EAGLE BANCORP INC [EGBN] Filings

10-Q 1 egbn-20220331.htm 10-Q egbn-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2022

☐ 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 May 6, 2022, the registrant had 32,080,186 shares of Common Stock outstanding.

EAGLE BANCORP, INC.

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets at March 31, 2022 and December 31, 2021 (unaudited)	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021 (unaudited)	4
	Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2022 and 2021 (unaudited)	5
	Consolidated Statements of Changes in Shareholders ' Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited)	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (unaudited)	7
	Notes to Consolidated Financial Statements	8

Item 2.	Management 's Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65

Item 4.	Controls and Procedures	66

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	67

Item 1A.	Risk Factors	67

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67

Item 3.	Defaults Upon Senior Securities	67

Item 4.	Mine Safety Disclosures	67

Item 5.	Other Information	67

Item 6.	Exhibits	68

Signatures		69

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

EAGLE BANCORP, INC.

Consolidated Balance Sheets (Unaudited)

(dollars in thousands, except per share data)


	March 31, 2022		December 31, 2021
Assets
Cash and due from banks	$	12,140	$	12,886
Federal funds sold	27,359		20,391
Interest-bearing deposits with banks and other short-term investments	682,883		1,680,945
Investment securities available-for-sale (amortized cost of $1,873,491 and $2,642,667, respectively, and allowance for credit losses of $18 and $620, respectively).	1,775,633		2,623,408
Investment securities held-to-maturity, net of allowance for credit losses of $817 and $0 (fair value of $1,144,505 and $0, respectively)	1,153,399		—
Federal Reserve and Federal Home Loan Bank stock	29,026		34,153
Loans held for sale	25,504		47,218
Loans	7,113,807		7,065,598
Less: allowance for credit losses	(71,505)		(74,965)
Loans, net	7,042,302		6,990,633
Premises and equipment, net	14,014		14,557
Operating lease right-of-use assets	28,969		30,555
Deferred income taxes	81,087		43,174
Bank-owned life insurance	109,415		108,789
Goodwill and other intangible assets, net	104,241		105,793
Other real estate owned	1,635		1,635
Other assets	139,616		133,173
Total Assets	$	11,227,223	$	11,847,310

Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand	$	2,951,594	$	3,277,956
Interest-bearing transaction	888,598		777,255
Savings and money market	5,047,548		5,197,247
Time	698,519		729,082
Total deposits	9,586,259		9,981,540
Customer repurchase agreements	28,293		23,918
Other short-term borrowings	150,000		300,000
Long-term borrowings	69,701		69,670
Operating lease liabilities	33,935		35,501
Reserve for unfunded commitments	4,369		4,379
Other liabilities	75,112		81,527
Total Liabilities	9,947,669		10,496,535

Shareholders' Equity
Common stock, par value $0.01 per share; shares authorized 100,000,000, shares issued and outstanding 32,079,474 and 31,960,379, respectively	318		316
Additional paid-in capital	437,820		434,640
Retained earnings	963,140		930,061
Accumulated other comprehensive loss	(121,724)		(14,242)
Total Shareholders' Equity	1,279,554		1,350,775
Total Liabilities and Shareholders' Equity	$	11,227,223	$	11,847,310

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Income (Unaudited)

(dollars in thousands, except per share data)


	Three Months Ended March 31,
	2022		2021
Interest Income
Interest and fees on loans	$	75,830	$	89,238
Interest and dividends on investment securities	11,430		4,395
Interest on balances with other banks and short-term investments	1,057		553
Interest on federal funds sold	4		8
Total interest income	88,321		94,194
Interest Expense
Interest on deposits	6,359		7,899
Interest on customer repurchase agreements	13		11
Interest on other short-term borrowings	460		495
Interest on long-term borrowings	1,037		3,138
Total interest expense	7,869		11,543
Net Interest Income	80,452		82,651
Reversal of Credit Losses	(2,787)		(2,350)
Reversal of Credit Losses for Unfunded Commitments	(11)		(442)
Net Interest Income After Reversal of Credit Losses	83,250		85,443

Noninterest Income
Service charges on deposits	1,286		977
Gain on sale of loans	1,492		5,178
Net (loss) gain on sale of investment securities	(25)		221
Increase in the cash surrender value of bank-owned life insurance	626		389
Other income	4,074		3,822
Total noninterest income	7,453		10,587
Noninterest Expense
Salaries and employee benefits	17,019		21,769
Premises and equipment expenses	3,128		3,618
Marketing and advertising	1,064		886
Data processing	2,880		2,814
Legal, accounting and professional fees	1,561		2,999
FDIC insurance	1,058		2,428
Other expenses	4,302		3,473
Total noninterest expense	31,012		37,987
Income Before Income Tax Expense	59,691		58,043
Income Tax Expense	13,947		14,574
Net Income	$	45,744	$	43,469

Earnings Per Common Share
Basic	$	1.43	$	1.36
Diluted	$	1.42	$	1.36

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

(dollars in thousands)


	Three Months Ended March 31,
		2022		2021
Net Income		$	45,744	$	43,469

Other Comprehensive (Loss) Income, Net of Tax:
Unrealized loss on securities available-for-sale		(58,406)		(17,617)
Reclassification adjustment for loss (gain) included in net income		19		(166)
Total unrealized loss on investment securities available-for-sale		(58,387)		(17,783)
Unrealized loss on securities transferred to held-to-maturity (1)		(49,095)		—


Unrealized gain on derivatives		—		573
Reclassification adjustment for gain included in net income		—		(288)
Total unrealized gain on derivatives		—		285
Other comprehensive loss		(107,482)		(17,498)
Comprehensive (Loss) Income		$	(61,738)	$	25,971

(1) Represents unamortized accumulated other comprehensive loss on securities transferred to held-to-maturity status.

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

(dollars in thousands except share data)































									Accumulated
				Additional					Other
	Common			Paid-in			Retained		Comprehensive		Shareholders'
	Shares	Amount		Capital			Earnings		Income (Loss)		Equity
Balance January 1, 2022	31,950,092	$	316	$	434,640		$	930,061	$	(14,242)	$	1,350,775

Net Income	—	—		—			45,744		—		45,744
Other comprehensive loss, net of tax	—	—		—			—		(107,482)		(107,482)
Stock-based compensation expense	—	—		2,966			—		—		2,966
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes	1,789	—		19			—		—		19
Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes	(62,228)	2		(2)			—		—		—
Vesting of performance-based stock awards, net of shares withheld for payroll taxes	21,026	—		—			—		—		—
Time-based stock awards granted	165,416	—		—			—		—		—
Issuance of common stock related to employee stock purchase plan	3,379	—		197			—		—		197
Cash dividends declared ($0.40 per share)	—	—		—			(12,665)		—		(12,665)

Balance March 31, 2022	32,079,474	$	318	$	437,820		$	963,140	$	(121,724)	$	1,279,554

Balance January 1, 2021	31,779,663	$	315	$	427,016		$	798,061	$	15,500	$	1,240,892

Net Income	—	—		—			43,469		—		43,469
Other comprehensive loss, net of tax	—	—		—			—		(17,498)		(17,498)
Stock-based compensation expense	—	—		1,825			—		—		1,825
Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes	(16,663)	1		(1)			—		—		—
Vesting of performance-based stock awards, net of shares withheld for payroll taxes	15,686	—		—		—	—		—		—
Time-based stock awards granted	178,001	—		—			—		—		—
Issuance of common stock related to employee stock purchase plan	5,158	—		139			—		—		139
Cash dividends declared ($0.25 per share)	—	—		—			(7,932)		—		(7,932)
Common stock repurchased	(1,466)	—		(62)			—		—		(62)
Balance March 31, 2021	31,960,379	$	316	$	428,917		$	833,598	$	(1,998)	$	1,260,833

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)


	Three Months Ended March 31,
	2022		2021
Cash Flows From Operating Activities:
Net Income	$	45,744	$	43,469
Adjustments to reconcile Net Income to net cash provided by operating activities:
Reversal of credit losses	(2,787)		(2,350)
Reversal of credit losses for unfunded commitments	(11)		(442)
Depreciation and amortization	843		1,078
Gain on sale of loans	(1,492)		(5,178)
Gain on mortgage servicing rights	(930)		(140)
Securities (discount accretion) premium amortization, net	2,660		2,705
Origination of loans held for sale	(114,699)		(432,372)
Proceeds from sale of loans held for sale	137,905		383,559
Net increase in cash surrender value of BOLI	(626)		(389)

Net loss (gain) on sale of investment securities	25		(221)
Stock-based compensation expense	2,966		1,825
Net tax expense from stock-based compensation	1,609		144
Increase in other assets	(3,960)		(777)
(Decrease) increase in other liabilities	(6,395)		20,346
Net Cash Provided by Operating Activities	60,852		11,257
Cash Flows From Investing Activities:
Investment securities available-for-sale:
Purchases	(311,705)		(347,787)
Proceeds from maturities	83,050		85,116
Proceeds from sale/call	6,225		28,505
Investment securities held-to-maturity:
Purchases	(237,036)		—
Proceeds from maturities	5,548		—

Purchases of Federal Reserve and Federal Home Loan Bank stock	(60)		(43)
Sale of Federal Reserve and Federal Home Loan Bank stock	5,186		6,169

Net (increase) decrease in loans	(48,667)		228,275
Net change in premises and equipment	(269)		(2,397)
Net Cash Used in Investing Activities	(497,728)		(2,162)
Cash Flows From Financing Activities:
(Decrease) increase in deposits	(395,281)		9,641
Increase (decrease) in customer repurchase agreements	4,375		(6,665)
Decrease in short-term borrowings	(150,000)		—

Repayment of long-term borrowings	—		(50,000)
Proceeds from issuance of common stock	—		139
Proceeds from employee stock purchase plan	197		—
Proceeds from exercise of equity compensation plans	19		—
Common stock repurchased	—		(62)
Tax equivalent shares withheld on exercise of stock-based compensation plans	(1,609)		—
Cash dividends paid	(12,665)		(7,932)
Net Cash Used in Financing Activities	(554,964)		(54,879)
Net Decrease in Cash and Cash Equivalents	(991,840)		(45,784)
Cash and Cash Equivalents at Beginning of Period	1,714,222		1,789,055
Cash and Cash Equivalents at End of Period	$	722,382	$	1,743,271
Supplemental Cash Flows Information:
Interest paid	$	7,574	$	14,384
Income taxes paid	$	—	$	—
Non-Cash Operating Activities
Initial recognition of operating lease right-of-use assets	$	—	$	7,339
Non-Cash Investing Activities
Transfers of investment securities from available-for-sale to held-to-maturity	$	922,795	$	—

See Notes to Consolidated Financial Statements.

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 Company'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, 2021 was derived from the audited Consolidated Balance Sheet as of that date. The Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals that in the opinion of management, are necessary to present fairly the results for the periods presented. 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 "Critical 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, 2021. Certain reclassifications have been made to 2021 amounts previously reported to conform to the 2022 presentation. Reclassifications had no effect on net income nor shareholders' equity.

Nature of Operations

The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination and sale of residential mortgage loans, the origination of small business loans, and the origination, securitization and sale of multifamily Federal Housing Administration ("FHA") loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration ("SBA"), is typically sold to third party investors in a transaction apart from the loan's origination. The Bank offers its products and services through seventeen banking offices, five lending centers and various digital capabilities, including remote deposit services and mobile banking services. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third-party insurance broker. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the 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 when management may have the intent to sell them prior to maturity. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.

Premiums and discounts on investment securities held-to-maturity, like available-for-sale securities, are amortized or accreted to the earlier of call or maturity based on expected lives, which include prepayment adjustments and call optionality.

The Company separately evaluates its investment securities held-to-maturity 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 allowance for credit losses for held-to-maturity securities and included in the balance of investment securities held-to-maturity 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 is performed and compared to the amortized cost basis of the security to estimate any credit losses. The Company excludes accrued interest receivable from the balance of amortized cost on its investment securities held-to-maturity as it would be written off in the event that an allowance for credit losses would be required.

Transfers of Investment Securities from Available-for-Sale to Held-to-Maturity

Transfers of debt securities into the held-to-maturity category from the available-for-sale 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 held-to-maturity securities. Such amounts are amortized over the remaining life of the security.

Loans

Loans held for investment 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 - Loans

The allowance for credit losses - loans ("ACL") is an estimate of the expected credit losses in the loans held for investment portfolio.

Accounting Standards Codification ("ASC") 326, "Financial Instruments-Credit Losses" requires that an estimate of current and expected credit losses ("CECL") be immediately recognized and reevaluated over the contractual life of the financial asset. The ACL is a valuation account that 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 risk characteristics are evaluated on an individual basis (e.g., nonaccrual loans, TDRs). 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 (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.

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.

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.

For our cash flow model, management utilizes and forecasts regional unemployment by using a national forecast and estimating a regional adjustment based on historical differences between the two as the loss driver over our 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. Unemployment projections materially inform our CECL economic forecast and resulted in a reduction to our ACL during the three months ended March 31, 2022. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.

While our methodology in establishing the ACL attributes portions of the ACL and RUC to the separate loan pools or 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. Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses.

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.

Paycheck Protection Program ("PPP"). The PPP portfolio comprises loans issued under the SBA's Paycheck Protection Program to support small businesses impacted by the pandemic. PPP loans are approved subject to limited underwriting criteria following SBA guidelines, are unsecured, and are fully guaranteed as to principal and interest by the SBA.

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 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.

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 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 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 allowance on collectively assessed 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, Credit Oversight Committee (which replaced Directors Loan Committee), the Audit Committee, and the Board of Directors. 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 loan will be in a trouble debt restructuring.

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.

Collateral Dependent Financial Assets

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.

A loan that has been modified or renewed is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company's ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. Refer to the subsection above "Lending operations and accommodations to borrowers" for a discussion on the impact of the CARES Act on TDRs.

Allowance for Credit Losses - Available-for-Sale Debt Securities

The Company utilizes ASC 326 to evaluate its available-for-sale ("AFS") debt security portfolio for expected credit losses. 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; or (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 shareholders' equity as comprehensive income, net of deferred taxes.

Changes in the allowance for credit losses 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. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a non-credit-related impairment.

We have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in other assets in the Consolidated Balance Sheets. Available-for-sale 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.

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 reserve for unfunded commitments ("RUC") on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company's Consolidated Statement of Income. 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 Sheet.

The following table presents a breakdown of the provision for credit losses included in our Consolidated Statements of Income for the applicable periods (in thousands):


	Three Months Ended March 31,
(dollars in thousands)	2022		2021
Provision for (reversal of) credit losses- loans	$	(3,001)	$	(2,261)
Provision for (reversal of) credit losses- HTM debt securities	817		—
Provision for (reversal of) credit losses- AFS debt securities	(603)		(89)
Total	$	(2,787)	$	(2,350)

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, 2021.

Other New Authoritative Accounting Guidance

Accounting Standards Adopted in 2022:

ASU No. 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" ("ASU 2020-06") simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in ASU 2020-06 are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. ASU 2020-06 did not have a material impact on the Company's consolidated financial statements.

Accounting Standards Pending Adoption:

ASU No. 2020-4, "Reference Rate Reform (Topic 848)" ("ASU 2020-4") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/ costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-4 also provides numerous optional expedients for derivative accounting. ASU 2020-4 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-4 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We do not anticipate that the LIBOR transition or the application of this ASU will have material effects on the Company's business operations and consolidated financial statements.

ASU No. 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures" ("ASU 2022-02") eliminates the accounting guidance for troubled debt restructurings ("TDRs") while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty that assess whether a modification has created a new loan. Additionally, ASU 2022-02 requires that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases. For entities that have adopted ASC 326, the amendments in the ASU are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The impact of ASU 2022-02 should be applied prospectively, or, for the recognition and measurement of TDRs, with a modified retrospective transition method. We are currently in the process of evaluating this guidance.

Note 2. Cash and Due from Banks

The Company has deposits with other banks for derivative positions it holds, totaling $4.1 million at March 31, 2022 and $6.3 million at December 31, 2021. At March 31, 2022, the Company was entitled to receive collateral totaling $10.1 million. At December 31, 2021, the Company was required to post $2.4 million of cash collateral with its counterparties. See Note 6 for additional information.

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 available-for-sale and held-to-maturity securities are summarized as follows:


			Gross		Gross		Allowance		Estimated
	Amortized		Unrealized		Unrealized		for Credit		Fair
(dollars in thousands)	Cost		Gains		Losses		Losses		Value
March 31, 2022
Investment securities available-for-sale:
U.S. treasury bonds	$	49,718	$	—	$	(2,225)	$	—	$	47,493
U.S. agency securities	744,404		106		(37,957)		—		706,553
Residential mortgage-backed securities	1,062,085		435		(58,095)		—		1,004,425
Municipal bonds	15,284		102		(206)		(1)		15,179
Corporate bonds	2,000		—		—		(17)		1,983

Total securities available-for-sale	$	1,873,491	$	643	$	(98,483)	$	(18)	$	1,775,633

			Gross		Gross		Estimated		Allowance
	Amortized		Unrecognized		Unrecognized		Fair		for Credit
(dollars in thousands)	Cost		Gains		Losses		Value		Losses
March 31, 2022
Investment securities held-to-maturity:


Residential mortgage-backed securities	$	886,526	$	—	$	(8,910)	$	877,616	$	—
Municipal bonds	128,926		—		(552)		128,374		(16)
Corporate bonds	138,764		—		(249)		138,515		(801)

Total securities held-to-maturity	$	1,154,216	$	—	$	(9,711)	$	1,144,505	$	(817)

			Gross		Gross		Allowance		Estimated
	Amortized		Unrealized		Unrealized		for Credit		Fair
(dollars in thousands)	Cost		Gains		Losses		Losses		Value
December 31, 2021
Investment securities available-for-sale:
U.S. treasury bonds	$	49,693	$	22	$	(257)	$	—	$	49,458
U.S. agency securities	629,273		736		(7,622)		—		622,387
Residential mortgage-backed securities	1,692,773		5,697		(20,797)		—		1,677,673
Municipal bonds	141,916		3,865		(347)		(3)		145,431
Corporate bonds	129,012		648		(584)		(617)		128,459
Total	$	2,642,667	$	10,968	$	(29,607)	$	(620)	$	2,623,408

In addition, at March 31, 2022 and December 31, 2021 the Company held $29.0 million and $34.2 million, respectively, in equity securities in a combination of FRB and FHLB stocks, which were required to be held for regulatory purposes and which were not marketable, and therefore are carried at cost.

The Company reassessed classification of certain investments in the first quarter of 2022 and, effective March 31, 2022, it transferred a total of $1.1 billion of residential mortgage-backed securities, municipal bonds and corporate bonds from available-for-sale to held-to-maturity securities, including $237.0 million of securities acquired in the first quarter of 2022 for which its intention to hold to maturity was finalized. At the time of transfer, the Company reversed the allowance for credit losses associated with the available-for-sale securities through provision for credit losses. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The related unrealized loss totaling $66.2 million included in other comprehensive loss remained in other comprehensive loss, to be amortized out of other comprehensive loss with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. No gain or loss was recorded at the time of transfer. Subsequent to transfer, the allowance for credit losses on these securities was evaluated under the accounting policy for held-to-maturity securities.

Accrued interest receivable on available-for-sale securities totaled $4.5 million and $6.0 million at March 31, 2022 and December 31, 2021, respectively, and accrued interest receivable on held-to-maturity securities totaled $4.1 million at March 31, 2022. The accrued interest on investment securities is excluded from the amortized cost of the securities and is reported in other assets in the Consolidated Balance Sheets.

Gross unrealized losses and fair value of available-for-sale securities, by length of time that individual securities have been in a continuous unrealized loss position are as follows:


		Less Than				12 Months
		12 Months				or Greater				Total
		Estimated				Estimated				Estimated
	Number of	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Securities	Value		Losses		Value		Losses		Value		Losses
March 31, 2022
U.S. treasury bonds	2	$	47,492	$	2,225	$	—	$	—	$	47,492	$	2,225
U. S. agency securities	80	469,018		22,925		194,355		15,032		663,373		37,957
Residential mortgage-backed securities	146	812,079		43,414		159,548		14,681		971,627		58,095