Eagle Bancorp Inc.

11/07/2024 | Press release | Distributed by Public on 11/07/2024 05:27

Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)

egbn-20240930
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-25923
Eagle Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Maryland 52-2061461
(State or other jurisdiction of
incorporation or organization) 		(I.R.S. Employer
Identification No.)
7830 Old Georgetown Road, Third Floor, Bethesda, Maryland
20814
(Address of principal executive offices) (Zip Code)
(301) 986-1800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Common Stock, $0.01 par value EGBN
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
As of November 1, 2024, the registrant had 30,201,538 shares of Common Stock outstanding.
EAGLE BANCORP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
3
Consolidated Balance Sheets at September 30, 2024 and December 31, 2023 (unaudited)
3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2024 and 2023 (unaudited)
4
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2024 and 2023 (unaudited)
5
Consolidated Statements of Changes in Shareholders' Equity for the Three and Nine Months Ended September 30, 2024 and 2023 (unaudited)
7
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023 (unaudited)
8
Notes to Consolidated Financial Statements
10
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
39
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
74
Item 4.
Controls and Procedures
74
PART II.
OTHER INFORMATION
Item 1.
Legal Proceedings
75
Item 1A.
Risk Factors
75
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
75
Item 3.
Defaults Upon Senior Securities
75
Item 4.
Mine Safety Disclosures
75
Item 5.
Other Information
75
Item 6.
Exhibits
76
Signatures
77
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE BANCORP, INC.
Consolidated Balance Sheets (Unaudited)
(dollars in thousands, except share and per share data)
September 30, 2024 December 31, 2023
Assets
Cash and due from banks $ 16,383 $ 9,047
Federal funds sold 9,610 3,740
Interest-bearing deposits with banks and other short-term investments 584,491 709,897
Investment securities available-for-sale (amortized cost of $1,550,038 and $1,668,316, respectively, and allowance for credit losses of $17 and $17, respectively).
1,433,006 1,506,388
Investment securities held-to-maturity, net of allowance for credit losses of $1,237 and $1,956, respectively (fair value of $868,425 and $901,582, respectively)
961,925 1,015,737
Federal Reserve and Federal Home Loan Bank stock 37,728 25,748
Loans held for investment, at amortized cost 7,970,269 7,968,695
Less: allowance for credit losses (111,867) (85,940)
Loans held for investment, net of allowance 7,858,402 7,882,755
Premises and equipment, net 8,291 10,189
Right-of-use assets - operating leases 15,167 19,129
Deferred income taxes 74,381 86,620
Bank-owned life insurance 115,064 112,921
Goodwill and other intangible assets, net 21 104,925
Other real estate owned 2,743 1,108
Other assets 167,840 176,334
Total Assets $ 11,285,052 $ 11,664,538
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand $ 1,609,823 $ 2,279,081
Interest-bearing transaction 903,300 997,448
Savings and money market 3,316,819 3,314,043
Time 2,710,908 2,217,467
Total deposits 8,540,850 8,808,039
Customer repurchase agreements 32,040 30,587
Other short-term borrowings 1,240,000 1,369,918
Long-term borrowings 75,812 -
Operating lease liabilities 18,755 23,238
Reserve for unfunded commitments 5,060 5,590
Other liabilities 147,111 152,883
Total Liabilities 10,059,628 10,390,255
Shareholders' Equity
Common stock, par value $0.01 per share; shares authorized 100,000,000, shares issued and outstanding 30,173,200 and 29,925,612, respectively
298 296
Additional paid-in capital 382,284 374,888
Retained earnings 967,019 1,061,456
Accumulated other comprehensive loss (124,177) (162,357)
Total Shareholders' Equity 1,225,424 1,274,283
Total Liabilities and Shareholders' Equity $ 11,285,052 $ 11,664,538
See Notes to Consolidated Financial Statements.
3
EAGLE BANCORP, INC.
Consolidated Statements of Operations (Unaudited)
(dollars in thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
Interest Income
Interest and fees on loans $ 139,836 $ 132,273 $ 415,446 $ 382,116
Interest and dividends on investment securities 12,578 13,732 37,663 41,518
Interest on balances with other banks and short-term investments 21,296 15,067 65,726 34,070
Interest on federal funds sold 103 77 311 202
Total interest income 173,813 161,149 519,146 457,906
Interest Expense
Interest on deposits 81,190 70,929 237,419 179,305
Interest on customer repurchase agreements 332 311 977 946
Interest on other short-term borrowings 20,448 18,152 62,856 56,989
Interest on long-term borrowings - 1,038 - 3,112
Total interest expense 101,970 90,430 301,252 240,352
Net Interest Income 71,843 70,719 217,894 217,554
Provision for Credit Losses 10,094 5,644 54,228 17,046
(Reversal of) Provision for Credit Losses for Unfunded Commitments (1,593) (839) (529) 327
Net Interest Income After (Reversal of) Provision for Credit Losses 63,342 65,914 164,195 200,181
Noninterest Income
Service charges on deposits 1,747 1,631 5,099 4,767
Gain (loss) on sale of loans 20 (5) 57 395
Net gain (loss) on sale of investment securities 3 5 10 (14)
Increase in the cash surrender value of bank-owned life insurance 731 669 2,143 1,972
Other income 4,450 4,047 8,563 11,522
Total noninterest income 6,951 6,347 15,872 18,642
Noninterest Expense
Salaries and employee benefits 21,675 21,549 65,171 67,680
Premises and equipment expenses 2,794 3,095 8,747 9,639
Marketing and advertising 1,588 768 4,109 2,288
Data processing 3,435 3,194 10,223 9,647
Legal, accounting and professional fees 3,433 2,162 8,645 8,065
FDIC insurance 7,399 3,342 19,728 7,409
Goodwill impairment
- - 104,168 -
Other expenses 3,290 3,523 9,311 11,467
Total noninterest expense 43,614 37,633 230,102 116,195
Income (Loss) Before Income Tax Expense 26,679 34,628 (50,035) 102,628
Income Tax Expense 4,864 7,245 12,290 22,319
Net Income (Loss) $ 21,815 $ 27,383 $ (62,325) $ 80,309
Earnings (Loss) Per Common Share
Basic $ 0.72 $ 0.91 $ (2.07) $ 2.63
Diluted $ 0.72 $ 0.91 $ (2.07) $ 2.63
See Notes to Consolidated Financial Statements.
4
EAGLE BANCORP, INC.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollars in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
Net Income (Loss) $ 21,815 $ 27,383 $ (62,325) $ 80,309
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gain (loss) on securities available-for-sale 35,338 (21,314) 33,901 (15,452)
Reclassification adjustment for (gain) loss included in net income (loss) (2) (4) (8) 10
Total unrealized gain (loss) on investment securities available-for-sale 35,336 (21,318) 33,893 (15,442)
Amortization of unrealized loss on securities transferred to held-to-maturity 1,355 1,400 4,062 3,444
Total unrealized gain on investment securities held-to-maturity 1,355 1,400 4,062 3,444
Unrealized (loss) gain on derivatives (25) - 225 -
Total unrealized (loss) gain on derivatives (25) - 225 -
Other comprehensive income (loss) 36,666 (19,918) 38,180 (11,998)
Comprehensive Income (Loss) $ 58,481 $ 7,465 $ (24,145) $ 68,311
See Notes to Consolidated Financial Statements.
5
EAGLE BANCORP, INC.
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Three Months Ended September 30, 2024 and 2023
(dollars in thousands except share and per share data)
Accumulated Other Comprehensive Income (Loss)
Common Additional Paid-in Capital Retained Earnings Shareholders' Equity
Shares Amount
Balance July 1, 2024 30,180,482 $ 297 $ 380,142 $ 949,863 $ (160,843) $ 1,169,459
Net Income - - - 21,815 - 21,815
Other comprehensive income, net of tax - - - - 36,666 36,666
Stock-based compensation expense - - 2,019 - - 2,019
Forfeitures of time-based stock awards and shares withheld for payroll taxes
(23,925) 1 (1) - - -
Time-based stock awards granted 10,082 - - - - -
Issuance of common stock related to employee stock purchase plan 6,561 - 124 - - 124
Cash dividends declared ($0.165 per share)
- - - (4,659) - (4,659)
Balance September 30, 2024 30,173,200 $ 298 $ 382,284 $ 967,019 $ (124,177) $ 1,225,424
Balance July 1, 2023 29,912,082 $ 296 $ 370,278 $ 1,040,779 $ (191,587) $ 1,219,766
Net Income - - - 27,383 - 27,383
Other comprehensive loss, net of tax - - - - (19,918) (19,918)
Stock-based compensation expense - - 1,969 - - 1,969
Forfeitures of time-based stock awards and shares withheld for payroll taxes
(15,250) - - - - -
Time-based stock awards granted 14,280 - - - - -
Issuance of common stock related to employee stock purchase plan 6,870 - 145 - - 145
Cash dividends declared ($0.45 per share)
- - - (13,463) - (13,463)
Common stock repurchased - - 2 - - 2
Balance September 30, 2023 29,917,982 $ 296 $ 372,394 $ 1,054,699 $ (211,505) $ 1,215,884
See Notes to Consolidated Financial Statements.
6
EAGLE BANCORP, INC.
Consolidated Statements of Changes in Shareholders' Equity - Continued (Unaudited)
Nine Months Ended September 30, 2024 and 2023
(dollars in thousands except share and per share data)
Accumulated Other Comprehensive Income (Loss)
Common Additional Paid-in Capital Retained Earnings Shareholders' Equity
Shares Amount
Balance January 1, 2024 29,925,612 $ 296 $ 374,888 $ 1,061,456 $ (162,357) $ 1,274,283
Net Loss - - - (62,325) - (62,325)
Other comprehensive income, net of tax - - - - 38,180 38,180
Stock-based compensation expense - - 7,051 - - 7,051
Forfeitures of time-based stock awards and shares withheld for payroll taxes (66,845) 2 (2) - - -
Vesting of performance-based stock awards, net of shares withheld for payroll taxes 12,013 - - - - -
Time-based stock awards granted 285,978 - - - - -
Issuance of common stock related to employee stock purchase plan 16,442 - 347 - - 347
Cash dividends declared ($1.065 per share)
- - - (32,112) - (32,112)
Balance September 30, 2024 30,173,200 $ 298 $ 382,284 $ 967,019 $ (124,177) $ 1,225,424
Balance January 1, 2023 31,346,903 $ 310 $ 412,303 $ 1,015,215 $ (199,507) $ 1,228,321
Net Income - - - 80,309 - 80,309
Other comprehensive loss, net of tax - - - - (11,998) (11,998)
Stock-based compensation expense - - 7,653 - - 7,653
Forfeitures of time-based stock awards and shares withheld for payroll taxes (59,314) 1 (1) - - -
Vesting of performance-based stock awards, net of shares withheld for payroll taxes 27,296 - - - - -
Time-based stock awards granted 187,822 - - - - -
Issuance of common stock related to employee stock purchase plan 15,275 - 459 - - 459
Cash dividends declared ($1.35 per share)
- - - (40,825) - (40,825)
Common stock repurchased (1,600,000) (15) (48,020) - - (48,035)
Balance September 30, 2023 29,917,982 $ 296 $ 372,394 $ 1,054,699 $ (211,505) $ 1,215,884
See Notes to Consolidated Financial Statements.
7
EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
Nine Months Ended September 30,
2024 2023
Cash Flows From Operating Activities:
Net (Loss) Income $ (62,325) $ 80,309
Adjustments to reconcile Net (Loss) Income to net cash provided by operating activities:
Provision for credit losses 54,228 17,046
(Reversal of ) provision for unfunded commitments (529) 327
Goodwill impairment
104,168 -
Depreciation and amortization 2,162 2,649
Gain on sale of loans (57) (395)
(Gain) loss on mortgage servicing rights (1,512) 108
Securities premium amortization, net 4,178 4,766
Origination of loans held for sale - (29,690)
Proceeds from sale of loans held for sale - 36,819
Net gain on sale of other real estate owned - (134)
(Gain) loss on call/sale of investment securities (10) 14
Net increase in cash surrender value of BOLI (2,143) (1,972)
Stock-based compensation expense 7,051 7,653
Decrease (increase) in other assets 5,943 (29,589)
Increase in other liabilities 2,528 51,058
Net Cash Provided by Operating Activities 113,682 138,969
Cash Flows From Investing Activities:
Investment securities available-for-sale:
Proceeds from maturities 89,035 92,647
Proceeds from call/sale 27,000 8,303
Investment securities held-to-maturity:
Proceeds from maturities 53,187 60,312
Proceeds from call 4,644 2,906
Proceeds from (purchase of) Federal Reserve stock (222) 39,378
Purchase of Federal Home Loan Bank stock (11,758) -
Proceeds from sale of mortgage servicing rights 4,798 -
Net increase in loans (32,828) (287,673)
Redemption of BOLI - 736
Proceeds from sale of OREO 656 609
Net change in premises and equipment (183) (298)
Net Cash Provided by (Used in) Investing Activities 134,329 (83,080)
Cash Flows From Financing Activities:
Decrease in deposits (267,189) (336,876)
Increase (decrease) in customer repurchase agreements 1,453 (9,411)
Net (decrease) increase in short-term borrowings (130,000) 325,000
Net proceeds from long-term borrowings 75,812 -
Proceeds from employee stock purchase plan 347 459
Common stock repurchased - (48,035)
Cash dividends paid (40,634) (40,825)
Net Cash Used in Financing Activities (360,211) (109,688)
Net Decrease in Cash and Cash Equivalents (112,200) (53,799)
Cash and Cash Equivalents at Beginning of Period 722,684 311,854
Cash and Cash Equivalents at End of Period $ 610,484 $ 258,055
See Notes to Consolidated Financial Statements.
8
EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows - Continued (Unaudited)
(dollars in thousands)
Nine Months Ended September 30,
2024 2023
Supplemental Cash Flows Information:
Interest paid $ 309,165 $ 266,633
Income taxes paid $ 5,980 $ 16,940
Non-Cash Investing Activities:
Transfer of loans for investment to loans held for sale $ 5,000 $ -
Transfers from loans to other real estate owned $ 2,370 $ -
See Notes to Consolidated Financial Statements.
9
EAGLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. (the "Parent") and its subsidiaries (together with the Parent, the "Company"), with all significant intercompany transactions eliminated. EagleBank (the "Bank"), a Maryland chartered commercial bank, is the Parent's principal subsidiary.
The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America ("GAAP") and to general practices in the banking industry. The Consolidated Financial Statements and accompanying notes of the Company included herein are unaudited. The Consolidated Balance Sheet as of December 31, 2023 was derived from the audited Consolidated Balance Sheet as of that date. The Consolidated Financial Statements reflect all adjustments, consisting of normal recurring adjustments, that in the opinion of management are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In addition to the accounting policies described below, the Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Certain reclassifications have been made to 2023 amounts previously reported to conform to the 2024 presentation. Reclassifications had no effect on net income or shareholders' equity. These statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
Nature of Operations
The Company, through the Bank, conducts a full-service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination of small business loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration ("SBA"), is typically sold to third party investors in a transaction apart from the loan's origination.
The Bank offers its products and services through twelve banking offices, four lending centers and various digital capabilities, including remote deposit services and mobile banking services. Eagle Insurance Services, LLC, a subsidiary of the Bank that previously offered access to insurance products and services through a referral program with a third party insurance broker, continues to receive fee income in connection with such program. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements.
Investment Securities
The Company recognizes acquired securities on the trade date. Investment securities comprise debt securities, which are classified depending on the Company's intent and ability to hold the securities to maturity. Debt securities are classified as available-for-sale ("AFS") when management may have the intent to sell them prior to maturity. Debt securities are classified as held-to-maturity ("HTM") and carried at amortized cost when management has the positive intent and ability to hold them to maturity.
AFS Securities are acquired as part of the Company's asset/liability management strategy and may be sold in response to changes in interest rates, current market conditions, loan demand, changes in prepayment risk and other factors. AFS Securities are carried at fair value, with unrealized gains or losses, other than impairment losses, being reported as accumulated other comprehensive income/(loss), a separate component of shareholders' equity, net of deferred income tax. Realized gains and losses, using the specific identification method, are included as a separate component of noninterest income in the Consolidated Statements of Operations.
10
Premiums and discounts on investment securities are amortized or accreted to the earlier of call or maturity based on expected lives, which include prepayment adjustments and call optionality.
Transfers of Investment Securities from Available-for-Sale to Held-to-Maturity
Transfers of debt securities into the HTM category from the AFS category are made at amortized cost, net of unrealized gain or loss reported in accumulated other comprehensive income (loss) at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the HTM securities. Such amounts are amortized over the remaining life of the security.
The Company does not intend to sell the HTM investments, and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.
Loans
The Company classifies loans in its portfolio as either held for investment ("HFI") or held for sale ("HFS"). HFS loans are reported at the lower of cost or fair value on the Consolidated Balance Sheets. HFI loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is recognized at the contractual rate on the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized on the interest method over the term of the loan.
Past due loans are placed on nonaccrual status when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Generally, this conclusion is reached when a loan is 90 days past due. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed through interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.
Allowance for Credit Losses
The following table presents a breakdown of the provision for credit losses included in our Consolidated Statements of Operations for the applicable periods:
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2024 2023 2024 2023
Provision for credit losses - loans $ 10,869 $ 5,643 $ 54,947 $ 15,802
Provision for (reversal of) credit losses - HTM debt securities (775) 1 (719) 1,244
Provision for credit losses - AFS debt securities - - - -
Total $ 10,094 $ 5,644 $ 54,228 $ 17,046
Allowance for Credit Losses - Loans
The allowance for credit losses ("ACL") - loans is an estimate of the expected credit losses in the HFI loans portfolio. The Company's ACL on the loan portfolio is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries are recorded to the extent they do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Reserves on loans that do not share similar risk characteristics are evaluated on an individual basis. Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. The remainder of the portfolio, representing all loans not evaluated individually for impairment, is segregated by call report codes, and a loan-level probability of default ("PD") / loss given default ("LGD") cash flow method is applied using an exposure at default ("EAD") model. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments.
The Company uses regression analysis of historical internal and peer data provided by a third-party service provider (as Company loss data is insufficient) to determine suitable credit loss drivers to utilize when modeling lifetime PD and LGD. This analysis also determines how expected PD will be impacted by different forecasted levels of the loss drivers.
11
A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in reserve for unfunded commitments ("RUC") on the Consolidated Balance Sheets. For periods beyond which we are able to develop reasonable and supportable forecasts, we revert to the historical loss rate on a straight-line basis over a twelve-month period.
Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring current expected credit losses ("CECL"). A summary of our primary portfolio segments is as follows:
Commercial.The commercial loan portfolio comprises lines of credit and term loans for working capital, equipment, and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, and acquisitions; and are generally secured by accounts receivable, inventory, equipment and other assets of our clients' businesses.
Income producing - commercial real estate.Income producing commercial real estate loans comprise permanent and bridge financing provided to professional real estate owners/managers of commercial and residential real estate projects and properties who generally have a demonstrated record of past success with similar properties. Collateral properties include apartment buildings, office buildings, hotels, mixed-use buildings, retail, data centers, warehouse, and shopping centers. The primary source of repayment on these loans is generally expected to come from lease or operation of the real property collateral. Income producing commercial real estate loans are impacted by fluctuation in collateral values, as well as rental demand and rates.
Owner occupied - commercial real estate. The owner occupied commercial real estate portfolio comprises permanent financing provided to operating companies and their related entities for the purchase or refinance of real property wherein their business operates. Collateral properties include industrial property, office buildings, religious facilities, mixed-use property, health care and educational facilities.
Real estate mortgage - residential. Real estate mortgage residential loans comprise consumer mortgages for the purpose of purchasing or refinancing first lien real estate loans secured by primary-residence, second-home, and rental residential real property.
Construction - commercial and residential.The construction commercial and residential loan portfolio comprises loans made to builders and developers of commercial and residential property, for both renovation, new construction, and development projects. Collateral properties include apartment buildings, mixed use property, residential condominiums, single and 1-4 residential property, and office buildings. The primary source of repayment on these loans is expected to come from the sale, permanent financing, or lease of the real property collateral. Construction loans are impacted by fluctuations in collateral values and the ability of the borrower or ultimate purchaser to obtain permanent financing.
Construction - commercial and industrial ("C&I") (owner occupied). The construction C&I (owner occupied) portfolio comprises loans to operating companies and their related entities for new construction or renovation of the real or leased property in which they operate. Generally these loans contain provisions for conversion to an owner occupied commercial real estate loan or to a commercial loan after completion of construction. Collateral properties include industrial, healthcare, religious facilities, restaurants, and office buildings.
Home equity. The home equity portfolio comprises consumer lines of credit and loans secured by subordinate liens on residential real property.
Other consumer.The other consumer portfolio comprises consumer purpose loans not secured by real property, including personal lines of credit and loans, overdraft lines, and vehicle loans. This category also includes other loan items such as overdrawn deposit accounts as well as loans and loan payments in process.
For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of expected prepayment speeds is based on historical internal data. EAD is based on each instrument's underlying amortization schedule in order to estimate the bank's expected credit loss exposure at the time of the borrower's potential default.
12
The ACL also includes an amount for inherent risks not reflected in the historical quantitative analysis associated with the reasonable and supportable forecast. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff and trends in delinquencies. While our methodology in establishing the reserve for credit losses attributes portions of the ACL and RUC to the commercial and consumer portfolio segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively. Our model may reflect assumptions by management that are not covered by the qualitative and environmental factors, and we reevaluate all of its factors quarterly.
During the first quarter of 2024, management enhanced the cash flow model to incorporate three macroeconomic variables in addition to national unemployment. The four economic variables selected, national unemployment, which was the original variable used, Commercial Real Estate ("CRE") Price Index, House Price Index and Gross Domestic Product ("GDP"), are incorporated by utilizing a Loss Driver Analysis approach that factors in historical losses, including during the Great Recession, of regional peer banks and the Bank. The updated model incorporates a weighting of three economic scenarios; baseline, upside and downside. The scenarios cover the four economic forecast variables, with each segment of the portfolio linked to two of these variables, depending on the segment. The loss driver analysis is spread over a reasonable and supportable period of 18 months and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.
We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Special mention loans are those that are currently protected by the sound net worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound net worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on nonaccrual depending on the circumstances of the individual loans.
Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on nonaccrual.
Classified loans represent the sum of loans graded substandard and doubtful.
The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and individually assessed loans as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to management committees and the Audit Committee of the Board of Directors (the "Board"). The committees' reports to the Board are part of the Board review on a quarterly basis of our consolidated financial statements.
When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation that a borrower will result in financial difficulty.
We do not measure an ACL on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on nonaccrual status.
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Collateral Dependent Financial Assets
Loans that do not share similar risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value ("NPV") from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
Loan Modifications to Borrowers in Financial Difficulty
The Company evaluates loan restructurings to determine if we have a loan modification and whether it results in a new loan or the continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there are principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications.
A loan that is considered a modified loan may be subject to an individually-evaluated loan analysis if the commitment is $500 thousand or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated provisions are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan.
Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status, foreclosure or repossession of the collateral to minimize economic loss to the Company.
Allowance for Credit Losses - AFS Securities
For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criterion is met, the security's amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment.
The entire amount of an impairment loss is recognized in earnings only when: (1) the Company intends to sell the security; (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in other comprehensive income, net of deferred taxes.
Changes in the ACL are recorded as a provision for or reversal of credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
We have made a policy election to exclude accrued interest from the amortized cost basis of AFS debt securities and report accrued interest separately in accrued interest and other assets in the Consolidated Balance Sheets. AFS debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.
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Allowance for Credit Losses - HTM Securities
The Company separately evaluates its HTM investment securities for any credit losses. The Company pools like securities and calculates expected credit losses through an estimate based on a security's credit rating, which is recognized as part of the ACL for HTM securities and included in the balance of HTM securities on the Consolidated Balance Sheets. If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually evaluated and a discounted cash flow analysis may be performed and compared to the amortized cost basis.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records a RUC on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company's Consolidated Statement of Operations.
The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company's Consolidated Balance Sheets.
Goodwill Assessment
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets acquired. Goodwill is deemed to have an indefinite useful life and as such is not subject to amortization, and instead is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company's results of operations, the trading price of the Company's common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company's policy is to test goodwill for impairment annually as of December 31, or on an interim basis if an event triggering an impairment assessment is determined to have occurred.
Goodwill is subject to impairment testing at the reporting unit level, which must be conducted at least annually, as well as when events or changes in circumstances indicate the assets might be impaired and/or upon the occurrence of a triggering event. Various factors, such as the Company's results of operations, the trading price of the Company's common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company's policy is to test goodwill for impairment annually as of December 31, or on an interim basis if an event triggering an impairment assessment is determined to have occurred.
The Company has determined that it has a single reporting unit. If the fair value of the reporting unit exceeds the book value, no write-down of recorded goodwill is required. If the fair value of the reporting unit is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value. Any impairment would be recorded through a reduction of goodwill or other intangible asset and an offsetting charge to noninterest expense.
Testing of goodwill impairment comprises a two-step process. First, the Company performs a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that an impairment has occurred, it proceeds to the quantitative impairment test, whereby it calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. In its performance of impairment testing, the Company has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment. If the carrying amount of the reporting unit exceeds the fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge. If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the reporting unit that is greater than the carrying amount, then no impairment charge is recorded.
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During the second quarter ended June 30, 2024, Management determined that a triggering event had occurred as a result of the share price trading under book value for more than four quarters due to changes in macroeconomic conditions and market volatility in the financial markets and the banking industry due to the impact from rising interest rates which resulted in fluctuations of the Company's stock price with a sustained decrease. As a result of the triggering event, the Company engaged a third-party service provider to assist Management with the determination of the fair value of the Company in the second quarter of 2024. The resulting calculations indicated that the fair value did not exceed the carrying amount of the Company's only reporting unit as of May 31, 2024 which resulted in a determination that goodwill had become fully impaired. The goodwill impairment charge of $104.2 million reduced fully the carrying value of the Company's goodwill as of May 31, 2024. The impaired goodwill was primarily related to the acquisition of the Virginia Heritage Bank in October 2014. The impairment charge did not impact our cash flows, liquidity ratios, core operating performance, or regulatory capital ratios.
New Authoritative Accounting Guidance
Accounting Standards Pending Adoption
ASU No. 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative"("ASU 2023-06") incorporates into the Accounting Standards Codification ("ASC" or "Codification") several SEC disclosure requirements under Regulations S-K and S-X. The amendments in the ASU are intended to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC's regulations. These requirements are similar to, but require more information than, generally accepted accounting principles. The new updates modify the disclosure or presentation requirements of a variety of Topics in the Codification. Entities should apply the amendments in ASU 2023-06 prospectively. For entities subject to the SEC's existing disclosure requirements and for entities that have to file or provide financial statements with or to the SEC for the purpose of selling or issuing securities that do not have contractual limits on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. As a result, the effective date will be different for each individual disclosure based on the effective date of the SEC's deletion of the related disclosure. Early adoption is prohibited. For all other entities, the effective date will be two years later. Early adoption is permitted for these entities, but not before the provisions of the ASU become effective for entities subject to SEC's regulation. The effective dates of the amendments are predicated on the SEC removing its related disclosure requirements from its regulations. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. We are currently in the process of evaluating this guidance.
ASU No. 2023-09,"Income Taxes (Topic 740): Improvements to Income Tax Disclosures"("ASU 2023-09"). The ASU requires additional income tax disclosures around effective tax rates and cash income taxes paid. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024 and interim periods within those fiscal years. The impact of ASU 2023-09 should be applied prospectively. We are currently in the process of evaluating this guidance.
ASU No. 2024-01, "Compensation-Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards"("ASU 2024-01") clarifies how an entity determines whether a profits interest or similar award (hereafter a "profits interest award") is accounted for either (1) as a share-based payment arrangement, and therefore, within the scope of ASC 718 or (2) not a share-based payment arrangement and therefore within the scope of other guidance. ASU 2024-01 also improves the clarity and operation of the guidance in ASC 718-10-15-3. The guidance in ASU 2024-01 applies to all entities that issue profits interest awards as compensation to employees or non-employees in exchange for goods or services. For public business entities, the amendments are effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2025, and interim periods within those annual periods. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. If an entity adopts the amendments in an interim period, it should adopt them as of the beginning of the annual period that includes that interim period. The amendments should be applied (i) retrospectively to all prior periods presented in the financial statements or (ii) prospectively to profits interest and similar awards granted or modified on or after the date at which the entity first applies the amendments. If the amendments are applied prospectively, an entity is required to disclose the nature of and reason for the change in accounting principle. We are currently in the process of evaluating this guidance.
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ASU No. 2024-02, "Codification Improvements-Amendments to Remove References to the Concepts Statements" ("ASU 2024-02") amends the Accounting Standard Codification ("Codification") by removing references to various concepts statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references were used in prior statements to provide guidance in certain topical areas. As stated in paragraph 105-10-05-3 of the Codification, FASB Concepts Statements are non-authoritative. These amendments will simplify the Codification which will further draw a distinction between authoritative and non-authoritative literature. The amendments are effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025. Early application of the amendments is permitted for all entities, for any fiscal year or interim period for which financial statements have not yet been issued (or made available for issuance). If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments using one of the following transition methods: (i) prospectively to all new transactions recognized on or after the date that the entity first applies the amendments, or (ii) retrospectively to the beginning of the earliest comparative period presented in which the amendments were first applied. We are currently in the process of evaluating this guidance.
Accounting Standards Adopted in 2024:
ASU No. 2023-07,"Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." ("ASU 2023-07") requires filers to disclose significant segment expenses, an amount and description for other segment items, the title and position of the entity's chief operating decision maker ("CODM") and an explanation of how the CODM uses the reported measures of profit or loss to assess segment performance, and, on an interim basis, certain segment related disclosures that previously were required only on an annual basis. ASU 2023-07 also clarifies that entities with a single reportable segment are subject to both new and existing segment reporting requirements and that an entity is permitted to disclose multiple measures of segment profit or loss, provided that certain criteria are met. ASU 2023-07 is effective for the Company for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Since early adoption is permitted, the Company adopted the guidance prescribed under ASU 2023-07 effective January 1, 2024. Adoption of this guidance did not have a material impact on our consolidated financial statements for fiscal year 2024.
Note 2. Cash and Due from Banks
For the nine months ended September 30, 2024 and 2023, the Bank maintained an average daily balance at the Federal Reserve Bank of $1.6 billion and $0.9 billion, respectively, on which interest is paid.
Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank of Atlanta ("FHLB") and noninterest-bearing balances with domestic correspondent banks to cover associated costs for services they provide to the Bank.
Note 3. Investment Securities
The amortized cost and estimated fair value of the Company's AFS and HTM securities are summarized as follows:
(dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Estimated Fair Value
September 30, 2024
Investment securities available-for-sale:
U.S. treasury bonds $ 49,970 $ - $ (567) $ - $ 49,403
U.S. agency securities 690,699 - (37,422) - 653,277
Residential mortgage-backed securities 745,006 125 (75,086) - 670,045
Commercial mortgage-backed securities 53,711 - (3,495) - 50,216
Municipal bonds 8,652 - (385) - 8,267
Corporate bonds 2,000 - (185) (17) 1,798
Total available-for-sale securities $ 1,550,038 $ 125 $ (117,140) $ (17) $ 1,433,006
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(dollars in thousands) Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated Fair Value
September 30, 2024
Investment securities held-to-maturity:
Residential mortgage-backed securities $ 621,203 $ - $ (66,264) $ 554,939
Commercial mortgage-backed securities 89,269 - (10,008) 79,261
Municipal bonds 120,307 - (8,024) 112,283
Corporate bonds 132,383 - (10,441) 121,942
Total $ 963,162 $ - $ (94,737) $ 868,425
Allowance for credit losses (1,237)
Total held-to-maturity securities, net of ACL $ 961,925
(dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Estimated Fair Value
December 31, 2023
Investment securities available-for-sale:
U.S. treasury bonds $ 49,894 $ - $ (1,993) $ - $ 47,901
U.S. agency securities 729,090 - (57,693) - 671,397
Residential mortgage-backed securities 823,992 45 (96,684) - 727,353
Commercial mortgage-backed securities 54,557 - (4,993) - 49,564
Municipal bonds 8,783 - (293) - 8,490
Corporate bonds 2,000 - (300) (17) 1,683
Total available-for-sale securities $ 1,668,316 $ 45 $ (161,956) $ (17) $ 1,506,388
(dollars in thousands) Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated Fair Value
December 31, 2023
Investment securities held-to-maturity:
Residential mortgage-backed securities $ 670,043 $ - $ (79,980) $ 590,063
Commercial mortgage-backed securities 90,227 - (12,867) 77,360
Municipal bonds 125,114 5 (8,540) 116,579
Corporate bonds 132,309 - (14,729) 117,580
Total $ 1,017,693 $ 5 $ (116,116) $ 901,582
Allowance for credit losses (1,956)
Total held-to-maturity securities, net of ACL $ 1,015,737
At September 30, 2024 and December 31, 2023, the Company held $37.7 million and $25.7 million, respectively, of equity securities in a combination of Federal Reserve System ("Federal Reserve Board," "Federal Reserve" or "FRB") and FHLB stocks, which are required to be held for regulatory purposes. These securities cannot be disposed of other than through redemption by the issuer and, if redeemed, would be redeemed at the original cost.
At September 30, 2024 and December 31, 2023, the Company had $46.5 million and $51.7 million, respectively, of unamortized unrealized losses outstanding following the transfer of investment securities from AFS to HTM in 2022. These unrealized losses are included in accumulated other comprehensive loss and are amortized through interest income as a yield adjustment over the remaining term of the securities.
Accrued interest receivable on investment securities totaled $7.4 million and $7.6 million at September 30, 2024 and December 31, 2023, respectively. The accrued interest receivable is excluded from the amortized cost of the securities and is reported in other assets in the Consolidated Balance Sheets.
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The following tables summarize AFS and HTM securities in an unrealized loss position by length of time:
Less Than 12 Months 12 Months or Greater Total
(dollars in thousands) Number of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses
September 30, 2024
Investment securities available-for-sale:
U.S. treasury bonds 2 $ - $ - $ 49,403 $ (567) $ 49,403 $ (567)
U. S. agency securities 76 2,498 (3) 650,779 (37,419) 653,277 (37,422)
Residential mortgage-backed securities 146 - - 660,627 (75,086) 660,627 (75,086)
Commercial mortgage-backed securities 13 - - 50,216 (3,495) 50,216 (3,495)
Municipal bonds 1 - - 8,267 (385) 8,267 (385)
Corporate bonds 1 - - 1,797 (185) 1,797 (185)
Total 239 $ 2,498 $ (3) $ 1,421,089 $ (117,137) $ 1,423,587 $ (117,140)
Less Than 12 Months 12 Months or Greater Total
(dollars in thousands) Number of Securities Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses
September 30, 2024
Investment securities held-to-maturity:
Residential mortgage-backed securities 141 $ - $ - $ 554,939 $ (66,264) $ 554,939 $ (66,264)
Commercial mortgage-backed securities 16 - - 79,261 (10,008) 79,261 (10,008)
Municipal bonds 38 3,503 (23) 107,779 (8,001) 111,282 (8,024)
Corporate bonds 30 - - 109,899 (10,441) 109,899 (10,441)
Total 225 $ 3,503 $ (23) $ 851,878 $ (94,714) $ 855,381 $ (94,737)
Less Than 12 Months 12 Months or Greater Total
(dollars in thousands) Number of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses
December 31, 2023
Investment securities available-for-sale:
U.S. treasury bonds
2 $ - $ - $ 47,901 $ (1,993) $ 47,901 $ (1,993)
U. S. agency securities 78 3,084 (4) 668,313 (57,689) 671,397 (57,693)
Residential mortgage-backed securities 149 - - 718,042 (96,684) 718,042 (96,684)
Commercial mortgage-backed securities 13 - - 49,564 (4,993) 49,564 (4,993)
Municipal bonds 1 - - 8,490 (293) 8,490 (293)
Corporate bonds 1 - - 1,683 (300) 1,683 (300)
Total 244 $ 3,084 $ (4) $ 1,493,993 $ (161,952) $ 1,497,077 $ (161,956)
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Less Than 12 Months 12 Months or Greater Total
(dollars in thousands) Number of Securities Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses
December 31, 2023
Investment securities held-to-maturity:
Residential mortgage-backed securities 142 $ - $ - $ 590,063 $ (79,980) $ 590,063 $ (79,980)
Commercial mortgage-backed securities 16 - - 77,360 (12,867) 77,360 (12,867)
Municipal bonds 40 - - 113,031 (8,540) 113,031 (8,540)
Corporate bonds 30 - - 105,523 (14,729) 105,523 (14,729)
Total 228 $ - $ - $ 885,977 $ (116,116) $ 885,977 $ (116,116)
Unrealized losses at September 30, 2024 were generally attributable to changes in market interest rates and interest spread relationships subsequent to the dates the securities were originally purchased and were considered to be temporary, and not due to credit quality concerns on the investment securities. The fair values of these securities are expected to recover as the securities approach their respective maturity dates. The Company does not intend to sell and it is likely that it will not be required to sell the securities prior to their anticipated recovery.
The Company measures its AFS and HTM security portfolios for current expected credit losses as part of its ACL analysis. For further information on provision for credit losses on AFS and HTM securities, including balances for the three and nine months ended September 30, 2024 and 2023, see Allowance for Credit Losses discussion in "Note 1. Summary of Significant Accounting Policies". At September 30, 2024, the Company had a total allowance of $17 thousand on its AFS securities and $1.2 million on its HTM securities, each of which primarily comprise allowances for corporate bonds.
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The following table summarizes the Company's investment in AFS securities and HTM securities by contractual maturity. Expected maturities for mortgage-backed securities ("MBS") will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
September 30, 2024
(dollars in thousands) Amortized Cost Estimated Fair Value
Investment securities available-for-sale:
Within one year $ 226,404 $ 223,552
One to five years 419,569 394,901
Five to ten years 85,553 76,816
Beyond ten years 19,795 17,493
Residential mortgage-backed securities 745,006 670,045
Commercial mortgage-backed securities 53,711 50,216
Less: allowance for credit losses - (17)
Total investment securities available-for-sale 1,550,038 1,433,006
Investment securities held-to-maturity:
Within one year 7,699 7,636
One to five years 57,804 56,704
Five to ten years 118,626 107,212
Beyond ten years 68,561 62,673
Residential mortgage-backed securities: 621,203 554,939
Commercial mortgage-backed securities 89,269 79,261
Less: allowance for credit losses (1,237) -
Total investment securities held-to-maturity 961,925 868,425
Total $ 2,511,963 $ 2,301,431
For the three and nine months ended September 30, 2024, gross realized gains on calls of investment securities were $3 thousand and $10 thousand, respectively, as compared to $5 thousand and $126 thousand for the three and nine months ended September 30, 2023.
There were no gross realized losses on sales or calls of investment securities during the three and nine months ended September 30, 2024, nor during the three months ended September 30, 2023. During the nine months ended September 30, 2023, there were $140 thousand of gross realized losses on sales or calls of investment securities.
Gross sales and call proceeds were $4.5 million and $31.6 million for the three and nine months ended September 30, 2024, respectively, and $2.6 million and $11.2 million for the same periods in 2023.
The book value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at September 30, 2024 and December 31, 2023 was $1.4 billion and $2.1 billion, respectively. These balances were well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of September 30, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. agency securities, that exceeded ten percent of shareholders' equity.
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Note 4. Loans and Allowance for Credit Losses
The Bank makes loans to customers primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank's loan portfolio consists of loans to businesses secured by real estate and other business assets.
HFI Loans, net of unamortized deferred fees and costs, at September 30, 2024 and December 31, 2023 are summarized by portfolio segment as follows:
September 30, 2024 December 31, 2023
(dollars in thousands, except amounts in the footnote) Amount % Amount %
Commercial $ 1,154,349 14 % $ 1,473,766 18 %
PPP loans 348 - % 528 - %
Income-producing - commercial real estate 4,155,120 52 % 4,094,614 51 %
Owner-occupied - commercial real estate 1,276,240 16 % 1,172,239 15 %
Real estate mortgage - residential 57,223 1 % 73,396 1 %
Construction - commercial and residential 1,174,591 15 % 969,766 12 %
Construction - C&I (owner-occupied) 100,662 1 % 132,021 2 %
Home equity 51,567 1 % 51,964 1 %
Other consumer 169 - % 401 - %
Total loans 7,970,269 100 % 7,968,695 100 %
Less: allowance for credit losses (111,867) (85,940)
Net loans (1)
$ 7,858,402 $ 7,882,755
(1)Excludes accrued interest receivable of $43.4 million and $45.3 million at September 30, 2024 and December 31, 2023, respectively, which were recorded in other assets on the Consolidated Balance Sheets.
Unamortized net deferred costs amounted to $20.7 million and $27.0 million at September 30, 2024 and December 31, 2023, respectively.
As of September 30, 2024 and December 31, 2023, the Bank serviced $56.0 million and $328.0 million, respectively, of SBA loans and other loan participations that are not reflected as loan balances on the Consolidated Balance Sheets. During the nine months ended September 30, 2024, the Company sold the servicing rights to all FHA loans.
Real estate loans are secured primarily by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required.
Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed-price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.
Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single-family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination.
Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner-occupied commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate approval authority. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.
Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower's architect. Each draw request shall also include the borrower's soft cost breakdown certified by the borrower or their agent. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition.
Commercial permanent loans are generally secured by improved real property that is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to 1.0. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.
Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.
The Company's loan portfolio includes acquisition, development and construction ("ADC") real estate loans including both investment and owner-occupied projects. ADC loans amounted to $1.8 billion at September 30, 2024. A portion of the ADC portfolio, both speculative and non-speculative, includes loan-funded interest reserves at origination. ADC loans that provide for the use of interest reserves represent approximately 59.6% of the outstanding ADC loan portfolio at September 30, 2024. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit, including: (1) the feasibility of the project; (2) the experience of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) the borrower equity contribution; and (5) the level of collateral protection. When appropriate, an interest reserve provides a means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company does not significantly utilize interest reserves in other loan products. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower's ability to repay the loan. In order to mitigate these inherent risks, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1) construction and development timelines that are monitored on an ongoing basis and track the progress of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction meetings among senior Company management, which include monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves.
The following table details activity in the ACL by portfolio segment for the three and nine months ended September 30, 2024 and 2023. PPP loans are excluded from these tables since they do not carry an allowance for credit loss, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. Government. Allocation of a portion of the allowance to one category of loans does not restrict the use of the allowance to absorb losses in other categories.
(dollars in thousands) Commercial Income-Producing Commercial Real Estate Owner-Occupied -Commercial Real Estate Real Estate Mortgage Residential Construction - Commercial and Residential Construction - C&I (Owner-Occupied) Home Equity Other Consumer Total
Three Months Ended September 30, 2024
Allowance for credit losses:
Balance at beginning of period $ 21,011 $ 53,251 $ 15,641 $ 750 $ 13,510 $ 1,431 $ 677 $ 30 106,301
Loans charged-off (1,563) - (3,800) - - - - (17) (5,380)
Recoveries of loans previously charged-off 53 - 24 - - - - - 77
Net loans (charged-off) recovered (1,510) - (3,776) - - - - (17) (5,303)
Provision for (reversal of) credit losses 802 61 8,206 (12) 1,907 (134) 23 16 10,869
Ending balance $ 20,303 $ 53,312 $ 20,071 $ 738 $ 15,417 $ 1,297 $ 700 $ 29 $ 111,867
Nine Months Ended September 30, 2024
Allowance for credit losses:
Balance at beginning of period $ 17,824 $ 40,050 $ 14,333 $ 861 $ 10,198 $ 1,992 $ 657 $ 25 $ 85,940
Loans charged-off (4,150) (21,329) (3,800) - (129) - - (88) (29,496)
Recoveries of loans previously charged-off 220 185 71 - - - - - 476
Net loans (charged-off) recovered (3,930) (21,144) (3,729) - (129) - - (88) (29,020)
Provision for (reversal of) credit losses 6,409 34,406 9,467 (123) 5,348 (695) 43 92 54,947
Ending balance $ 20,303 $ 53,312 $ 20,071 $ 738 $ 15,417 $ 1,297 $ 700 $ 29 $ 111,867
Three Months Ended September 30, 2023
Allowance for credit losses:
Balance at beginning of period $ 15,374 $ 38,486 $ 12,805 $ 811 $ 8,018 $ 1,914 $ 595 $ 26 $ 78,029
Loans charged-off (467) - - - - - - - (467)
Recoveries of loans previously charged-off 103 - 23 - - - - 1 127
Net loans (charged-off) recovered (364) - 23 - - - - 1 (340)
Provision for (reversal of) credit losses 1,327 2,207 1,424 53 615 (20) 39 (2) 5,643
Ending balance $ 16,337 $ 40,693 $ 14,252 $ 864 $ 8,633 $ 1,894 $ 634 $ 25 $ 83,332
Nine Months Ended September 30, 2023
Allowance for credit losses:
Balance at beginning of period $ 15,655 $ 35,688 $ 12,702 $ 969 $ 7,195 $ 1,606 $ 555 $ 74 $ 74,444
Loans charged-off (1,828) (5,306) - - (136) - - (50) (7,320)
Recoveries of loans previously charged-off 335 - 31 - 34 - - 6 406
Net loans (charged-off) recovered (1,493) (5,306) 31 - (102) - - (44) (6,914)
Provision for (reversal of) credit losses 2,175 10,311 1,519 (105) 1,540 288 79 (5) 15,802
Ending balance $ 16,337 $ 40,693 $ 14,252 $ 864 $ 8,633 $ 1,894 $ 634 $ 25 $ 83,332
The following table presents the amortized cost basis of collateral-dependent HFI loans by class of loans as of September 30, 2024 and December 31, 2023:
September 30, 2024 December 31, 2023
Business/Other Business/Other
(dollars in thousands) Assets Real Estate Assets Real Estate
Commercial $ 439 $ 1,817 $ 1,674 $ 1,240
Income-producing - commercial real estate 39,205 55,077 1,754 39,172
Owner-occupied - commercial real estate - 37,732 - 19,836
Real estate mortgage - residential - - - 1,692
Construction - commercial and residential - - - 525
Home equity - 257 - 242
Total $ 39,644 $ 94,883 $ 3,428 $ 62,707
Credit Quality Indicators
The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators inform an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes that comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes that comprise the consumer portfolio segment.
The following are the definitions of the Company's credit quality indicators:
Pass: Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.
Special Mention: Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management's close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention.
Classified:
Classified (a) Substandard- Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard.
Classified (b) Doubtful- Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.
The Company's credit quality indicators are generally updated annually, however, credits rated "Special Mention" or below are reviewed more frequently. Based on the most recent analysis performed, the amortized cost basis of HFI loans by risk category, class and year of origination, along with any charge-offs that were recorded in the applicable loan segment, if applicable, were as follows:
(dollars in thousands) Prior 2020 2021 2022 2023 2024 Revolving Loans Amort. Cost Basis Revolving Loans Convert. to Term Total
September 30, 2024
Commercial
Pass $ 141,608 $ 27,799 $ 140,443 $ 121,922 $ 120,991 $ 67,565 $ 457,999 $ 5,967 $ 1,084,294
Special Mention 7,312 - - - - - 3,014 - 10,326
Substandard 11,401 7,860 1,948 220 - - 30,296 8,004 59,729
Total 160,321 35,659 142,391 122,142 120,991 67,565 491,309 13,971 1,154,349
YTD gross charge-offs (4,100) - - - - - - (50) (4,150)
PPP loans
Pass - - 348 - - - - - 348
Income producing - commercial real estate
Pass 1,374,777 178,968 601,123 807,962 311,981 93,934 222,568 27,526 3,618,839
Special Mention 211,617 91,610 - - - - - - 303,227
Substandard 222,554 - - - - - 10,500 - 233,054
Total 1,808,948 270,578 601,123 807,962 311,981 93,934 233,068 27,526 4,155,120
YTD gross charge-offs (20,943) (386) - - - - - - (21,329)
Owner occupied - commercial real estate
Pass 650,594 33,225 220,650 47,551 138,686 76,133 509 - 1,167,348
Special Mention 51,430 - - - - - - - 51,430
Substandard 56,208 1,254 - - - - - - 57,462
Total 758,232 34,479 220,650 47,551 138,686 76,133 509 - 1,276,240
YTD Gross Charge-offs (3,800) - - - - - - - - (3,800)
Real estate mortgage - residential
Pass 22,324 2,450 14,340 12,235 5,874 - - - 57,223
Total 22,324 2,450 14,340 12,235 5,874 - - - 57,223
YTD Gross Charge-offs - - - - - - - - -
Construction - commercial and residential
Pass 26,733 8,614 238,650 564,369 161,581 6,546 127,331 - 1,133,824
Substandard 6,141 29,737 4,889 - - - - - 40,767
Total 32,874 38,351 243,539 564,369 161,581 6,546 127,331 - 1,174,591
YTD gross charge-offs (129) - - - - - - - (129)
Construction - C&I (owner occupied)
Pass 6,212 49,996 - 35,098 8,514 - 842 - 100,662
Total 6,212 49,996 - 35,098 8,514 - 842 - 100,662
Home equity
Pass 1,481 71 35 116 - - 49,175 400 51,278
Substandard 62 - 227 - - - - - 289
Total 1,543 71 262 116 - - 49,175 400 51,567
Other consumer
Pass 3 - - - - 69 96 1 169
Total 3 - - - - 69 96 1 169
YTD gross charge-offs (87) - - - - - - (1) (88)
Total recorded investment $ 2,790,457 $ 431,584 $ 1,222,653 $ 1,589,473 $ 747,627 $ 244,247 $ 902,330 $ 41,898 $ 7,970,269
Total YTD gross charge-offs $ (29,059) $ (386) $ - $ - $ - $ - $ - $ (51) $ (29,496)
(dollars in thousands) Prior 2019 2020 2021 2022 2023 Revolving Loans Amort. Cost Basis Revolving Loans Convert. to Term Total
December 31, 2023
Commercial
Pass $ 157,563 $ 48,524 $ 39,133 $ 194,555 $ 149,320 $ 191,889 $ 623,684 $ 5,207 $ 1,409,875
Special Mention 1,415 - - - - - 2,259 - 3,674
Substandard 13,797 58 10,337 1,509 222 - 33,670 624 60,217
Total 172,775 48,582 49,470 196,064 149,542 191,889 659,613 5,831 1,473,766
YTD gross charge-offs (885) - - - - - - (1,135) (2,020)
PPP loans
Pass - - - 528 - - - - 528
Total - - - 528 - - - - 528
Income producing - commercial real estate
Pass 1,257,937 326,999 328,743 517,957 732,291 327,126 263,317 1,845 3,756,215
Special Mention 84,585 44,424 6,740 - - - - - 135,749
Substandard 139,961 62,689 - - - - - - 202,650
Total 1,482,483 434,112 335,483 517,957 732,291 327,126 263,317 1,845 4,094,614
YTD gross charge-offs (11,817) - - - - - - - (11,817)
Owner occupied - commercial real estate
Pass 534,525 103,034 35,385 202,776 41,907 125,934 673 55 1,044,289
Special Mention 54,288 13,348 - - - - - - 67,636
Substandard 37,167 - 1,274 - - - - 21,873 60,314
Total 625,980 116,382 36,659 202,776 41,907 125,934 673 21,928 1,172,239
YTD Gross Charge-offs - - - - - - - - -
Real estate mortgage - residential
Pass 22,877 7,545 2,186 15,967 14,756 5,895 - - 69,226
Substandard 4,170 - - - - - - - 4,170
Total 27,047 7,545 2,186 15,967 14,756 5,895 - - 73,396
YTD Gross Charge-offs - - - - - - - - -
Construction - commercial and residential
Pass 30,619 3,440 45,739 251,038 419,393 87,400 124,013 - 961,642
Substandard 8,124 - - - - - - - 8,124
Total 38,743 3,440 45,739 251,038 419,393 87,400 124,013 - 969,766
YTD Gross Charge-offs (136) (5,500) - - - - - - (5,636)
Construction - C&I (owner occupied)
Pass 18,551 4,265 56,361 618 33,237 12,619 6,370 - 132,021
Home equity
Pass 1,590 - 87 151 118 - 49,035 643 51,624
Substandard - 36 - - - - 62 242 340
Total 1,590 36 87 151 118 - 49,097 885 51,964
YTD Gross Charge-offs - - - - - - - - -
Other consumer
Pass 1 - - - 46 - 354 - 401
Total 1 - - - 46 - 354 - 401
YTD gross charge-offs (50) - - - - - - - (50)
Total recorded investment $ 2,367,170 $ 614,362 $ 525,985 $ 1,185,099 $ 1,391,290 $ 750,863 $ 1,103,437 $ 30,489 $ 7,968,695
Total YTD gross charge-offs $ (12,888) $ (5,500) $ - $ - $ - $ - $ - $ (1,135) $ (19,523)
Nonaccrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The following table presents, by portfolio segment, the nonaccrual HFI loans amortized cost basis as of September 30, 2024 and December 31, 2023:
(dollars in thousands, except amounts in footnotes) Nonaccrual with No Allowance for Credit Losses Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans
September 30, 2024
Commercial $ 1,479 $ 451 $ 1,930
Income producing - commercial real estate 47,224 47,058 94,282
Owner occupied - commercial real estate 642 37,088 37,730
Real estate mortgage - residential - 172 172
Construction - commercial and residential - - -
Home equity 257 - 257
Total(1)
$ 49,602 $ 84,769 $ 134,371
December 31, 2023
Commercial $ 1,002 $ 1,047 $ 2,049
Income producing - commercial real estate 40,926 - 40,926
Owner occupied - commercial real estate 19,836 - 19,836
Real estate mortgage - residential - 1,946 1,946
Construction - commercial and residential - 525 525
Home equity 242 - 242
Total(1)
$ 62,006 $ 3,518 $ 65,524
(1)Gross coupon interest income of approximately $5.9 million and $4.1 million would have been recorded for the nine months ended September 30, 2024 and 2023, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while no coupon interest income was actually recorded on such loans for the nine months ended September 30, 2024 and 2023, respectively.
The table presents, by portfolio segment, an aging analysis and the recorded investments in HFI loans past due, on an amortized cost basis as of September 30, 2024 and December 31, 2023:
(dollars in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 Days or More Past Due Total Past Due Loans Current Loans Nonaccrual Loans Total Recorded Investment in Loans
September 30, 2024
Commercial $ 66 $ 17,996 $ - $ 18,062 $ 1,134,357 $ 1,930 $ 1,154,349
PPP loans - - - - 348 - 348
Income producing - commercial real estate 8,413 26,159 - 34,572 4,026,266 94,282 4,155,120
Owner occupied - commercial real estate 2,566 - - 2,566 1,235,944 37,730 1,276,240
Real estate mortgage - residential - - - - 57,051 172 57,223
Construction - commercial and residential 1,031 - - 1,031 1,173,560 - 1,174,591
Construction - C&I (owner occupied) - - - - 100,662 - 100,662
Home equity 106 - - 106 51,204 257 51,567
Other consumer - 1 - 1 168 - 169
Total $ 12,182 $ 44,156 $ - $ 56,338 $ 7,779,560 $ 134,371 $ 7,970,269
(dollars in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 Days or More Past Due Total Past Due Loans Current Loans Nonaccrual Loans Total Recorded Investment in Loans
December 31, 2023
Commercial $ 985 $ 7,048 $ - $ 8,033 $ 1,463,684 $ 2,049 $ 1,473,766
PPP loans - - - - 528 - 528
Income producing - commercial real estate - - - - 4,053,688 40,926 4,094,614
Owner occupied - commercial real estate 1,274 - - 1,274 1,151,129 19,836 1,172,239
Real estate mortgage - residential 2,089 - - 2,089 69,361 1,946 73,396
Construction - commercial and residential 2,056 - - 2,056 967,185 525 969,766
Construction - C&I (owner occupied) - - - - 132,021 - 132,021
Home equity 197 - - 197 51,525 242 51,964
Other consumer - - - - 401 - 401
Total $ 6,601 $ 7,048 $ - $ 13,649 $ 7,889,522 $ 65,524 $ 7,968,695
Loan Modifications for Borrowers Experiencing Financial Difficulty
The Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulties that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are for modifications which have a direct impact on cash flows.
The Company may offer various types of modifications when restructuring a loan. Commercial and industrial loans modified in a loan restructuring often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested.
Commercial mortgage and construction loans modified in a loan restructuring often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a loan restructuring may also involve extending the interest-only payment period.
Loans modified in a loan restructuring for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for consumer and commercial loans that have been modified in a loan restructuring is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.
Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further loss. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.
The following tables present the amortized cost basis as of September 30, 2024 and 2023 and the financial effect of HFI loans modified to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2024 and 2023:
September 30, 2024
(dollars in thousands) Term Extension Combination - Term Extension and Principal Payment Delay Combination - Interest Rate Reduction and Principal Payment Delay Combination - Term Extension, Principal Payment Delay and Interest Rate Reduction Total Percentage of Total Loan Type Weighted Average Term and Principal Payment Extension Weighted Average Interest Rate Reduction
Three months ended September 30, 2024
Commercial $ 11,328 $ 28,776 $ - $ - $ 40,104 3.5% 10 months -%
Income producing - commercial real estate 27,535 69,023 - - 96,558 2.3% 12 months -%
Owner occupied - commercial real estate - - - - - -% - -%
Construction - commercial and residential - - - - - -% - -%
Total $ 38,863 $ 97,799 $ - $ - $ 136,662
Nine months ended September 30, 2024:
Commercial $ 27,325 $ 28,776 7,831 $ - $ 63,932 5.5% 13 months 1.63%
Income producing - commercial real estate 27,535 171,851 - 3,513 202,899 4.9% 10 months 3.59%
Owner occupied - commercial real estate 874 - - - 874 0.1% 12 months -%
Construction - commercial and residential - 11,030 - - 11,030 0.9% 9 months -%
Total $ 55,734 $ 211,657 $ 7,831 $ 3,513 $ 278,735
September 30, 2023
(dollars in thousands) Term Extension Combination - Term Extension and Principal Payment Delay Combination - Interest Rate Reduction and Principal Payment Delay Combination - Term Extension, Principal Payment Delay and Interest Rate Reduction Total Percentage of Total Loan Type Weighted Average Term and Principal Payment Extension Weighted Average Interest Rate Reduction
Three months ended September 30, 2023:
Commercial $ 29,898 $ - $ - $ - $ 29,898 2.1 % 4 months - %
Income producing - commercial real estate 7,190 55,649 - 113,833 176,672 4.3 % 10 months 1.89 %
Owner occupied - commercial real estate - 19,125 - - 19,125 1.6 % 3 months - %
Total $ 37,088 $ 74,774 $ - $ 113,833 $ 225,695
Nine months ended September 30, 2023:
Commercial $ 36,969 $ - $ - $ - $ 36,969 2.6 % 7 months - %
Income producing - commercial real estate 7,190 57,808 - 113,833 178,831 4.3 % 13 months 2.55 %
Owner occupied - commercial real estate - 19,125 - - 19,125 1.6 % 9 months - %
Construction - commercial and residential 7,093 - - - 7,093 0.8 % 6 months - %
Total $ 51,252 $ 76,933 $ - $ 113,833 $ 242,018
The following table presents the performance of HFI loans modified during the prior twelve months to borrowers experiencing financial difficulty:
September 30, 2024
Payment Status (Amortized Cost Basis)
(dollars in thousands) Current 30-89 Days Past Due Nonaccrual
Commercial $ 60,611 $ 3,321 $ -
Income producing - commercial real estate 158,916 12,371 57,558
Owner occupied - commercial real estate 874 - -
Real estate mortgage - residential - - -
Construction - commercial and residential 11,030 - -
Total $ 231,431 $ 15,692 $ 57,558
The Company monitors loan payments on performing and nonperforming loans on an on-going basis to determine if a loan is considered to have a payment default. To determine the existence of a payment default, the Company analyzes the economic conditions that exist for each borrower and their ability to generate positive cash flow during a given loan's term.
The following table presents the amortized cost basis of HFI loans that were experiencing payment default as of September 30, 2024 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty:
September 30, 2024
Amortized Cost Basis
(dollars in thousands) Term Extension Combination - Term Extension and Principal Payment Delay Combination - Term Extension, Principal Payment Delay and Interest Rate Reduction
Commercial $ 3,321 $ - $ -
Income producing - commercial real estate - 69,929 -
Owner occupied - commercial real estate - - -
Construction - commercial and residential - - -
Total $ 3,321 $ 69,929 $ -
The Company individually evaluates nonaccrual loans when performing its CECL estimate to calculate the ACL. Additionally, the Company utilizes historical internal and third-party service provider sourced loss data in the determination of its PD/LGD rates applied in the calculation of its CECL estimate. Upon determination that a modified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is charged off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL is adjusted by the same amount.
Note 5. Leases
The Company accounts for leases in accordance with ASC Topic 842. A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Substantially all of the leases in which the Company is the lessee comprise real estate for branch offices, ATM locations, and corporate office space. Substantially all of our leases are classified as operating leases and are included in operating lease right-of-use ("ROU") assets and operating lease liabilities on the Consolidated Balance Sheets.
As of September 30, 2024 and December 31, 2023, the Company had $15.2 million and $19.1 million of operating lease ROU assets, respectively, and $18.8 million and $23.2 million of operating lease liabilities, respectively, on the Company's Consolidated Balance Sheets. The Company elects not to recognize ROU assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Balance Sheets.
The leases contain options to extend or terminate the lease, which are recognized as part of the ROU assets and lease liabilities when an economic benefit to exercise the option exists and there is a 90% probability that the Company will exercise the option. If these criteria are not met, the options are not included in ROU assets and lease liabilities.
As of September 30, 2024, the Company's leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or its ability to incur additional financial obligations. During the nine months ended September 30, 2024, the Company did not enter into new leases nor renew any leases. However, during the same period, the Company did extend two existing leases, one each in Maryland and District of Columbia, and two additional leases expired.
22
The following table presents lease costs and other lease information.
Three Months Ended Nine Months Ended
(dollars in thousands) September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023
Lease cost
Operating lease cost (cost resulting from lease payments) $ 1,525 $ 1,604 $ 4,691 $ 4,987
Variable lease cost (cost excluded from lease payments) 231 245 709 754
Sublease income - (30) (40) (89)
Net lease cost $ 1,756 $ 1,819 $ 5,360 $ 5,652
Operating lease - operating cash flows (fixed payments) $ 1,703 $ 1,760 $ 5,212 $ 5,433
(dollars in thousands) September 30, 2024 December 31, 2023
Right-of-use assets - operating leases $ 15,167 $ 19,129
Operating lease liabilities $ 18,755 $ 23,238
Weighted average lease term - operating leases 4.57 yrs 4.93 yrs
Weighted average discount rate - operating leases 2.63 % 2.78 %
Future minimum payments for operating leases with initial or remaining terms of more than one year as of September 30, 2024 were as follows:
(dollars in thousands)
Twelve months ended:
September 30, 2025 $ 6,821
September 30, 2026 3,580
September 30, 2027 2,753
September 30, 2028 2,207
September 30, 2029 1,857
Thereafter 2,413
Total future minimum lease payments 19,631
Amounts representing interest (876)
Present value of net future minimum lease payments $ 18,755
23
Note 6. Goodwill and Intangibles
Intangible assets are included in the Consolidated Balance Sheets as a separate line item, net of accumulated amortization and consist of the following items:
(dollars in thousands) Gross
Intangible
Assets 		Additions Accumulated
Amortization 		Impairment Net
Intangible
Assets
September 30, 2024:
Goodwill $ 104,168 $ - $ - $ (104,168) $ -
Excess servicing (1)
37 - (16) - 21
Non-compete agreements 720 - (720) - -
Total $ 104,925 $ - $ (736) $ (104,168) $ 21
December 31, 2023:
Goodwill $ 104,168 $ - $ - $ - $ 104,168
Excess servicing (1)
65 - (28) - 37
Non-compete agreements - 1,234 (514) - 720
Total $ 104,233 $ 1,234 $ (542) $ - $ 104,925
(1)The Company recognizes a servicing asset for the computed value of servicing fees on the sale of multifamily FHA loans and the sale of the guaranteed portion of SBA loans. Assumptions related to loan terms and amortization are made to arrive at the initial recorded values.
During the second quarter ended June 30, 2024, Management determined that a triggering event had occurred as a result of the share price trading under book value for more than four quarters due to changes in macroeconomic conditions and market volatility in the financial markets and the banking industry due to the impact from rising interest rates which resulted in fluctuations of the Company's stock price with a sustained decrease. As a result of the triggering event, the Company engaged a third-party service provider to assist Management with the determination of the fair value of the Company in the second quarter of 2024. The resulting calculations indicated that the fair value did not exceed the carrying amount of the Company's only reporting unit as of May 31, 2024 which resulted in a determination that goodwill had become fully impaired. The goodwill impairment charge of $104.2 million reduced fully the carrying value of the Company's goodwill as of May 31, 2024. The impaired goodwill is primarily related to the acquisition of the Virginia Heritage Bank in October 2014. The impairment charge did not impact our cash flows, liquidity ratios, core operating performance, or regulatory capital ratios.
Note 7. Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities through the use of derivative financial instruments.
Cash Flow Hedges of Interest Rate Risk
The Company historically utilized interest rate swaptions, accounted for as cash flow hedges, to protect itself against adverse fluctuations in interest rates on a forecasted issuance of debt. During the quarter ended March 31, 2024, the Company terminated its interest rate swaption contracts and discontinued the associated hedging relationship. The amount in accumulated other comprehensive loss related to the swaption contracts is being amortized over the remainder of the hedged transaction. The Company expects to reclassify the remaining $57 thousand out of accumulated other comprehensive loss over the next two quarters as a reduction of interest expense.
24
Interest Rate Products
Interest rate derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net market risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. At September 30, 2024, the Company had posted $10.2 million of cash collateral with other financial institutions and held $9.2 million of cash collateral on behalf of other financial institutions.
The Company entered into credit risk participation agreements ("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts in exchange for a fee. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities.
Credit-Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815, "Derivatives and Hedging."In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty.
The interest rate derivative agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party's exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; 3) if the Company fails to maintain its status as a well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
25
The table below identifies the balance sheet category and fair value of the Company's derivative instruments as of September 30, 2024 and December 31, 2023. The Company has a minimum collateral posting threshold with its derivative counterparty. If the Company had breached any provisions under the agreement at September 30, 2024, it could have been required to settle its obligations under the agreement at the termination value.
September 30, 2024 December 31, 2023
(dollars in thousands) Notional
Amount 		Fair Value Balance Sheet
Category 		Notional
Amount 		Fair Value Balance Sheet
Category
Derivatives in an asset position:
Derivatives designated as hedging instruments:
Interest rate product $ - $ - Other assets $ 300,000 $ 374 Other assets
Derivatives not designated as hedging instruments:
Interest rate product 755,156 31,984 Other assets 651,429 30,288 Other assets
Credit risk participation agreements 49,480 1 Other liabilities 49,480 3 Other liabilities
Total 804,636 31,985 700,909 30,291
Total derivatives in an asset position: $ 804,636 $ 31,985 $ 1,000,909 $ 30,665
Derivatives in a liability position:
Derivatives not designated as hedging instruments:
Interest rate product $ 755,156 $ 30,588 Other liabilities $ 654,757 $ 30,555 Other liabilities
The table below presents the effect of the Company's derivative financial instruments on the Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023:
The Effect of Derivatives Not Designated as Hedging Instruments on the Consolidated Statements of Operations
Amount of Gain (Loss) Recognized in Income on Derivatives
Location of Gain (Loss) Recognized in Income on Derivatives Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2024 2023 2024 2023
Interest rate products Other income / (other expense) $ 843 $ 3,027 $ 1,321 $ 3,735
Note 8. Deposits
The following table provides information regarding the Bank's deposit composition at September 30, 2024 and December 31, 2023:
(dollars in thousands) September 30, 2024 December 31, 2023
Noninterest-bearing demand $ 1,609,823 $ 2,279,081
Interest-bearing transaction 903,300 997,448
Savings and money market 3,316,819 3,314,043
Time deposits 2,710,908 2,217,467
Total $ 8,540,850 $ 8,808,039
26
The remaining maturity of time deposits at September 30, 2024 and December 31, 2023 were as follows:
(dollars in thousands) September 30, 2024 December 31, 2023
2024 $ 411,016 $ 1,445,395
2025 1,907,109 576,379
2026 374,159 180,384
2027 6,443 5,482
2028 10,175 9,827
2029 2,006 -
Total $ 2,710,908 $ 2,217,467
As of September 30, 2024 and December 31, 2023, time deposit accounts in excess of $250 thousand were as follows:
(dollars in thousands) September 30, 2024 December 31, 2023
Three months or less $ 187,180 $ 119,880
More than three months through six months 182,214 318,353
More than six months through twelve months 798,285 368,103
Over twelve months 483,883 726,758
Total $ 1,651,562 $ 1,533,094
At September 30, 2024, total brokered deposits were $3.6 billion or 42.5% of total deposits, of which $1.4 billion were attributable to the Certificates of Deposit Account Registry Service ("CDARS") and Insured Cash Sweep ("ICS") two-way accounts. At December 31, 2023, total brokered deposits (excluding the CDARS and ICS two-way) were $2.5 billion, or 28.8% of total deposits.
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Note 9. Borrowings
The following table summarizes the Company's borrowings, which include repurchase agreements with the Company's customers and borrowings, at September 30, 2024 and December 31, 2023:
(dollars in thousands) Borrowings - Principal Unamortized Deferred Issuance Costs Net Borrowings Outstanding
Available Capacity (1)
Maturity Dates
Interest Rates (2)
September 30, 2024:
Customer repurchase agreements $ 32,040 $ - $ 32,040 $ - N/A 3.31%
Short-term borrowings:
Secured borrowings:
FHLB 240,000 - 240,000 1,203,126 April 1, 2025 5.20%
FRB:
BTFP 1,000,000 - 1,000,000 - January 15, 2025 4.76%
Discount window - - - 1,839,552 N/A N/A
Raymond James repurchase agreement - - - 18,604 N/A N/A
Subordinated notes - - - - N/A N/A
Total 1,240,000 - 1,240,000 3,061,282
Long-term borrowings:
Senior notes
77,665 (1,853) 75,812 - September 30, 2029 10.00 %
Total borrowings $ 1,349,705 $ (1,853) $ 1,347,852 $ 3,061,282
December 31, 2023:
Customer repurchase agreements $ 30,587 $ - $ 30,587 $ - N/A 3.42%
Short-term borrowings:
Secured borrowings:
FHLB - - - 1,271,846 N/A N/A
FRB:
BTFP 1,300,000 - 1,300,000 598,870 March 22, 2024 4.53%
Discount window - - - 601,504 N/A N/A
Raymond James repurchase agreement - - - 17,993 N/A N/A
Subordinated notes 70,000 (82) 69,918 - September 1, 2024 5.75%
Long-term borrowings:
Senior notes
- - - -
N/A
N/A
Total borrowings $ 1,400,587 $ (82) $ 1,400,505 $ 2,490,213
(1)Available capacity on the Company's borrowing arrangements with the FHLB, the FRB and the Raymond James repurchase line comprise pledged collateral that has not been borrowed against. At September 30, 2024, the Company had total additional undrawn borrowing capacity of approximately $4.0 billion, comprising unencumbered securities available to be pledged of approximately $892.9 million and undrawn financing on pledged assets of $3.1 billion.
(2)Represent the weighted average interest rate on customer repurchase agreements and the borrowings outstanding and the coupon interest rate on the subordinated notes, which approximates the effective interest rate.
The Company's repurchase agreements operate on a rolling basis and do not contain contractual maturity dates. The contractual maturity dates on FHLB secured borrowings represent the maturity dates of current advances and are not evidence of a termination date on the line.
There are no prepayment penalties nor unused commitment fees on any of the Company's borrowing arrangements.
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Bank Term Funding Program ("BTFP")
On March 12, 2023, the FRB, Department of Treasury and the Federal Deposit Insurance Corporation ("FDIC") issued a joint statement outlining actions they had taken to protect the U.S. economy by strengthening public confidence in the banking system as a result of and in response to recently announced bank closures. Among other actions, the Federal Reserve Board announced that it would make available additional funding to eligible depository institutions through the creation of a new BTFP. The BTFP provides eligible depository institutions, including the Company's subsidiary bank, the Bank, an additional source of liquidity.
Borrowings are funded based on a percentage of the principal of eligible collateral posted, as defined within the terms of the program. Interest is payable at a fixed rate over the term of the borrowing and there are no prepayment penalties. The Federal Reserve announced in January 2024 that the BTFP would stop originating new loans on March 11, 2024, as scheduled. The Federal Reserve also modified the terms of the program so that the interest rate for new loans would be no lower than the interest rate on reserve balances in effect on the day the loan is made. In January 2024, the Company borrowed an additional $500.0 million through the BTFP and refinanced $500.0 million under the program, both at an interest rate of 4.76% that mature in January 2025.
Senior Notes
On September 30, 2024, the Company closed a private placement of its 10.00% senior unsecured debt totaling $77.7 million maturing on September 30, 2029 (the "2029 Senior Notes"). At September 30, 2024, the carrying value of these 2029 Senior Notes was $75.8 million. which reflected $1.9 million in deferred financing costs that are being amortized over the life of the 2029 Senior Notes.
In connection with the issuance of the 2029 Senior Notes, the Company also entered into a registration rights agreement dated September 30, 2024 with the purchasers of the 2029 Senior Notes (the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, the Company is planning to file an exchange offer registration statement with the SEC to exchange the Senior Notes for substantially identical notes registered under the Securities Act.
Subordinated Notes
On August 5, 2014, the Company completed the sale of $70.0 million of its 5.75% subordinated notes, which matured and were repaid in September 2024 (the "2024 Notes"). The net proceeds were approximately $68.8 million which included $1.2 million in deferred financing costs, which were amortized over the life of the 2024 Notes. The 2024 Notes were offered to the public at par and qualified as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements and were fully phased out of regulatory capital as of December 31, 2023 as they approached maturity.
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Note 10. Net Income (Loss) per Common Share
The calculation of net income (loss) per common share for the three and nine months ended September 30, 2024 and 2023 was as follows:
Three Months Ended September 30, Nine Months Ended September 30,
(dollars and shares in thousands, except per share data) 2024 2023 2024 2023
Basic:
Net income (loss) $ 21,815 $ 27,383 $ (62,325) $ 80,309
Average common shares outstanding 30,174 29,910 30,143 30,487
Basic net income (loss) per common share $ 0.72 $ 0.91 $ (2.07) $ 2.63
Diluted:
Net income (loss) $ 21,815 $ 27,383 $ (62,325) $ 80,309
Average common shares outstanding 30,174 29,910 30,143 30,487
Adjustment for common share equivalents 68 34 - 48
Average common shares outstanding-diluted 30,242 29,944 30,143 30,535
Diluted net income (loss) per common share (1)
$ 0.72 $ 0.91 $ (2.07) $ 2.63
Anti-dilutive shares 3 3 58 3
(1)For periods ended with a net loss, anti-dilutive financial instruments have been excluded from the calculation of GAAP diluted EPS.
Basic net income (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss) of the Company. The computation of diluted per share does not assume conversion or exercise of securities that would have an anti-dilutive effect on net income (loss) per share.
Securities issued by the Company that could potentially dilute net income (loss) per share in future periods include stock options and restricted stock. To calculate diluted net income (loss) per share, the Company utilizes the Treasury Stock method which results in only an incremental number of shares added to shares outstanding during the period.
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Note 11. Other Comprehensive (Loss) Income
The following table presents the components of other comprehensive (loss) income for the three and nine months ended September 30, 2024 and 2023.
(dollars in thousands) Before Tax Tax Effect Net of Tax
Three Months Ended September 30, 2024
Net unrealized gain on securities available-for-sale $ 46,788 $ (11,450) $ 35,338
Less: Reclassification adjustment for net gain included in net income (3) 1 (2)
Total unrealized gain on investment securities available-for-sale
46,785 (11,449) 35,336
Amortization of unrealized loss on securities transferred to held-to-maturity 1,768 (413) 1,355
Net unrealized loss on derivatives (32) 7 (25)
Other comprehensive income $ 48,521 $ (11,855) $ 36,666
Three Months Ended September 30, 2023
Net unrealized loss on securities available-for-sale $ (28,150) $ 6,836 $ (21,314)
Less: Reclassification adjustment for net gain included in net income (5) 1 (4)
Total unrealized loss on investment securities available-for-sale (28,155) 6,837 (21,318)
Amortization of unrealized loss on securities transferred to held-to-maturity 1,824 (424) 1,400
Other comprehensive loss
$ (26,331) $ 6,413 $ (19,918)
Nine Months Ended September 30, 2024
Net unrealized gain on securities available-for-sale
$ 44,907 $ (11,006) $ 33,901
Less: Reclassification adjustment for net gain included in net income (10) 2 (8)
Total unrealized gain on investment securities available-for-sale
44,897 (11,004) 33,893
Amortization of unrealized loss on securities transferred to held-to-maturity 5,224 (1,162) 4,062
Net unrealized gain on derivatives 298 (73) 225
Other comprehensive income $ 50,419 $ (12,239) $ 38,180
Nine Months Ended September 30, 2023
Net unrealized loss on securities available-for-sale
$ (20,070) $ 4,618 $ (15,452)
Less: Reclassification adjustment for net loss included in net income 14 (4) 10
Total unrealized loss on investment securities available-for-sale
(20,056) 4,614 (15,442)
Amortization of unrealized loss on securities transferred to held-to-maturity 5,638 (2,194) 3,444
Other comprehensive loss $ (14,418) $ 2,420 $ (11,998)
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The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2024 and 2023.
(dollars in thousands) Securities Available-For-Sale Securities Held-to-Maturity Derivatives Accumulated Other Comprehensive Income (Loss)
Three Months Ended September 30, 2024
Balance at beginning of period $ (123,689) $ (37,222) $ 68 $ (160,843)
Other comprehensive income (loss) before reclassifications 35,338 - (25) 35,313
Amounts reclassified from accumulated other comprehensive income (loss) (2) - - (2)
Amortization of unrealized loss on securities transferred to held-to-maturity - 1,355 - 1,355
Net other comprehensive income (loss) during period 35,336 1,355 (25) 36,666
Balance at end of period $ (88,353) $ (35,867) $ 43 $ (124,177)
Three Months Ended September 30, 2023
Balance at beginning of period $ (148,897) $ (42,690) $ - $ (191,587)
Other comprehensive loss before reclassifications (21,314) - - (21,314)
Amounts reclassified from accumulated other comprehensive income (loss) (4) - - (4)
Amortization of unrealized loss on securities transferred to held-to-maturity - 1,400 - 1,400
Net other comprehensive (loss) income during period (21,318) 1,400 - (19,918)
Balance at end of period $ (170,215) $ (41,290) $ - $ (211,505)
Nine Months Ended September 30, 2024
Balance at beginning of period $ (122,246) $ (39,929) $ (182) $ (162,357)
Other comprehensive (loss) income before reclassifications 33,901 - 225 34,126
Amounts reclassified from accumulated other comprehensive income (loss) (8) - - (8)
Amortization of unrealized loss on securities transferred to held-to-maturity - 4,062 - 4,062
Net other comprehensive income (loss) during period 33,893 4,062 225 38,180
Balance at end of period $ (88,353) $ (35,867) $ 43 $ (124,177)
Nine Months Ended September 30, 2023
Balance at beginning of period $ (154,773) $ (44,734) $ - $ (199,507)
Other comprehensive income before reclassifications (15,452) - - (15,452)
Amounts reclassified from accumulated other comprehensive income 10 - - 10
Amortization of unrealized loss on securities transferred to held-to-maturity - 3,444 - 3,444
Net other comprehensive (loss) income during period (15,442) 3,444 - (11,998)
Balance at end of period $ (170,215) $ (41,290) $ - $ (211,505)
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The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2024 and 2023.
Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Three Months Ended September 30, Affected Line Item in Consolidated Statements of Income
(dollars in thousands) 2024 2023
Realized gain (loss) on sale of investment securities $ 3 $ 5 Net gain (loss) on sale of investment securities
Income tax benefit (expense) (1) (1) Income tax expense
Total reclassifications for the periods $ 2 $ 4
Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Nine Months Ended September 30, Affected Line Item in Consolidated Statements of Operations
(dollars in thousands) 2024 2023
Realized gain (loss) on sale of investment securities $ 10 $ (14) Net gain (loss) on sale of investment securities
Income tax benefit (expense) (2) 4 Income tax expense
Total reclassifications for the periods $ 8 $ (10)
Note 12. Fair Value Measurements
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, "Fair Value Measurements and Disclosures,"establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. treasury and other U.S. Government and agency securities actively traded in over-the-counter markets.
Level 2 Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or inputs that can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.
Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.
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Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023.
(dollars in thousands) Quoted Prices
(Level 1) 		Significant Other Observable Inputs
(Level 2) 		Significant Other Unobservable Inputs
(Level 3) 		Total Fair Value
September 30, 2024
Assets:
Investment securities available-for-sale:
U.S treasury bonds $ - $ 49,403 $ - $ 49,403
U. S. agency securities - 653,277 - 653,277
Residential mortgage-backed securities - 670,045 - 670,045
Commercial mortgage-backed securities - 50,216 - 50,216
Municipal bonds - 8,267 - 8,267
Corporate bonds - 1,798 - 1,798
Interest rate product - 31,984 - 31,984
Credit risk participation agreements - 1 - 1
Total assets measured at fair value on a recurring basis $ - $ 1,464,991 $ - $ 1,464,991
Liabilities:
Interest rate product $ - $ 30,588 $ - $ 30,588
Total liabilities measured at fair value on a recurring basis $ - $ 30,588 $ - $ 30,588
December 31, 2023
Assets:
Investment securities available-for-sale:
U.S. treasury bonds $ - $ 47,901 $ - $ 47,901
U. S. agency securities - 671,397 - 671,397
Residential mortgage-backed securities - 727,353 - 727,353
Commercial mortgage-backed securities - 49,564 - 49,564
Municipal bonds - 8,490 - 8,490
Corporate bonds - 1,683 - 1,683
Interest rate product - 30,662 - 30,662
Credit risk participation agreements - 3 - 3
Total assets measured at fair value on a recurring basis $ - $ 1,537,053 $ - $ 1,537,053
Liabilities:
Interest rate product $ - $ 30,555 $ - $ 30,555
Total liabilities measured at fair value on a recurring basis $ - $ 30,555 $ - $ 30,555
Investment securities available-for-sale:AFS securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 2 securities include certain U.S. treasury bonds, U.S. agency debt securities, MBS issued by Government Sponsored Entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, for which the carrying amounts approximate the fair value.
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Credit risk participation agreements: The Company enters into RPAs with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2.
Interest rate derivatives:The Company entered into an interest rate derivative agreement with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the derivatives strike rate. The fair value of the derivative is calculated by determining the total expected asset or liability exposure of the derivative. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities. Accordingly, the derivative falls within Level 2.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company measures certain assets at fair value on a nonrecurring basis, and the following is a general description of the methods used to value such assets.
Loans: The fair value of individually assessed loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those individually assessed loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At September 30, 2024, substantially all of the Company's individually evaluated loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, individually evaluated loans where an allowance is established based on the fair value of collateral, i.e. those that are collateral dependent, require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.
Other real estate owned ("OREO"): OREO is initially recorded at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral, which the Company classifies as a Level 3 valuation.
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Assets measured at fair value on a nonrecurring basis are included in the table below:
(dollars in thousands) Quoted Prices
(Level 1) 		Significant Other Observable Inputs
(Level 2) 		Significant Other Unobservable Inputs
(Level 3) 		Total Fair Value
September 30, 2024
Individually assessed loans:
Commercial $ - $ - $ 2,489 $ 2,489
Income producing - commercial real estate - - 92,796 92,796
Owner occupied - commercial real estate - - 33,961 33,961
Home equity - - 257 257
Other real estate owned - - 2,743 2,743
Total assets measured at fair value on a nonrecurring basis as of September 30, 2024 $ - $ - $ 132,246 $ 132,246
December 31, 2023
Individually assessed loans:
Commercial $ - $ - $ 2,475 $ 2,475
Income producing - commercial real estate - - 41,038 41,038
Owner occupied - commercial real estate - - 19,880 19,880
Real estate mortgage - residential - - 1,638 1,638
Consumer - - 396 396
Home equity - - 242 242
Other real estate owned - - 1,108 1,108
Total assets measured at fair value on a nonrecurring basis as of December 31, 2023 $ - $ - $ 66,777 $ 66,777
As shown in the table above, certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets after they are evaluated for impairment. The primary assets accounted for at fair value on a nonrecurring basis are related to collateral-dependent loans that are individually assessed and other real estate owned. For the collateral-dependent loans and other real estate owned, the Company measures the fair value utilizing a market valuation approach, based on an appraisal conducted by an independent, licensed appraiser. Management may discount the value from the appraisal in determining the fair value if, based on its understanding of the market conditions, the collateral had been impaired below the appraised value (Level 3). For loans that are not collateral dependent, the Company uses an income approach, specifically, the discounted cash flow method. The continuing payments are discounted over the expected life at the loan's original contract rate and include adjustments for risk of default.
Fair Value of Financial Instruments
The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists.
Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company's financial instruments, the fair value of such instruments has been derived based on management's assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values, including in certain cases, the Company's estimation of exit pricing, and should not be considered an indication of the fair value of the Company taken as a whole.
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The estimated fair value of the Company's financial instruments at September 30, 2024 and December 31, 2023 are as follows:
Fair Value Measurements
(dollars in thousands) Carrying Value Fair Value Quoted Prices
(Level 1) 		Significant Other Observable Inputs
(Level 2) 		Significant Other Unobservable Inputs
(Level 3)
September 30, 2024
Assets
Cash and due from banks $ 16,383 $ 16,383 $ 16,383 $ - $ -
Federal funds sold 9,610 9,610 - 9,610 -
Interest-bearing deposits with other banks 584,491 584,491 - 584,491 -
Investment securities available-for-sale 1,433,006 1,433,006 - 1,433,006 -
Investment securities held-to-maturity 961,925 868,425 - 868,425 -
Federal Reserve and Federal Home Loan Bank stock 37,728 N/A - - -
Loans 7,970,269 7,649,112 - 7,649,112
Bank owned life insurance 115,064 115,064 - 115,064 -
Annuity investment 12,636 12,636 - 12,636 -
Interest rate product 31,984 31,984 - 31,984 -
Accrued interest receivable 50,786 50,786 50,786 - -
Liabilities
Noninterest-bearing deposits $ 1,609,823 $ 1,609,823 $ - $ 1,609,823 $ -
Interest-bearing deposits 4,220,119 4,220,119 - 4,220,119 -
Time deposits 2,710,908 2,727,075 - 2,727,075 -
Customer repurchase agreements 32,040 32,040 - 32,040 -
Other short-term borrowings 1,240,000 1,240,000 - 1,240,000 -
Long-term borrowings 75,812 82,399 - 82,399
Interest rate product 30,588 30,588 - 30,588 -
Accrued interest payable 51,875 51,875 51,875 - -
December 31, 2023
Assets
Cash and due from banks $ 9,047 $ 9,047 $ 9,047 $ - $ -
Federal funds sold 3,740 3,740 - 3,740 -
Interest-bearing deposits with other banks 709,897 709,897 - 709,897 -
Investment securities available-for-sale 1,506,388 1,506,388 - 1,506,388 -
Investment securities held-to-maturity 1,015,737 901,582 - 901,582 -
Federal Reserve and Federal Home Loan Bank stock 25,748 N/A - - -
Loans 7,968,695 7,720,241 - - 7,720,241
Bank owned life insurance 112,921 112,921 - 112,921 -
Annuity investment 13,112 13,112 - 13,112 -
Credit risk participation agreements 3 3 - 3 -
Interest rate product 30,662 30,662 - 30,662 -
Accrued interest receivable 53,337 53,337 53,337 - -
Liabilities
Noninterest-bearing deposits $ 2,279,081 $ 2,279,081 $ - $ 2,279,081 $ -
Interest-bearing deposits 4,311,491 4,311,491 - 4,311,491 -
Time deposits 2,217,467 2,217,795 - 2,217,795 -
Customer repurchase agreements 30,587 30,587 - 30,587 -
Other short-term borrowings 1,369,918 1,368,621 - 1,368,621 -
Long-term borrowings - - - - -
Interest rate product 30,555 30,555 - 30,555 -
Accrued interest payable 57,395 57,395 57,395 - -
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Note 13. Legal Contingencies
From time to time, the Company and its subsidiaries are involved in various legal proceedings incidental to their business in the ordinary course, including matters in which damages in various amounts are claimed, as well as regulatory and governmental investigations and inquiries that could result in penalties, fines or other sanctions against the Company. Based on information currently available, the Company does not believe that the liabilities (if any) resulting from such matters will have a material effect on the financial position of the Company. However, considering inherent uncertainties involved in such matters, ongoing legal expenses or an adverse outcome in one or more of these matters could materially and adversely affect the Company's financial condition, results of operations or cash flows in any particular reporting period, as well as its reputation.
Under ASC 450, the Company accrues for a loss contingency when the loss is probable and reasonably estimable. The Company discloses the matter if a material loss is at least reasonably possible. Under ASC 450, a loss contingency is "reasonably possible" if "the chance of the future event or events occurring is more than remote but less than likely", and a loss contingency is "remote" if "the chance of the future event or events occurring is slight."
The Company is cooperating with an ongoing investigation by the U.S. Attorney's Office for the Middle District of Pennsylvania into, among other things, the Company's anti-money laundering controls between approximately 2011 and 2017 and the Company's relationship with a former customer who pleaded guilty to a charge of bank fraud in 2020. Due to the inherent uncertainty in predicting the outcome of a pending investigation, we are unable to estimate reasonably possible losses, if any, resulting from this matter.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Eagle Bancorp, Inc. and its subsidiaries (collectively, the "Company") as of the dates and periods indicated. The Company's primary subsidiary is EagleBank (the "Bank"), and the Company's other direct and indirect active subsidiaries are Bethesda Leasing, LLC, Eagle Insurance Services, LLC and Landroval Municipal Finance, Inc.
This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
Caution About Forward-Looking Statements. This report contains forward-looking statements. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements and are typically identified with words such as "may," "will," "can," "anticipates," "believes," "expects," "plans," "outlook," "estimates," "potential," "assume," "probable," "possible," "continue," "should," "could," "would," "strive," "seeks," "deem," "projections," "forecast," "consider," "indicative," "uncertainty," "likely," "unlikely," "likelihood," "unknown," "attributable," "depends," "intends," "generally," "feel," "typically," "judgment," "subjective" and similar words or phrases.
For details on factors that could affect these expectations, see the risk factors contained in this report and the risk factors and other cautionary language included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, and in other periodic and current reports filed by the Company with the Securities and Exchange Commission ("SEC"). These forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements. The Company's past results are not necessarily indicative of future performance, and nothing contained herein is meant to or should be considered and treated as earnings guidance of future quarters' performance projections. All information is as of the date of this report. Any forward-looking statements made by or on behalf of the Company speak only as to the date they are made. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward-looking statement for any reason.
GENERAL
The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating twenty-five years of successful operations. The Company provides general commercial and consumer banking services through the Bank, its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System ("Federal Reserve Board," "Federal Reserve" or "FRB").
The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full-service banking alternative to the super regional financial institutions that dominate the Company's primary market area. The Company's philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of twelve branch offices, including six in Suburban Maryland, three in Northern Virginia, and three in Washington, D.C. The Bank also operates four lending offices, with two in Suburban Maryland, one in Northern Virginia, and one in Washington, D.C.
The Bank offers a broad range of commercial banking services to its business and professional clients, as well as full-service consumer banking services to individuals living and/or working primarily in the Bank's market area. The Bank emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, non-profit organizations and associations, and investors living and working in and near the primary service area. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, "NOW" accounts and money market and savings accounts, business, construction, and commercial loans, consumer loans, and cash management services. The Bank is also active in the origination of Small Business Administration ("SBA") loans.
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The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated. The Company originates multifamily Federal Housing Administration ("FHA") loans through the Department of Housing and Urban Development's Multifamily Accelerated Program ("MAP"). The Company securitizes these loans through the Government National Mortgage Association ("Ginnie Mae") MBS I program and shortly thereafter sells the resulting securities in the open market to authorized dealers in the normal course of business, and periodically bundles and sells the servicing rights. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages other real estate owned ("OREO") assets. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 and Note 1 to the Consolidated Financial Statements included in this report. There have been no significant changes to the Company's accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 except as indicated in "Accounting Standards Adopted in 2024" in Note 1 to the Consolidated Financial Statements in this report.
Allowance for Credit Losses on Loans and Reserve for Unfunded Commitments
A consequence of lending activities is that we may incur credit losses, so we record an allowance for credit losses ("ACL") with respect to loan receivables and a reserve for unfunded commitments ("RUC") as estimates of those losses. The amount of the ACL on loans is based on management's assessment of current expected credit losses ("CECL") in the portfolio.
The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as changes in interest rates, the financial performance of borrowers and regional unemployment rates, which management estimates by using a national forecast and estimating a regional adjustment based on historical differences between the two.
Management has significant discretion in making the judgments inherent in the determination of the provisions for credit loss, ACL and the RUC. Our determination of these amounts requires significant reliance on estimates and significant judgment as to the amount and timing of expected future cash flows on loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors and the reliance on our reasonable and supportable forecasts.
We estimate the ACL on loans using a quantitative model that uses a probability of default ("PD") / loss given default ("LGD") cash flow method with an exposure at default ("EAD") model to estimate expected credit losses for its loan segments. The modeling of expected prepayment speeds is based on historical internal data and adjustments to account for loan-specific risk characteristics after pooling our loan portfolio based on similar risk characteristics.
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The Company uses regression analysis of historical internal and peer data provided by a third-party service provider (as Company loss data is insufficient) to determine suitable loss drivers to utilize when modeling lifetime PD and LGD. This analysis also determines how expected PD will react to forecasted levels of the loss drivers. During the three months ended March 31, 2024, management enhanced the cash flow model to incorporate three additional macroeconomic variables. The four economic variables selected, national unemployment (original variable used), Commercial Real Estate ("CRE") Price Index, House Price Index and Gross Domestic Product ("GDP"), are incorporated by utilizing a Loss Driver Analysis approach that factors in historical losses, including during the Great Recession, of regional peer banks and the Bank. The updated model incorporates a weighting of three economic scenarios; baseline, upside and downside. The scenarios cover the four economic forecast variables, with each segment of the portfolio linked to two of these variables, depending on the segment. The loss driver analysis is spread over a reasonable and supportable period of 18 months and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.
Loans that have evidence of credit deterioration are excluded from the loan segments subject to the quantitative model above and are individually assessed.
The RUC represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. The RUC is determined by estimating future draws and applying the expected loss rates on those draws.
The ACL also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff and trends in delinquencies. While our methodology in establishing the reserve for credit losses attributes portions of the ACL and RUC to the commercial and consumer portfolio segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively. Our model may reflect assumptions by management that are not covered by the qualitative and environmental factors, and we reevaluate all of its factors quarterly.
Management has developed an analytical process to monitor the adequacy of the ACL. Our methodology for determining our ACL was developed utilizing, among other factors, the guidance from federal banking regulatory agencies and relevant available information from internal and external sources and relating to past events, current conditions and reasonable and supportable forecasts. The process is being continually enhanced and refined based on periodic reviews. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. For example, the effects of the COVID-19 pandemic and related hybrid or fully remote working environment has negatively impacted the performance outlook in the central business district office CRE segment of our loan portfolio, which informed our CECL economic forecast and continued to adversely impact our loss reserve as of September 30, 2024. Refer to the "Provision for Credit Losses" and "Allowance for Credit Losses" of Management's Discussion and Analysis of Financial Condition and Results of Operations for more information on the provision for credit losses and ACL for the loan portfolio.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company's results of operations, the trading price of the Company's common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company's policy is to test goodwill for impairment annually as of December 31, or on an interim basis if an event triggering an impairment assessment is determined to have occurred.
Testing of goodwill impairment comprises a two-step process. First, the Company performs a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that an impairment has occurred, it proceeds to the quantitative impairment test, whereby it calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. In its performance of impairment testing, the Company has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment. If the carrying amount of the reporting unit exceeds the fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge. If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the reporting unit that is greater than the carrying amount, then no impairment charge is recorded.
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During the second quarter ended June 30, 2024, Management determined that a triggering event had occurred as a result of the share price trading under book value for more than four quarters due to changes in macroeconomic conditions and market volatility in the financial markets and the banking industry due to the impact from rising interest rates which resulted in fluctuations of the Company's stock price with a sustained decrease. As a result of the triggering event, the Company engaged a third-party service provider to assist Management with the determination of the fair value of the Company in the second quarter of 2024. The resulting calculations indicated that the fair value did not exceed the carrying amount of the Company's only reporting unit as of May 31, 2024 which resulted in a determination that goodwill had become fully impaired. The goodwill impairment charge of $104.2 million reduced fully the carrying value of the Company's goodwill as of May 31, 2024. The impaired goodwill is primarily related to the acquisition of the Virginia Heritage Bank in October 2014. The impairment charge did not impact our cash flows, liquidity ratios, core operating performance, or regulatory capital ratios.
The method employed to determine the fair value of the reporting unit was a combination of a risk-weighted income and market valuation methodologies, comprised of the discounted cash flow method, the guideline public company method and the guideline transaction method.
Significant judgment is necessary in the determination of the fair value of a reporting unit. The income valuation methodology requires an estimation of future cash flows, considering the after-tax results of operations, the extent and timing of credit losses, and appropriate discount and growth rates. Actual future cash flows may differ from forecasted results based on the assumptions used.
In performing the discounted cash flow analysis, the Company utilized multi-year cash projections that rely on internal forecasts of loan and deposit growth, bond mix, financing composition, market pricing of securities, credit performance, forward interest rates, future returns driven by net interest margin, fee generation and expense incurrence, industry and economic trends, and other relevant considerations. The long-term growth rate used in the calculation of fair value was derived from published projections of the inflation rate and GDP, along with Management estimates.
The discount rate was calculated as the cost of equity capital using the modified capital asset pricing model, which includes variables including the risk-free interest rate, beta, equity risk premium, size premium, and company-specific risk premium.
The market approach considers a combination of price to tangible book value and price to earnings, adjusted based on companies similar to the reporting unit and adjusted for selected multiples, along with a control premium based on a review of transactions in the banking industry in order to calculate the indicated value of the Company's equity on a control, marketable basis.
RESULTS OF OPERATIONS
Earnings Summary
Three Months Ended September 30, 2024 vs. Three Months Ended September 30, 2023
Net income for the three months ended September 30, 2024 was $21.8 million as compared to net income of $27.4 million for the same period in 2023, a $5.6 million decrease. This decrease was primarily due to an increase in provision for credit losses of $4.5 million and an increase in noninterest expense of $6.0 million, partially offset by a reduction of income tax expense of $2.3 million. The increase in the provision was due to an updated scoring of qualitative factors and an increase in the provision attributable to the reserve on the performing CRE office portfolio. The increase in noninterest expense was due to higher FDIC insurance fees. The reduction in income tax expense was due to lower pre-tax income period over period.
Total revenue (i.e. net interest income plus noninterest income) was $78.8 million for the three months ended September 30, 2024 as compared to $77.1 million for the same period in 2023. The most significant portion of revenue is net interest income, which was $71.8 million for the three months ended September 30, 2024, compared to $70.7 million for the same period in 2023, and was the primary driver for higher total revenue period over period. Refer to the "Net Interest Income and Net Interest Margin" section below for additional details.
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When the impact of the provision is excluded, pre-provision net revenue ("PPNR"), a non-GAAP measure, was $35.2 million for the three months ended September 30, 2024, as compared to $39.4 million for the same period in 2023. The $4.2 million decrease was primarily due to an increase in noninterest expenses driven by higher FDIC insurance fees, partially offset by higher net interest income as discussed in the "Net Interest Income and Net Interest Margin" below. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, was 2.37% for the three months ended September 30, 2024 and 2.43% for the same period in 2023. The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below.
Total noninterest income for the three months ended September 30, 2024 increased to $7.0 million from $6.3 million for the same period in 2023, a 9.5% increase. For further information on the components and drivers of these changes, see the "Noninterest Income" section below.
Noninterest expense totaled $43.6 million for the three months ended September 30, 2024, as compared to $37.6 million for same period in 2023, a $6.0 million increase. The increase in noninterest expense was primarily due to higher FDIC insurance fees. Additional details on other noninterest expenses are provided in "Noninterest Expense" section below.
The efficiency ratio was 55.4% for the three months ended September 30, 2024, as compared to 48.8% for the same period in 2023. The adverse change in the efficiency ratio was primarily driven by an increase in noninterest expenses due to higher FDIC insurance fees.
For the three months ended September 30, 2024 and 2023, the Company had average assets of $12.4 billion and $11.9 billion, respectively, the increase in which was primarily attributable to an increase in average interest-bearing deposits with other banks and other short-term investments over the comparative period. For the three months ended September 30, 2024 and 2023, the Company had average common equity of $1.2 billion and $1.2 billion, respectively. For the three months ended September 30, 2024 and 2023, the Company had average tangible common equity, a non-GAAP measure, of $1.2 billion and $1.1 billion, respectively. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
For the three months ended September 30, 2024, the Company reported an annualized return on average assets ("ROAA") of 0.7%, as compared to 0.9% for the same period in 2023. The annualized return on average common equity ("ROACE") for the three months ended September 30, 2024 was 7.2% as compared to 8.8% for the same period in 2023. The annualized return on average tangible common equity ("ROATCE") for the three months ended September 30, 2024 was 7.2% as compared to 9.6% for the same period in 2023. The adverse change in returns was primarily attributable to the reduction in net income. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
RESULTS OF OPERATIONS
Earnings Summary
Nine Months Ended September 30, 2024 vs. Nine Months Ended September 30, 2023
Net loss for the nine months ended September 30, 2024 was $62.3 million, as compared to net income of $80.3 million for the same period in 2023, a decrease of $142.6 million. This decrease was primarily attributable to the recognition of goodwill impairment of $104.2 million in the second quarter of 2024 and an increase in provision for credit losses of $37.2 million, partially offset by a reduction of income tax expenses of $10.0 million. For more information on the drivers and the components of these changes, see the "Provision for Credit Losses" and "Income Tax Expenses" sections below.
When the impact of the provision and goodwill impairment are excluded, operating pre-provision net revenue ("PPNR"), a non-GAAP measure, was $107.8 million for the nine months ended September 30, 2024, as compared to $120.0 million for the same period in 2023. The $12.2 million decrease was primarily due to an increase in noninterest expenses driven by higher FDIC insurance fees. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
Total revenue (i.e. net interest income plus noninterest income) was $233.8 million for the nine months ended September 30, 2024, as compared to $236.2 million for the same period in 2023.
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The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, was 2.40% for the nine months ended September 30, 2024 and 2.56% for the same period in 2023. The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below.
Total noninterest income for the nine months ended September 30, 2024 decreased to $15.9 million from $18.6 million for the same period in 2023, a 14.9% decrease. For further information on the components and drivers of these changes, see the "Noninterest Income" section below.
The efficiency ratio, inclusive of the goodwill impairment charge, was 98.43% for the nine months ended September 30, 2024 as compared to 49.19% for the same period in 2023. Excluding the goodwill impairment charge, the operating efficiency ratio (non-GAAP) was 53.87%. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
For the nine months ended September 30, 2024 and 2023, the Company had average assets of $12.5 billion and $11.8 billion, respectively, the increase in which was primarily attributable to an increase in average interest-bearing deposits with other banks and other short-term investments over the comparative period. For the nine months ended September 30, 2024 and 2023, the Company had average common equity of $1.3 billion and $1.2 billion, respectively. For the nine months ended September 30, 2024 and 2023, the Company had average tangible common equity, a non-GAAP measure, of $1.2 billion and $1.1 billion, respectively. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
For the nine months ended September 30, 2024, the Company reported an annualized ROAA, inclusive of the goodwill impairment charge, of (0.67)%, as compared to 0.91% for the same period in 2023. The annualized ROACE for the nine months ended September 30, 2024 was (6.65)% as compared to 8.66% for the same period in 2023. The annualized ROATCE, a non-GAAP measure, for the nine months ended September 30, 2024 was (7.0)% as compared to 9.45% for the same period in 2023. The adverse change in returns was primarily attributable to the recognition of goodwill impairment of $104.2 million in 2024. Excluding the goodwill impairment charge, operating annualized ROAA (non-GAAP) in 2024 was 0.45%, operating annualized return on common equity (non-GAAP) was 4.47%, and operating annualized return on tangible common equity (non-GAAP) was 4.72%. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans, investment securities, and interest bearing deposits with other banks and other short-term investments. The cost of funds includes interest expense on deposits, customer repurchase agreements and other borrowings, which consist primarily of federal funds purchased, advances from secured financing arrangements, including the Federal Home Loan Bank of Atlanta ("FHLB") and the Federal Reserve's Bank Term Funding Program ("BTFP") and Discount Window, and subordinated notes. Noninterest bearing deposits and capital are other components representing funding sources. Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.
Net interest income was $71.8 million for the three months ended September 30, 2024, as compared to $70.7 million for the same period in 2023. Net interest income increased for the three months ended September 30, 2024 primarily due to an increase in average loan balances ($8.0 billion compared to $7.8 billion) and yields increased from 6.73% to 6.93%. Additionally, average balances for interest bearing deposits with other banks increased from $1.1 billion to $1.6 billion. These increases were offset by higher average balances in total interest bearing deposits from $6.7 billion to $7.4 billion.
The net interest margin decreased by 6 basis points in the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, (from 2.43% to 2.37%). The yield on earning assets increased by 19 basis points (from 5.54% to 5.73%) while cost of funds increased 30 basis points (from 3.39% to 3.69%). Average loans were $8.0 billion for the three months ended September 30, 2024 compared to $7.8 billion for the same period in 2023. Additionally, average short-term borrowings were unchanged at $1.6 billion for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Overall yields on interest earning assets moved higher during the three months ended September 30, 2024 as compared to the same period in 2023, as variable rate loans adjusted upwards. Additionally, rates on interest bearing liabilities moved higher during the three months ended September 30, 2024 as compared to the same period in 2023, as funding costs increased.
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Net interest income was $217.9 million for the nine months ended September 30, 2024, as compared to $217.6 million for the same period in 2023. Net interest income increased for the nine months ended September 30, 2024 primarily due to higher average loan balances ($8.0 billion compared to $7.8 billion) and yields (6.93% compared to 6.58%) as compared to September 30, 2023. This was partially offset by increases in average deposit rates (4.32% compared to 4.03%), increases in interest bearing deposits ($7.3 billion vs $6.0 billion) and increases in other borrowing rates (4.94% compared to 4.83%) for the nine months ended September 30, 2024 as compared to the same period in 2023.
The net interest margin decreased by 16 basis points in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 (from 2.56% to 2.40%). The yield on earning assets increased by 33 basis points (from 5.39% to 5.72%) while cost of funds increased 55 basis points (from 3.08% to 3.63%). Overall yields on interest earning assets moved higher during the nine months ended September 30, 2024 as compared to the same period in 2023, as variable rate loans adjusted upwards. Additionally, rates on interest bearing liabilities moved higher during the nine months ended September 30, 2024 as compared to the same period in 2023, as funding costs increased due to a combination of interest rates and mix of funding sources utilized.
Average loans increased to $8.0 billion for the nine months ended September 30, 2024 compared to $7.8 billion for the same period in 2023. Average interest bearing deposits increased to $7.3 billion for the nine months ended September 30, 2024 from $6.0 billion for the nine months ended September 30, 2023, while average noninterest bearing demand deposits decreased to $2.0 billion for the nine months ended September 30, 2024 from $2.8 billion for the nine months ended September 30, 2023. Additionally, average short-term borrowings remained unchanged at $1.7 billion for the nine months ended September 30, 2024 and 2023.
The tables below present the average balances and rates of the major categories of the Company's assets and liabilities for the three and nine months ended September 30, 2024 and 2023. Included in the tables are measurements of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin, together with net interest income, provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets.
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Eagle Bancorp, Inc.
Consolidated Average Balances, Interest Yields and Rates (Unaudited)
(dollars in thousands)
Three Months Ended September 30,
2024
2023
Average
Balance 		Interest Average
Yield/Rate 		Average
Balance 		Interest Average
Yield/Rate
ASSETS
Interest earning assets:
Interest bearing deposits with other banks and other short-term investments $ 1,577,464 $ 21,296 5.37 % $ 1,127,451 $ 15,067 5.30 %
Loans held for sale (1)
4,936 1 0.08 % - - - %
Loans (1) (2)
8,026,524 139,835 6.93 % 7,795,144 132,273 6.73 %
Investment securities available-for-sale (2)
1,479,598 7,336 1.97 % 1,554,348 8,126 2.07 %
Investment securities held-to-maturity (2)
974,366 5,242 2.14 % 1,047,515 5,606 2.12 %
Federal funds sold 10,003 103 4.10 % 7,728 77 3.95 %
Total interest earning assets 12,072,891 173,813 5.73 % 11,532,186 161,149 5.54 %
Total noninterest earning assets 397,006 489,683
Less: allowance for credit losses (108,998) (78,964)
Total noninterest earning assets 288,008 410,719
TOTAL ASSETS $ 12,360,899 $ 11,942,905
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing transaction $ 1,656,676 $ 14,596 3.51 % $ 1,421,522 $ 12,785 3.57 %
Savings and money market 3,254,128 34,896 4.27 % 3,113,755 32,855 4.19 %
Time deposits 2,517,944 31,698 5.01 % 2,162,582 25,289 4.64 %
Total interest bearing deposits 7,428,748 81,190 4.35 % 6,697,859 70,929 4.20 %
Customer repurchase agreements 38,045 332 3.47 % 36,082 311 3.42 %
Other short-term borrowings 1,615,867 20,448 5.03 % 1,610,097 19,190 4.73 %
Long-term borrowings 824 - - % - - - %
Total interest bearing liabilities 9,083,484 101,970 4.47 % 8,344,038 90,430 4.30 %
Noninterest bearing liabilities:
Noninterest bearing demand 1,915,666 2,248,782
Other liabilities 160,272 114,923
Total noninterest bearing liabilities 2,075,938 2,363,705
Shareholders' Equity 1,201,477 1,235,162
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,360,899 $ 11,942,905
Net interest income $ 71,843 $ 70,719
Net interest spread 1.26 % 1.24 %
Net interest margin 2.37 % 2.43 %
Cost of funds 3.69 % 3.39 %
(1)Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $3.9 million and $4.1 million for the three months ended September 30, 2024 and 2023, respectively.
(2)Interest and fees on loans and investments exclude tax equivalent adjustments.
46
Eagle Bancorp, Inc.
Consolidated Average Balances, Interest Yields and Rates (Unaudited)
(dollars in thousands)
Nine Months Ended September 30,
2024
2023
Average
Balance 		Interest Average
Yield/Rate 		Average
Balance 		Interest Average
Yield/Rate
ASSETS
Interest earning assets:
Interest bearing deposits with other banks and other short-term investments $ 1,624,575 $ 65,726 5.40 % $ 905,414 $ 34,070 5.03 %
Loans held for sale (1)
4,329 101 3.12 % 1,620 73 6.02 %
Loans (1) (2)
8,006,298 415,345 6.93 % 7,766,212 382,043 6.58 %
Investment securities available for sale (2)
1,491,608 21,631 1.94 % 1,613,257 24,463 2.03 %
Investment securities held-to-maturity (2)
993,553 16,032 2.16 % 1,067,628 17,055 2.14 %
Federal funds sold 10,037 311 4.14 % 9,392 202 2.88 %
Total interest earning assets 12,130,400 519,146 5.72 % 11,363,523 457,906 5.39 %
Total noninterest earning assets 471,966 492,069
Less: allowance for credit losses (100,592) (77,342)
Total noninterest earning assets 371,374 414,727
TOTAL ASSETS $ 12,501,774 $ 11,778,250
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing transaction $ 1,708,797 $ 47,526 3.72 % $ 1,173,823 $ 29,533 3.36 %
Savings and money market 3,332,552 104,277 4.18 % 3,135,300 96,990 4.14 %
Time deposits 2,307,756 85,616 4.96 % 1,642,805 52,782 4.30 %
Total interest bearing deposits 7,349,105 237,419 4.32 % 5,951,928 179,305 4.03 %
Customer repurchase agreements 37,578 977 3.47 % 38,473 946 3.29 %
Other short-term borrowings 1,698,170 62,856 4.94 % 1,665,293 60,101 4.83 %
Long-term borrowings 277 - - % - - - %
Total interest bearing liabilities 9,085,130 301,252 4.43 % 7,655,694 240,352 4.20 %
Noninterest bearing liabilities:
Noninterest bearing demand 2,007,963 2,784,396
Other liabilities 157,277 97,586
Total noninterest bearing liabilities 2,165,240 2,881,982
Shareholders' Equity 1,251,404 1,240,574
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,501,774 $ 11,778,250
Net interest income $ 217,894 $ 217,554
Net interest spread 1.29 % 1.19 %
Net interest margin 2.40 % 2.56 %
Cost of funds 3.63 % 3.08 %
(1)Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $12.9 million and $12.0 million for the nine months ended September 30, 2024 and 2023, respectively.
(2)Interest and fees on loans and investments exclude tax equivalent adjustments.
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Rate/Volume Analysis of Net Interest Income
The rate/volume tables below present the composition of the change in net interest income for the period indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest bearing liabilities, and the changes in net interest income due to changes in interest rates.
Three Months Ended September 30, 2024 compared with the Three Months Ended September 30, 2023
(dollars in thousands)
Change Due to Volume
Change Due to Rate
Total Increase (Decrease)
Interest earned on
Loans $ 3,926 $ 3,636 $ 7,562
Loans held for sale 1 - 1
Investment securities available-for-sale (391) (399) (790)
Investment securities held-to-maturity (391) 27 (364)
Interest bearing bank deposits 6,014 215 6,229
Federal funds sold 23 3 26
Total interest income 9,182 3,482 12,664
Interest paid on
Interest bearing transaction 2,115 (304) 1,811
Savings and money market 1,481 560 2,041
Time deposits 4,156 2,253 6,409
Customer repurchase agreements 17 4 21
Other borrowings 69 1,189 1,258
Total interest expense 7,838 3,702 11,540
Net interest income $ 1,344 $ (220) $ 1,124
Nine Months Ended September 30, 2024 compared with the Nine Months Ended September 30, 2023
(dollars in thousands)
Change Due to Volume
Change Due to Rate
Total Increase (Decrease)
Interest earned on
Loans $ 11,811 $ 21,491 $ 33,302
Loans held for sale 122 (94) 28
Investment securities available-for-sale (1,845) (987) (2,832)
Investment securities held-to-maturity (1,183) 160 (1,023)
Interest bearing bank deposits 27,061 4,595 31,656
Federal funds sold 14 95 109
Total interest income 35,980 25,260 61,240
Interest paid on
Interest bearing transaction 13,460 4,533 17,993
Savings and money market 6,102 1,185 7,287
Time deposits 21,364 11,470 32,834
Customer repurchase agreements (22) 53 31
Other borrowings 1,187 1,568 2,755
Total interest expense 42,091 18,809 60,900
Net interest income $ (6,111) $ 6,451 $ 340
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Provision for Credit Losses
The provision for credit losses represents the amount of expense charged to current earnings to record the ACL on loans and the ACL on available-for-sale and held-to-maturity investment securities. The amount of the ACL on loans is based on management's assessment of CECL in the portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company.
The provision for credit losses for unfunded commitments is presented separately on the Consolidated Statements of Operations. This provision considers the probability that unfunded commitments will fund among other factors.
Refer to the discussion under "Critical Accounting Policies and Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations above and in Note 1 to the Consolidated Financial Statements in "Item 1 - Financial Information" for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the ACL and the provisions charged to expense. Also, refer to the table in the "Allowance for Credit Losses" section in Management's Discussion and Analysis of Financial Condition and Results of Operations, which reflects activity in the ACL.
During the three months ended September 30, 2024, the Company recorded a provision for credit losses of $10.9 million on its loan portfolio and incurred $5.3 million in net charge-offs to its ACL. The provision for credit losses on loans for the same period in 2023 was $5.6 million and there were $340 thousand of net charge-offs in its ACL. During the nine months ended September 30, 2024, the Company recorded a provision for credit losses of $54.9 million and net charge-offs of $29.0 million on its loan portfolio. The provision for credit losses on loans for the same period in 2023 was $15.8 million and there were $6.9 million of net charge-offs in its ACL.
The change in provision for credit losses during the three and nine months ended September 30, 2024, was primarily attributable to the following factors: 1) changes in the qualitative component of the model relating to CRE office properties; 2) enhancements to the quantitative model during Q1 to include additional economic factors; and, 3) specific reserves on individually evaluated non-performing loans. Additionally, the change in provision for credit losses during the nine months ended September 30, 2024, was also impacted by the partial charge off of a CRE office relationship after an updated valuation was received in the first quarter 2024.
The provision for credit losses for the held-to-maturity securities portfolio was recorded primarily on several corporate bonds. During the three months ended September 30, 2024 and 2023, there was a reversal of provision for credit losses of $775 thousand and a provision expense of $1 thousand, respectively, for the held-to-maturity securities portfolios. During the nine months ended September 30, 2024 and 2023, there was a reversal of provision for credit losses of $719 thousand and a provision expense of $1.2 million, respectively, for the held-to-maturity securities portfolios. There was no provision for credit losses on the available-for-sale securities portfolio for the three and nine months ended September 30, 2024 and 2023.
The provision for unfunded commitments is presented separately on the Consolidated Statements of Operations. This provision considers the probability that unfunded commitments will fund. During the three months ended September 30, 2024 and 2023, a reversal of provision of $1.6 million and $839 thousand, respectively, were recorded for unfunded commitments. During the nine months ended September 30, 2024 and 2023, a provision reversal of $529 thousand and provision expense of $327 thousand, respectively, were recorded for unfunded commitments.
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Noninterest Income
Noninterest income includes service charges on deposits, gain on sale of loans, gains and losses on sale of investment securities, income from bank owned life insurance ("BOLI") and other income. The following table summarizes the comparative noninterest income for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
(dollars in thousands) 2024 2023 Dollar Change Percent Change
Service charges on deposits $ 1,747 $ 1,631 $ 116 7 %
Gain (loss) on sale of loans 20 (5) 25 (500) %
Net gain on sale of investment securities
3 5 (2) (40) %
Increase in the cash surrender value of bank-owned life insurance 731 669 62 9 %
Other income 4,450 4,047 403 10 %
Total $ 6,951 $ 6,347 $ 604 10 %
Nine Months Ended September 30,
(dollars in thousands) 2024 2023 Dollar Change Percent Change
Service charges on deposits $ 5,099 $ 4,767 $ 332 7 %
Gain on sale of loans
57 395 (338) (86) %
Net gain (loss) on sale of investment securities 10 (14) 24 (171) %
Increase in the cash surrender value of bank-owned life insurance 2,143 1,972 171 9 %
Other income 8,563 11,522 (2,959) (26) %
Total $ 15,872 $ 18,642 $ (2,770) (15) %
Total noninterest income for the three months ended September 30, 2024 increased to $7.0 million from $6.3 million for the three months ended September 30, 2023. The increase was primarily driven by gains on the sale of mortgage servicing rights and higher swap fee income.
Total noninterest income for the nine months ended September 30, 2024 decreased to $15.9 million from $18.6 million for the nine months ended September 30, 2023. The decrease was primarily based on the prior year period nonrecurring items including income from Small Business Investment Companies ("SBIC") fund and swap fees.
Noninterest Expense
Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional, Federal Deposit Insurance Corporation ("FDIC") insurance assessments, and other expenses. The following table summarizes the comparative noninterest expense for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
(dollars in thousands) 2024 2023
Dollar Change
Percent Change
Salaries and employee benefits $ 21,675 $ 21,549 $ 126 1 %
Premises and equipment expenses 2,794 3,095 (301) (10) %
Marketing and advertising 1,588 768 820 107 %
Data processing 3,435 3,194 241 8 %
Legal, accounting and professional fees 3,433 2,162 1,271 59 %
FDIC insurance 7,399 3,342 4,057 121 %
Other expenses 3,290 3,523 (233) (7) %
Total $ 43,614 $ 37,633 $ 5,981 16 %
50
Nine Months Ended September 30,
(dollars in thousands)
2024 2023
Dollar Change
Percent Change
Salaries and employee benefits $ 65,171 $ 67,680 $ (2,509) (4) %
Premises and equipment expenses 8,747 9,639 (892) (9) %
Marketing and advertising 4,109 2,288 1,821 80 %
Data processing 10,223 9,647 576 6 %
Legal, accounting and professional fees 8,645 8,065 580 7 %
FDIC insurance 19,728 7,409 12,319 166 %
Goodwill impairment 104,168 - 104,168 - %
Other expenses 9,311 11,467 (2,156) (19) %
Total
$ 230,102 $ 116,195 $ 113,907 98 %
Total noninterest expense was $43.6 million for the three months ended September 30, 2024, as compared to $37.6 million for the three months ended September 30, 2023, a 15.9% increase. The increase for the three months ended September 30, 2024 was primarily due to increases in FDIC deposit insurance assessments.
Total noninterest expense was $230.1 million for the nine months ended September 30, 2024, as compared to $116.2 million for the nine months ended September 30, 2023, a 98.0% increase. The increase for the nine months ended September 30, 2024 was primarily due to the goodwill impairment charge of $104.2 million to reduce fully the carrying value of the Company's goodwill. Refer to the "Critical Accounting Policies" section for additional details. Excluding the goodwill impairment charge, total operating noninterest expense (non-GAAP) was $125.9 million for the nine months ended September 30, 2024. Refer to the "Use of Non-GAAP Financial Measures" section for additional details and a reconciliation of GAAP to non-GAAP financial measures.
Salaries and employee benefits were $21.7 million and $21.5 million, respectively, for the three months ended September 30, 2024 and September 30, 2023. Salaries and employee benefits were $65.2 million and $67.7 million, respectively, for the nine months ended September 30, 2024 and September 30, 2023. The decrease in salaries and employee benefits over the comparative nine months ended September 30, 2024 and 2023 was primarily due to reduced incentive accruals, payroll taxes and healthcare costs.
FDIC insurance expense was $7.4 million for the three months ended September 30, 2024 compared to $3.3 million, for the same period in 2023, a 121% increase. FDIC insurance expense was $19.7 million for the nine months ended September 30, 2024 compared to $7.4 million, for the same period in 2023, a 166% increase. The increase in FDIC insurance expense over the comparative three and nine months ended September 30, 2024 and 2023 was primarily due to increases in FDIC deposit insurance assessments.
Marketing expenses were $1.6 million and $0.8 million, respectively, for the three months ended September 30, 2024 and September 30, 2023, an 107% increase. Marketing expenses were $4.1 million and $2.3 million, respectively, for the nine months ended September 30, 2024 and September 30, 2023, an 80% increase. The increase in marketing expenses over the comparative three and nine months ended September 30, 2024 and 2023 was primarily due to higher marketing expenses related to our digital banking channel.
Legal, accounting and professional fees were $3.4 million and $8.6 million for the three and nine months ended September 30, 2024, respectively, compared to $2.2 million and $8.1 million for the three and nine months ended September 30, 2023, respectively, an increase of $1.2 million and an increase of $0.5 million for the comparative periods, respectively.
The major components of other expenses include franchise taxes, director compensation and insurance expense. Other expenses decreased to $3.3 million from $3.5 million, or 6.6%, for the three months ended September 30, 2024, compared to the same three month period in 2023. For the nine month period ended September 30, 2024 other expenses decreased to $9.3 million from $11.5 million, or 19.1%, for the same period in 2023. The decrease in other expenses over the comparative nine months ended September 30, 2024 and 2023 was primarily due to a reduction in director fees.
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The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 55.35% and 98.43% for the three months and nine months ended September 30, 2024, respectively as compared to 48.83% and 49.19% for the same periods in 2023. The adverse change in the efficiency ratio for the nine months ended September 30, 2024 was primarily driven by the recognition of goodwill impairment of $104.2 million. Excluding the goodwill impairment charge, the operating efficiency ratio (non-GAAP) was 53.87% for the nine months ended September 30, 2024. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
As a percentage of average assets, total noninterest expense (annualized) was 1.40% for the three months ended September 30, 2024 as compared to 1.25% for the same period in 2023. As a percentage of average assets, total noninterest expense (annualized) was 2.46% for the nine months ended September 30, 2024, as compared to 1.32% for the same period in 2023. Excluding the goodwill impairment charge, total operating noninterest expense (non-GAAP) (annualized) as a percentage of average assets was 1.35% for the nine months ended September 30, 2024. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
Income Tax Expense
For the three and nine months ended September 30, 2024 the tax provision was $4.9 million and $12.3 million, respectively, compared to $7.2 million and $22.3 million for the three and nine months ended September 30, 2023. The decrease in the tax provision over the comparative three and nine months ended September 30, 2024 and 2023 was primarily due to decreases in pre-tax income period over period. The change in the effective tax rate over the comparative three and nine months ended September 30, 2024 and 2023 was primarily driven by the impairment of the goodwill which is not deductible for tax purposes.
The Inflation Reduction Act of 2022 was signed into law by President Biden on August 16, 2022 and made significant changes to the U.S. tax law, including the introduction of a corporate alternative minimum tax of 15% of the "adjusted financial statement income" of certain domestic corporations as well as a 1% excise tax on the fair market value of stock repurchases by certain domestic corporations, effective for tax years beginning in 2023. Effective January 1, 2023, the Company became subject to the tax laws under the Inflation Reduction Act. The Company has not experienced and currently does not expect the tax-related provisions of the Inflation Reduction Act to have a material impact on our financial results.
FINANCIAL CONDITION
Summary
Total assets were $11.3 billion and $11.7 billion at September 30, 2024 and December 31, 2023, respectively. The decrease in total assets of $0.4 billion, or 3.3%, from December 31, 2023 to September 30, 2024 was primarily due to decreases in investment securities and interest-bearing deposits with other banks, and the impairment charge of goodwill related to a 2014 acquisition.
The largest component of assets, total loans with an amortized cost basis of $8.0 billion at September 30, 2024, remained relatively flat compared to the balance at December 31, 2023. Refer to the "Loan Portfolio" section below for further discussion on loans.
Investment securities, at amortized cost net of the ACL, totaled $2.5 billion at September 30, 2024 as compared to $2.7 billion at December 31, 2023, a decrease of $172.1 million, or 6.4%, that was primarily driven by the pay down of principal on mortgage-backed securities ("MBS") and calls of securities. At September 30, 2024 and December 31, 2023, investment securities available-for-sale had an amortized cost of $1.6 billion and $1.7 billion, respectively, and a fair value of $1.4 billion and $1.5 billion, respectively. Additionally, September 30, 2024 and December 31, 2023, investment securities held-to-maturity had an amortized cost of $961.9 million (net of ACL of $1.2 million) and $1.0 billion (net of ACL of $2.0 million), respectively, and an estimated fair value of $868.4 million and $901.6 million, respectively.
In terms of funding, total deposits at September 30, 2024 were $8.5 billion, down from $8.8 billion at December 31, 2023, a decline of 3.0%. Total borrowings (excluding customer repurchase agreements) were $1.3 billion and $1.4 billion at September 30, 2024 and December 31, 2023, respectively. The components and drivers of the change are discussed in the "Deposits and Other Borrowings" section below.
Total shareholders' equity declined to $1.2 billion as of September 30, 2024 from $1.3 billion as of December 31, 2023.
52
The Company's capital ratios remain substantially in excess of regulatory minimum and buffer requirements. Regulatory ratios based on risk-weighted assets experienced minor fluctuations of less than 5% from December 31, 2023 to September 30, 2024. The total risk based capital ratio was 15.51% at September 30, 2024, as compared to 14.79% at December 31, 2023. The common equity tier 1 capital ("CET1") risk based capital ratio was 14.30% at September 30, 2024, as compared to 13.90% at December 31, 2023. The tier 1 risk based capital ratio was 14.30% at September 30, 2024, as compared to 13.90% at December 31, 2023. The tier 1 leverage ratio was 10.77% at September 30, 2024, as compared to 10.73% at December 31, 2023.
The ratio of common equity to total assets was 10.86% at September 30, 2024, as compared to 10.92% at December 31, 2023 as common equity levels declined 3.8% over the nine months ended September 30, 2024. Book value per share was $40.61 at September 30, 2024, a 4.6% decrease over $42.58 at December 31, 2023. These declines were primarily due to the goodwill impairment charge of $104.2 million.
In addition, the tangible common equity ratio was 10.86% at September 30, 2024, as compared to 10.12% at December 31, 2023. Tangible book value per share was $40.61 at September 30, 2024, a 3.9% increase from $39.08 at December 31, 2023. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
In order to be considered well-capitalized, the Bank must have a CET1 risk based capital ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. The Company and the Bank exceed all these requirements and satisfy the capital conservation buffer of 2.5% of CET1 capital. Failure to maintain the required capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.
Loan Portfolio
In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank. Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality.
Loans outstanding were $8.0 billion at September 30, 2024, an increase of $1.6 million, from the balance at December 31, 2023. The loan portfolio is relatively flat in the nine months ended September 30, 2024, driven by increased fundings of ongoing construction projects for commercial and residential properties, offset by a reduction in commercial loans. Market rates year to date in 2024 for our new loan originations on average have been consistent with the market rates at the end of 2023, reflecting that the Federal Reserve did not increase or decrease short-term interest rates until mid-September 2024. We continue to see opportunities for growth in the commercial real estate market in our focused sectors; our processes for evaluating these opportunities are designed to ensure they are subject to reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Following origination, we continue to monitor our borrowers' business plans and identify primary and alternative sources for loan repayment and, if necessary, obtain collateral to mitigate credit loss in the event of default.
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Loans, net of amortized deferred fees and costs, at September 30, 2024 and December 31, 2023 by major category are summarized below.
September 30, 2024 December 31, 2023
(dollars in thousands, except amounts in the footnote) Amount % Amount %
Commercial $ 1,154,349 14 % $ 1,473,766 18 %
PPP loans 348 - % 528 - %
Income producing - commercial real estate 4,155,120 52 % 4,094,614 51 %
Owner occupied - commercial real estate 1,276,240 16 % 1,172,239 15 %
Real estate mortgage - residential 57,223 1 % 73,396 1 %
Construction - commercial and residential 1,174,591 15 % 969,766 12 %
Construction - C&I (owner occupied) 100,662 1 % 132,021 2 %
Home equity 51,567 1 % 51,964 1 %
Other consumer 169 - % 401 - %
Total loans 7,970,269 100 % 7,968,695 100 %
Less: allowance for credit losses (111,867) (85,940)
Loans, net(1)
$ 7,858,402 $ 7,882,755
(1)Excludes accrued interest receivable of $43.4 million and $45.3 million at September 30, 2024 and December 31, 2023, respectively, which is recorded in other assets.
As noted above, a significant portion of the loan portfolio consists of commercial, construction and commercial real estate loans, primarily made in the Washington, D.C. metropolitan area, and is secured by real estate or other collateral in that market. While our basic market area is the Washington, D.C. metropolitan area, the Bank has made loans outside that market where the borrower is an existing customer and the nature and quality of such loans was consistent with the Bank's lending policies. Although all of these loans are made to a diversified pool of unrelated borrowers across numerous businesses, adverse developments in the real estate market could continue to have an adverse impact on this portfolio of loans and the Company's income and financial position. Management believes that the CRE concentration risk is mitigated by diversification among the types and characteristics of real estate collateral properties, sound underwriting practices and ongoing portfolio monitoring and market analysis.
The Company's concentration in the Washington, D.C. metro area includes "Washington's Maryland Suburbs," which comprise Frederick, Prince George's and Montgomery counties and "Northern Virginia," which comprises Alexandria, Arlington, Falls Church, Fairfax, Loudoun and Prince William counties. At September 30, 2024, 30.9%, 27.4%, 24.5%, 5.4% and 11.8% of the loan portfolio, as a percentage of total amortized cost, was concentrated in Washington D.C., Washington's Maryland Suburbs, Northern Virginia, other counties in Maryland and other locations in the United States, respectively. At December 31, 2023, 31.5%, 26.4%, 25.1%, 5.5% and 11.5% of the loan portfolio, as a percentage of total amortized cost, was concentrated in Washington D.C., Washington's Maryland Suburbs, Northern Virginia, other counties in Maryland and other locations in the United States, respectively. While we remain cautious with regard to CRE market conditions, principally office, the strength of the Washington D.C. metro area in certain sectors, particularly multi-family CRE and the housing market, continue to drive premiums for well-located properties.
As part of its lending strategy, the Company maintains a substantial portfolio of CRE loans, with $6.5 billion and $6.1 billion, or 81.7% and 77.0% of total loans, of amortized cost outstanding at September 30, 2024 and December 31, 2023, respectively. Management meets regularly in order to monitor its existing CRE loan portfolio and to evaluate the pipeline for CRE loan investment. Income producing CRE loans collateralized by office properties comprised approximately $864.0 million and $949.0 million, or 10.8% and 11.9% of total loans, at September 30, 2024 and December 31, 2023, respectively. Office loans within Washington D.C., Washington's Maryland Suburbs and Northern Virginia were $796.5 million and $879.0 million, or 10.0% and 11.0% of total loans, at September 30, 2024 and December 31, 2023, respectively. As a percentage of total amortized cost of income producing - CRE office loans, 38.1%, 29.0%, 15.0%, 10.1% were located in Washington's Maryland Suburbs, Northern Virginia, the central business district of Washington D.C. and Washington, D.C (outside the central business district), respectively, at September 30, 2024.
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The following table summarizes the Company's income producing - commercial real estate loans, at principal, at September 30, 2024:
At September 30, 2024
Maryland Virginia
(dollars in thousands) Washington D.C. Washington Suburbs Other Northern Virginia Other Other Total Percent of Total
Collateral Type:
Hotel & motel $ 137,147 $ 80,516 $ 82,923 $ 60,223 $ - $ 21,742 $ 382,551 9 %
Industrial 881 78,870 40,567 19,439 11,932 - 151,689 4 %
Mixed use 260,330 45,950 371 54,643 25,723 4,970 391,987 9 %
Multifamily 395,123 224,830 315 120,408 84,954 48,204 873,834 21 %
Office 217,341 329,312 4,288 251,174 63,368 - 865,483 21 %
Retail 79,224 99,131 61,209 74,504 99,391 1,523 414,982 10 %
Single / 1-4 Family & Res. Condo 69,432 2,610 2,130 13,451 6,492 4,056 98,171 2 %
Other 190,641 184,304 36,094 519,811 8,629 46,451 985,930 24 %
Total $ 1,350,119 $ 1,045,523 $ 227,897 $ 1,113,653 $ 300,489 $ 126,946 $ 4,164,627 100 %
Percent of total 32 % 25 % 6 % 27 % 7 % 3 % 100 %
Percent of Principal by Loan Size:
Less than $1 million 2 % 2 % 3 % 2 % 2 % 1 %
$1 million to $5 million 10 % 9 % 18 % 7 % 10 % 16 %
$5 million to $10 million 7 % 8 % 29 % 4 % 10 % 43 %
$10 million to $25 million 18 % 15 % 31 % 32 % 36 % 11 %
$25 million to $50 million 47 % 27 % 19 % 37 % 18 % 29 %
Greater than $50 million 16 % 39 % - % 18 % 24 % - %
Total 100 % 100 % 100 % 100 % 100 % 100 %
At September 30, 2024, $332.7 million of principal of loans collateralized by office properties were criticized or classified.
At September 30, 2024, the Company had no concentrations of loans with any one borrower in any one industry exceeding 10% of its total loan portfolio. An industry for this purpose is defined as a group of businesses that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.
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The following table sets forth the time to the final contractual maturity of the loan portfolio as of September 30, 2024:
September 30, 2024
(dollars in thousands) Total
One Year or Less (1)
Over One Year to Five Years Over Five Years to Fifteen Years Over Fifteen Years
Commercial $ 1,154,349 $ 414,070 $ 585,836 $ 150,889 $ 3,554
PPP loans 348 - 348 - -
Income producing - commercial real estate (2)
4,155,120 1,617,826 2,256,418 280,876 -
Owner occupied - commercial real estate 1,276,240 237,393 448,975 351,392 238,480
Real estate mortgage - residential 57,223 14,729 33,073 461 8,960
Construction - commercial and residential 1,174,591 342,232 799,042 3,580 29,737
Construction - C&I (owner occupied) 100,662 26,981 3,522 9,828 60,331
Home equity 51,567 1,364 1,861 1,206 47,136
Other consumer 169 169 - - -
Total loans $ 7,970,269 $ 2,654,764 $ 4,129,075 $ 798,232 $ 388,198
Loans with:
Predetermined fixed interest rate $ 3,216,302 $ 1,060,322 $ 1,595,576 $ 494,622 $ 65,782
Floating or adjustable interest rate 4,753,967 1,594,442 2,533,499 303,610 322,416
Total loans $ 7,970,269 $ 2,654,764 $ 4,129,075 $ 798,232 $ 388,198
(1)Demand loans, having no contractual maturity, and overdrafts are reported as due in one year or less.
(2)Income producing CRE office loans, which had total principal of $865.5 million at September 30, 2024 and are included within income producing - commercial real estate, had principal of $278.5 million, $579.7 million, $6.7 million, and $0.6 million aggregated with one year or less, over one year to five years, over five years to fifteen years, and over fifteen years remaining until contractual maturity, respectively. Approximately $208.5 million and $328.9 million of income producing CRE office loans as of September 30, 2024 were due to mature within three months and 18 months, respectively.
Allowance for Credit Losses
The ACL is an estimate based on many factors which reflect management's assessment of the risk in the loan portfolio. Those factors include economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio and internal loan processes of the Company and Bank. A full discussion of the accounting for ACL is contained in Note 1 to the Consolidated Financial Statements and activity in the ACL is contained in Note 4 to the Consolidated Financial Statements. Also, please refer to the discussion under the caption "Provision for Credit Losses" for a discussion of the Company's calculation of the provision for credit losses during the nine months ended September 30, 2024 and 2023.
The ACL for loans at September 30, 2024 at $111.9 million, reflected a $25.9 million increase from December 31, 2023 when it was $85.9 million, reflecting a provision for credit losses of $54.9 million and $29.0 million in net charge-offs during the nine months ended September 30, 2024. Net charge-offs, on an annualized basis, represented 0.48% of average loans for the nine months ended September 30, 2024, an increase from net charge-offs of $6.9 million during the nine months ended September 30, 2023, which represented 0.12% of average loans on an annualized basis. Net charge-offs during the nine months ended September 30, 2024 included $20.1 million of charge offs on one CRE office lending relationship. At September 30, 2024, the ACL for loans represented 1.40% of total loans outstanding, as compared to 1.08% at December 31, 2023. The ACL represented 83% of nonperforming loans at September 30, 2024, as compared to 131% at December 31, 2023. Refer to the "Provision for Credit Losses" section of Management's Discussion and Analysis of Financial Condition and Results of Operations for more information on the provision for credit losses.
As part of its comprehensive loan review process, the Bank's Risk Committee evaluates loans which are past due 30 days or more. The Committee makes an assessment of the conditions and circumstances surrounding delinquent and potential problem loans. The Bank's loan policy requires that loans be placed on nonaccrual if they are 90 days past due or if their collection is deemed to be doubtful, unless they are well secured and in the process of collection. The Credit Administration department analyzes the status of development and construction projects, including sales activities and utilization of interest reserves in order to assess potential increased levels of risk which may require additional reserves.
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The Company believes it has taken a prudent posture with respect to risk rating its loan portfolio. As of September 30, 2024 and December 31, 2023, loans rated special mention had an amortized cost of $365.0 million and $207.1 million, respectively, and loans rated substandard had an amortized cost of $391.3 million and $335.8 million, respectively. The increases in special mention loans were primarily attributable to additions in CRE loans, particularly in income producing - commercial real estate and commercial loans. The increases in substandard loans were primarily attributable to additions in CRE loans, particularly in commercial construction loans. At September 30, 2024, 100% and 59% of special mention and substandard loans, respectively, were current. Based upon their status as potential problem loans, loans risk rated special mention or substandard receive heightened scrutiny and ongoing intensive risk management. Additionally, the Company's loan loss allowance methodology incorporates increased reserve factors for certain loans considered potential problem loans as compared to the general portfolio.
Management, being aware of the loan growth experienced by the Bank and the risks facing CRE, is intent on maintaining strong portfolio management and a strong risk rating process. The Bank provides analysis of credit requests and the management of problem credits. The Bank has developed and implemented analytical procedures for evaluating credit requests, has refined the Company's risk rating system and has adopted enhanced monitoring of the loan portfolio and the adequacy of the ACL, in particular on its CRE and construction loans (including those collateralized by office properties). These analyses include stress testing. Additionally, fair value assessments of loans acquired are included in our analytical procedures. The loan portfolio analysis process is ongoing and proactive to support the Company's objective of maintaining a portfolio of quality credits and quickly identifying weaknesses before they become more severe.
At September 30, 2024 and December 31, 2023, the Company's performing office coverage ratio, which calculates the ACL attributable to loans collateralized by performing office properties as a percentage of total loans, was 4.55% and 1.91%, respectively.
The following table sets forth activity in the ACL for the periods indicated.
Nine Months Ended September 30,
(dollars in thousands) 2024 2023
Balance at beginning of period $ 85,940 $ 74,444
Charge-offs:
Commercial (4,150) (1,828)
Income producing - commercial real estate (21,329) (5,306)
Owner occupied - commercial real estate (3,800) -
Construction - commercial and residential (129) (136)
Other consumer (88) (50)
Total charge-offs (29,496) (7,320)
Recoveries:
Commercial 220 335
Income producing - commercial real estate 185 -
Owner occupied - commercial real estate 71 31
Construction - commercial and residential - 34
Other consumer - 6
Total recoveries 476 406
Net charge-offs (29,020) (6,914)
Provision for credit losses - loans 54,947 15,802
Balance at end of period $ 111,867 $ 83,332
Annualized ratio of net charge-offs during the period to average loans outstanding during the period 0.48 % 0.12 %
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The following table reflects the allocation of the ACL at the dates indicated. The allocation of the allowance at September 30, 2024 includes ACL of $5.4 million against individually assessed loans of $134.4 million, as compared to ACL of $0.6 million against individually assessed loans of $66.1 million at December 31, 2023. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category.
September 30, 2024 December 31, 2023
(dollars in thousands) Amount % of Total ACL % of Total Loans Amount % of Total ACL % of Total Loans
Commercial $ 20,303 18 % 14 % $ 17,824 21 % 18 %
Income producing - commercial real estate 53,312 48 % 52 % 40,050 47 % 51 %
Owner occupied - commercial real estate 20,071 17 % 16 % 14,333 16 % 15 %
Real estate mortgage - residential 738 1 % 1 % 861 1 % 1 %
Construction - commercial and residential 15,417 14 % 15 % 10,198 12 % 12 %
Construction - C&I (owner-occupied) 1,297 1 % 1 % 1,992 2 % 2 %
Home equity 700 1 % 1 % 657 1 % 1 %
Other consumer 29 - % - % 25 - % - %
Total allowance $ 111,867 100 % 100 % $ 85,940 100 % 100 %
Nonperforming Assets
The Company's level of nonperforming assets, which comprise the amortized cost of loans delinquent 90 days or more and nonaccrual loans, which includes the nonperforming portion of loan modifications, and the carrying value of OREO, totaled $137.1 million at September 30, 2024 representing 1.22% of total assets, as compared to $66.6 million of nonperforming assets, or 0.57% of total assets, at December 31, 2023.
The Company had no accruing loans which were 90 days or more past due at September 30, 2024. Management prioritizes remaining attention to early signs of deterioration in borrowers' financial conditions and to taking action designed to mitigate risk. The Company places loans on nonaccrual status if it deems collection to be doubtful. The Company believes it is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its ACL, at 1.40% of total loans at September 30, 2024, is adequate to absorb expected credit losses within the loan portfolio at that date.
Total nonperforming loans had an amortized cost of $134.4 million at September 30, 2024, representing 1.69% of total loans, compared to $65.5 million at December 31, 2023, representing 0.82% of total loans. The increase was primarily from the addition of two income-producing commercial real estate loans and one owner-occupied commercial real estate loan to non-accruing status following a partial charge-off on the combined balances in the nine months ended September 30, 2024.
The CECL standard allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation. This can occur due to credit deterioration, increased collateral dependency or other factors leading to impairment. In particular, the Company individually evaluates loans on nonaccrual and those identified as loan modifications to borrowers experiencing financial difficulties, though it may individually evaluate other loans or groups of loans as well if it determines they no longer share similar risk with their assigned segment. Reserves on individually assessed loans are determined by one of two methods: the fair value of collateral or the discounted cash flow. Fair value of collateral is used for loans determined to be collateral dependent, and the fair value represents the net realizable value of the collateral, adjusted for sales costs, commissions, senior liens, etc. Discounted cash flow is used on loans that are not collateral dependent where structural concessions have been made and continuing payments are expected. The continuing payments are discounted over the expected life at the loan's original contract rate and include adjustments for risk of default.
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Nonperforming assets include loans that the Company considers to be individually assessed. Individually assessed loans are defined as those as to which we believe it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a loan restructuring to a borrower experiencing financial difficulties that has not shown a period of performance as required under applicable accounting standards. Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value ("NPV") from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset. Generally, all appraisals associated with individually assessed loans are updated on a not less than annual basis.
The Company evaluates loan modifications according to the accounting guidance for loan modifications to determine if the modification results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. A loan that is considered a modified loan may be subject to an individually-evaluated loan analysis if the commitment is $500 thousand or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated provisions are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status, foreclosure or repossession of the collateral to minimize economic loss to the Company.
Commercial and consumer loans modified are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.
During the nine months ended September 30, 2024, the Bank modified 33 loans with a total amortized cost of $278.7 million at September 30, 2024 (3.5% of the loan portfolio). These loans received extended loan terms of between approximately 1 to 36 months.
Loans modified in the preceding twelve months totaled $304.7 million, of which approximately $15.7 million are loans 30-89 days past due and $57.6 million are on nonaccrual status. All other loans are performing under their modified terms.
Alternatively, management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant, and therefore, such modifications are not considered to be loan restructurings to a borrower experiencing financial difficulty, as the accommodation of a borrower's request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty. For example: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business which suggests a temporary interest only period on an amortizing loan; (2) there may be delays in absorption on a real estate project which reasonably suggests extension of the loan maturity at market terms; or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing.
Included in nonperforming assets was OREO of $2.7 million, comprising four foreclosed properties, at September 30, 2024 and $1.1 million, comprising three foreclosed properties, at December 31, 2023. OREO properties are carried at the lower of cost or fair value less estimated costs to sell.
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It is the Company's policy to obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties generally not less frequently than annually. Generally, the Company would obtain updated appraisals or evaluations on OREO properties where it has reason to believe, based upon market indications (such as: comparable sales, a scenario in which the Company is considering legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. Two OREO properties were sold during the nine months ended September 30, 2024 and one OREO property was sold during the nine months ended September 30, 2023, generating proceeds of $656 thousand and $609 thousand, respectively. There were no sales of OREO properties during the three months ended September 30, 2024 and 2023.
The following table shows the amounts of nonperforming assets, including loans at amortized cost and OREO at the lower of cost or fair value less estimated costs to sell:
(dollars in thousands) September 30, 2024 December 31, 2023
Nonaccrual Loans:
Commercial $ 1,930 $ 2,049
Income producing - commercial real estate 94,282 40,926
Owner occupied - commercial real estate 37,730 19,836
Real estate mortgage - residential 172 1,946
Construction - commercial and residential - 525
Home equity 257 242
Total nonperforming loans 134,371 65,524
Other real estate owned 2,743 1,108
Total nonperforming assets $ 137,114 $ 66,632
Coverage ratio, allowance for credit losses to total nonperforming loans 83 % 131 %
Ratio of nonperforming loans to total loans 1.69 % 0.82 %
Ratio of nonperforming assets to total assets 1.22 % 0.57 %
Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio.
At September 30, 2024, there were $391.3 million of substandard loans. Substandard loans are considered potential or actual problem loans due to known information about possible or actual credit problems which causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in the reclassification to the past due, nonaccrual or restructured loan categories, as appropriate. Based upon their status as potential or actual problem loans, these loans receive heightened scrutiny and ongoing intensive risk management.
Deposits and Other Borrowings
The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, Negotiable Order of Withdrawal ("NOW") accounts, savings accounts, and certificates of deposits. The deposit base includes transaction accounts, time and savings accounts, and accounts that customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank regularly utilizes alternative funding sources such as secured borrowings from the FHLB, federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms. Additionally, the Bank participated in the BTFP established by the Federal Reserve in March 2023. The Federal Reserve announced in January 2024 that the BTFP would stop originating new loans on March 11, 2024, as scheduled. The Federal Reserve also modified the terms of the program so that the interest rate for new loans would be no lower than the interest rate on reserve balances in effect on the day the loan is made. In January 2024, prior to these announcements by the Federal Reserve, the Company borrowed an additional $500.0 million through the BTFP and refinanced $500.0 million under the program, each at an interest rate of 4.76% and a maturity date in January 2025.
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The following table summarizes the Company's deposits at September 30, 2024 and December 31, 2023:
September 30, 2024 December 31, 2023
Balance
Percentage
Balance
Percentage
Noninterest-bearing demand
$ 1,609,823 19 % $ 2,279,081 26 %
Interest-bearing transaction
903,300 11 % 997,448 11 %
Savings and money market
3,316,819 39 % 3,314,043 38 %
Time deposits
2,710,908 31 % 2,217,467 25 %
Total
$ 8,540,850 100 % $ 8,808,039 100 %
For the nine months ended September 30, 2024, total deposits decreased by $267.2 million as compared to December 31, 2023. The decrease was primarily attributable to a $669.3 million decrease in noninterest bearing demand deposits, partially offset by a $493.4 million increase in time deposits. These deposit changes were the result of a decline in deposits from a third party payment processor related to the fluctuations in deposit levels resulting from its business, as well as declines in some public and brokered fundings, partially offset by growth in time deposits from the company's digital acquisition channel.
No single depositor represented more than 10% of total deposits as of September 30, 2024. The ten largest depositors not associated with brokered pass-through relationships represented approximately 17% of total deposits in the aggregate as of September 30, 2024. The Company maintains a significant deposit relationship with a third-party payments processor, whose business results in deposit inflows and outflows on an ongoing basis, which contributes to variations in period end compared to average deposit balances.
From time to time, when appropriate in order to fund strong loan demand or account for increased deposit outflow, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from a regional brokerage firm and other national brokerage networks, including IntraFi Network, LLC ("IntraFi"). Additionally, the Bank participates in the Certificates of Deposit Account Registry Service ("CDARS") and the Insured Cash Sweep product ("ICS"), which provide for reciprocal ("two-way") transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance. The total of reciprocal deposits at September 30, 2024 was $1.4 billion (16% of total deposits) as compared to $1.7 billion (19% of total deposits) at December 31, 2023. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank, but there can be no assurance that they will continue to be adequate or appropriate to meet our liquidity needs. The Bank also is able to obtain one-way CDARS deposits and participates in IntraFi's Insured Network Deposit Program ("IND"). The Bank had $763.9 million and $786.5 million of IND brokered deposits as of September 30, 2024 and December 31, 2023, respectively. However, to the extent that the condition or reputation of the Company or Bank deteriorates, to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, or if aggregate funding available to banks changes due to changes in the marketplace, we may experience an outflow of brokered deposits or difficulty in obtaining them in the future. In that event, we would be required to obtain alternate sources for funding, which may increase our cost of funds and negatively impact our net interest margin.
We have used brokered deposits and intend to continue to use brokered deposits as one of our funding sources to support future growth. At September 30, 2024, total brokered deposits were $3.6 billion, or 42.5% of total deposits, of which $1.4 billion were attributable to the CDARS and ICS two-way accounts. Total brokered deposits were comprised of $1.3 billion, $0.9 billion, and $1.4 billion of time deposits, savings and money market accounts and interest-bearing transaction accounts, respectively, at September 30, 2024. At December 31, 2023, total brokered deposits (excluding the CDARS and ICS two-way) were $2.5 billion, or 28.8% of total deposits, and comprised $1.5 billion, $961.5 million, and $108.2 million of time deposits, savings and money market accounts, and interest-bearing transaction accounts, respectively.
At September 30, 2024 and December 31, 2023, total deposits included estimated totals of $2.2 billion and $2.8 billion of uninsured deposits, which represented 25.5% and 31.4% of total deposits, respectively. The decrease in the percentage of the Bank's deposits that are uninsured was in part due to customers' increased use of the products facilitated by IntraFi that enable customers to maximize FDIC deposit insurance coverage for their deposits.
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As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or "customer repurchase agreement," allowing qualifying businesses to earn interest on short-term excess funds, which are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $32.0 million at September 30, 2024 compared to $30.6 million at December 31, 2023. Customer repurchase agreements are not deposits and are not insured by the FDIC but are collateralized by U.S. agency securities and/or U.S. agency backed MBS. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.
The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at September 30, 2024 and December 31, 2023.
At September 30, 2024, the Company had $240.0 million in FHLB secured borrowings outstanding compared to none at December 31, 2023. Outstanding FHLB advances are secured by collateral consisting of specifically pledged marketable investment securities and a blanket lien on qualifying loans in the Bank's commercial mortgage, residential mortgage and home equity loan portfolios. Additionally, at September 30, 2024 and December 31, 2023, the Company had $1.0 billion and $1.3 billion of outstanding borrowings under the BTFP. Outstanding BTFP advances are secured by collateral consisting of specifically pledged qualifying investment securities. Outstanding short-term advances and borrowings are part of the overall asset liability strategy to support loan growth.
The subordinated notes outstanding at December 31, 2023 comprised the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, which matured and were repaid in September 2024.
On September 30, 2024, the Company closed a private placement of its 10.00% senior unsecured debt totaling $77.7 million maturing on September 30, 2029 (the "2029 Senior Notes"). At September 30, 2024, the carrying value of these 2029 Senior Notes was $75.8 million. which reflected $1.9 million in deferred financing costs that are being amortized over the life of the 2029 Senior Notes.
In connection with the issuance of the 2029 Senior Notes, the Company also entered into a registration rights agreement dated September 30, 2024 with the purchasers of the 2029 Senior Notes (the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, the Company is planning to file an exchange offer registration statement with the SEC to exchange the Senior Notes for substantially identical notes registered under the Securities Act.
Commitments and Contractual Obligations
Loan commitments outstanding and lines and letters of credit were as follows:
(dollars in thousands) September 30, 2024 December 31, 2023
Unfunded loan commitments $ 1,564,617 $ 1,981,334
Unfunded lines of credit 94,396 98,614
Letters of credit 70,820 87,146
Total $ 1,729,833 $ 2,167,094
Various commitments to extend credit are made in the normal course of banking business. Letters of credit are also issued for the benefit of customers. These commitments are subject to loan underwriting standards and geographic boundaries consistent with the Company's loans outstanding.
Unfunded loan commitments are agreements whereby the Bank has made a commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract and the borrower has accepted the commitment in writing. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment as is the case in asset based lending credit facilities. Collateral obtained varies and may include certificates of deposit, accounts receivable, inventory, property and equipment, residential and CRE. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.
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Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since lines of credit may expire without being drawn, the total unfunded line of credit amount does not necessarily represent future cash requirements.
Letters of credit include standby and commercial letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank's customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary.
Liquidity Management
Liquidity is a measure of the Company's and Bank's ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank's primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. Approximately 60% of the Company's investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements and public funds, to generate cash from sales as needed to meet ongoing loan demand. As of September 30, 2024, the unrealized losses recorded on the available-for-sale securities were acting as a deterrent to any sale of those securities to raise liquidity. However, these securities can be utilized as pledged assets that provide secondary liquidity through the form of additional available borrowings. Investment securities that are classified as held-to-maturity can also be used as collateral to pledge against additional borrowings. The Company's primary sources of liquidity are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial.
The following table summarizes the Company's secondary sources of liquidity in use and available at September 30, 2024:
(dollars in thousands, except amount in the footnotes) Secondary Sources of Liquidity in Use Secondary Sources of Liquidity Remaining Available
September 30, 2024:
Unsecured brokered deposits(1)
$ 926,410 $ 1,930,266
FHLB secured borrowings 240,000 1,203,126
FRB:
BTFP secured borrowings 1,000,000 -
Discount window secured borrowings - 1,839,552
Federal funds lines - 145,000
Customer repurchase agreements 32,040 -
Raymond James repurchase agreement - 18,604
Unpledged assets: (2)
Interest-bearing deposits with banks N/A 25,833
Investment securities N/A 892,856
Total $ 2,198,450 $ 6,055,237
(1)The available liquidity from the unsecured brokered deposits represents unsecured funds under one-way CDARS and ICS brokered deposits that would require then current market rates and be dependent on the availability of funds in those networks.
(2)Comprise unencumbered assets that could be liquidated or used as collateral to obtain additional liquidity through debt financing.
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The funding mix has continued to change throughout the nine months ended September 30, 2024. Deposits were $8.5 billion and $8.8 billion at September 30, 2024 and December 31, 2023, respectively. The decrease in deposits was primarily attributable to a $669.3 million decrease in noninterest bearing demand deposits, partially offset by a $493.4 million increase in time deposits. These deposit changes were the result of a decline in deposits from a third party payment processor related to the fluctuations in deposit levels resulting from its business, as well as declines in some public and brokered fundings, partially offset by growth in time deposits from the company's digital acquisition channel. Borrowings at quarter-end were $1.3 billion and $1.4 billion at September 30, 2024 and December 31, 2023, respectively. The net decrease in borrowings was attributable to a decrease in net fundings on the Company's secured borrowings and subordinated notes that matured and were repaid in September 2024, partially offset by issuance of the 2029 Senior Notes. Refer to the "Deposits and Other Borrowings" section above for further discussion.
The Bank can purchase up to $145.0 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at September 30, 2024 and December 31, 2023. The Bank can borrow unsecured funds under one-way CDARS and ICS brokered deposits up to $1.9 billion, against which there was $926.4 million outstanding at September 30, 2024. The Bank also has custodial agreements with various broker-dealers through IntraFi's IND program which provided $763.9 million of brokered deposits at September 30, 2024.
At September 30, 2024, the Bank was eligible to draw on advances from the FHLB up to $1.4 billion based on assets pledged as collateral to the FHLB, against which the Bank borrowed $240.0 million as of September 30, 2024. The Bank had no FHLB borrowings outstanding at December 31, 2023. The Bank posted additional collateral to the FHLB during the nine months ended September 30, 2024 and during the year ended December 31, 2023 to increase its eligibility for advances to meet its ongoing liquidity needs and expects to continue to utilize this source of funding in the future.
In March 2023, the Federal Reserve Board announced that it would make available additional funding to eligible depository institutions through the creation of the BTFP. The BTFP provided eligible depository institutions, including the Bank, an additional source of liquidity. Subsequent to its initiation, the Federal Reserve also modified the terms of the program so that the interest rate for new loans would be no lower than the interest rate on reserve balances in effect on the day the loan is made. In January 2024, the Company borrowed an additional $500.0 million through the BTFP and refinanced $500.0 million under the program at an interest rate of 4.76% and a maturity in January 2025. The Federal Reserve discontinued the origination of new loans on March 11, 2024, as scheduled. At September 30, 2024, the Bank had $1.0 billion of BTFP borrowings outstanding. This alternative source of liquidity is being utilized for balance sheet optimization.
The Bank has a back-up borrowing facility through the Discount Window at the Federal Reserve. This facility, which can be used to borrow up to $1.8 billion, is collateralized with specific assets identified to the Federal Reserve. During the third quarter, additional collateral in the form of acceptable loans was pledged to the Discount Window increasing available contingent capacity. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only. There can be no assurance, however, that these alternative sources of liquidity will continue to be available or will be sufficient to meet our ongoing liquidity needs.
In total, the Bank's aggregate borrowing capacity at September 30, 2024 was $3.9 billion, which consists of $1.2 billion and $1.8 billion of additional aggregate capacity to borrow from the FHLB and the Federal Reserve's Discount Window, respectively, on assets that have been pledged; along with $18.6 million of aggregate capacity to borrow on a pledge security through a repurchase agreement with Raymond James. The Bank also has unencumbered securities totaling approximately $892.9 million available for pledging to the FHLB or the Federal Reserve for additional borrowing capacity.
The loss of deposits through disintermediation is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank makes competitive deposit interest rate comparisons weekly and makes adjustments from time to time to ensure its interest rate offerings are competitive.
There is, however, a risk that the cost of funds will increase significantly as the Bank competes for deposits or that some deposits would be lost if rates were to continue to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks' lines of credit to offset a decline in deposits in the short run, but the use of such sources may negatively impact our net interest margin and our earnings. The continuing elevated cost of funding negatively impacted our net interest margin. Late in the third quarter of 2024, the Federal Reserve decreased interest rates by 50 basis points, having minimal impact on net interest margin in the quarter.
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There can be no assurance that the mix of sources of funds available to us at any particular time in the future will be adequate to meet our future liquidity needs. Furthermore, the market for customer and brokered deposits is highly competitive and the risk of disintermediation is high, particularly in a rising or high interest rate environment. Most of our noninterest bearing deposits are operating deposits or compensating balances that are held in connection with lending relationships. The potential outflow of such deposits is a risk unless we pay a more competitive rate of interest on them, which could significantly and negatively impact the Bank's interest expense and net interest margin, as the transfer of some noninterest-bearing deposits to interest-bearing deposits did in 2023. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The Asset Liability Committee ("ALCO") has adopted policy guidelines, which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan.
The Company believes it maintains sufficient primary and secondary sources of liquidity to fund its operations. During the first nine months ended September 30, 2024, average short term liquidity, comprising interest bearing deposits with other banks and other short-term investments and investment securities available-for-sale, was $3.1 billion, which is above the Bank's average needs. Secondary sources of liquidity available at September 30, 2024 were $6.1 billion, which include the FHLB, other insured brokered deposit sweep programs, unpledged securities, Fed funds lines, and the FRB Discount Window. At September 30, 2024, the Company held total securities available to be pledged with an estimated fair value of $892.9 million. At September 30, 2024, under the Bank's liquidity formula, it had $6.5 billion of primary and secondary liquidity sources. Management believes the amount is adequate to meet current and projected funding needs.
Capital Resources and Adequacy
The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company's current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.
The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution's total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution's total risk-based capital and the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. Although growth in that segment over the past 36 months at 28% did not exceed the 50% threshold laid out in the regulatory guidance, we expect the heightened supervisory expectations to continue to apply to us given the federal banking regulators' general focus on commercial real estate exposures at banks.
At September 30, 2024, we did exceed the construction, land development, and other land acquisitions regulatory concentration threshold, and we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators. Construction, land and land development loans represent 124% of total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio.
Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, as our commercial real estate concentration fluctuates each quarter, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company seeks to manage the risks relating to commercial real estate and its capital adequacy through the development and implementation of its Capital Policy and Capital Plan, the preparation of pro-forma projections including stress testing and the development of internal minimum targets for regulatory capital ratios that are subject to approval by the Board and in excess of well capitalized ratios.
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The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
At September 30, 2024, the capital position of the Company and its wholly owned subsidiary, the Bank, continue to exceed regulatory requirements and well-capitalized guidelines. The primary indicators relied on by bank regulators in measuring the capital position are four ratios as follows: Tier 1 risk-based capital ratio, Total risk-based capital ratio, the Leverage ratio and the CET1 ratio. Tier 1 capital consists of common and qualifying preferred shareholders' equity less goodwill and other intangibles. Total risk-based capital consists of Tier 1 capital, plus qualifying subordinated debt and the qualifying portion of the ACL. Risk-based capital ratios are calculated with reference to risk-weighted assets, which are prescribed by regulation. The measure of Tier 1 capital to average assets for the prior quarter is often referred to as the leverage ratio. The CET1 ratio is the Tier 1 capital ratio but excluding preferred stock.
The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.
The FRB and the FDIC have adopted rules (the "Basel III Rules") implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. Under the Basel III Rules, the Company and Bank are required to maintain a CET1 ratio of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, effectively resulting in a minimum CET1 ratio of 7.0%; a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, or 8.5% with the fully phased in capital conservation buffer; a minimum total capital to risk-weighted assets ratio of 10.5% with the fully phased-in capital conservation buffer; and a minimum leverage ratio of 4.0%. The Basel III Rules also increased risk weights for certain assets and off-balance-sheet exposures. At September 30, 2024, the Company and the Bank meet all these requirements.
The Company announced a regular quarterly cash dividend on September 30, 2024 of $0.165 per share to shareholders of record on October 21, 2024 and it was paid on October 31, 2024.
The ability of the Company to continue to grow is dependent on its results of operations and those of the Bank, the ability to obtain additional funds for contribution to the Bank's capital, through additional borrowings, through the sale of additional common stock or preferred stock or through the issuance of additional qualifying capital instruments, such as subordinated debt. The capital levels required to be maintained by the Company and Bank may be impacted as a result of the Bank's concentrations in commercial real estate loans.
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The capital amounts and ratios for the Company and Bank as of September 30, 2024 and December 31, 2023 are presented in the table below.
Company Bank Minimum Required Basel III
To Be Well-Capitalized Under Prompt Corrective Action Regulations (1)
Actual Actual
(dollars in thousands) Amount Ratio Amount Ratio
September 30, 2024
CET1 capital (to risk weighted assets) $ 1,351,807 14.30 % $ 1,351,231 14.38 % 7.00 % 6.50 %
Total capital (to risk weighted assets) $ 1,465,659 15.51 % $ 1,465,083 15.60 % 10.50 % 10.00 %
Tier 1 capital (to risk weighted assets) $ 1,351,807 14.30 % $ 1,351,231 14.38 % 8.50 % 8.00 %
Tier 1 capital (to average assets) $ 1,351,807 10.77 % $ 1,351,231 10.81 % 4.00 % 5.00 %
December 31, 2023
CET1 capital (to risk weighted assets) $ 1,335,967 13.90 % $ 1,330,001 13.92 % 7.00 % 6.50 %
Total capital (to risk weighted assets) $ 1,421,347 14.79 % 1,415,381 14.81 % 10.50 % 10.00 %
Tier 1 capital (to risk weighted assets) $ 1,335,967 13.90 % 1,330,001 13.92 % 8.50 % 8.00 %
Tier 1 capital (to average assets) $ 1,335,967 10.73 % 1,330,001 10.72 % 4.00 % 5.00 %
(1)Applies to the Bank only.
Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company.
In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020. In March 2020, the federal banking regulators issued an interim final rule that provides banking organizations with an alternative option to temporarily delay for two years the estimated impact of the adoption of the CECL methodology on regulatory capital, followed by the three-year phase-in period. The cumulative amount that is not recognized in regulatory capital will be phased in at 25 percent per year beginning January 1, 2022. We have elected to adopt the option provided by the March 2020 interim final rule.
Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk
A fundamental risk in banking is exposure to market risk, or interest rate risk, since a bank's earnings is largely dependent on net interest income. The Bank's ALCO formulates and monitors the management of interest rate risk through policies and guidelines established by it and overseen by the Audit Committee and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows to provide net interest income growth consistent with the Company's profit objectives.
During the nine months ended September 30, 2024, the Company was able to produce a net interest margin of 2.40% as compared to 2.56% during the same period in 2023 and continues to manage its overall interest rate risk position.
The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits.
The loan portfolio remained relatively flat in the first nine months of 2024. The re-pricing duration of the loan portfolio was 12 months at September 30, 2024 and December 31, 2023, with fixed rate loans amounting to 40% of total loans at September 30, 2024 and 38% at December 31, 2023. Variable and adjustable rate loans comprised 60% of total loans at September 30, 2024 and 62% at December 31, 2023. Variable rate loans are generally indexed to the Secured Overnight Funding Rate ("SOFR") or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate.
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In the current and expected future interest rate environment, the Company has maintained its investment portfolio to manage the balance between yield and risk in its portfolio of MBS. Further, the Company has been principally collecting cash flows from the investment portfolio to provide liquidity. At September 30, 2024, the amortized cost less allowance of the investment portfolio decreased by $172.1 million, or 6.4%, as compared to the balance at December 31, 2023.
Based on amortized cost, the percentage mix of municipal securities was 5% of total investments at September 30, 2024 and December 31, 2023. The portion of the portfolio invested in MBS was 60% at September 30, 2024 and December 31, 2023. The portion of the portfolio invested in U.S. agency investments was 27% at September 30, 2024 and December 31, 2023. Corporate bonds made up 5% of total investments at September 30, 2024 and December 31, 2023. U.S. treasury bonds were 2% of total investments at September 30, 2024 and December 31, 2023. The duration of the investment portfolio decreased to 4 years at September 30, 2024 from 4.4 years at December 31, 2023.
At September 30, 2024, $80.3 million of corporate bonds were subordinated debt from other financial institutions. Corporate bonds generally, and subordinated debt in particular, pose credit risk such that if any of these issuers were to enter bankruptcy or insolvency proceedings, we could experience losses that may be material to operating results and our financial condition. We may also experience increases in provisions for credit losses, adversely affecting our net income, if the creditworthiness of the issuers declines, whether due to idiosyncratic factors, economic conditions generally or other unforeseen factors or events.
The Company has credit risk participation agreements ("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. These derivatives are not designated as hedges, are not speculative and have an asset position with a notional value of $49.5 million as of September 30, 2024. The changes in fair value for these contracts are recognized directly in earnings.
The duration of the total deposit portfolio decreased, measuring 22 months at September 30, 2024 and 28 months at December 31, 2023. The Company experienced a total deposit decrease of $267.2 million for the nine months ended September 30, 2024 as compared to a total loan increase of $1.6 million for the same period. The funding mix has continued to change in the nine months ended September 30, 2024. The decrease in deposits was primarily attributable to a $669.3 million decrease in noninterest bearing demand deposits, partially offset by a $493.4 million increase in time deposits. These deposit changes were the result of a decline in deposits from a third party payment processor related to the fluctuations in deposit levels resulting from its business, as well as declines in some public and brokered fundings, partially offset by growth in time deposits from the company's digital acquisition channel. During the nine months ended September 30, 2024, the Company's cost of interest bearing deposits increased by 13 basis points across its interest-bearing deposits, which comprise 81.2% of its total deposits at September 30, 2024.
The net unrealized loss before income tax on the investment securities available-for-sale portfolio was $117.0 million and $162.0 million at September 30, 2024 and December 31, 2023, respectively. At September 30, 2024, the net unrealized loss position represented 7.55% of the investment portfolio's book value.
Management relies on the use of models in order to measure the expected future impact on interest income of various interest rate environments, as described above. Through its modeling, the Company makes certain estimates that may vary from actual results. There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, given competitive pressures, customer preferences and the inability to forecast future interest rates and movements with complete accuracy.
Market rates have been stable in the first nine months of 2024 since (i) the last short-term interest rate increase from the Federal Reserve was instituted in July 2023, and (ii) during the nine months ended September 2024, the Federal Reserve instituted only one adjustment to interest rates at the end of September 2024, as a decrease of 50 basis points, amid changes in the economic outlook indicating that inflation is moderating and the labor market is weakening. The decrease in interest rates was the first decrease since early 2020 which was a period of economic upheaval due to the Covid pandemic. While yields on interest-earning assets remain at increased levels, including the impact of the reset of variable and adjustable rate loans, as scheduled, our cost of funds on interest-bearing liabilities has also increased in connection with increased utilization of interest-bearing deposits and borrowings and increasing rates on those financing sources. As a result, the net interest margin has declined slightly, as compared to the two previous quarters.
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Our rate risk modeling showed very modest net interest margin expansion in an interest rate environment at increased interest rate levels while showing modest net interest margin compression in a declining interest rate environment. The model's prediction in a rising rate environment is the result of increases in both interest income on variable and adjustable rate loans and interest expense on its deposit liabilities, based on our funding needs, market conditions and certain contractual obligations but with no changes in the mix of assets or liabilities or the spreads we are able to earn. The opposite is true in a falling interest rate environment as decreases in both interest income on variable and adjustable rate loans and interest expense on deposit liabilities drive modest margin compression. The model also assumes a stable interest rate environment after the programmed changes in the yields, which assumes repricing of assets and liabilities as scheduled in a stable interest rate environment, which may be quite different than real world conditions.
Interest rate floors on certain of the Company's variable and adjustable rate loans may provide asset yield protection in a low-interest rate environment; however, they are also expected to delay the impact of increases to market rates on interest income until such floors have been exceeded. In the first nine months of 2024, interest rate floors have not been relevant in the current interest rate environment since most variable rate loans are well above their floor rate. Nevertheless, the most recent interest rate cut of 50 basis points instituted by the Federal Reserve at the end of September 2024, is a sign of changes in the economic outlook which may result in additional adjustments to interest rates as the economic outlook continues to evolve.
At September 30, 2024, the Company had a portfolio of $4.8 billion of variable and adjustable rate loans that were subject to interest rate floors with a weighted average rate of 7.48%, which was a 34 bps increase from December 31, 2023. At September 30, 2024, $187.8 million, or 2.36%, of loans held by the Company were earning interest at their floor rate.
The Company employs an earnings simulation model (immediate parallel shifts along the yield curve) on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related income statement effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities (including prepayments), loan prepayments, interest rates, deposit decay rates, and the level of noninterest income and noninterest expense. Further discussion of the limitations of this analysis are listed below and in the risk factors and other cautionary language included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, and in other periodic and current reports filed by the Company with the SEC.
The data is then subjected to a "shock test" which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100, 200, and 300 basis points, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, earnings and the market equity over the next twelve and twenty-four month periods from September 30, 2024. In addition to analysis of simultaneous changes in interest rates along the yield curve, an analysis of changes based on interest rate "ramps" is also performed. Such analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes.
For the analysis presented below, at September 30, 2024, the simulation assumes a 100 basis point change in interest rates on interest bearing deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 10 basis points and assumes a 100 basis point change in interest rates on interest bearing deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario. The Bank does have deposits with contractual terms which means these deposits will change 100 basis points for every 100 basis points change in market rates. Thus, the overall measure of the correlation between deposit costs and market rate changes is modeled at 100%. The Company utilized the same assumptions for its analysis at December 31, 2023.
Because competitive market behavior does not necessarily track the trend of interest rates but at times moves ahead of financial market influences, the change in the cost of liabilities may be different than anticipated by the interest rate risk model. If this were to occur, the effects of a rising or declining interest rate environment may not be in accordance with management's expectations.
As quantified in the table below, the Company's analysis at September 30, 2024 shows a moderate effect on net interest income (over the next 12 months) as well as the effect on the economic value of equity when interest rates are shocked down 100, 200, and 300 basis points and up 100, 200, 300, and 400 basis points. This moderate impact is due substantially to the significant level of variable rate and repriceable assets and liabilities and related shorter relative durations. At September 30, 2024, the repricing duration of the (a) investment portfolio was 4.0 years, (b) loan portfolio was 1.0 year, (c) interest bearing deposit portfolio was 1.3 years, and (d) the borrowed funds portfolio was 0.3 years.
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The following table reflects the result of simulation analysis on the September 30, 2024 asset and liabilities balances:
Change in interest
rates (basis points) 		Percentage change in net
interest income 		Percentage change in
net income 		Percentage change in
market value of portfolio
equity
+ 400 2.2% 5.4% 9.4%
+ 300 1.3% 3.3% 21.6%
+ 200 0.4% 1.2% 15.1%
+ 100 (0.4)% (0.9)% 8.3%
- - - -
- 100 (1.4)% (3.3)% (4.9)%
- 200 (1.8)% (4.2)% (9.6)%
- 300 (1.9)% (4.5)% (21.4)%
The results of the simulation are within the relevant policy limits adopted by the Company for percentage change in net interest income. For net interest income, the Company has adopted a policy limit of -10% for a 100 basis point change, -12% for a 200 basis point change, -18% for a 300 basis point change, and -24% for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change, and -30% for a 400 basis point change.
The impact on net interest income and net income of (1.4)% and (3.3)%, respectively, given a 100 basis point decrease in market interest rates at September 30, 2024 compares to increases of 0.9% and 2.0%, respectively, for the same period in 2023, and reflects in large measure the beta factor discussion above. The analysis at the end of the first nine months of 2024 compared to the first nine months of 2023, showed that in an environment of increasing rates the continued increase in income is dependent on rate increases, which are passed through to borrowers basis point for basis point, as opposed to the prior year where our model suggested rising rates would not be fully passed on to depositors. The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at September 30, 2024 are not believed to be excessive.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.
While an instantaneous parallel shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios, we believe that a non-immediate parallel shifts in interest rates would have a more modest impact. Further, the earnings simulation model does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, the various rate indexes do not move in parallel (e.g. SOFR, Fed Funds), hedging activities we might take and changing product spreads that could mitigate any potential beneficial or adverse impact of changes in interest rates.
Another key factor to consider is the behavior of our deposit portfolio in the baseline forecast and in alternate interest rate scenarios set out in the table above is a key assumption in our projected estimates of net interest income. The projected impact on net interest income in the table above assumes no change in deposit portfolio size or mix from the baseline forecast in alternative rate environments. In higher rate scenarios, any customer activity resulting in the replacement of low-cost or noninterest-bearing deposits with higher-yielding deposits or market-based funding would reduce the assumed benefit of those deposits. The projected impact on net interest income in the table above also assumes a "through-the-cycle" non-maturity deposit beta which may not be an accurate predictor of actual deposit rate changes realized in scenarios of smaller and/or non-parallel interest rate movements.
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Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by current and future changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react to different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable-rate mortgage loans, have features (generally referred to as interest rate caps and floors) that limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing and capital policies.
Use of Non-GAAP Financial Measures
The information set forth below contains certain financial information determined by methods other than in accordance with GAAP. These non-GAAP financial measures are "tangible common equity," "tangible book value per common share," "tangible common equity ratio," "average tangible common equity," "annualized return on average tangible common equity," "operating annualized return on average tangible common equity," "efficiency ratio," "operating efficiency ratio," "operating noninterest expense," "operating revenue," "pre-provision net revenue," "operating pre-provision net revenue," "operating net income," and "operating earnings per share (diluted)." The Company considers these non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. Management uses these non-GAAP measures in its analysis of our performance because it believes these measures are used as a measure of our performance by investors.
The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity, or tangible common equity, and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders' equity by common shares outstanding. The Company calculates the ROATCE by dividing net income available to common shareholders by average tangible common equity which is calculated by excluding the average balance of intangible assets from the average common shareholders' equity. The Company calculates operating ROATCE by dividing operating net income available to common shareholders by average tangible common equity which is calculated by excluding the average balance of intangible assets from the average common shareholders' equity. The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios, and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions.
The Company calculates the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income. The operating efficiency ratio is calculated by first subtracting from noninterest expense the one-time goodwill impairment of $104.2 million recorded in the second quarter of 2024, as applicable, and then by dividing the operating noninterest expense by the sum of net interest income and noninterest income. The efficiency ratio and the operating efficiency ratio measures a bank's overhead as a percentage of its revenue. The Company believes that reporting the non-GAAP efficiency ratio and the non-GAAP operating efficiency ratio more closely measures its effectiveness of controlling operational activities.
Operating noninterest expense is a non-GAAP financial measure derived from GAAP based amounts. The Company calculates operating noninterest expense by subtracting from noninterest expense the one-time goodwill impairment of $104.2 million recorded in the second quarter of 2024, as applicable. During the three months ended June 30, 2024, Management determined that a triggering event had occurred as a result of the Company's sustained decrease in the Company's stock price. Management performed an interim quantitative impairment test, resulting in the impairment charge on its only reporting unit as of May 31, 2024 and determined that goodwill had become fully impaired, which resulted in an impairment charge of $104.2 million to reduce fully the carrying value of the Company's goodwill. The Company considers the adjusted metric information that is important to shareholders because the impairment charge was a one-time event that occurred during the second quarter of
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2024. The operating noninterest expense allows investors to better compare the Company's performance against historical periods.
The Company calculates pre-provision net revenue by subtracting noninterest expense from the sum of net interest income and noninterest income. The operating pre-provision net revenue is calculated by first subtracting from noninterest expense the one-time goodwill impairment of $104.2 million recorded in the second quarter of 2024, as applicable, and then by subtracting the operating noninterest expense from the sum of net interest income and noninterest income. The Company considers this information important to shareholders because it illustrates revenue excluding the impact of provisions and reversals to the ACL on loans.
These disclosures should not be considered in isolation or as a substitute for results determined in accordance with GAAP and are not necessarily comparable to non-GAAP performance measures which may be presented by other bank holding companies. Management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measures.
The following tables reconcile the GAAP financial measures to the associated non-GAAP financial measures:
(dollars in thousands except per share data) September 30, 2024 December 31, 2023
Common shareholders' equity $ 1,225,424 $ 1,274,283
Less: Intangible assets (21) (104,925)
Tangible common equity $ 1,225,403 $ 1,169,358
Book value per common share $ 40.61 $ 42.58
Less: Intangible book value per common share - (3.50)
Tangible book value per common share $ 40.61 $ 39.08
Total assets $ 11,285,052 $ 11,664,538
Less: Intangible assets (21) (104,925)
Tangible assets $ 11,285,031 $ 11,559,613
Tangible common equity ratio 10.86 % 10.12 %
Three Months Ended September 30,
Nine Months Ended September 30,
(dollars in thousands)
2024
2023 2024 2023
Average common shareholders' equity $ 1,201,477 $ 1,235,162 $ 1,251,404 $ 1,240,574
Less: Average intangible assets (24) (104,639) (67,941) (104,366)
Average tangible common equity $ 1,201,453 $ 1,130,523 $ 1,183,463 $ 1,136,208
Net income (loss) available to common shareholders $ 21,815 $ 27,383 $ (62,325) $ 80,309
Average tangible common equity 1,201,453 1,130,523 1,183,463 1,136,208
Annualized return on average tangible common equity 7.22 % 9.61 % (7.03) % 9.45 %
Net income (loss) $ 21,815 $ 27,383 $ (62,325) $ 80,309
Add back of goodwill impairment - - 104,168 -
Operating net income (Non-GAAP) $ 21,815 $ 27,383 $ 41,843 $ 80,309
Operating annualized return on average tangible common equity (Non-GAAP) 7.22 % 9.61 % 4.72 % 9.45 %
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Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023 2024 2023
Net interest income $ 71,843 $ 70,719 $ 217,894 $ 217,554
Noninterest income 6,951 6,347 15,872 18,642
Operating revenue 78,794 77,066 233,766 236,196
Noninterest expense 43,614 37,633 230,102 116,195
Exclude goodwill impairment - - (104,168) -
Operating noninterest expense (Non-GAAP) 43,614 37,633 125,934 116,195
Efficiency ratio 55.35 % 48.83 % 98.43 % 49.19 %
Operating efficiency ratio (Non-GAAP) 55.35 % 48.83 % 53.87 % 49.19 %
Net interest income $ 71,843 $ 70,719 $ 217,894 $ 217,554
Noninterest income 6,951 6,347 15,872 18,642
Operating revenue 78,794 77,066 233,766 236,196
Noninterest expense 43,614 37,633 230,102 116,195
Pre-provision net revenue 35,180 39,433 3,664 120,001
Add back of goodwill impairment - - 104,168 -
Operating pre-provision net revenue (Non-GAAP) $ 35,180 $ 39,433 $ 107,832 $ 120,001
Operating net (loss) income and operating (loss) earnings per share (diluted) are non-GAAP financial measures derived from GAAP based amounts. The Company calculates operating net (loss) income by excluding from net (loss) income the one-time goodwill impairment of $104.2 million recorded in the second quarter of 2024, as applicable. During the three months ended June 30, 2024, Management determined that a triggering event had occurred as a result of the share price trading under book value for more than four quarters. Management performed an interim quantitative impairment test as of May 31, 2024, and determined that goodwill had become fully impaired, resulting in the impairment charge on its only reporting unit, of $104.2 million to reduce fully the carrying value of the Company's goodwill. The Company calculates operating (loss) earnings per share (diluted) by dividing net (loss) income, excluding the one-time goodwill impairment of $104.2 million recorded in the second quarter of 2024, as applicable, by the weighted average shares outstanding (diluted) for the three and nine months ended September 30, 2024, as applicable. The Company considers this information important to shareholders because operating net (loss) income and operating (loss) earnings per share (diluted) provides investors insight into how Company earnings changed exclusive of the impairment charge to allow investors to better compare the Company's performance against historical periods.
The table below provides a reconciliation of operating net (loss) income and operating (loss) earnings per share (diluted) to the nearest GAAP measure.
Three Months Ended September 30,
Nine Months Ended September 30,
(dollars in thousands)
2024
2023 2024 2023
Net (loss) income $ 21,815 $ 27,383 $ (62,325) $ 80,309
Add back of goodwill impairment - - 104,168 -
Operating net income (Non-GAAP) $ 21,815 $ 27,383 $ 41,843 $ 80,309
(Loss) earnings per share (diluted) (1)
$ 0.72 $ 0.91 $ (2.07) $ 2.63
Add back of goodwill impairment per share (diluted) - - 3.46 -
Operating earnings per share (diluted) (Non-GAAP)
$ 0.72 $ 0.91 $ 1.39 $ 2.63
(1)For periods ended with a net loss, anti-dilutive financial instruments have been excluded from the calculation of earnings per share (diluted). Operating earnings per share (diluted) calculations include the impact of outstanding equity-based awards for all periods.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to Item 2 of this report, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption "Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk."
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company's management, under the supervision and with the participation of the Chief Executive Officer, Executive Chairman and Chief Financial Officer, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, the Chief Executive Officer, Executive Chairman and the Chief Financial Officer concluded that the Company's disclosure controls and procedures as of September 30, 2024 were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that it is accumulated and communicated to our management, including the Chief Executive Officer, Executive Chairman and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the third quarter of 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to "Note 13. Legal Contingencies" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
We are subject to various risks and uncertainties, including those described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023, which could adversely affect our business, financial performance and results of operations. There have been no material changes to our risk factors from those risks included in our Annual Report on Form 10-K.
ITEM 2. - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
4.1
Indenture, dated as of September 30, 2024, between Eagle Bancorp, Inc. and Wilmington Trust, National Association, as Trustee
4.2 Form of 10.00% Senior Notes due 2029 (included in Exhibit 4.1)
4.3
Registration Rights Agreement, dated as of September 30, 2024, by and among Eagle Bancorp, Inc. and the Purchasers
10.1
Form of Senior Note Purchase Agreement, dated as of September 30, 2024, by and among Eagle Bancorp, Inc. and the Purchasers
31.1
Certification of Susan G. Riel
31.2
Certification of Eric R. Newell
31.3
Certification of Norman R. Pozez
32.1
Certification of Susan G. Riel
32.2
Certification of Eric R. Newell
32.3
Certification of Norman R. Pozez
101 Interactive data files pursuant to Rule 405 of Regulation S-T:
(i) Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023
(ii) Consolidated Statement of Operations for the three and nine months ended September 30, 2024 and 2023
(iii) Consolidated Statement of Comprehensive (Loss) Income for the three and nine months ended September 30, 2024 and 2023
(iv) Consolidated Statement of Changes in Shareholders' Equity for the three and nine months ended September 30, 2024 and 2023
(v) Consolidated Statement of Cash Flows for the nine months ended September 30, 2024 and 2023
(vi) Notes to the Consolidated Financial Statements
104 The cover page of this Quarterly Report on Form 10-Q, formatted in Inline XBRL
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EAGLE BANCORP, INC.
Date: November 7, 2024 By: /s/ Susan G. Riel
Susan G. Riel, President and Chief Executive Officer of the Company
Date: November 7, 2024 By: /s/ Eric R. Newell
Eric R. Newell, Executive Vice President and Chief Financial Officer of the Company
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