased 21% for the first six months of 2020
as compared to the first six months of 2019, due primarily to the decline in
insurance mortality proceeds compared to the prior year.
?Bank card fee income declined 5% during the first six months of 2020, compared
to the first six months of 2019, as a result of diminished consumer transaction
volume.
?Other non-interest income decreased by 7% during the first six months of 2020, compared to the first six months of 2019 as a result of a decline in miscellaneous income.
Non-interest Expense
Non-interest expense amounts and trends are presented in the following table for
the periods indicated:
Six Months Ended June 30, 2020/2019 2020/2019
(Dollars in thousands) 2020 2019 $ Change % Change
Salaries and employee benefits $ 62,350 $ 51,465 $ 10,885 21.2 %
Occupancy expense of premises 10,572 9,991 581 5.8
Equipment expense 5,970 5,288 682 12.9
Marketing 1,918 1,830 88 4.8
Outside data services 3,751 3,740 11 0.3
FDIC insurance 1,860 2,220 (360) (16.2)
Amortization of intangible assets 2,598 974 1,624 166.7
Merger and acquisition expense 23,908 - 23,908 n/m
Professional fees and services 3,666 2,879 787 27.3
Other expenses 16,591 9,692 6,899 71.2
Total non-interest expense $ 133,184 $ 88,079 $ 45,105 51.2
Non-interest expense increased 51% to $133.2 million in the first six months of
2020 compared to $88.1 million for first six months of 2019. This $45.1 million
increase resulted from the following primary causes:
?Merger and acquisition expense of
?Increased incentive and merit compensation costs and the incremental operating costs resulting from the acquisitions; and
?Prepayment penalties of
Excluding merger and acquisition expense and the impact of the prepayment penalties from 2020, non-interest expense increased 17% over the prior year period. Further detail by category of non-interest expense follows:
?Salaries and employee benefits, the largest component of non-interest expense, increased 21% or$10.9 million in the first six months of 2020. Regular salaries represented$7.4 million of this increase, which was the result of the initial staffing cost associated with the 2020 acquisitions. The remainder of the increase was the result of incentives as a result of significantly increased mortgage loan production and bonus/overtime compensation earned as part of the implementation of the PPP program. As a result of the acquisitions, the average number of full-time equivalent employees increased to 1,163 in the first six months of 2020 compared to 920 in the first six months of 2019. ?Combined occupancy and equipment expenses increased 8% compared to the prior year as a result of increased cost associated with the additional branches and business offices from Revere.
?Outside data services and marketing expense reflected modest amount increases.
?FDIC insurance experienced a 16% decrease as a result of the additional capital contribution from the Company to the Bank associated with the Company's issuance of subordinated debt late in 2019.
?Amortization of intangible assets increased primarily as a result of the amortization expense from the core deposit intangible asset recognized in the Revere transaction and to a lesser degree, the amortization of intangibles acquired from the RPJ acquisition.
?Professional fees and services grew 27% from the prior year as a result of costs associated with lending activity.
?Other expenses increased$6.8 million , primarily due to the$5.9 million in prepayment penalties incurred in the liquidation of acquired FHLB advances from Revere. The impact of penalties was offset by the accelerated amortization of the fair value marks on these borrowings and is reflected in the net interest income. Income Taxes The Company had an income tax benefit of$5.0 million in the first six months of 2020, compared to income tax expense of$18.3 million in the first six months of 2019 as a result of the impact of operations on pre-tax earnings. The resulting effective tax rates was a benefit rate of 53.7% for the first six months of 2020 compared to a tax rate of 23.8% for the first six months of 2019. The effective tax rate for the six months endedJune 30, 2020 was the result of the impact of the amount of 49
-------------------------------------------------------------------------------- tax-advantaged income in proportion to the net loss before taxes as compared to the prior year period. Additionally, recent changes to tax laws expand the time permitted to utilize previous net operating losses. The Company applied this change to the 2018 acquisition of WashingtonFirst to realize a tax benefit of$1.8 million for the current year.
Operating Expense Performance
Management views the GAAP efficiency ratio as an important financial measure of expense performance and cost management. The ratio expresses the level of non-interest expense as a percentage of total revenue (net interest income plus total non-interest income). Lower ratios indicate improved productivity.
Non-GAAP Financial Measures
The Company also uses a traditional efficiency ratio that is a non-GAAP
financial measure of operating expense control and efficiency of operations.
Management believes that its traditional efficiency ratio better focuses
attention on the operating performance of the Company over time than does a GAAP
efficiency ratio, and is highly useful in comparing period-to-period operating
performance of the Company's core business operations. It is used by management
as part of its assessment of its performance in managing non-interest expense.
However, this measure is supplemental, and is not a substitute for an analysis
of performance based on GAAP measures. The reader is cautioned that the non-GAAP
efficiency ratio used by the Company may not be comparable to GAAP or non-GAAP
efficiency ratios reported by other financial institutions.
In general, the efficiency ratio is non-interest expense as a percentage of net
interest income plus non-interest income. Non-interest expense used in the
calculation of the non-GAAP efficiency ratio excludes merger and acquisition
expense, the amortization of intangibles, and other non-recurring expenses, such
as early prepayment penalties on FHLB advances. Income for the non-GAAP
efficiency ratio includes the favorable effect of tax-exempt income, and
excludes securities gains and losses, which vary widely from period to period
without appreciably affecting operating expenses, and other non-recurring gains
(if any). The measure is different from the GAAP efficiency ratio, which also is
presented in this report. The GAAP measure is calculated using non-interest
expense and income amounts as shown on the face of the Condensed Consolidated
Statements of Income/ (Loss). The GAAP efficiency ratio for the first six months
of 2020 was 64.36% compared to 52.91% for the first six months of 2019, as
non-interest expense increased due to merger and acquisition expense and the
previously mentioned prepayment penalties on FHLB advances. The GAAP and
non-GAAP efficiency ratios are reconciled and provided in the following table.
The non-GAAP efficiency ratio was 48.21% in the first six months of 2020
compared to 51.57% for the first six months of 2019. The improvement in the
current year's non-GAAP efficiency ratio compared to the prior year was the
result of the 24% rate of growth in non-GAAP revenue which outpaced the 16%
growth in the non-GAAP non-interest expense.
In addition, the Company uses pre-tax, pre-provision adjusted for merger
expenses as a measure of the level of recurring income before taxes. Management
believes this provides financial statement users with a useful metric of the
run-rate of revenues and expenses that is readily comparable to other financial
institutions. This measure is calculated by adding the provision for credit
losses, merger and acquisition expense and the provision for income taxes back
to net income. This metric increased by 25% in the first six months of 2020
compared to the first six months of 2019 due primarily to the acquisition driven
increase in net interest income and increases in mortgage banking and wealth
management income which offset the increase in non-interest expense.
50
--------------------------------------------------------------------------------GAAP and Non-GAAP Efficiency Ratios
Six Months Ended June 30,
(Dollars in thousands) 2020 2019
Pre-tax pre-provision pre-merger income:
Net income/ (loss) $ (4,351) $ 58,593
Plus non-GAAP adjustments:
Merger expenses 23,908 -
Income tax expense/ (benefit) (5,048) 18,283
Provision for credit losses 83,155 1,505
Pre-tax pre-provision pre-merger income Efficiency ratio - GAAP basis: Non-interest expense
Net interest income plus non-interest income
Efficiency ratio - GAAP basis 64.36 % 52.91 % Efficiency ratio - Non-GAAP basis: Non-interest expense$ 133,184 $ 88,079 Less non-GAAP adjustments: Amortization of intangible assets 2,598 974 Loss on FHLB redemption 5,928 - Merger expenses 23,908 - Non-interest expense - as adjusted
Net interest income plus non-interest income$ 206,940 $ 166,460 Plus non-GAAP adjustment: Tax-equivalent income 2,433 2,450 Less non-GAAP adjustment: Securities gains 381 5 Net interest income plus non-interest income - as adjusted$ 208,992 $ 168,905 Efficiency ratio - Non-GAAP basis 48.21 % 51.57 % The Company has presented operating earnings, operating earnings per share, operating return on average assets, operating return on average tangible common equity and average tangible common equity to average tangible assets in order to present metrics that are more comparable to prior periods to provide an indication of the core performance of the Company year over year. Operating earnings reflect net income exclusive of the provision for credit losses, merger and acquisition expense and the income and expense associated with the PPP program, in each case net of tax. Weighted-average diluted shares outstanding are adjusted to add back shares, and participating securities, which are excluded from GAAP weighted average diluted shares due to a net loss during the current year. Adjusted average assets represents average assets to exclude PPP loans outstanding. Average tangible stockholders' equity represents average stockholders' equity adjusted for average accumulated other comprehensive income/ (loss), average goodwill, and average intangible assets, net. 51 --------------------------------------------------------------------------------
GAAP and Non-GAAP Performance Ratios
Six Months Ended June 30,
(Dollars in thousands) 2020 2019
Net income/ (loss) (GAAP) $ (4,351) $ 58,593
Plus non-GAAP adjustments:
Provision for credit losses - net of tax 61,992 1,122
Merger and acquisition expense - net of tax 17,823 -
PPLF funding expense - net of tax 368 -
Less non-GAAP adjustment:
PPP interest income and deferred fees - net of
tax 4,483 -
Operating earnings (non-GAAP) $ 71,349 $ 59,715 Weighted-average shares outstanding - diluted (GAAP) 40,826,748
35,865,518
Shares antidilutive due to net loss 504,266 -
Weighted-average shares outstanding - diluted (non-GAAP) 41,331,014
35,865,518
Earnings/ (loss) per diluted share (GAAP)$ (0.11) $
1.63
Operating earnings per diluted share (non-GAAP)
1.66
Average assets (GAAP) $ 10,799,840 $ 8,276,601
Average PPP loans 356,792 -
Adjusted average assets (non-GAAP) $ 10,443,048 $ 8,276,601
Return on average assets (GAAP) (0.08) % 1.43 % Operating return on adjusted average assets (non-GAAP) 1.37 % 1.45 % Average assets (GAAP)$ 10,799,840 $ 8,276,601 Average goodwill (360,549) (347,149)
Average other intangible assets, net (22,074) (9,367)
Average tangible assets (non-GAAP)$ 10,417,217 $
7,920,085
Average total stockholders' equity (GAAP)$ 1,260,298 $ 1,086,256 Average accumulated other comprehensive (income)/ loss (5,528) 11,285 Average goodwill (360,549) (347,149) Average other intangible assets, net (22,074) (9,367) Average tangible common equity (non-GAAP)$ 872,147 $
741,025
Return on average tangible common equity (GAAP) (1.00) %
15.95 % Operating return on average tangible common equity (non-GAAP)
16.45 % 16.25 %
Average tangible common equity to average tangible
assets (non-GAAP) 8.37 % 9.36 %
52
--------------------------------------------------------------------------------
Results of Operations
For the Three Months Ended
For the second quarter of 2020 the Company realized a net loss of$14.3 million ($0.31 per share) compared to net income of$28.3 million ($0.79 per diluted share) for the second quarter of 2019. The loss was the result of the combination of merger and acquisition expense, the impact of the current economic forecast in the determination of the allowance for credit losses and the additional provision for credit losses associated with the acquisition of Revere, which closed onApril 1, 2020 . The current quarter's results included$22.5 million for merger and acquisition expense related to the Revere acquisition. Additionally, earnings for the second quarter were negatively impacted by a$58.7 million provision for credit losses. Of this amount, approximately$33.8 million was related to the change in the current quarter's economic forecast. In addition, as required by GAAP, the initial allowance for credit losses on Revere's acquired non-PCD loans was recognized through the provision for credit losses in the amount of$17.5 million . Comparatively, the provision for credit losses for the first quarter of 2020 was$24.5 million . The Company's participation in the PPP and the associated funding program had a net positive impact of$4.1 million , net of tax, in the current quarter.
For the current quarter, operating earnings on an after-tax basis, which
excludes the impact of merger and acquisition expense, the provision for credit
losses and the effects from the PPP program, were
Net Interest Income Net interest income for the second quarter of 2020, increased 53% to$101.5 million compared to$66.2 million for the second quarter of 2019. On a tax-equivalent basis, net interest income for the second quarter of 2020 was$102.8 million compared to$67.4 million for the second quarter of 2019. The increase in net interest income was the result of the Revere acquisition. Additionally, growth in net interest income benefited from$8.3 million in net amortization of the fair value marks, which resulted in an$8.6 million reduction in interest expense. The majority of the decrease in interest expense was due to the$5.8 million in the accelerated amortization from the prepayment of the acquired FHLB advances. The implementation of the PPP program during the current quarter generated interest income, net of its associated funding cost, of$5.5 million . Overall, year-to-date, interest income increased 32% while interest expense decreased 36%. The net interest margin for the current quarter was 3.47%, compared to the net interest margin for the second quarter of 2019 of 3.54%. Compared to the prior year's quarter, the yield on$11.9 billion of average interest-earning assets declined to 3.92% compared to 4.65% on average interest-earning assets of$7.6 billion for the prior year quarter. Excluding the net$8.3 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin would have been 3.19%. Included in the current quarter is the accelerated amortization of the$5.8 million purchase premium on FHLB advances as a result of the prepayment of those borrowings. The positive effect of the accelerated amortization accounts for approximately 20 basis points in the current quarter's net interest margin. The remaining fair value marks and the impact of the PPP program were responsible for an additional eight basis points. Average interest-earning assets increased by 56% and average interest-bearing liabilities increased by 58% in the second quarter of 2020 compared to the second quarter of 2019. Average noninterest-bearing deposits increased 67% in the second quarter of 2020 as compared to the same quarter of the prior year. The percentage of average noninterest-bearing deposits to total deposits increased to 31% in the current quarter compared to 29% in the second quarter of 2019. The primary cause of these increases was the acquisition of Revere during the quarter and, to a lesser extent, the PPP program and its impact on commercial loans and noninterest-bearing deposits. AtJune 30, 2020 , total average loans comprised 83% of average interest-earning assets with an average yield of 4.32%, as compared to 86% of average interest-earning assets atJune 30, 2019 with an average yield of 4.90%. The average yield on investment securities decreased to 2.54% for the quarter endedJune 30, 2020 , from 3.17% atJune 30, 2019 . The decline in the overall average yield on earnings assets was driven by downward movement of market interest rates. The impact of the decline in the yield on average interest-earning assets was partially mitigated by the 95 basis point decline in the average rate paid on average interest-bearing liabilities as the rate paid decreased from 1.60% for the second quarter of 2019 to 0.65% for the second quarter of 2020. Similarly, the decline in the 71 basis point decline in the average rate paid on interest-bearing deposits was primarily the reduction in rates paid on money market savings deposits. While the general market rate decline also affected time deposit rates, the average rate paid on time deposits declined further as a result of amortization of their fair value mark. Excluding the amortization of all the fair value marks, the average rate paid on total average interest-bearing liabilities was 1.06%. 53 --------------------------------------------------------------------------------
Consolidated Average Balances, Yields and Rates
Three Months Ended June 30,
2020 2019
Annualized Annualized
Average (1) Average Average (1) Average(Dollars in thousands and Balances Interest Yield/Rate
Balances Interest Yield/Rate
tax-equivalent)
Assets:
Residential mortgage loans $ 1,208,566 $ 11,259 3.73 % $ 1,244,086 $ 11,971 3.85 %
Residential construction 162,978 1,691 4.17 174,095 1,873 4.32
loans
Total mortgage loans 1,371,544 12,950 3.78 1,418,181 13,844 3.91
Commercial AD&C loans 969,251 10,886 4.52 686,282 10,268 6.00
Commercial investor real 3,448,882 38,426 4.48 1,960,919 24,357 4.98
estate loans
Commercial owner occupied 1,681,674 19,794 4.73 1,215,632 14,840 4.90
real estate loans
Commercial business loans 1,899,264 19,426 4.11 756,594 10,321 5.47
Total commercial loans 7,999,071 88,532 4.45 4,619,427 59,786 5.19
Consumer loans 575,734 5,341 3.73 505,235 6,335 5.03
Total loans (2) 9,946,349 106,823 4.32 6,542,843 79,965 4.90
Loans held for sale 53,312 405 3.04 37,121 381 4.11
Taxable securities 1,164,490 7,045 2.42 744,701 5,689 3.06
Tax-exempt securities (3) 234,096 1,824 3.12 220,162 1,959 3.56
Total investment 1,398,586 8,869 2.54 964,863 7,648 3.17
securities (4)
Interest-bearing deposits 522,469 155 0.12 73,793 428 2.32
with banks
Federal funds sold 416 - 0.10 620 1 0.60
Total interest-earning 11,921,132 116,252 3.92 7,619,240 88,423 4.65
assets
Less: allowance for credit (118,863) (53,068)
losses
Cash and due from banks 181,991 66,031
Premises and equipment, 60,545 60,871
net
Other assets 858,351 601,809
Total assets $ 12,903,156 $ 8,294,883
Liabilities and
Stockholders' Equity:
Interest-bearing demand $ 1,067,487 457 0.17 % $ 747,343 460 0.25 %
deposits
Regular savings deposits 367,191 73 0.08 332,796 118 0.14
Money market savings 2,890,842 3,396 0.47 1,690,413 6,589 1.56
deposits
Time deposits 2,281,434 8,358 1.47 1,680,055 8,979 2.14
Total interest-bearing 6,606,954 12,284 0.75 4,450,607 16,146 1.46
deposits
Other borrowings 713,965 600 0.34 157,499 290 0.74
Advances from FHLB 775,767 (2,123) (1.08) 623,727 4,103 2.64
Subordinated debentures 230,223 2,652 4.61 37,376 490 5.25
Total borrowings 1,719,955 1,129 0.27 818,602 4,883 2.39
Total interest-bearing 8,326,909 13,413 0.65 5,269,209 21,029 1.60
liabilities
Noninterest-bearing demand 3,007,222 1,796,802
deposits
Other liabilities 178,481 129,794 Stockholders' equity 1,390,544 1,099,078 Total liabilities and$ 12,903,156 $ 8,294,883
stockholders' equity
Net interest income and 102,839 3.27 % 67,394 3.05 % spread Less: tax-equivalent 1,325 1,209 adjustment Net interest income$ 101,514 $ 66,185 Interest income/earning 3.92 % 4.65 %
assets
Interest expense/earning 0.45 1.11 assets Net interest margin 3.47 % 3.54 %
(1) Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.45% for both 2020 and 2019. The
annualized taxable-equivalent
adjustments utilized in the above table to compute yields aggregated to
54
--------------------------------------------------------------------------------
Interest Income
The Company's total tax-equivalent interest income increased 31% for the second quarter of 2020 compared to the prior year quarter. The previous table reflects the growth in average interest-earning assets over the prior year quarter as average loans grew 52% and average investment securities grew 45%. Increases occurred in most categories of interest-earning assets from the Revere acquisition and, to a lesser extent, the PPP program. Mortgage loans decreased as a result of rate driven refinance and new loan origination activity and the continued sale of the majority of new mortgage loan production. The significant growth in the average balance in interest-bearing deposits with banks was the result of the loan funding under the PPP program being placed into customer deposit accounts at the Bank. The average yield on interest-earning assets declined to 3.92% for the current quarter compared to 4.65% for the same period of the prior year. The average yields on loans and investment securities for the current quarter decreased by 58 and 63 basis points, respectively, compared to the prior year quarter as market rates declined during the period. The PPP program and amortization of the fair value premiums negatively impacted the current quarter's yield on average loans by 7 and 1 basis point(s), respectively. The decrease in the yield on investments was driven by the decline in yields during the year and as proceeds from maturities and calls were reinvested in securities at the lower available rates. The combined decrease in the yield on loans and the investment portfolio resulted in the 73 basis point decline in the yield on interest-earning assets from period to period. Excluding the PPP program and the amortization of the fair value marks, the yield on interest-earning assets would have been 3.96% Interest Expense Interest expense decreased 36% in the second quarter of 2020 compared to the second quarter of 2019. The decrease from period to period was attributable to two major factors, the decline in general market rates that occurred over the previous twelve months and the impact of the amortization of the acquisition fair value marks. The main driver in the 71 basis point decline in the average rate paid on interest-bearing deposits were the notable decreases in the rates paid on money market savings and time deposits. The remaining decline in the average rate paid on deposits was due to the$2.8 million in amortization of fair value marks on time deposits for the current quarter. The other significant driver in the decline in interest expense was the impact of the accelerated amortization of the$5.8 million purchase premium on the acquired FHLB advances as a result of the prepayment of those advances. Excluding the accelerated amortization, the average rate paid on borrowings would have been 1.62%. The combined impact of the general decline in market rates and amortization of fair value marks resulted in the 0.65% average rate paid on interest-bearing liabilities for the current quarter compared to 1.60% for the same period of the prior year. The average rate paid also benefited from the low funding cost of the PPP program and from the growth in noninterest-bearing deposits that grew to 31% of deposits in the current quarter compared to 28% in the prior year's second quarter. The average rate paid on interest-bearing liabilities for the current quarter, after excluding the fair value amortization would have been 1.06%. Non-interest Income Non-interest income amounts and trends are presented in the following table for the periods indicated: Three Months Ended June 30, 2020/2019 2020/2019 (Dollars in thousands) 2020 2019 $ Change % Change Securities gains $ 212 $ 5$ 207 n/m % Service charges on deposit accounts 1,223
2,442 (1,219) (49.9)
Mortgage banking activities 8,426
3,270 5,156 157.7
Wealth management income 7,604
5,539 2,065 37.3
Insurance agency commissions 1,188
1,265 (77) (6.1)
Income from bank owned life insurance 809 654 155 23.7
Bank card fees 1,257 1,467 (210) (14.3)
Other income 2,205 1,914 291 15.2
Total non-interest income $ 22,924 $ 16,556 $ 6,368 38.5
Total non-interest income increased 38% to $22.9 million for the second quarter
of 2020 compared to $16.6 million for the second quarter of 2019. Excluding
securities gains, the increase from the prior year quarter to the current year
quarter was 37%. This $6.4 million increase was driven predominantly by the $5.2
million increase in income from mortgage banking activities and, to a lesser
extent, the $2.1 million increase in wealth management income. These increases
more than offset the decline in consumer based fees during the period. Further
detail by type of non-interest income follows:
55
--------------------------------------------------------------------------------?Service charges on deposit accounts decreased 50% in the second quarter of 2020, compared to the second quarter of 2019, as the Company, in an effort to lessen the financial burden of the pandemic on clients, elected to waive or eliminate fees associated with deposit account activities.
?Income from mortgage banking activities increased by$5.2 million or 158% in the second quarter of 2020 as compared to the second quarter of 2019. The increased income from mortgage banking activities was attributable to the increased origination volume during the period as a result of refinancing activity. The Company sells the majority of its mortgage loan production for gains versus retaining them in the loan portfolio. ?Wealth management income increased 37% for the second quarter of 2020, as compared to the second quarter of 2019. This increase reflects the full quarter impact of the acquisition of RPJ which was acquired inFebruary 2020 . Overall total assets under management increased to$4.5 billion atJune 30, 2020 compared to$3.2 billion atJune 30, 2019 . ?Income from bank owned life insurance increased by 24% or$0.2 million in the second quarter of 2020, compared to the second quarter of 2019, as a result of the additional policies from the Revere acquisition.
?Bank card income decreased 14% in the second quarter of 2020, compared to the second quarter of 2019 due to a decline in consumer transaction volume.
?Other non-interest income increased 15% in the second quarter of 2020, compared to the second quarter of 2019 as a result of increased fee income.
Non-interest Expense
Non-interest expense amounts and trends are presented in the following table for
the periods indicated:
Three Months Ended June 30, 2020/2019 2020/2019
(Dollars in thousands) 2020 2019 $ Change % Change
Salaries and employee benefits $ 34,297 $ 25,489 $ 8,808 34.6 %
Occupancy expense of premises 5,991 4,760 1,231 25.9
Equipment expense 3,219 2,712 507 18.7
Marketing 729 887 (158) (17.8)
Outside data services 2,169 1,962 207 10.6
FDIC insurance 1,378 1,084 294 27.1
Amortization of intangible assets 1,998 483 1,515 313.7
Merger and acquisition expense 22,454 - 22,454 n/m
Professional fees and services 1,840 1,634 206 12.6
Other expenses 11,363 4,876 6,487 133.0
Total non-interest expense $ 85,438 $ 43,887 $ 41,551 94.7
Non-interest expense totaled $85.4 million in the second quarter of 2020
compared to $43.9 million in the second quarter of 2019, a 95% increase. Merger
and acquisition expense accounted for $22.5 million of the growth of
non-interest expense. The non-interest expense growth also included $5.9 million
in prepayment penalties from the liquidation of the acquired FHLB advances.
These prepayment penalties offset the impact of the accelerated amortization
noted previously in the discussion on net interest income. Excluding the impact
of these non-core expenses, the year-over-year growth rate would have been 27%.
Further detail by category of non-interest expense follows:
?Salaries and employee benefits, the largest component of non-interest expenses,
increased 35% in the second quarter of 2020 compared to the same period of the
prior year as a result of the additional initial staffing cost in salary and
benefits associated with the 2020 acquisitions. The remainder of the increase
was due to incentives resulting from significantly increased mortgage loan
production and bonus/overtime compensation earned as part of the implementation
of the PPP program. The average number of full-time equivalent employees rose to
1,159 in the second quarter of 2020 compared to 912 in the second quarter of
2019.
?Occupancy and equipment expenses for the quarter increased 23% compared to the prior year quarter as a result of the cost associated with the additional branches and business offices.
?Marketing expense decreased 18% as a result of decreased advertising initiatives.
?
?Outside data service expense grew 11% driven by transaction-based services offered by the Bank.
?Professional fees and services increased 13% from the prior year quarter due to increased costs associated with credit management.
56
--------------------------------------------------------------------------------?Amortization of intangible assets increased primarily as a result of the amortization expense from the core deposit intangible asset recognized in the Revere transaction and to a lesser degree, the amortization of intangibles acquired from the RPJ acquisition.
?Other expenses increased by$6.5 million , primarily due to the$5.9 million in prepayment penalties incurred in the liquidation of acquired FHLB advances from Revere. The impact of penalties was offset by the accelerated amortization of the fair value marks on these advances and is reflected in the net interest income. Income Taxes The Company had income tax benefit of$5.3 million in the second quarter of 2020, compared to income tax expense of$8.9 million in the second quarter of 2019. The resulting effective tax benefit rate was 27.2% for the second quarter of 2020 compared to an effective tax rate of 24.0% for the second quarter of 2019. Operating Expense Performance Management views the GAAP efficiency ratio as an important financial measure of expense performance and cost management. The ratio expresses the level of non-interest expense as a percentage of total revenue (net interest income plus total non-interest income). Lower ratios may indicate improved productivity as the growth rate in revenue streams exceeds the growth in operating expenses. Non-GAAP Financial Measures The Company also uses a traditional efficiency ratio that is a non-GAAP financial measure of operating expense control and efficiency of operations. Management believes that its traditional efficiency ratio better focuses attention on the operating performance of the Company over time than does a GAAP efficiency ratio, and is highly useful in comparing period-to-period operating performance of the Company's core business operations. It is used by management as part of its assessment of its performance in managing non-interest expenses. However, this measure is supplemental, and is not a substitute for an analysis of performance based on GAAP measures. The reader is cautioned that the non-GAAP efficiency ratio used by the Company may not be comparable to GAAP or non-GAAP efficiency ratios reported by other financial institutions. In general, the efficiency ratio is non-interest expenses as a percentage of net interest income plus non-interest income. Non-interest expenses used in the calculation of the non-GAAP efficiency ratio exclude merger and acquisition expense, the amortization of intangibles, and other non-recurring expenses, such as early prepayment penalties on FHLB advances. Income for the non-GAAP efficiency ratio includes the favorable effect of tax-exempt income, and excludes securities gains and losses, which vary widely from period to period without appreciably affecting operating expenses, and other non-recurring gains (if any). The measure is different from the GAAP efficiency ratio, which also is presented in this report. The GAAP measure is calculated using non-interest expense and income amounts as shown on the face of the Condensed Consolidated Statements of Income/ (Loss). The GAAP efficiency ratio in the second quarter of 2020 was 68.66% compared to 53.04% for the second quarter of 2019, as non-interest expense increased due to merger and acquisition expense and the previously mentioned prepayment penalties on FHLB advances. The GAAP and non-GAAP efficiency ratios are reconciled and provided in the following table. The non-GAAP efficiency ratio was 43.85% in the second quarter of 2020 compared to 51.71% in the second quarter of 2019. The improvement in the current year's non-GAAP efficiency ratio compared to the prior year, was the result of the 50% rate of growth in non-GAAP revenue which outpaced the 27% growth in the non-GAAP non-interest expense. In addition to efficiency ratios, the Company uses pre-tax, pre-provision income, excluding merger and acquisition expense, as a measure of the level of recurring income before taxes. Management believes this provides financial statement users with a useful metric of the run-rate of revenues and expenses which is readily comparable to other financial institutions. This measure is calculated by adding the provision for credit losses, merger and acquisition expense and the provision for income taxes back to net income. This metric increased for the second quarter of 2020 compared to the second quarter of 2019 due to the growth in net revenues that significantly exceeded the growth in non-interest expense, excluding merger and acquisition expense. 57
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GAAP and Non-GAAP Efficiency Ratios
Three Months Ended June 30,
(Dollars in thousands) 2020 2019
Pre-tax pre-provision pre-merger income:
Net income/ (loss) Plus non-GAAP adjustments:
Merger and acquisition expenses 22,454 -
Income tax expense/ (benefit) (5,348) 8,945
Provision for credit losses 58,686 1,633
Pre-tax pre-provision pre-merger income Efficiency ratio - GAAP basis: Non-interest expense
Net interest income plus non-interest income
Efficiency ratio - GAAP basis 68.66 % 53.04 % Efficiency ratio - Non-GAAP basis: Non-interest expense$ 85,438 $ 43,887 Less non-GAAP adjustments: Amortization of intangible assets 1,998 483 Loss on FHLB redemption 5,928 - Merger and acquisition expenses 22,454 - Non-interest expense - as adjusted
Net interest income plus non-interest income
Plus non-GAAP adjustment:
Tax-equivalent income 1,325 1,209
Less non-GAAP adjustment:
Securities gains 212 5
Net interest income plus non-interest income - as adjusted
Efficiency ratio - Non-GAAP basis
43.85 % 51.71 %
The Company has presented operating earnings, operating earnings per share,
operating return on average assets, operating return on average tangible common
equity and average tangible common equity to average tangible assets in order to
present metrics that are more comparable to prior periods to provide an
indication of the core performance of the Company period over period. Operating
earnings reflects net income exclusive of the provision for credit losses,
merger and acquisition expense and the income and expense associated with the
PPP program, in each case net of tax. Weighted-average diluted shares
outstanding are adjusted to add back shares, and participating securities, which
are excluded from GAAP weighted average diluted shares due to a net loss during
the current year. Adjusted average assets represents average assets to exclude
PPP loans outstanding. Average tangible stockholders' equity represents average
stockholders' equity adjusted for average accumulated other comprehensive
income/ (loss), average goodwill, and average intangible assets, net.
58
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GAAP and Non-GAAP Performance Ratios
Three Months Ended June 30,
(Dollars in thousands) 2020 2019
Net income/ (loss) (GAAP) $ (14,338) $ 28,276
Plus non-GAAP adjustments:
Provision for credit losses - net of tax 43,750 1,217
Merger and acquisition expense - net of tax 16,739 -
PPLF funding expense - net of tax 368 -
Less non-GAAP adjustment:
PPP interest income and deferred fees - net of
tax 4,483 -
Operating earnings (non-GAAP) $ 42,036 $ 29,493 Weighted-average shares outstanding - diluted (GAAP) 46,988,351
35,890,437
Shares antidilutive due to net loss 539,473 -
Weighted-average shares outstanding - diluted
(non-GAAP) 47,527,824 35,890,437
Earnings/ (loss) per diluted share (GAAP)$ (0.31) $ 0.79 Operating earnings per diluted share (non-GAAP) $ 0.88$ 0.82 Average assets (GAAP)$ 12,903,156 $ 8,294,883 Average PPP loans 713,584 - Adjusted average assets (non-GAAP)$ 12,189,572
Return on average assets (GAAP) (0.45) % 1.37 % Operating return on adjusted average assets (non-GAAP) 1.39 % 1.43 % Average assets (GAAP)$ 12,903,156 $ 8,294,883 Average goodwill (355,054) (347,149)
Average other intangible assets, net (32,337) (9,123)
Average tangible assets (non-GAAP)$ 12,515,765
Average total stockholders' equity (GAAP)$ 1,390,544 $ 1,099,078 Average accumulated other comprehensive (income)/ loss (8,722) 8,244 Average goodwill (355,054) (347,149) Average other intangible assets, net (32,337) (9,123) Average tangible common equity (non-GAAP)$ 994,431
Return on average tangible common equity (GAAP) (5.80) %
15.10 % Operating return on average tangible common equity (non-GAAP)
17.00 % 15.75 %
Average tangible common equity to average tangible
assets (non-GAAP) 7.95 % 9.46 %
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FINANCIAL CONDITION
The Company's total assets grew to$13.3 billion or by 54% atJune 30, 2020 , as compared to$8.6 billion atDecember 31, 2019 , primarily as a result of the acquisition of Revere during the current quarter. The Company's participation in the PPP program contributed$1.1 billion to the overall$4.7 billion asset growth from the previous year end. Exclusive of PPP program, total asset growth was 42%. During this period, total loans grew by 54% to$10.3 billion atJune 30, 2020 , compared to$6.7 billion atDecember 31, 2019 . The Revere acquisition resulted in$2.5 billion of the total loan growth during the period. Deposit growth, primarily from the Revere acquisition, was 56% fromDecember 31, 2019 toJune 30, 2020 , as noninterest-bearing deposits experienced growth of 81% and interest-bearing deposits grew 46%. Additionally, the deposit growth was positively affected by the influx of funds from the PPP program as loan funds were placed in existing deposit accounts at the Bank. The growth in deposits resulted in the loan to deposit ratio improving to 102.64% atJune 30, 2020 from 104.11% atDecember 31, 2019 . Loans Excluding PPP loans, total loans grew 39% to$9.3 billion atJune 30, 2020 . Commercial loans, excluding PPP loans, grew 49% or$2.4 billion . The remainder of the loan portfolio grew 10% as the residential real estate portfolio grew 7% and the consumer loan portfolio grew 20%. The majority of the growth, exclusive of the PPP program, was driven by the acquisition of Revere. Organic consumer loans and residential real estate loans experienced 7% and 2% declines, respectively, as borrowers reduced their outstanding loans through the refinancing of their mortgage loans and paying off any associated home equity borrowings. Analysis of Loans A comparison of the loan portfolio at the dates indicated is presented in the following table: June 30, 2020 December 31, 2019 Period-to-Period Change (Dollars in thousands) Amount % Amount % Amount % Residential real estate: Residential mortgage$ 1,211,745 11.7 %$ 1,149,327 17.1 %$ 62,418 5.4 % Residential construction 169,050 1.6 146,279 2.2 22,771 15.6
Commercial real estate:
Commercial owner occupied
real estate 1,601,803 15.5 1,288,677 19.2 313,126 24.3
Commercial investor real
estate 3,581,778 34.6 2,169,156 32.4 1,412,622 65.1 Commercial AD&C 997,423 9.6 684,010 10.2 313,413 45.8 Commercial business 2,222,810 21.5 801,019 11.9 1,421,791 177.5 Consumer 558,434 5.5 466,764 7.0 91,670 19.6 Total loans$ 10,343,043 100.0 %$ 6,705,232 100.0 %$ 3,637,811 54.3
The following table presents the impact of the acquired Revere loan portfolio on
the Company's existing loan portfolio, by loan segment as of
June 30, 2020
Originated Revere Acquired Total
(In thousands) Loans Loans (1) Loans
Residential real estate:
Residential mortgage $ 1,117,308 $ 94,437 $ 1,211,745
Residential construction 158,451 10,599 169,050
Commercial real estate:
Commercial owner occupied real estate 1,177,640 424,163 1,601,803
Commercial investor real estate 2,452,400 1,129,378 3,581,778
Commercial acquisition, development and
construction 685,264 312,159 997,423
Commercial Business 1,838,003 384,807 2,222,810
Consumer 436,248 122,186 558,434
Total loans $ 7,865,314 $ 2,477,729 $ 10,343,043
(1) Revere acquired loans included $942.5
million of loans classified as PCD.
60
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The following table discloses the impact of deferrals granted under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") on the loan portfolio by portfolio segment:
June 30, 2020
Loans with a % of Total
Deferral Granted Other Outstanding Loans Total Loans Loans with
(Dollars in thousands) Balance % Balance % Balance a Deferral
Residential real estate:
Residential mortgage
Residential construction 4,699 0.3 164,351 1.8 169,050 2.8 Commercial real estate: Commercial owner-occupied real estate 262,884 18.0 1,338,919 15.1 1,601,803 16.4
Commercial investor real
estate 928,277 63.5 2,653,501 29.9 3,581,778 25.9 Commercial AD&C 50,175 3.4 947,248 10.7 997,423 5.0 Commercial business 126,666 8.7 2,096,144 23.6 2,222,810 5.7 Consumer 12,543 0.9 545,891 6.1 558,434 2.2 Total loans$ 1,461,745 $ 8,881,298 $ 10,343,043 14.1 The following table discloses the impact of deferrals granted and PPP loans issued under the CARES Act on the commercial loan portfolio by selected industry segment: June 30, 2020 Loans with a Other Outstanding (In thousands) Deferral Granted PPP Loans Loans Total Loans CRE Investment - Retail $ 322,359$ 759 $ 743,187 $ 1,066,305 CRE Investment - Office 90,120 318 612,024 702,462 CRE Investment - Multifamily 105,489 3,998 364,768 474,255 Hotels 253,611 8,477 128,009 390,097 Restaurants 31,087 73,238 122,186 226,511 All other industries 565,336 996,749 3,982,099 5,544,184 Total Commercial Loans$ 1,368,002 $ 1,083,539 $ 5,952,273 $ 8,403,814
Analysis of
The composition of investment securities at the periods indicated is presented
in the following table:
June 30, 2020 December 31, 2019 Period-to-Period Change
(Dollars in thousands) Amount % Amount % Amount %
Investments
available-for-sale:
U.S. treasuries and
government agencies $ 168,072 11.8 % $ 258,495 23.0 % $ (90,423) (35.0) %
State and municipal 297,580 20.9 233,649 20.8 63,931 27.4
Mortgage-backed and
asset-backed 877,955 61.6 570,759 50.7 307,196 53.8
Corporate debt 12,192 0.9 9,552 0.8 2,640 27.6
Trust preferred - - 310 - (310) (100.0)
Marketable equity
securities - - 568 0.1 (568) (100.0)
Total
available-for-sale
securities 1,355,799 95.2 1,073,333 95.4 282,466 26.3
Other equity securities:
Other equity securities 68,853 4.8 51,803 4.6 17,050 32.9
Total other equity
securities 68,853 4.8 51,803 4.6 17,050 32.9
Total securities $ 1,424,652 100.0 % $ 1,125,136 100.0 % $ 299,516 26.6
The investment portfolio consists primarily of U.S. Treasuries, U.S. Agency
securities, U.S. Agency mortgage-backed securities, U.S. Agency collateralized
mortgage obligations, asset-backed securities and state and municipal
securities. The portfolio is monitored on a continuing basis with consideration
given to interest rate trends and the structure of the yield
61
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curve and with a frequent assessment of economic projections and analysis. At
June 30, 2020 , 98% of the investment portfolio was invested in Aaa/AAA or
Aa/AA-rated securities. The composition and size of the portfolio at June 30,
2020 shifted from U.S. Treasuries and U.S. government Agencies to
mortgage-backed and municipal securities compared to the prior year-end to take
advantage of investment spreads that occurred late in the first quarter as a
result of the interest rate dislocation in the markets. The duration of the
portfolio is monitored to ensure the adequacy and ability to meet liquidity
demands. At June 30, 2020 the duration of the portfolio was 3.6 years compared
to 3.5 years at December 31, 2019 . The portfolio possesses low credit risk that
could provide the liquidity necessary to meet loan and operational demands.
Other Earning Assets
Residential mortgage loans held for sale increased to$69 million atJune 30, 2020 , compared to$54 million atDecember 31, 2019 as a result of the increased volume of loan originations during the period and the decision to continue to sell the majority of the Company's mortgage loan production. The aggregate of interest-bearing deposits with banks and federal funds sold increased by$547 million atJune 30, 2020 compared toDecember 31, 2019 primarily as a result of funding from the PPP program that was placed into customer deposit accounts at the Bank combined with the modest commercial and consumer line drawdowns. The Company has maintained this higher liquidity position in light of the economic uncertainty driven by the COVID-19 pandemic.
Deposits
The composition of deposits at the periods indicated is presented in the
following table:
June 30, 2020 December 31, 2019 Period-to-Period Change
(Dollars in thousands) Amount % Amount % Amount %
Noninterest-bearing deposits $ 3,434,038 34.1 % $ 1,892,052 29.4 % $ 1,541,986 81.5 %
Interest-bearing deposits:
Demand 1,142,475 11.3 836,433 13.0 306,042 36.6
Money market savings 2,945,990 29.2 1,839,593 28.5 1,106,397 60.1
Regular savings 387,636 3.8 329,919 5.1 57,717 17.5Time deposits of less than
$100,000 585,539 5.8 463,431 7.2 122,108 26.3
Time deposits of
more 1,581,156 15.8 1,078,891 16.8 502,265 46.6
Total interest-bearing
deposits 6,642,796 65.9 4,548,267 70.6 2,094,529 46.1
Total deposits $ 10,076,834 100.0 % $ 6,440,319 100.0 % $ 3,636,515 56.5
Deposits and Borrowings
Total deposits increased by 56% to $10.1 billion at June 30, 2020 from $6.4
billion at December 31, 2019 . This acquisition driven increase resulted in
noninterest-bearing deposits increasing 81% and interest-bearing deposits
increasing 46%. A portion of the deposit growth is the result of the funds from
the PPP program as loan funds were placed in deposit accounts at the Bank until
utilized by the respective borrowers. At June 30, 2020 , interest-bearing
deposits represented 66% of deposits with the remaining 34% in
noninterest-bearing balances, compared to 71% and 29%, respectively, at December
31, 2019 . The mix of interest-bearing deposits remained relatively stable at
June 30, 2020 compared December 31, 2019 . Total borrowings increased 78% at June
30, 2020 compared to December 31, 2019 , as a direct result of the funds borrowed
under the PPPLF to fund the underlying PPP loans, in addition to $31 million of
Revere's debt as part of the acquisition.
Capital Management
Management monitors historical and projected earnings, dividends, and asset growth, as well as risks associated with the various types of on and off-balance sheet assets and liabilities, in order to determine appropriate capital levels. Total stockholders' equity was$1.4 billion atJune 30, 2020 compared to$1.1 billion December 31, 2019 . This increase in equity occurred due to the acquisition of Revere which resulted in the issuance of 12.8 million shares of common stock valued at$289 million . Prior to the acquisition of Revere, the Company repurchased$25.7 million of common stock during the current year. The ratio of average equity to average assets was 11.67% for the six months endedJune 30, 2020 , as compared to 13.12% for the first six months of 2019. 62 --------------------------------------------------------------------------------
Risk-Based Capital Ratios
Bank holding companies and banks are required to maintain capital ratios in accordance with guidelines adopted by the federal bank regulators. These guidelines are commonly known as risk-based capital guidelines. The actual regulatory ratios and required ratios for capital adequacy are summarized for the Company in the following table.
Minimum
Ratios at Regulatory
June 30, 2020 December 31, 2019 Requirements
Total capital to risk-weighted assets 13.79% 14.85% 8.00%
Tier 1 capital to risk-weighted assets 10.23% 11.21%
6.00%
Common equity tier 1 capital 10.23% 11.06% 4.50% Tier 1 leverage 8.35% 9.70% 4.00% As ofJune 30, 2020 , the most recent notification from the Bank's primary regulator categorized the Bank as a "well-capitalized" institution under the prompt corrective action rules of the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations is not a recommendation or endorsement of the Company or the Bank by federal bank regulators. The minimum capital level requirements applicable to the Company and the Bank are: (1) a common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6%; (3) a total capital ratio of 8%; and (4) a Tier 1 leverage ratio of 4%. The rules also establish a "capital conservation buffer" of 2.5% above the regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. The main driver of the decline in the ratios atJune 30, 2020 fromDecember 31, 2019 was the impact that the Revere transaction had on total risk-based assets. Other contributors to the decline are the negative effects of diminished earnings as a result of the provision for credit losses and merger and acquisition expense, and the impact of the previously mentioned stock repurchase program. During the year, the Company elected to apply the provisions of the CECL deferral transition in the determination of its risk based capital ratios. AtJune 30, 2020 , the impact of the application of this deferral transition provided an additional$21.7 million in Tier 1 capital and resulted in raising the common equity tier 1 ratio by 22 basis points.
Tangible Common Equity
Tangible common equity, tangible assets and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity excludes the balances of goodwill, other intangible assets and accumulated other comprehensive income/ (loss) from total stockholders' equity. Tangible assets excludes the balances of goodwill and other intangible assets. Management believes that this non-GAAP financial measure provides information to investors that may be useful in understanding our financial condition. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. Tangible common equity totaled$968.6 million atJune 30, 2020 , compared to$782.3 million atDecember 31, 2019 . AtJune 30, 2020 , the ratio of tangible common equity to tangible assets has decreased to 7.52% compared to 9.46% atDecember 31, 2019 . The decrease in tangible common equity was caused primarily by the growth of total assets due to the acquisition of Revere as tangible assets grew at 56% versus the 24% in tangible common equity. Secondary causes of the decline in the ratio were the repurchase of$25.7 million in common stock in the current year and the addition of$34.9 million in goodwill and intangibles from the Revere and RPJ acquisitions during 2020. Excluding the PPP loans from tangible assets, the ratio of tangible common equity to tangible assets was 8.19%. 63
-------------------------------------------------------------------------------- A reconciliation of total stockholders' equity to tangible common equity and total assets to tangible assets along with tangible book value per share, book value per share and related non-GAAP tangible common equity ratio are provided in the following table:
Tangible Common Equity Ratio - Non-GAAP
(Dollars in thousands, except per share data) June 30, 2020 December 31, 2019 Tangible common equity ratio: Total stockholders' equity$ 1,390,093
Accumulated other comprehensive income/ (loss) (14,824) 4,332 Goodwill (370,547)
(347,149)
Other intangible assets, net (36,143) (7,841) Tangible common equity$ 968,579 $ 782,316 Total assets$ 13,290,447 $ 8,629,002 Goodwill (370,547) (347,149) Other intangible assets, net (36,143)
(7,841)
Tangible assets$ 12,883,757
Tangible common equity ratio 7.52 % 9.46 % Outstanding common shares 47,001,022 34,970,370 Tangible book value per share$ 20.61 $ 22.37 Book value per share$ 29.58 $ 32.40 Credit Risk The fundamental lending business of the Company is based on understanding, measuring and controlling the credit risk inherent in the loan portfolio. The Company's loan portfolio is subject to varying degrees of credit risk. Credit risk entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers. The Company's credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry or collateral type. Typically, each consumer and residential lending product has a generally predictable level of credit losses based on historical loss experience. Residential mortgage and home equity loans and lines generally have the lowest credit loss experience. Loans secured by personal property, such as auto loans, generally experience medium credit losses. Unsecured loan products, such as personal revolving credit, have the highest credit loss experience and, for that reason, the Company has chosen not to engage in a significant amount of this type of lending. Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions. Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements. Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates that may occur during improved economic times. Inconsistent economic conditions may have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations. Loans acquired as a part of an acquisition transaction with evidence of more-than-insignificant credit deterioration since their origination as of the date of the acquisition ("purchased credit deteriorated" or "PCD" loans) are recorded at their initial fair values. The identification of loans that have experienced a more-than-insignificant deterioration in credit quality since their origination requires a judgment and assessment of a number of factors. For further discussion regarding the acquired loans, including PCD loans, refer to that section of Note 1-Significant Accounting Policies. To control and manage credit risk, management has a credit process in place to reasonably ensure that credit standards are maintained along with an in-house loan administration accompanied by oversight and review procedures. The primary purpose of loan underwriting is the evaluation of specific lending risks and involves the analysis of the borrower's ability to service the debt as well as the assessment of the value of the underlying collateral. Oversight and review procedures include the monitoring of portfolio credit quality, early identification of potential problem credits and the proactive management of problem credits. 64
-------------------------------------------------------------------------------- The Company recognizes a lending relationship as non-performing when either the loan becomes 90 days delinquent or as a result of factors (such as bankruptcy, interruption of cash flows, etc.) considered at the monthly credit committee meeting. Classification as a non-accrual loan is based on a determination that the Company may not collect all principal and/or interest payments according to contractual terms. When a loan is placed on non-accrual status all accrued but unpaid interest is reversed from interest income. Typically, all payments received on non-accrual loans are first applied to the remaining principal balance of the loans. Any additional recoveries are credited to the allowance up to the amount of all previous charge-offs. The level of non-performing loans to total loans was 0.77% atJune 30, 2020 , compared to 0.80% atMarch 31, 2020 and 0.62% atDecember 31, 2019 . AtJune 30, 2020 , non-performing loans totaled$79.9 million , compared to$54.0 million atMarch 31, 2020 , and$41.3 million atDecember 31, 2019 . Non-performing loans include accruing loans 90 days or more past due and restructured loans. The growth in non-performing loans was driven by three major components: loans placed in non-accrual status, acquired Revere non-accrual loans, and loans previously accounted for as purchased credit impaired loans that have been designated as non-accrual loans as a result of the Company's adoption of the accounting standard for expected credit losses at the beginning of the year. Loans placed on non-accrual during the year amounted to$29.7 million compared to$9.6 million for the prior year. Acquired Revere non-accrual loans were$11.3 million . Excluding the impact of the acquisition of Revere, the current year's growth in non-accrual loans was primarily the result of three large relationships. While the diversification of the lending portfolio among different commercial, residential and consumer product lines along with different market conditions of the D.C. suburbs,Northern Virginia andBaltimore metropolitan area has mitigated some of the risks in the portfolio, local economic conditions and levels of non-performing loans may continue to be influenced by the conditions being experienced in various business sectors of the economy on both a regional and national level. As noted, risks, uncertainties and various other factors related to the COVID-19 pandemic includes the impact on the economy and the businesses of our borrowers and their ability to remit contractual payments on their obligations to the Company in a timely manner. The current ability to predict the outcome or impact of the remedial actions and stimulus measures adopted by the government on the economic well-being of our borrowers and the manifestations of all these factors including the future performance aspect of the credit portfolio remains uncertain. The Company's methodology for evaluating whether a loan shall be placed on non-accrual status begins with risk-rating credits on an individual basis and includes consideration of the borrower's overall financial condition, payment record and available cash resources that may include the sufficiency of collateral value and, in a select few cases, verifiable support from financial guarantors. In measuring a specific allowance, the Company looks primarily to the value of the collateral (adjusted for estimated costs to sell) or projected cash flows generated by the operation of the collateral as the primary sources of repayment of the loan. The Company may consider the existence of guarantees and the financial strength and wherewithal of the guarantors involved in any loan relationship. Guarantees may be considered as a source of repayment based on the guarantor's financial condition and payment capacity. Accordingly, absent a verifiable payment capacity, a guarantee alone would not be sufficient to avoid classifying the loan as non-accrual.
Management has established a credit process that dictates that structured procedures be performed to monitor these loans between the receipt of an original appraisal and the updated appraisal. These procedures include the following:
?An internal evaluation is updated periodically to include borrower financial statements and/or cash flow projections.
?The borrower may be contacted for a meeting to discuss an updated or revised action plan which may include a request for additional collateral.
?Re-verification of the documentation supporting the Company's position with respect to the collateral securing the loan.
?At the monthly credit committee meeting the loan may be downgraded and a specific allowance may be decided upon in advance of the receipt of the appraisal.
?Upon receipt of the updated appraisal (or based on an updated internal financial evaluation) the loan balance is compared to the appraisal and a specific allowance is decided upon for the particular loan, typically for the amount of the difference between the appraised value (adjusted for estimated costs to sell) and the loan balance.
?Evaluation of whether adverse changes in the value of the collateral are expected over the remainder of the loan's expected life.
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?The Company will individually assess the allowance for credit losses based on
the fair value of the collateral for any collateral dependent loans where
borrower is experiencing financial difficulty or when the Company determines
that the foreclosure is probable. The Company will charge-off the excess of the
loan amount over the fair value of the collateral adjusted for the estimated
selling costs.
Loans considered to be troubled debt restructurings ("TDRs") are loans that have
their terms restructured (e.g., interest rates, loan maturity date, payment and
amortization period, etc.) in circumstances that provide payment relief to a
borrower experiencing financial difficulty. All restructured
collateral-dependent loans are individually assessed for allowance for credit
losses and may either be in accruing or non-accruing status. Non-accruing
restructured loans may return to accruing status provided doubt has been removed
concerning the collectability of principal and interest as evidenced by a
sufficient period of payment performance in accordance with the restructured
terms. Loans may be removed from the restructured category if the borrower is no
longer experiencing financial difficulty, a re-underwriting event took place and
the revised loan terms of the subsequent restructuring agreement are considered
to be consistent with terms that can be obtained in the credit market for loans
with comparable risk.
In March 2020 , the CARES Act was signed into law and provided financial
institutions the option to temporarily suspend certain requirements under GAAP
related to TDRs for a limited period of time during the COVID-19 pandemic. In
April 2020 , the federal regulatory agencies issued a joint statement that
provided further guidance on loan modifications related to COVID-19. The CARES
Act provides for extensions of up to 180 days in the delay of loan principal
and/or interest payments for customers who are affected by the COVID-19
pandemic. These customers must meet certain criteria, such as they were in good
standing and not more than 30 days past due prior to the pandemic, as well as
other requirements noted in the regulatory agencies' revised statement. Based on
the guidance noted above, the Company does not classify the COVID-19 loan
modifications as TDRs, nor are the customers considered past due with regards to
their delayed payments. Upon exiting the loan modification deferral program, the
measurement of loan delinquency will resume where it left off upon entry into
the program.
In response to the COVID-19 pandemic, the Company developed a set of guidelines
to provide relief to qualified commercial and mortgage/consumer loans customers.
These guidelines, as permitted by the CARES Act, provide for deferment of
certain loan payments of up to 180 days to provide relief to qualified
commercial, mortgage and consumer loan customers. Initial deferrals of 90 days
were granted to qualified customers with the option to request a second deferral
for an additional 90 days. The Company granted initial approvals for payment
deferrals on over 2,400 loans with an aggregate balance of $2.0 billion . At June
30, 2020 , loans with payment accommodation amounted to $1.5 billion or 16% of
the total non-PPP loan portfolio. Commercial loans comprised $1.4 billion or 93%
of the total accommodations at June 30, 2020 . At June 30, 2020 , the amount of
loans approved for a second deferral period amounted to $39 million . Applying
the stipulated criteria, at June 30, 2020 , the Company has approved and funded
over 5,100 loans for a total of $1.1 billion in loans to businesses. Loans
originated under the program are 100% guaranteed under the provisions of the
CARES Act.
The Company may extend the maturity of a performing or current loan that may
have some inherent weakness associated with the loan. However, the Company
generally follows a policy of not extending maturities on non-performing loans
under existing terms. Maturity date extensions only occur under revised terms
that clearly place the Company in a position to increase the likelihood of or
assure full collection of the loan under the contractual terms and/or terms at
the time of the extension that may eliminate or mitigate the inherent weakness
in the loan. These terms may incorporate, but are not limited to additional
assignment of collateral, significant balance curtailments/liquidations and
assignments of additional project cash flows. Guarantees may be a consideration
in the extension of loan maturities. As a general matter, the Company does not
view extension of a loan to be a satisfactory approach to resolving
non-performing credits. On an exception basis, certain performing loans that
have displayed some inherent weakness in the underlying collateral values, an
inability to comply with certain loan covenants which are not affecting the
performance of the credit or other identified weakness may be extended.
The Company typically sells a substantial portion of its fixed-rate residential
mortgage originations in the secondary mortgage market. Concurrent with such
sales, the Company is required to make customary representations and warranties
to the purchasers about the mortgage loans and the manner in which they were
originated. The related sale agreements grant the purchasers recourse back to
the Company, which could require the Company to repurchase loans or to share in
any losses incurred by the purchasers. This recourse exposure typically extends
for a period of six to twelve months after the sale of the loan although the
time frame for repurchase requests can extend for an indefinite period. Such
transactions could be due to a number of causes including borrower fraud or
early payment default. The Company has seen a very limited number of repurchase
and indemnity demands from purchasers for such events and routinely monitors its
exposure in this regard. The Company maintains a liability of $0.6 million for
possible losses due to repurchases.
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The Company periodically engages in whole loan sale transactions of its
residential mortgage loans as a part its interest rate risk management strategy.
There were no whole loan sales of mortgage loans from the portfolio during the
current year.
Mortgage loan servicing rights are accounted for at amortized cost and are
monitored for impairment on an ongoing basis. The amortized cost of the
Company's mortgage loan servicing rights remained at
Analysis of Credit Risk
The following table presents information with respect to non-performing assets and 90-day delinquencies for the periods indicated:
(Dollars in thousands) June 30, 2020 December 31, 2019 Non-accrual loans: Residential real estate: Residential mortgage$ 11,724 $ 12,661 Residential construction - - Commercial real estate: Commercial investor real estate 26,482 8,437 Commercial owner-occupied real estate 6,729 4,148 Commercial AD&C 2,957 829 Commercial business 20,246 8,450 Consumer 7,800 4,107 Total non-accrual loans 75,938 38,632 Loans 90 days past due: Residential real estate: Residential mortgage 138 - Residential construction - - Commercial real estate: Commercial investor real estate 515 - Commercial owner-occupied real estate 775 - Commercial AD&C - - Commercial business - - Consumer - - Total 90 days past due loans 1,428 - Restructured loans (accruing) 2,553 2,636 Total non-performing loans 79,919 41,268 Other real estate owned, net 1,389 1,482 Total non-performing assets$ 81,308 $ 42,750 Non-performing loans to total loans 0.77% 0.62% Non-performing assets to total assets 0.61% 0.50% Allowance for credit losses to non-performing loans 204.56% 136.02% 67
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The following table discloses information on the credit quality of originated loans, acquired Revere loans and totals loans:
June 30, 2020
Originated Revere Acquired Total
(Dollars in thousands) Loans Loans Loans
Performing loans:
Current $ 7,765,860 $ 2,462,669 $ 10,228,529
30-59 days 24,266 2,896 27,162
60-89 days 7,073 360 7,433
Total performing loans 7,797,199 2,465,925 10,263,124
Non-performing loans:
Non-accrual loans 64,134 11,804 75,938
Loans greater than 90 days past due 1,428 - 1,428
Restructured loans 2,553 - 2,553
Total non-performing loans 68,115 11,804 79,919
Total loans $ 7,865,314 $ 2,477,729 $ 10,343,043 Non-performing loans to total
loans 0.87% 0.48%
0.77%
Allowance for credit losses to
non-performing loans 167.98% 415.64% 204.56% Allowance for Credit Losses The allowance for credit losses represents management's estimate of the portion of the Company's loans' amortized cost basis not expected to be collected over the loans' contractual life. As a part of the credit oversight and review process, the Company maintains an allowance for credit losses (the "allowance"). The following allowance section should be read in conjunction with "Allowance for Credit Losses" section in "Note 1 - Significant Accounting Policies". The Company excludes accrued interest from the measurement of the allowance as the Company has a non-accrual policy to reverse any accrued, uncollected interest income when loans are placed on non-accrual status. The adequacy of the allowance is determined through ongoing evaluation of the credit portfolio, and involves consideration of a number of factors. Determination of the allowance is inherently subjective and requires significant estimates, including consideration of current conditions and future economic forecasts, which may be susceptible to significant volatility. The amount of expected losses can vary significantly from the amounts actually observed. Loans deemed uncollectible are charged off against the allowance, while recoveries are credited to the allowance when received. Management adjusts the level of the allowance through provision for credit losses. During the first quarter of 2020, the Company adopted ASC 326 "Financial Instruments - Credit Losses." At the adoption date, the allowance for credit losses increased by$5.8 million or 10%. Included in this transition adjustment is the reclassification of$2.8 million to the allowance for credit losses of amounts related to the previously acquired impaired loans. The after-tax transition impact to retained earnings as a result of adopting the new standard was$2.2 million . The provision for credit losses totaled$83.2 million for the six months endedJune 30, 2020 compared to a provision of$1.5 million for the same period in the prior year. During the current year, the provision for credit losses was significantly impacted by the negative projected impact of COVID-19 on specific economic metrics used in the Company's CECL model. The economic metrics with the greatest impact in order of magnitude were, the expected future unemployment rate, the expected level of business bankruptcies and to a lesser degree, the house price index. These expectations were based on the assessment of the impact on the Company's market area caused by the economic disruption. The portion of the$83.2 million provision directly attributable to the significant deterioration in the economic forecast amounted to approximately$53.8 million . In addition, as required by GAAP, the initial allowance for credit losses on Revere's acquired non-PCD loans was recognized through provision for credit losses in the amount of$17.5 million . The remainder of the provision reflects the impact of changes in interest rates, existing terms, qualitative factors, portfolio composition and portfolio maturities. The acquisition of Revere's PCD loans resulted in an increase to the allowance for credit losses of$18.6 million , which did not affect the current quarter's provision expense. 68 -------------------------------------------------------------------------------- AtJune 30, 2020 , the allowance for credit losses was$163.5 million as compared to$56.1 million atDecember 31, 2019 . The allowance for credit losses as a percent of total loans was 1.58% and 0.84% atJune 30, 2020 andDecember 31, 2019 , respectively. The allowance for credit losses represented 205% of non-performing loans atJune 30, 2020 as compared to 136% atDecember 31, 2019 . The allowance attributable to the commercial portfolio represented 1.70% of total commercial loans while the portion attributable to total combined consumer and mortgage loans was 1.04%. With respect to the total commercial portion of the allowance, 41% of this portion is allocated to the commercial business loan portfolio, resulting in the ratio of the allowance for commercial business loans to total commercial business loans of 2.64%. A similar ratio with respect to AD&C loans was 1.91% at the end of the current quarter. Excluding the PPP loans, which do not have an associated allowance, the allowance for credit losses as percentage of total loans outstanding would be 1.76% and the ratio of the allowance for commercial business loans to total commercial business loans would be 5.02% The current methodology for assessing the appropriate allowance includes: (1) a collective quantified reserve that reflects the Company's historical default and loss experience adjusted for expected economic conditions over a reasonable and supportable forecast period and the Company's prepayment and curtailment rates, (2) collective qualitative factors that consider concentrations of the loan portfolio, expected changes to the economic forecasts, large lending relationships, early delinquencies, and factors related to credit administration, including, among others, loan-to-value ratios, borrowers' risk rating and credit score migrations, and (3) individual allowances on collateral-dependent loans where borrowers are experiencing financial difficulty or where the Company determined that foreclosure is probable. Under the current methodology, the impact of the utilization of the historical default and loss experience results in 90% of the total allowance being attributable to the historical performance of the portfolio while 10% of the allowance is attributable to the collective qualitative factors applied to determine the allowance. The methodology used under previous accounting guidance in prior periods was dependent to a large degree on the application of qualitative factors which resulted in 85% of the total allowance being attributable to those qualitative factors with the remaining portion of the prior period's allowance being dependent on historical loss experience. The quantified collective portion of the allowance is determined by pooling loans into segments based on the similar risk characteristics of the underlying borrowers, in addition to consideration of collateral type, industry and business purpose of the loans. The Company selected two collective methodologies, the discounted cash flows and weighted average remaining life methodologies. Segments utilizing the discounted cash flow method are further sub-segmented based on the risk level (determined either by risk ratings or Beacon Scores). Collective calculation methodologies use the Company's historical default and loss experience adjusted for future economic forecasts. At initial adoption of CECL, management opted for the application of the reasonable and supportable forecast period of two years under stable economic conditions. However, under the current deteriorated economic conditions, the reasonable and supportable forecast period was adjusted during the first quarter's determination of the allowance for credit losses to one year, due to the inherent uncertainty in the future economic outlook. Management has retained the one year forecast period in the current quarter's estimate of the allowance for credit losses. Following the end of the reasonable and supportable forecast period expected losses revert back to historical mean over the next two years on a straight-line basis.
Economic variables which have the most significant impact on the allowance include:
?unemployment rate;
?number of business bankruptcies; and
?house price index.
The collective quantified component of the allowance is supplemented by a qualitative component to address various risk characteristics of the Company's loan portfolio including:
?trends in early delinquencies;
?changes in the risk profile related to large loans in the portfolio;
?concentrations of loans to specific industry segments;
?expected changes in economic conditions;
?changes in the Company's credit administration and loan portfolio management processes; and
?the quality of the Company's credit risk identification processes.
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The individual reserve assessment is applied to collateral dependent loans where
borrowers are experiencing financial difficulty or when the Company determined
that foreclosure is probable. The determination of the fair value of the
collateral depends on whether a repayment of the loan is expected to be from the
sale or the operation of the collateral. When repayment is expected from the
operation of the collateral, the Company uses the present value of expected cash
flows from the operation of the collateral as the fair value. When repayment of
the loan is expected from the sale of the collateral the fair value of the
collateral is based on an observable market price or the appraised value less
estimated cost to sell. During the individual reserve assessment, management
also considers the potential future changes in the value of the collateral over
the remainder of the loan's life. The balance of collateral-dependent loans
individually assessed for the allowance was $60.5 million , with individual
allowances of $8.8 million against those loans at June 30, 2020 .
If an updated appraisal is received subsequent to the preliminary determination
of an individual allowance or partial charge-off, and it is less than the
initial appraisal used in the initial assessment, an additional individual
allowance or charge-off is taken on the related credit. Partially charged-off
loans are not written back up based on updated appraisals and always remain on
non-accrual with any and all subsequent payments first applied to the remaining
balance of the loan as principal reductions. No interest income is recognized on
loans that have been partially charged-off.
A current appraisal on large loans is usually obtained if the appraisal on file
is more than 12 months old and there has been a material change in market
conditions, zoning, physical use or the adequacy of the collateral based on an
internal evaluation. The Company's policy is to strictly adhere to regulatory
appraisal standards. If an appraisal is ordered, no more than a 30 day
turnaround is requested from the appraiser, who is selected by Credit
Administration from an approved appraiser list. After receipt of the updated
appraisal, the assigned credit officer will recommend to the Chief Credit
Officer whether an individual allowance or a charge-off should be taken. The
Chief Credit Officer has the authority to approve an individual allowance or
charge-off between monthly credit committee meetings to ensure that there are no
significant time lapses during this process. The Company's borrowers are
concentrated in nine counties in Maryland , three counties in Virginia and in
Washington D.C. Excluding the PPP loans, commercial and residential mortgages,
including home equity loans and lines, represented 87% of total loans at both
June 30, 2020 and December 31, 2019 . Certain loan terms may create
concentrations of credit risk and increase the Company's exposure to loss. These
include terms that permit the deferral of principal payments or payments that
are smaller than normal interest accruals (negative amortization); loans with
high loan-to-value ratios; loans, such as option adjustable-rate mortgages, that
may expose the borrower to future increases in repayments that are in excess of
increases that would result solely from increases in market interest rates; and
interest-only loans. The Company does not make loans that provide for negative
amortization or option adjustable-rate mortgages.
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--------------------------------------------------------------------------------Summary of Loan Credit Loss Experience
The following table presents the activity in the allowance for credit losses for
the periods indicated:
Six Months Ended Year Ended
(Dollars in thousands) June 30, 2020 December 31, 2019
Balance, January 1 $ 56,132 $ 53,486
Initial allowance on PCD loans at adoption of ASC 326 2,762 -
Transition impact of adopting ASC 326 2,983 -
Initial allowance on acquired Revere PCD loans 18,628 -
Provision for credit losses 83,155 4,684
Loan charge-offs:
Residential real estate:
Residential mortgage (414) (690)
Residential construction - -
Commercial real estate:
Commercial investor real estate - -
Commercial owner-occupied real estate - -
Commercial AD&C - -
Commercial business (339) (1,195)
Consumer (286) (783)
Total charge-offs (1,039) (2,668)
Loan recoveries:
Residential real estate:
Residential mortgage 66 138
Residential construction 3 8
Commercial real estate:
Commercial investor real estate 4 16
Commercial owner-occupied real estate - -
Commercial AD&C - 228
Commercial business 694 49
Consumer 93 191
Total recoveries 860 630
Net charge-offs (179) (2,038)
Balance, period end $ 163,481 56,132
Net charge-offs to average loans 0.00% 0.03%
Allowance for credit losses to loans 1.58% 0.84%
The following table discloses information on allowance for credit losses and
allowance ratios for originated loans and Revere acquired non-PCD and PCD loans:
June 30, 2020
Revere acquired loans
Originated Loans Non-PCD PCD Total Loans
Reserve Reserve Reserve Reserve
(Dollars in thousands) Allowance Ratio Allowance Ratio Allowance Ratio Allowance Ratio
Residential real estate:
Residential mortgage $ 11,409 1.02 % $ 835 1.01 % $ 232 2.04 % $ 12,476 1.03 %
Residential
construction 1,284 0.81 82 0.83 6 0.83 1,372 0.81
Commercial real estate:
Commercial
owner-occupied real
estate 12,789 1.09 2,655 1.05 3,236 1.90 18,680 1.17
Commercial investor
real estate 30,054 1.23 7,435 1.14 9,451 1.99 46,940 1.31
Commercial AD&C 13,237 1.93 4,294 1.85 1,487 1.85 19,018 1.91
Commercial business 40,757 2.22 8,567 4.49 9,312 4.80 58,636 2.64
Consumer 4,889 1.12 1,259 1.13 211 0.83 6,359 1.14
Total loans $ 114,419 1.45 $ 25,127 1.64 $ 23,935 2.54 $ 163,481 1.58
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Market Risk Management
The Company's net income is largely dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the extent that
interest-bearing liabilities mature or re-price on a different basis than
interest-earning assets. When interest-bearing liabilities mature or re-price
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or re-price more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net interest income. Net interest income is also affected by changes in the
portion of interest-earning assets that are funded by interest-bearing
liabilities rather than by other sources of funds, such as noninterest-bearing
deposits and stockholders' equity.
The Company's interest rate risk management goals are (1) to increase net
interest income at a growth rate consistent with the growth rate of total
assets, and (2) to minimize fluctuations in net interest income as a percentage
of interest-earning assets. Management attempts to achieve these goals by
balancing, within policy limits, the volume of floating-rate liabilities with a
similar volume of floating-rate assets; by keeping the average maturity of
fixed-rate asset and liability contracts reasonably matched; by maintaining a
pool of administered core deposits; and by adjusting pricing rates to market
conditions on a continuing basis.
The Company's board of directors has established a comprehensive interest rate
risk management policy, which is administered by management's Asset Liability
Management Committee ("ALCO"). The policy establishes limits on risk, which are
quantitative measures of the percentage change in net interest income (a measure
of net interest income or "NII" at risk) and the fair value of equity capital (a
measure of economic value of equity or "EVE" at risk) resulting from a
hypothetical change in U.S. Treasury interest rates for maturities from one day
to thirty years. The Company measures the potential adverse impacts that
changing interest rates may have on its short-term earnings, long-term value,
and liquidity by employing simulation analysis through the use of computer
modeling. The simulation model captures optionality factors such as call
features and interest rate caps and floors embedded in investment and loan
portfolio contracts. As with any method of gauging interest rate risk, there are
certain shortcomings inherent in the interest rate modeling methodology used by
the Company. When interest rates change, actual movements in different
categories of interest-earning assets and interest-bearing liabilities, loan
prepayments, and withdrawals of time and other deposits, may deviate
significantly from assumptions used in the model. As an example, certain types
of money market deposit accounts are assumed to reprice at 40 to 100% of the
interest rate change in each of the up rate shock scenarios even though this is
not a contractual requirement. As a practical matter, management would likely
lag the impact of any upward movement in market rates on these accounts as a
mechanism to manage the Bank's net interest margin. Finally, the methodology
does not measure or reflect the impact that higher rates may have on
adjustable-rate loan customers' ability to service their debts, or the impact of
rate changes on demand for loan and deposit products.
The Company prepares a current base case and multiple alternative simulations at least once a quarter and reports the analysis to the board of directors. In addition, more frequent forecasts are produced when interest rates are particularly uncertain or when other business conditions so dictate.
The statement of condition is subject to quarterly testing for eight alternative
interest rate shock possibilities to indicate the inherent interest rate risk.
Average interest rates are shocked by +/- 100, 200, 300, and 400 basis points
("bp"), although the Company may elect not to use particular scenarios that it
determines are impractical in a current rate environment. It is management's
goal to structure the statement of condition so that net interest income at risk
over a twelve-month period and the economic value of equity at risk do not
exceed policy guidelines at the various interest rate shock levels.
The Company augments its quarterly interest rate shock analysis with alternative
external interest rate scenarios on a monthly basis. These alternative interest
rate scenarios may include non-parallel rate ramps and non-parallel yield curve
twists. If a measure of risk produced by the alternative simulations of the
entire statement of condition violates policy guidelines, ALCO is required to
develop a plan to restore the measure of risk to a level that complies with
policy limits within two quarters.
Measures of net interest income at risk produced by simulation analysis are
indicators of an institution's short-term performance in alternative rate
environments. These measures are typically based upon a relatively brief period,
usually one year. They do not necessarily indicate the long-term prospects or
economic value of the institution.
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Estimated Changes in Net Interest Income
Change in Interest Rates: + 400 bp + 300 bp + 200 bp + 100 bp - 100 bp - 200 bp -300 bp -400 bp
Policy Limit 23.50% 17.50% 15.00% 10.00% 10.00% 15.00% 17.50% 23.50%
June 30, 2020 7.46% 5.43% 3.56% 1.39% N/A N/A N/A N/A
December 31, 2019 11.26% 8.71% 6.06% 3.06% (3.47%) N/A N/A N/A
The impact of these various interest movements on net interest income are
reflected in the preceding table. At June 30, 2020 , further interest rate
declines are improbable due to the low level of existing market rates. As
reflected in the table, in a rising interest rate environment, net interest
income sensitivity decreased compared to December 31, 2019 . The change in the
net interest income at risk resulted from decreased asset sensitivity due to the
impact of repricing the acquired deposits and the timing associated with the
repricing of variable rate loans. All measures remained well within prescribed
policy limits.
The measures of equity value at risk indicate the ongoing economic value of the
Company by considering the effects of changes in interest rates on all of the
Company's cash flows, and by discounting the cash flows to estimate the present
value of assets and liabilities. The difference between these discounted values
of the assets and liabilities is the economic value of equity, which, in theory,
approximates the fair value of the Company's net assets.
Estimated Changes in Economic Value of Equity
Change in Interest Rates: + 400 bp + 300 bp + 200 bp + 100 bp - 100 bp - 200 bp -300 bp -400 bp
Policy Limit 35.00% 25.00% 20.00% 10.00% 10.00% 20.00% 25.00% 35.00%
June 30, 2020 (7.17%) (3.67%) (0.07%) 1.27% N/A
N/A N/A N/A
Overall, the measure of the EVE at risk decreased in all rising rate scenarios fromDecember 31, 2019 toJune 30, 2020 . The improvement in EVE in all rising rate scenarios is the result of the combination of longer durations of noninterest-bearing deposits while loan durations shortened with the inclusion of Revere's portfolio and inclusion of the PPP program. Additionally, the inclusion of the related PPP funding facility substantially shortened the duration of borrowings. Liquidity Management Liquidity is measured by a financial institution's ability to raise funds through loan repayments, maturing investments, deposit growth, borrowed funds, capital and the sale of highly marketable assets such as investment securities and residential mortgage loans. In assessing liquidity, management considers operating requirements, the seasonality of deposit flows, investment, loan and deposit maturities and calls, expected funding of loans and deposit withdrawals, and the market values of available-for-sale investments, so that sufficient funds are available on short notice to meet obligations as they arise and to ensure that the Company is able to pursue new business opportunities. The Company's liquidity position, considering both internal and external sources available, exceeded anticipated short-term and long-term needs atJune 30, 2020 . Liquidity is measured using an approach designed to take into account core deposits, in addition to factors already discussed above. Management considers core deposits, defined to include all deposits other than brokered and outsourced deposits and certain time deposits of$250 thousand or more, to be a relatively stable funding source. Core deposits equaled 73% of total interest-earning assets atJune 30, 2020 . The Company's growth and mortgage banking activities are also additional considerations when evaluating liquidity requirements. Also considered are changes in the liquidity of the investment portfolio due to fluctuations in interest rates. Under this approach, implemented by the Funding and Liquidity Subcommittee of ALCO under formal policy guidelines, the Company's liquidity position is measured weekly, looking forward at thirty day intervals from thirty (30) to three hundred sixty (360) days. The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. AtJune 30, 2020 , the Company's liquidity and funds availability provides it with flexibility in funding loan demand and other liquidity demands. The Company also has external sources of funds available that can be drawn upon when required. The main sources of external liquidity are available lines of credit with the FHLB and theFederal Reserve Bank . The line of credit with the FHLB totaled$2.4 billion , all of which was available for borrowing based on pledged collateral, with$452 million borrowed against it as ofJune 30, 2020 . The secured lines of credit at theFederal Reserve Bank and correspondent banks totaled$383 million , all of which was available for borrowing based on pledged collateral, with no borrowings against it as ofJune 30, 2020 . In addition, the Company had unsecured lines of credit with correspondent banks of$880 million atJune 30, 2020 . AtJune 30, 2020 , there were no outstanding borrowings against these lines of credit. AtJune 30, 2020 , the Company borrowed$845 73 -------------------------------------------------------------------------------- million under the PPPLF. These funds are secured by guaranteed loans originated under the PPP program. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate atJune 30, 2020 . The parent company ("Bancorp") is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, Bancorp is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. Bancorp's primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to Bancorp in any calendar year, without the receipt of prior approval from theFederal Reserve Bank , cannot exceed net income for that year to date period plus retained net income (as defined) for the preceding two calendar years. Based on this requirement, as ofJune 30, 2020 , the Bank could have declared a dividend of$115 million to Bancorp. AtJune 30, 2020 , Bancorp had liquid assets of$48 million . Arrangements to fund credit products or guarantee financing take the form of loan commitments (including lines of credit on revolving credit structures) and letters of credit. Approvals for these arrangements are obtained in the same manner as loans. Generally, cash flows, collateral value and risk assessment are considered when determining the amount and structure of credit arrangements.
Commitments to extend credit in the form of consumer, commercial real estate and business at the dates indicated were as follows:
June 30 ,December 31 , (In thousands) 2020
2019
Commercial real estate development and construction
189,779 89,224
Real estate-residential mortgage 240,622
74,282
Lines of credit, principally home equity and business lines
2,056,300 1,400,038
Standby letters of credit 70,747 62,065 Total commitments to extend credit and available credit lines$ 3,158,653 $ 2,196,977 Commitments to extend credit are agreements to provide financing to a customer with the provision that there are no violations of any condition established in the agreement. Commitments generally have interest rates determined by current market rates, expiration dates or other termination clauses and may require payment of a fee. Lines of credit typically represent unused portions of lines of credit that were provided and remain available as long as customers comply with the requisite contractual conditions. Commitments to extend credit are evaluated, processed and/or renewed regularly on a case by case basis, as part of the credit management process. The total commitment amount or line of credit amounts do not necessarily represent future cash requirements, as it is highly unlikely that all customers would draw on their lines of credit in full at one time.
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