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

~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For the Quarterly Period Ended September 30, 2017~~

	☐
For the Quarterly Period Ended June 30, 2020

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

~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For the transition period from _________ to _________~~

~~Commission File Number 0-25923~~

Eagle Bancorp, ~~Inc.~~Inc.

(Exact name of registrant as specified in its charter)

~~Maryland~~		~~52-2061461~~
Maryland	52-2061461
(State or other jurisdiction of		~~(I.R.S. Employer~~
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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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 definition 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 ☐

~~Large accelerated filer ☒~~

~~Accelerated filer ☐~~

~~Non-accelerated filer ☐ (Do not~~If an emerging growth company, indicate by check mark if ~~a smaller reporting company)~~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. ☐

~~Smaller Reporting Company ☐~~

~~Emerging Growth Company ☐~~

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange ~~Act).~~Act Yes ☐ No ☒

As of ~~October~~July 31, ~~2017,~~2020, the registrant had ~~34,178,014~~ 32,228,940 shares of Common Stock outstanding.

Table of Contents

Item 1 – Financial Statements (Unaudited)

EAGLE BANCORP, INC.

Consolidated Balance Sheets (Unaudited)

(dollars in thousands, except per share data)


	June 30, 2020		December 31, 2019
Assets
Cash and due from banks	$	12,199	$	7,539
Federal funds sold		25,466		38,987
Interest bearing deposits with banks and other short-term investments		598,377		195,447
Investment securities available for sale, at fair value (amortized cost of $750,653 and $839,192 and allowance for credit losses of $138 and $0 as of June 30, 2020 and December 31, 2019, respectively).		772,394		843,363
Federal Reserve and Federal Home Loan Bank stock		40,018		35,194
Loans held for sale		68,433		56,707
Loans		8,021,761		7,545,748
Less allowance for credit losses		(108,796)		(73,658)
Loans, net		7,912,965		7,472,090
Premises and equipment, net		12,970		14,622
Operating lease right-of-use assets		25,368		27,372
Deferred income taxes		37,364		29,804
Bank owned life insurance		75,913		75,724
Intangible assets, net		104,651		104,739
Other real estate owned		8,237		1,487
Other assets		105,315		85,644
Total Assets	$	9,799,670	$	8,988,719

Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand	$	2,416,058	$	2,064,367
Interest bearing transaction		861,703		863,856
Savings and money market		3,504,718		3,013,129
Time, $100,000 or more		527,870		663,987
Other time		625,623		619,052
Total deposits		7,935,972		7,224,391
Customer repurchase agreements		31,198		30,980
Other short-term borrowings		300,000		250,000
Long-term borrowings		267,882		217,687
Operating lease liabilities		27,137		29,959
Reserve for unfunded commitments		7,170		—
Other liabilities		42,416		45,021
Total Liabilities		8,611,775		7,798,038

Shareholders’ Equity
Common stock, par value $.01 per share; shares authorized 100,000,000, shares issued and outstanding 32,224,756 and 33,241,496, respectively		320		331
Additional paid in capital		440,934		482,286
Retained earnings		731,973		705,105
Accumulated other comprehensive income		14,668		2,959
Total Shareholders’ Equity		1,187,895		1,190,681
Total Liabilities and Shareholders’ Equity	$	9,799,670	$	8,988,719

Assets September 30, 2017 December 31, 2016 September 30, 2016
Cash and due from banks $ 8,246 $ 10,285 $ 8,678
Federal funds sold 8,548 2,397 5,262
Interest bearing deposits with banks and other short-term investments 432,156 355,481 505,087
Investment securities available-for-sale, at fair value 556,026 538,108 430,668
Federal Reserve and Federal Home Loan Bank stock 30,980 21,600 19,920
Loans held for sale 25,980 51,629 78,118
Loans 6,084,204 5,677,893 5,481,975
Less allowance for credit losses (62,967 ) (59,074 ) (56,864 )
Loans, net 6,021,237 5,618,819 5,425,111
Premises and equipment, net 19,546 20,661 19,370
Deferred income taxes 45,432 48,220 41,065
Bank owned life insurance 61,238 60,130 59,747
Intangible assets, net 107,150 107,419 107,694
Other real estate owned 1,394 2,694 5,194
Other assets 75,723 52,653 56,218
Total Assets $ 7,393,656 $ 6,890,096 $ 6,762,132

Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand $ 1,843,157 $ 1,775,684 $ 1,668,271
Interest bearing transaction 429,247 289,122 297,973
Savings and money market 2,818,871 2,902,560 2,802,519
Time, $100,000 or more 482,325 464,842 452,015
Other time 340,352 283,906 337,371
Total deposits 5,913,952 5,716,114 5,558,149
Customer repurchase agreements 73,569 68,876 71,642
Other short-term borrowings 200,000 — 50,000
Long-term borrowings 216,807 216,514 216,419
Other liabilities 55,346 45,793 50,283
Total Liabilities 6,459,674 6,047,297 5,946,493

Shareholders’ Equity
Common stock, par value $.01 per share; shares authorized 100,000,000, shares issued and outstanding 34,174,009, 34,023,850, and 33,590,880, respectively 340 338 333
Warrant — — 946
Additional paid in capital 518,616 513,531 509,706
Retained earnings 415,975 331,311 305,594
Accumulated other comprehensive loss (949 ) (2,381 ) (940 )
Total Shareholders’ Equity 933,982 842,799 815,639
Total Liabilities and Shareholders’ Equity $ 7,393,656 $ 6,890,096 $ 6,762,132

See notes to consolidated financial statements.

Table of Contents

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,
2017 2016 2017 2016
Interest Income
Interest and fees on loans $ 78,176 $ 69,869 $ 226,543 $ 202,002
Interest and dividends on investment securities 3,194 2,177 8,854 7,121
Interest on balances with other banks and short-term investments 991 376 2,084 856
Interest on federal funds sold 9 9 27 31
Total interest income 82,370 72,431 237,508 210,010
Interest Expense
Interest on deposits 7,233 4,840 19,466 13,513
Interest on customer repurchase agreements 58 39 136 115
Interest on short-term borrowings 164 383 441 727
Interest on long-term borrowings 2,979 2,441 8,937 4,515
Total interest expense 10,434 7,703 28,980 18,870
Net Interest Income 71,936 64,728 208,528 191,140
Provision for Credit Losses 1,921 2,288 4,884 9,219
Net Interest Income After Provision For Credit Losses 70,015 62,440 203,644 181,921

Noninterest Income
Service charges on deposits 1,626 1,431 4,641 4,303
Gain on sale of loans 2,173 3,009 6,740 8,464
Gain on sale of investment securities 11 1 542 1,123
Increase in the cash surrender value of  bank owned life insurance 369 391 1,108 1,171
Other income 2,605 1,573 6,846 5,209
Total noninterest income 6,784 6,405 19,877 20,270
Noninterest Expense
Salaries and employee benefits 16,905 17,130 50,451 49,157
Premises and equipment expenses 3,846 3,786 11,613 11,419
Marketing and advertising 732 857 2,873 2,551
Data processing 2,019 1,879 6,057 5,716
Legal, accounting and professional fees 1,240 771 3,539 2,845
FDIC insurance 929 629 2,063 2,193
Other expenses 3,845 3,786 12,153 11,354
Total noninterest expense 29,516 28,838 88,749 85,235
Income Before Income Tax Expense 47,283 40,007 134,772 116,956
Income Tax Expense 17,409 15,484 50,109 44,966
Net Income $ 29,874 $ 24,523 $ 84,663 $ 71,990

Earnings Per Common Share
Basic $ 0.87 $ 0.73 $ 2.48 $ 2.14
Diluted $ 0.87 $ 0.72 $ 2.47 $ 2.11
~~See notes to consolidated financial statements.~~

~~EAGLE BANCORP, INC.~~
~~Consolidated Statements of Comprehensive Income (Unaudited)~~
~~(dollars in thousands)~~

Three Months Ended June 30,

Six Months Ended June 30,


2020

2019

2020

2019

Interest Income









Interest and fees on loans

$
92,928

$
101,889

$
189,683

$
199,710

Interest and dividends on investment securities

4,571

5,238

9,998

10,836

Interest on balances with other banks and short-term investments

161

1,105

1,720

2,771

Interest on federal funds sold

12

47

72

96

Total interest income

97,672

108,279

201,473

213,413

Interest Expense

Interest on deposits

12,514

22,461

33,060

43,361

Interest on customer repurchase agreements

86

75

173

173

Interest on short-term borrowings

501

1,435

858

1,575

Interest on long-term borrowings

3,208

2,979

6,275

5,958

Total interest expense

16,309

26,950

40,366

51,067

Net Interest Income

81,363

81,329

161,107

162,346

Provision for Credit Losses

19,737

3,600

34,047

6,960

Provision for Unfunded Commitments

940

—

3,052

—

Net Interest Income After Provision For Credit Losses

60,686

77,729

124,008

155,386

Noninterest Income

Service charges on deposits

942

1,606

2,367

3,300

Gain on sale of loans

3,079

1,923

4,023

3,311

Gain on sale of investment securities

713

563

1,535

1,475

Increase in the cash surrender value of bank owned life insurance

828

429

1,242

854

Other income

6,933

1,839

8,798

3,711

Total noninterest income

12,495

6,360

17,965

12,651

Noninterest Expense

Salaries and employee benefits

17,104

17,743

34,901

41,387

Premises and equipment expenses

3,468

3,652

7,289

7,504

Marketing and advertising

1,111

1,268

2,189

2,416

Data processing

2,759

2,603

5,255

4,978

Legal, accounting and professional fees

3,979

2,740

10,967

4,449

FDIC insurance

1,980

1,126

3,404

2,242

Other expenses

4,491

4,227

8,234

8,687

Total noninterest expense

34,892

33,359

72,239

71,663

Income Before Income Tax Expense

38,289

50,730

69,734

96,374

Income Tax Expense

9,433

13,487

17,755

25,382

Net Income

$
28,856

$
37,243

$
51,979

$
70,992

Earnings Per Common Share

Basic

$
0.90

$
1.08

$
1.60

$
2.06

Diluted

$
0.90

$
1.08

$
1.60

$
2.05

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016

Net Income $ 29,874 $ 24,523 $ 84,663 $ 71,990

Other comprehensive income, net of tax:
Unrealized gain (loss) on securities available for sale 15 (907 ) 1,243 4,110
Reclassification adjustment for net gains included in net income (7 ) 1 (340 ) (674 )
Total unrealized gain (loss) on investment securities 8 (906 ) 903 3,436
Unrealized gain (loss) on derivatives 347 1,756 1,350 (5,478 )
Reclassification adjustment for amounts included in net income (183 ) (466 ) (821 ) 911
Total unrealized gain (loss) on derivatives 164 1,290 529 (4,567 )
Other comprehensive income (loss) 172 384 1,432 (1,131 )
Comprehensive Income $ 30,046 $ 24,907 $ 86,095 $ 70,859

See notes to consolidated financial statements.

Table of Contents

EAGLE BANCORP, INC.

Consolidated Statements of ~~Changes in Shareholders’ Equity~~ Comprehensive Income (Unaudited)
(dollars in ~~thousands except share data)~~thousands)


Three Months Ended June 30,

Six Months Ended June 30,


2020

2019

2020

2019
Net Income

$
28,856

$
37,243

$
51,979

$
70,992

Other comprehensive income, net of tax:

Unrealized gain on securities available for sale

1,870

5,925

13,977

11,979
Reclassification adjustment for net gains included in net income

(537)

(417)

(1,144)

(1,092)
Total unrealized gain on investment securities

1,333

5,508

12,833

10,887
Unrealized gain (loss) on derivatives

565

(513)

(902)

(1,665)
Reclassification adjustment for amounts included in net income

(295)

(236)

(222)

(1,180)
Total unrealized gain (loss) on derivatives

270

(749)

(1,124)

(2,845)
Other comprehensive income

1,603

4,759

11,709

8,042
Comprehensive Income

$
30,459

$
42,002

$
63,688

$
79,034
Accumulated
Other Total
Common Additional Paid Retained Comprehensive Shareholders’
Shares Amount Warrant in Capital Earnings Income (Loss) Equity

Balance January 1, 2017 34,023,850 $ 338 $ — $ 513,531 $ 331,311 $ (2,381 ) $ 842,799

Net Income — — — — 84,663 — 84,663
Other comprehensive gain, net of tax — — — — — 1,432 1,432
Stock-based compensation expense — — — 4,198 1 — 4,199
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes 60,925 1 — 258 — — 259
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes (16,962 ) 1 — (2 ) — — (1 )
Vesting of performance based stock awards, net of shares withheld for payroll taxes 3,589 — — — — — —
Time based stock awards granted 91,097 — — — — — —
Issuance of common stock related to employee stock purchase plan 11,510 — — 631 — — 631
Balance September 30, 2017 34,174,009 $ 340 $ — $ 518,616 $ 415,975 $ (949 ) $ 933,982

Balance January 1, 2016 33,467,893 $ 331 $ 946 $ 503,529 $ 233,604 $ 191 $ 738,601

Net Income — — — — 71,990 — 71,990
Other comprehensive loss, net of tax — — — — — (1,131 ) (1,131 )
Stock-based compensation expense — — — 5,159 — — 5,159
Issuance of common stock related to options exercised, 23,614 — — 282 — — 282
net of shares withheld for payroll taxes — — — — — —
Excess tax benefits realized from stock compensation — — — 166 — — 166
Vesting of time based stock awards issued at date of grant, (17,556 ) 2 — (2 ) — — —
net of shares withheld for payroll taxes — — — — — — —
Time based stock awards granted 104,775 — — — — — —
Issuance of common stock related to employee stock purchase plan 12,154 — — 572 — — 572

Balance September 30, 2016 33,590,880 $ 333 $ 946 $ 509,706 $ 305,594 $ (940 ) $ 815,639

See notes to consolidated financial statements.

Table of Contents

EAGLE BANCORP, INC.

Consolidated Statements of ~~Cash Flows~~ Changes in Shareholders’ Equity (Unaudited)
(dollars in ~~thousands)~~thousands except share data)

Accumulated

Other

Common

Additional Paid

Retained

Comprehensive

Shareholders'


Shares
Amount

in Capital

Earnings

Income

Equity
Balance April 1, 2020

32,197,258

$
320

$
439,321

$
710,072

$
13,065

$
1,162,778

Net Income

—

—

—

28,856

—

28,856
Other comprehensive income, net of tax

—

—

—

—

1,603

1,603
Stock-based compensation expense

—

—

1,427

—

—

1,427
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes

(2,738)

—

—

—

—

—
Time based stock awards granted

24,068

—

—

—

—

—
Issuance of common stock related to employee stock purchase plan

6,168

—

186

—

—

186
Cash dividends declared ($0.22 per share)

—

—

—

(6,955)

—

(6,955)
Balance June 30, 2020

32,224,756

$
320

$
440,934

$
731,973

$
14,668

$
1,187,895

Balance April 1, 2019

34,537,193

$
343

$
530,894

$
618,243

$
(992)

$
1,148,488
Net Income

—

—

—

37,243

—

37,243
Other comprehensive income, net of tax

—

—

—

—

4,759

4,759
Stock-based compensation expense

—

—

1,471

—

—

1,471
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes

750

—

37

—

—

37
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes

(1,800)

—

—

—

—

—
Issuance of common stock related to employee stock purchase plan
��
3,710

—

183

—

—

183
Cash dividends declared ($0.22 per share)

—

—

—

(7,599)

—

(7,599)
Balance June 30, 2019

34,539,853

$
343

$
532,585

$
647,887

$
3,767

$
1,184,582

Nine Months Ended September 30,
2017 2016
Cash Flows From Operating Activities:
Net Income $ 84,663 $ 71,990
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses 4,884 9,219
Depreciation and amortization 4,868 4,628
Gains on sale of loans (6,740 ) (8,464 )
Securities premium amortization (discount accretion), net 2,799 3,412
Origination of loans held for sale (481,917 ) (606,213 )
Proceeds from sale of loans held for sale 514,306 584,051
Net increase in cash surrender value of BOLI (1,108 ) (1,171 )
Decrease (increase) deferred income tax benefit 1,293 (754 )
Decrease in value of other real estate owned — 200
Net loss (gain) on sale of other real estate owned 301 (657 )
Net gain on sale of investment securities (542 ) (1,123 )
Stock-based compensation expense 4,199 5,159
Net tax benefits from stock compensation 460 —
Excess tax benefits realized from stock compensation — (166 )
Increase in other assets (23,059 ) (8,590 )
Increase in other liabilities 9,553 13,035
Net cash provided by operating activities 113,960 64,556
Cash Flows From Investing Activities:
Decrease in interest bearing deposits with other banks and short-term investments — 784
Purchases of available for sale investment securities (144,554 ) (106,163 )
Proceeds from maturities of available for sale securities 55,732 65,727
Proceeds from sale/call of available for sale securities 70,079 94,217
Purchases of Federal Reserve and Federal Home Loan Bank stock (27,665 ) (3,017 )
Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock 18,285 —
Net increase in loans (408,447 ) (491,720 )
Proceeds from sale of other real estate owned 2,144 3,614
Bank premises and equipment acquired (2,459 ) (4,836 )
Net cash used in investing activities (436,885 ) (441,394 )
Cash Flows From Financing Activities:
Increase in deposits 197,838 399,705
Increase (decrease) in customer repurchase agreements 4,693 (714 )
Increase in short-term borrowings 200,000 50,000
Increase in long-term borrowings 293 147,491
Proceeds from exercise of equity compensation plans 257 282
Excess tax benefits realized from stock compensation — 166
Proceeds from employee stock purchase plan 631 572
Net cash provided by financing activities 403,712 597,502
Net Increase In Cash and Cash Equivalents 80,787 220,664
Cash and Cash Equivalents at Beginning of Period 368,163 298,363
Cash and Cash Equivalents at End of Period $ 448,950 $ 519,027
Supplemental Cash Flows Information:
Interest paid $ 31,257 $ 18,196
Income taxes paid $ 52,800 $ 47,950
Non-Cash Investing Activities
Transfers from loans to other real estate owned $ 1,145 $ 2,500
Transfers from other real estate owned to loans $ — $ —

Accumulated

Additional

Other

Common

Paid

Retained

Comprehensive

Shareholders’


Shares

Amount

in Capital

Earnings

Income

Equity
Balance January 1, 2020

33,241,496

$
331

$
482,286

$
705,105

$
2,959

$
1,190,681

��

Cumulative effect adjustment due to the adoption of ASC 326, net of tax

—

—

—

(10,931)

—

(10,931)
Net Income

—

—

—

51,979

—

51,979
Other comprehensive income, net of tax

—

—

—

—

11,709

11,709
Stock-based compensation expense

—

—

2,423

—

—

2,423
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes

(24,921)

—

—

—

—

—
Vesting of performance based stock awards, net of shares withheld for payroll taxes

4,126

—

—

—

—

—
Time based stock awards granted

176,252

—

—

—

—

—
Issuance of common stock related to employee stock purchase plan

10,644

—

382

—

—

382
Cash dividends declared ($0.44 per share)

—

—

—

(14,180)

—

(14,180)
Common stock repurchased

(1,182,841)

(11)

$
(44,157)

—

—

(44,168)
Balance June 30, 2020

32,224,756

$
320

$
440,934

$
731,973

$
14,668

$
1,187,895

Balance January 1, 2019

34,387,919

$
342

$
528,380

$
584,494

$
(4,275)

$
1,108,941

Net Income

—

—

—

70,992

—

70,992
Other comprehensive income, net of tax

—

—

—

—

8,042

8,042
Stock-based compensation expense

—

—

3,501

—

—

3,501
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes

26,784

—

332

—

—

332
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes

(12,744)

1

(1)

—

—

—
Vesting of performance based stock awards, net of shares withheld for payroll taxes

17,655

—

—

—

—

—
Time based stock awards granted

112,636

—

—

—

—

—
Issuance of common stock related to employee stock purchase plan

7,603

—

373

—

—

373
Cash dividends declared ($0.22 per share)

—

—

—

(7,599)

—

(7,599)
Balance June 30, 2019

34,539,853

$
343

$
532,585

$
647,887

$
3,767

$
1,184,582

See notes to consolidated financial statements.

Table of Contents

EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)

Six Months Ended June 30,


2020

2019
Cash Flows From Operating Activities:




Net Income

$
51,979

$
70,992
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for credit losses

34,047

6,960
Provision for unfunded commitments

3,052

—
Depreciation and amortization

2,238

3,567
Amortization of operating lease right-of-use assets

—

1,360
Gains on sale of loans

(4,023)

(3,311)
Gains on sale of GNMA loans

—

(71)
Securities premium amortization (discount accretion), net

2,931

2,519
Origination of loans held for sale

(307,790)

(230,865)
Proceeds from sale of loans held for sale

300,087

215,995
Net increase in cash surrender value of BOLI

(1,242)

(854)
Deferred income tax (benefit) expense

(7,560)

2,807
Net gain on sale of investment securities

(1,535)

(1,475)
Stock-based compensation expense

2,423

3,501
Net tax (expense) benefits from stock compensation

(313)

10
(Increase) decrease in other assets

(20,365)

6,912
Increase (decrease) in other liabilities

(5,612)

(29,242)
Net cash provided by operating activities

48,317

48,805
Cash Flows From Investing Activities:




Purchases of available-for-sale investment securities

(209,460)

(63,572)
Proceeds from maturities of available-for-sale securities

170,754

67,223
Proceeds from sale/call of available-for-sale securities

119,988

42,143
Purchases of Federal Reserve and Federal Home Loan Bank stock

(9,074)

(76,150)
Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock

4,250

65,663
Net increase in loans

(481,672)

(405,986)
Increase (decrease) in premises and equipment

(2,965)

1,675
Net cash used in investing activities

(408,179)

(369,004)
Cash Flows From Financing Activities:




Increase (decrease) in deposits

711,581

(24,393)
Increase in customer repurchase agreements

218

1,256
Increase in short-term borrowings

50,000

225,000
Increase in long-term borrowings

50,098

—
Proceeds from exercise of equity compensation plans

—

332
Proceeds from employee stock purchase plan

382

373
Common stock repurchased

(44,168)

—
Cash dividends paid

(14,180)

(7,599)
Net cash provided by financing activities

753,931

194,969
Net Increase (Decrease) In Cash and Cash Equivalents

394,069

(125,230)
Cash and Cash Equivalents at Beginning of Period

241,973

321,864
Cash and Cash Equivalents at End of Period

$
636,042

$
196,634
Supplemental Cash Flows Information:

Interest paid

$
41,413

$
51,735
Income taxes paid

$
26,900

$
31,850
Non-Cash Investing Activities

Initial recognition of operating lease right-of-use assets

$
945

$
29,574
Transfers from loans to other real estate owned

$
6,750

$
—

See notes to consolidated financial statements.

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EAGLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~(Unaudited)~~

Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. and its subsidiaries (the “Company”),. Active subsidiaries include: EagleBank (the “Bank”), Eagle ~~Commercial Ventures, LLC (“ECV”), Eagle~~ Insurance Services, LLC, ~~and~~ Bethesda Leasing, LLC, and Landroval Municipal Finance, Inc., with all significant intercompany transactions eliminated.
The Consolidated Financial Statements of the Company included herein are unaudited. 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. The amounts as of and for the year ended December 31, ~~2016~~2019 were derived from audited Consolidated Financial Statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. ~~There have been no significant changes~~In addition to the ~~Company’s~~“Critical Accounting ~~Policies as disclosed~~Policies” impacted by the new Current Expected Credit Loss (“CECL”) standard 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, ~~2016.~~2019. The Company believes that the disclosures are adequate to make the information presented not misleading. Certain reclassifications have been made to amounts previously reported to conform to the current period presentation.
~~These statements should be read in conjunction with~~The following table presents a breakdown of the ~~audited Consolidated Financial Statements and related notes~~provision for credit losses included in ~~the Company’s Annual Report on Form 10-K~~our Consolidated Statements of Income for the year ended December 31, 2016. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results of operations to be expected for the remainder of the year, or for any other period.applicable periods (in thousands):

Three Months Ended

Six Months Ended
(dollars in thousands)

June 30, 2020

June 30, 2020
Provision for credit losses- loans

19,599

33,909
Provision for credit losses- AFS debt securities

138

138
Total provision for credit losses

19,737

34,047

Nature of Operations
The Company, through the Bank, conducts a full service community banking business, primarily in ~~the metropolitan~~Northern Virginia, Suburban Maryland, and Washington, ~~D.C area.~~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 ~~FHA~~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 ~~twenty-one~~20 banking offices, ~~five~~5 lending centers and various electronic capabilities, including remote deposit services and ~~mobile~~digital 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. ~~Eagle Commercial Ventures, LLC,~~Landroval Municipal Finance, Inc., a ~~direct~~ subsidiary of the ~~Company, provides subordinated financing for~~Bank, focuses on lending to municipalities by buying debt on the ~~acquisition, development and construction~~public market as well as direct purchase issuance. Bethesda Leasing, a subsidiary of the Bank, holds title to repossessed real ~~estate projects; these transactions involve higher levels of risk, together with commensurate higher returns. Refer to Higher Risk Lending – Revenue Recognition below.~~
estate.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts inof assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial ~~statements and accompanying notes.~~statements. Actual results ~~may~~could differ from those ~~estimates and such differences could be material to the financial statements.~~
~~Cash Flows~~
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest bearing deposits with other banks which have an original maturity of three months or less.
~~Investment Securities~~
estimates. The Company has no securities classified as trading, or as held to maturity. Securities available-for-sale 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. Securities available-for-sale are carried at fair value, with unrealized gains orallowance for credit 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.

Premiums and discounts on investment securities are amortized/accreted to the earlier of call or maturity based on expected lives, which lives are adjusted based on prepayment assumptions and call optionality if any. Declines in the fair value of ~~individual available-for-sale securities below~~financial instruments and the status of contingencies are particularly susceptible to significant change.

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Risks and Uncertainties

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ~~cost~~ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that ~~are other-than-temporary in nature result in write-downs~~almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the ~~individual securities~~outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to ~~their fair value. Factors affecting~~ the ~~determination~~Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of ~~whether other-than-temporary impairment has occurred include~~March 2020 as a ~~downgrading~~$2 trillion legislative package. The goal of the ~~security by~~CARES Act is to prevent a ~~rating agency,~~severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had and are expected to continue to have a ~~significant deterioration in~~material impact on the Company’s operations.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

The Company’s fee income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the ~~issuer, or~~expected COVID-19 related economic crisis. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact is likely to impact its fee income in future periods.

The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a ~~change~~scenario, interest income in ~~management’s intent and~~future periods could be negatively impacted. At this time the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to ~~hold a security~~repay in future periods.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses.

The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, and rates for ashort term funding have recently been very low. If funding costs were to become elevated for an extended period of time, ~~sufficient to allow for any anticipated recovery in fair value. Management systematically evaluates investment securities for other-than-temporary declines in fair value~~it could have an adverse effect on ~~a quarterly basis. This analysis requires management to consider various factors, which include the: (1) duration and magnitude~~the Company’s net interest margin. If an extended recession caused large numbers of the ~~decline in value; (2) financial condition of the issuer or issuers; and (3) structure of the security.~~

~~The entire amount of an impairment loss is recognized in earnings only when: (1)~~Company’s customers to withdraw their funds, the Company ~~intends to sell the security;~~might become more reliant on volatile or ~~(2) it is~~ more ~~likely than not that the Company will have to sell the security before recovery~~expensive sources of ~~its amortized cost basis; or (3)~~funding.

Asset valuation

Currently, the Company does not expect COVID-19 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.

~~Loans Held for Sale~~

The Company regularly engages in sales of residential mortgage loans held for sale and the guaranteed portion of small business loans, guaranteed by the Small Business Administration (“SBA”), and originated by the Bank. The Company has electedaffect its ability to carry loans held for sale at fair value. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of these loans are recorded as a component of noninterest income in the Consolidated Statements of Operations.

~~The Company’s current practice is to sell residential mortgage loans held for sale on a servicing released basis, and, therefore, it has no intangible asset recorded in the normal course of business~~account timely for the ~~value of~~assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such ~~servicing~~ as of September 30, 2017, December 31, 2016 and September 30, 2016. The sale of the guaranteed portion of SBA loans on a servicing retained basis, in a transaction apart from the loan’s origination, gives rise to an excess servicing asset, which is computed on a loan by loan basis with the unamortized amount being included in intangible assets in the Consolidated Balance Sheets. This excess servicing asset is being amortized on a straight-line basis (with adjustment for prepayments) as an offset to servicing fees collected and is included in other income in the Consolidated Statements of Operations.

The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e. interest rate lock commitments). Such interest rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. To protect against the price risk inherent in residential mortgage loan commitments, the Company utilizes both “best efforts” and “mandatory delivery” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Under a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor and the investor commits to a price that it will purchase the loan from the Company if the loan to the underlying borrower closes. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the investor commits to purchase a loan at a price representing a premium on the day the borrower commits to an interest rate with the intent that the buyer/investor has assumed the interest rate risk on the loan. As a result, the Bank is not generally exposed to losses on loans sold utilizing best efforts, nor will it realize gains related to rate lock commitments due to changes in interest rates. The market values of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss should occur on the interest rate lock commitments. Under a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay the investor a “pair-off” fee, based on then-current market prices, to compensate the investor for the shortfall. The Company manages the interest rate risk on interest rate lock commitments by entering into forward sale contracts of mortgage backed securities, whereby the Company obtains the right to deliver securities to investors in the future at a specified price. Such contracts are accounted for as derivatives and are recorded at fair value in derivative assets or liabilities, carried on the Consolidated Balance Sheet within other assets or other liabilities with changes in fair value recorded in other income within the Consolidated Statements of Operations. The period of time between issuance of a loan commitment to the customer and closing and sale of the loan to an investor generally ranges from 30 to 90 days under current market conditions. The gross gains on loan sales are recognized based on new loan commitments with adjustment for price and pair-off activity. Commission expenses on loans held for sale are recognized based on loans closed.

~~In circumstances where~~widening credit spreads, the Company does not ~~deliver the whole loan to an investor, but rather elects to retain the loan in its portfolio, the loan is transferred from held for sale to loans at fair value at date of transfer.~~

The Company originates a small number of FHA loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”). The Company securitizes these loans through the Government National Mortgage Association (“Ginnie Mae”) MBS I program and sells the resulting securities in the open market to authorized dealers in the normal course of business and generally retains the servicing rights. When servicing is retained on FHA loans securitized and sold, the Company computes an excess servicing asset on a loan by loan basis with the unamortized amount being included in intangible assets in the Consolidated Balance Sheets. Revenue represents gains from the sale of the Ginnie Mae securities and net revenues earned on the servicing of FHA loans securitizing the Ginnie Mae securities. The gains on Ginnie Mae securities include the realized and unrealized gains and losses on sales of FHA mortgage loans, as well as theanticipate significant changes in fair value of FHA interest rate lock commitments and FHA forward loan sale commitments. Revenue from servicing commercial FHA mortgages is recognized as earned based on the specific contractual terms of the underlying servicing agreements, along with amortization of and changes in impairment of mortgage servicing rights.

~~Loans~~

Loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is accrued at the contractual rate on the principal amount outstanding. It is the Company’s policymethodology used to ~~discontinue the accrual of interest when circumstances indicate that collection is doubtful. Deferred fees and costs are being amortized on the interest method over the term of the loan.~~

Management considers loans impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments according to contractual terms. Loans are evaluated for impairment in accordance with the Company’s portfolio monitoring and ongoing risk assessment procedures. Management considers the financial condition of the borrower, cash flow of the borrower, payment status of the loan, and the value of the collateral, if any, securing the loan. Generally, impaired loans do not include large groups of smaller balance homogeneous loans such as residential real estate and consumer type loans which are evaluated collectively for impairment and are generally placed on nonaccrual when the loan becomes 90 days past due as to principal or interest. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (90 days or less) provided eventual collection of all amounts due is expected. The impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, ordetermine the fair value of ~~the collateral if repayment is expected to be provided solely by the collateral. In appropriate circumstances, interest income on impaired loans may be recognized on~~assets measured in accordance with GAAP.

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COVID-19 could cause a ~~cash basis.~~

~~Higher Risk Lending – Revenue Recognition~~

~~The Company had occasionally made higher risk acquisition, development,~~further and construction (“ADC”) loans that entailed higher risks than ADC loans made following normal underwriting practices (“higher risk loan transactions”). These higher risk loan transactions were made throughsustained decline in the Company’s subsidiary, ECV. This activity was limited as to individual transaction amount and total exposure amounts, based on capital levels, and is carefully monitored. The loans are carried on the balance sheet at amounts outstanding. ECV had three higher risk loan transactions outstanding asstock price. As of ~~September~~June 30, ~~2017 and December 31, 2016, amounting to $9.5 million and $9.3 million, respectively.~~

~~Allowance for Credit Losses~~

The allowance for credit losses represents an amount which, in management’s judgment, is adequate to absorb probable losses on loans and other extensions of credit that may become uncollectible. The adequacy of the allowance for credit losses is determined through careful and continuous review and evaluation of the loan portfolio and involves the balancing of a number of factors to establish a prudent level of allowance. Among the factors considered in evaluating the adequacy of the allowance for credit losses are lending risks associated with growth and entry into new markets, loss allocations for specific credits, the level of the allowance to nonperforming loans, historical loss experience, economic conditions, portfolio trends and credit concentrations, changes in the size and character of the loan portfolio, and management’s judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. Allowances for impaired loans are generally determined based on collateral values. Loans or any portion thereof deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the level of the allowance through the provision for credit losses, which is recorded as a current period operating expense. The allowance for credit losses consists of allocated and unallocated components.

~~The components of the allowance for credit losses represent an estimation done pursuant to Accounting Standards Codification (“ASC”) Topic 450,~~~~“Contingencies,”~~ ~~or ASC Topic 310,~~~~“Receivables.”~~ Specific allowances are established in cases where management has identified significant conditions or circumstances related to a specific credit that management believes indicate the probability that a loss may be incurred. For potential problem credits for which specific allowance amounts have not been determined,2020, the Company establishes allowances according to the application of credit risk factors. These factors are set by management and approved by the appropriate Board committee to reflect its assessment of the relative level of risk inherent in each risk grade. A third component of the allowance computation, termed a nonspecific or environmental factors allowance, is based upon management’s evaluation of various environmental conditions that are not directly measured in the determination of either the specific allowance or formula allowance. Such conditions include general economic and business conditions affecting key lending areas, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, specific industry conditions within portfolio categories, recent loss experience in particular loan categories, duration of the current business cycle, bank regulatory examination results, findings of outside review consultants, and management’s judgment with respect to various other conditions including credit administration and management and the quality of risk identification systems. Executive management reviews these environmental conditions quarterly, and documents the rationale for all changes.

Management believes that the allowance for credit losses is adequate; however, determination of the allowance is inherently subjective and requires significant estimates. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Evaluation of the potential effects of these factors on estimated losses involves a high degree of uncertainty, including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle. In addition, various banking agencies, as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the Bank’s loan portfolio and allowance for credit losses. Such review may result in recognition of additions to the allowance based on their judgments of information available to them at the time of their examination.

~~Premises and Equipment~~

Premises and equipment are stated at cost less accumulated depreciation and amortization computed using the straight-line method for financial reporting purposes. Premises and equipment are depreciated over the useful lives of the assets, which generally range from three to seven years for furniture, fixtures and equipment, three to five years for computer software and hardware, and five to twenty years for building improvements. Leasehold improvements are amortized over the terms of the respective leases, which may include renewal options where management has the positive intent to exercise such options, or the estimated useful lives of the improvements, whichever is shorter. The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. These costs are included as a component of premises and equipment expenses on the Consolidated Statements of Operations.

~~Other Real Estate Owned (OREO)~~

Assets acquired through loan foreclosure are held for sale and are recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. The new basis is supported by appraisals that are generally no more than twelve months old. Costs after acquisition are generally expensed. If the fair value of the asset declines, a write-down is recorded through noninterest expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in market conditions or appraised values.

~~Goodwill and Other Intangible Assets~~

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic impairment testing. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives.

Goodwill is subject to impairment testing at the reporting unit level, which must be conducted at least annually. The Company performs impairment testing during the fourth quarter of each year or when events or changes in circumstances indicate the assets might be impaired.

~~The Company performs~~performed a qualitative assessment to determine whether it iswas more likely than not that the fair value of athe reporting unit iswas less than its carrying amount. ~~If, after assessing updated qualitative factors, the Company determines it is not more likely than not that~~A triggering event was deemed to have occurred as a result of COVID-19 and, accordingly, a step one assessment was performed by comparing the fair value of athe reporting unit ~~is less than~~with its carrying amount ~~it does not have to perform the two-step goodwill impairment test.~~(including goodwill). Determining the fair value of a reporting unit under the ~~first step of the~~ goodwill impairment test ~~and determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment test are judgmental~~is subjective and often ~~involve~~involves the use of significant estimates and assumptions. ~~Similarly, estimates and assumptions are used in determining the fair value of other intangible assets.~~ Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables. Based on the results of ~~qualitative assessments~~the assessment of all reporting units, the Company concluded that no impairment existed ~~at December 31, 2016.~~as of June 30, 2020. However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

Business Continuity Plan

~~Interest Rate Swap Derivatives~~The Company has implemented a remote working strategy for many of its employees. The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its business continuity plans.

Lending operations and accommodations to borrowers

In response to the COVID-19 pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications. Modifications under this program have predominately been for a period of 90 days. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. As of June 30, 2020, we granted temporary modifications on approximately 708 loans representing approximately $1.63 billion (approximately 20% of total loans) in outstanding exposure. Some of these deferrals may not have met the criteria for treatment under U.S. GAAP as troubled debt restructurings ("TDRs"). Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term loan modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the program. The PPP loans originated by the Bank generally have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of June 30, 2020, principal outstanding on PPP loans totaled $456 million to just over 1,400 businesses. The Company understands that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

Credit

The Company is ~~exposed to certain risks arising from both its business operations and economic conditions.~~working with customers directly affected by COVID-19. The Company ~~principally manages~~is prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for credit losses (“ACL”) and record additional provision for credit losses. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

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Allowance for Credit Losses

On January 1, 2020, we adopted ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which replaces the incurred loss methodology for determining our provision for credit losses and ACL with an expected loss methodology that is referred to as the current expected credit loss model. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable and held-to-maturity (“HTM”) debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 "Leases (Topic 842)" ("ASU 2016-02"). In addition, ASU 2016-13 made changes to the accounting for available-for-sale (“AFS”) debt securities. One such change is to require credit-related impairments to be recognized as an allowance for credit losses rather than as a ~~wide variety~~write-down of ~~business and operational risks through~~the securities amortized cost basis when management does not intend to sell or believes that it is not more than likely that they will be required to sell the securities prior to recovery of ~~its core business activities.~~the securities amortized cost basis. We adopted ASU 2016-13 using the modified retrospective method. Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company ~~manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing~~does not own Held to Maturity investment debt securities.

Loans

Loans held for investment are stated at the amount ~~sources,~~of unpaid principal reduced by deferred income (net of costs). Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and ~~duration~~commitment fees are deferred and amortized as an adjustment to yield over the life of ~~its assets~~the loan, or over the commitment period, as applicable.

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and ~~liabilities~~the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and ~~through the use of derivative financial instruments. Specifically,~~industrial loans modified in a TDR 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. The most common change in terms provided by the Company ~~enters into derivative financial instruments~~is an extension of an interest only term. As of June 30, 2020, all performing TDRs were categorized as interest-only modifications.

A loan is considered past due when a contractually due payment has not been received by the contractual due date. We place a loan on non-accrual status when there is a clear indication that the borrower’s cash flow may not be sufficient to ~~manage exposures~~meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed as a reduction of current period 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 ~~arise from business activities that result~~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 is an estimate of the expected credit losses in the ~~receipt~~loans held for investment and available-for-sale debt securities portfolios.

ASU 2016-13 replaces the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or ~~payment~~purchased. The allowance for credit losses 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 do not exceed the aggregate of amounts previously charged-off and expected to be charged- off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term, as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors.

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The allowance for credit losses is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Reserves on loans that do not share risk characteristics are evaluated on an individual basis (nonaccrual, TDR). In order to determine the allowance for credit losses, all loans are assigned a credit grade. Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. For purposes of determining the pool-basis reserve, the remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated by call report codes. Each credit grade within each product type is assigned a historical loss rate. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future ~~known~~losses at the portfolio segment level, as well as any necessary qualitative adjustments. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and ~~uncertain cash amounts,~~letters of credit, and any needed reserve is recorded in reserve for unfunded commitments on the ~~value~~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. See further detail regarding our forecasting methodology in the “Discounted Cash Flow Method” section below.

Even though portions of ~~which are determined by interest rates. The Company’s derivative financial instruments designated as cash flow hedges~~the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management's judgment, should be charged off. Portfolio segments are used to ~~manage differences~~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 is comprised of 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 are comprised of 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 is comprised of 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 are comprised of 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 is comprised of 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 – 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 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 is comprised of consumer lines of credit and loans secured by subordinate liens on residential real property.

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Other Consumer. The other consumer portfolio is comprised of 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 non-accrual 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 non-accrual.

The methodology used in the ~~amount, timing, and duration~~estimation of the ~~Company’s known or expected cash receipts~~allowance, which is performed at least quarterly, is designed to be dynamic and ~~its known or expected cash payments principally related~~responsive to ~~certain variable rate deposits. Refer~~changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and in reserves assigned on an individual basis 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, Director’s Loan Committee, the Audit Committee, and the Board of Directors. The committees report to the ~~“Loans Held~~Board as part of the Board's review on a quarterly basis of our consolidated financial statements.

When management determines that foreclosure is probable, and for ~~Sale” section for a discussion on forward commitment contracts, which~~certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are ~~also considered derivatives.~~

~~At the inception of a derivative contract, the Company designates the derivative as one of three types~~ based on ~~the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of~~ the 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 either of the following applies: management has a ~~recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2)~~reasonable expectation that a ~~hedge of a forecasted transaction~~loan will be restructured, or the ~~variability~~extension or renewal options are included in the borrower contract.

We do not measure an allowance for credit losses 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 non-accrual status.

Discounted Cash Flow Method

The Company uses the discounted cash flow (“DCF”) method to estimate expected credit losses for the commercial, income producing – commercial real estate, owner occupied – commercial real estate, real estate mortgage - residential, construction – commercial and residential, construction – C&I (owner occupied), home equity, and other consumer loan pools. For each of these loan segments, the Company generates cash ~~flows~~flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, probability of default, and loss given default. The modeling of expected prepayment speeds is based on historical internal data.

The Company uses regression analysis of historical internal and peer data to ~~be received or paid related~~determine suitable loss drivers to utilize when modeling lifetime probability of default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts regional unemployment as a loss driver. COVID-19 has negatively impacted unemployment projections, which inform our CECL economic forecast and increased our loss reserve as of June 30, 2020.

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For all DCF models, management has determined that 8 quarters represents a reasonable and supportable forecast period and reverts back to a ~~recognized asset or liability (“~~historical loss rate over twelve months on a straight-line basis. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.

The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow ~~hedge”), or (3) an~~stream at the instrument ~~with no hedging designation (“stand-alone derivative”). Regarding Interest Rate Swap Derivatives,~~level. Instrument effective yield is calculated, net of the ~~Company has no fair value hedges, only cash flow hedges. For a cash flow hedge,~~impacts of prepayment assumptions, and the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same period(s) during which the hedged transaction affects earnings (i.e. the period wheninstrument expected cash flows are ~~exchanged~~then discounted at that effective yield to produce an instrument-level Net Present Value ("NPV "). An ACL is established for the difference between ~~counterparties). For both fair value~~the instrument’s NPV and cash flow hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivativesamortized cost basis.

Collateral Dependent Financial Assets

Loans that do not ~~qualify for hedge accounting~~share risk characteristics are ~~reported currently in earnings, as noninterest income.~~

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception andevaluated on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income or expense. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings.

~~Customer Repurchase Agreements~~

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The agreements are entered into primarily as accommodations for large commercial deposit customers. The obligation to repurchase the securities is reflected as a liability in the Company’s Consolidated Balance Sheets, while the securities underlying the securities sold under agreements to repurchase remain in the respective assets accounts and are delivered to and held asindividual basis. For collateral ~~by third party trustees.~~

~~Marketing and Advertising~~

~~Marketing and advertising costs are generally expensed as incurred.~~

~~Income Taxes~~

~~The Company employs the asset and liability method of accounting for income taxes as required by ASC Topic 740, “~~~~Income Taxes~~.” Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse. In accordance with ASC Topic 740, the Company may establish a reserve against deferred tax assets in those cases where realization is less than certain, although no such reserves exist at September 30, 2017, December 31, 2016, or September 30, 2016.

~~Transfer of Financial Assets~~

~~Transfers of~~dependent financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. In certain cases, the recourse to the Bank to repurchase assets may exist but is deemed immaterial based on the specific facts and circumstances.

~~Earnings per Common Share~~

Basic net income per common share is derived by dividing net income by the weighted-average number of common shares outstanding during the period measured. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period measured including the potential dilutive effects of common stock equivalents.

~~Stock-Based Compensation~~

~~In accordance with ASC Topic 718,~~~~“Compensation,”~~ the Company records as compensation expense an amount equal to the amortization (over the remaining service period) of the fair value of option and restricted stock awards computed at the date of grant. Compensation expense on performance based grants is recorded based on the probability of achievement of the goals underlying the performance grant. Refer to Note 10 for a description of stock-based compensation awards, activity and expense.

~~New Authoritative Accounting Guidance~~

~~ASU 2014-09,~~~~“Revenue from Contracts with Customers (Topic 606).”~~In May 2014, the FASB and the International Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date” which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company is substantially complete with its overall assessment of revenue streams and reviewing of related contracts potentially affected by the ASU including deposit related fees, sale of OREO, interchange fees, and other fee income. The Company’s assessment suggests that adoption of this ASU should not materially change the method in which we currently recognize revenue for these revenue streams. The Company is also substantially complete with its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). In addition, the Company is evaluating the ASU’s expanded disclosure requirements. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be material.

~~ASU 2016-01,~~~~“Financial Instruments—(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”~~ ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation,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 operation or 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 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 costs 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.

The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected TDR.

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 page 10 for a discussion on the impact of the CARES Act on TDRs.

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

Although ASU No. ~~2016-01~~2016-13 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. One notable change from the legacy OTTI model is when evaluating whether credit loss exists, an entity may no longer consider the length of time fair value has been less than amortized cost. 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 are 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 allowance for credit losses 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 allowance for credit losses is recognized in other comprehensive income. 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. The majority of available-for-sale debt securities as of June 30, 2020 and December 31, 2019 were issued by US agencies. However, as of June 30, 2020, the Company determined that part of the unrealized loss positions in AFS corporate and municipal

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securities could be the result of credit losses, and therefore, an allowance for credit losses of $138 thousand was recorded. See Note 3 Investment Securities for more information.

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 accrued interest and other assets in the consolidated balance sheets. Available-for-sale debt securities are placed on non- accrual 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 non-accrual 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 statements 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.

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, 2019.

Other New Authoritative Accounting Guidance

Accounting Standards Adopted in 2020

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the Agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Agencies confirmed with the staff of the Financial Accounting Standards Board (“FASB”) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time. See Note 5 to the Consolidated Financial ~~Statements; however, the Company will continue to closely monitor developments and additional guidance.~~

Statements for further detail.

ASU ~~2016-02,~~~~“Leases (Topic 842).”~~ Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): (1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company is currently evaluating the provisions of ASU 2016-02 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

~~ASU 2016-09,~~~~“Improvements to Employee Share-Based Payment Accounting (Topic 718).”~~ ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance also requires an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (prior guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU 2016-09 was effective for the Company on January 1, 2017 and the adoption of this new standard (ASU 2016-09) resulted in a net $460 thousand, or $0.01 per basic common share, reduction to income tax expense for the nine months ended September 30, 2017.

~~ASU~~ 2016-13,“Measurement of Credit Losses on Financial Instruments (Topic 326).” ~~This ASU significantly changes how entities will measure credit losses for most financial assets~~Under the CECL standard and ~~certain other instruments that are not measured at fair value through net income. In issuing~~based on the ~~standard,~~January 1, 2020 effective date, the ~~FASB is responding~~Company made an initial adjustment to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for ~~loan and lease losses.~~credit losses of $10.6 million along with $4.1 million to the reserve for unfunded commitments. In ~~addition, entities will need~~accordance with adoption of CECL, the initial January 1, 2020 cumulative-effect adjustment was to ~~disclose~~retained earnings,net of taxes under the ~~amortized cost balance~~modified retrospective approach. Results for ~~each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual~~ reporting periods beginning after ~~December 15, 2019; early adoption is permitted~~January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Refer to the “Allowance for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

Credit Losses- Loans” section above for additional detail.

ASU ~~No. 2016-15,~~~~“Classification~~2020-02 "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)" ("ASU 2020-02") incorporates SEC SAB 119 (updated from SAB 102) into the Accounting Standards Codification (the "Codification") by aligning SEC recommended policies and procedures with ASC 326. ASU 2020-02 was effective on January 1, 2020 and had no significant impact on our documentation requirements, financial statement or disclosures.

Table of ~~Certain Cash Receipts and Cash Payments.”~~ ~~FASB issued this update in August 2016. Current GAAP is unclear or does not include specific guidance on how~~Contents

ASU 2020-03 "Codification Improvements to ~~classify certain transactions~~Financial Instruments" ("ASU 2020-03") revised a wide variety of topics in the ~~statement of cash flows. This~~Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU ~~is intended to reduce diversity~~2020-03 was effective immediately upon its release in ~~practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim~~March 2020 and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 isdid not ~~expected to~~ have a material ~~impact on the Company’s Consolidated Financial Statements.~~

~~ASU No. 2017-04,~~~~“Simplifying the Test for Goodwill Impairment.”~~ FASB issued this update in January 2017. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company expects to early adopt upon the next goodwill impairment test in 2017. ASU No. 2017-04 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

~~ASU 2017-12,~~~~“Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities~~~~(ASU 2017-12)~~”. The Financial Accounting Standards Board issued this update in August 2017. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company plans to adopt ASU 2017-12 on January 1, 2019. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the standard, we currently expect adoption to have an immaterial impact on our consolidated financial statements.

Accounting Standards Pending Adoption

ASU 2019-12 "Income Taxes (Topic 740)" ("ASU 2019-12") simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance. ASU 2019-012 will be effective for us on January 1, 2021 and is not expected to have any material impact on our consolidated financial statements.

ASU 2020-04, "Reference Rate Reform (Topic 848)" ("ASU 2020-04") 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 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 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 are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements.

Note 2. Cash and Due from Banks

Regulation D of the Federal Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. During ~~2017,~~2020, the Bank maintained balances at the Federal Reserve sufficient to meet reserve requirements, as well as significant excess reserves, on which interest is paid.

Additionally, the Bank maintains interest bearing balances with the Federal Home Loan Bank of Atlanta and noninterest bearing balances with domestic correspondent banks as compensation for services they provide to the Bank.

Note 3. Investment Securities Available-for-Sale
Amortized cost and estimated fair value of securities available-for-sale are summarized as follows:

Gross Gross Estimated
September 30, 2017 Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
U. S. agency securities $ 179,100 $ 342 $ 1,524 $ 177,918
Residential mortgage backed securities 303,822 374 2,670 301,526
Municipal bonds 61,593 1,673 119 63,147
Corporate bonds 13,011 206 — 13,217
Other equity investments 218 — — 218
$ 557,744 $ 2,595 $ 4,313 $ 556,026

Gross Gross Estimated
December 31, 2016 Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
U. S. agency securities $ 107,425 $ 519 $ 1,802 $ 106,142
Residential mortgage backed securities 329,606 324 3,691 326,239
Municipal bonds 94,607 1,723 400 95,930
Corporate bonds 9,508 82 11 9,579
Other equity investments 218 — — 218
$ 541,364 $ 2,648 $ 5,904 $ 538,108

Gross

Gross

Allowance

Estimated
June 30, 2020

Amortized

Unrealized

Unrealized

for Credit

Fair
(dollars in thousands)

Cost

Gains

Losses

Losses

Value
U. S. agency securities

$
116,223

$
1,580

$
749

$
—

$
117,054
Residential mortgage backed securities

516,297

15,346

115

—

531,528
Municipal bonds

86,374

4,333

—

13

90,694
Corporate bonds

31,561

1,562

78

125

32,920
Other equity investments

198

—

—

—

198

$
750,653

$
22,821

$
942

$
138

$
772,394

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Gross

Gross

Allowance

Estimated
December 31, 2019

Amortized

Unrealized

Unrealized

for Credit

Fair
(dollars in thousands)

Cost

Gains

Losses

Losses

Value
U. S. agency securities

$
180,228

$
621

$
1,055

$
—

$
179,794
Residential mortgage backed securities

541,490

4,337

1,975

—

543,852
Municipal bonds

71,902

2,034

5

—

73,931
Corporate bonds

10,530

203

—

—

10,733
U.S. Treasury

34,844

11

—

—

34,855
Other equity investments

198

—

—

—

198

$
839,192

$
7,206

$
3,035

$
—

$
843,363

In addition, at ~~September~~June 30, ~~2017,~~2020 and December 31, 2019 the Company held ~~$31.0~~$40.0 million and $35.2 million, respectively, in equity securities in a combination of Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stocks, which are required to be held for regulatory purposes and which are not marketable, and therefore are carried at cost.

Accrued interest on available-for-sale securities totaled $2.7 million and $3.2 million at June 30, 2020 and December 31, 2019, respectively, and was included in other assets in the consolidated balance sheets.
Gross unrealized losses and fair value of available-for-sale securities for which an allowance for credit losses has not been recorded, by length of time that ~~the~~ individual ~~available-for-sale~~ securities have been in a continuous unrealized loss position are as follows:

Less than 12 Months
12 Months or Greater Total
Estimated Estimated Estimated
September 30, 2017 Number of Fair Unrealized Fair Unrealized Fair Unrealized

Less than

12 Months

12 Months

or Greater

Total

Estimated

Estimated

Estimated

June 30, 2020

Number of

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(dollars in thousands) Securities Value Losses Value Losses Value Losses

Securities

Value

Losses

Value

Losses

Value

Losses
U. S. agency securities 32 $ 97,832 $ 1,101 $ 28,299 $ 423 $ 126,131 $ 1,524

25

$
24,653

$
99

$
37,287

$
650

$
61,940

$
749
Residential mortgage backed securities 113 198,670 1,523 55,920 1,147 254,590 2,670

20

41,864

66

7,721

49

49,585

115
Municipal bonds 5 13,301 119 — — 13,301 119
150 $ 309,803 $ 2,743 $ 84,219 $ 1,570 $ 394,022 $ 4,313

Less than 12 Months
12 Months or Greater Total
Estimated Estimated Estimated
December 31, 2016 Number of Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) Securities Value Losses Value Losses Value Losses
U. S. agency securities 27 $ 88,991 $ 1,764 $ 3,768 $ 38 $ 92,759 $ 1,802
Residential mortgage backed securities 112 232,347 3,110 19,402 581 251,749 3,691
Municipal bonds 16 34,743 400 — — 34,743 400
Corporate bonds 2 4,998 11 — — 4,998 11

2

4,447

78

—

—

4,447

78
157 $ 361,079 $ 5,285 $ 23,170 $ 619 $ 384,249 $ 5,904

47

$
70,964

$
243

$
45,008

$
699

$
115,972

$
942

Less than

12 Months

12 Months

or Greater

Total

Estimated

Estimated

Estimated

December 31, 2019

Number of

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(dollars in thousands)

Securities

Value

Losses

Value

Losses

Value

Losses
U. S. agency securities

36

$
75,159

$
439

$
51,481

$
616

$
126,640

$
1,055
Residential mortgage backed securities

111

197,794

1,148

90,742

827

288,536

1,975
Municipal bonds

1

1,994

5

—

—

1,994

5

148

$
274,947

$
1,592

$
142,223

$
1,443

$
417,170

$
3,035

The majority of the AFS debt securities in an unrealized loss position as of June 30, 2020, consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss.
As of June 30, 2020, total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. However, as of June 30, 2020, the Company determined that ~~exist are generally~~part of the unrealized loss positions in AFS corporate and municipal securities could be the result of ~~changes in market interest rates~~credit losses, and ~~interest spread relationships since original purchases.~~therefore, an allowance for credit losses of $138 thousand was recorded. The weighted average duration of debt securities, which comprise 99.9% of total investment securities, is relatively short at ~~3.5~~3.1 years. 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~~security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. ~~The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2017 represent an other-than-temporary impairment.~~ The Company does not intend to sell the 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.

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The amortized cost and estimated fair value of investments available-for-sale at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 by contractual maturity are shown in the table below. Expected maturities for residential 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, 2017 December 31, 2016
Amortized Estimated Amortized Estimated

June 30, 2020

December 31, 2019

Amortized

Estimated

Amortized

Estimated
(dollars in thousands) Cost Fair Value Cost Fair Value

Cost

Fair Value

Cost

Fair Value
U. S. agency securities maturing:

One year or less $ 90,495 $ 89,503 $ 83,885 $ 82,548

$
34,038

$
34,219

$
96,332

$
96,226
After one year through five years 74,481 74,433 20,736 20,897

77,465

78,008

76,121

75,821
Five years through ten years 14,124 13,982 2,804 2,697

4,720

4,827

7,775

7,747
Residential mortgage backed securities 303,822 301,526 329,606 326,239

516,297

531,528

541,490

543,852
Municipal bonds maturing:

One year or less 2,537 2,586 1,056 1,070

7,382

7,437

5,897

5,969
After one year through five years 21,116 21,875 45,808 46,865

19,797

20,703

21,416

21,953
Five years through ten years 36,868 37,493 46,668 46,839

51,195

54,407

42,589

44,015
After ten years 1,072 1,193 1,075 1,156

8,000

8,160

2,000

1,994
Corporate bonds
Corporate bonds maturing:

One year or less

10,929

11,312

502

508
After one year through five years 11,511 11,717 8,008 8,079

15,407

15,999

8,528

8,725
After ten years 1,500 1,500 1,500 1,500

5,225

5,734

1,500

1,500
U.S. treasury

—

—

34,844

34,855
Other equity investments 218 218 218 218

198

198

198

198
$ 557,744 $ 556,026 $ 541,364 $ 538,108
Allowance for Credit Losses

—

(138)

—

—

$
750,653

$
772,394

$
839,192

$
843,363

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, gross realized gains on sales of investments securities were ~~$795 thousand~~$1.5 million and there were 0 gross realized losses on sales of investment ~~securities were $254 thousand.~~securities. For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, gross realized gains on sales of investments securities were ~~$1.3~~$1.5 million primarily due to the $829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations, and there were 0 gross realized losses on sales of investment ~~securities were $202 thousand.~~securities.

Proceeds from sales and calls of investment securities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 were ~~$70.1~~$120.0 million ~~and~~compared to $42.1 million for the same period in ~~2016 were $94.2 million.~~
2019.
The carrying 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~~June 30, ~~2017~~2020 and December 31, 2019 was ~~$459.9~~$346 million and $378 million, respectively, which is well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. agency securities, which exceeded ~~ten~~10 percent of shareholders’ equity.

Note 4. Mortgage Banking ~~Derivative~~
Derivatives
As part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed ~~securities (“MBS”).~~securities. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.

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Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.

The fair value of the mortgage banking derivatives is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.

At ~~September~~June 30, ~~2017~~2020, the Bank had no material mortgage banking derivative financial instruments. During the second quarter of 2020, the Company suspended locking loans for sale on a mandatory basis as a result of significant market dislocation that was experienced as a result of COVID-19 as well as the operational strain associated with the mandatory underwriting process given the volume of residential mortgages. At June 30, 2019 the Bank had mortgage banking derivative financial instruments with a notional value of ~~$59.6~~$124.5 million related to its forward ~~contracts as compared to $81.7 million at September 30, 2016.~~contracts. The fair value of these mortgage banking derivative instruments at ~~September 30, 2017~~December 31, 2019 was ~~$63~~$280 thousand included in other assets and ~~$36~~$66 thousand included in other ~~liabilities as compared to $217 thousand included in other assets and $222 thousand included in other liabilities at September 30, 2016.~~

liabilities.

Included in other noninterest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 was a net gain of ~~$71 thousand~~$1.1 million and a net ~~gain~~loss of ~~$335~~$165 thousand relating to mortgage banking derivative instruments as compared to a net ~~loss~~gain of ~~$46~~$84 thousand and a net gain of ~~$274~~$219 thousand for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2019. The amount included in other noninterest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 pertaining to its mortgage banking hedging activities was a net realized gain of $1.3 million and a net loss of ~~$14~~$7 thousand, ~~and $912 thousand~~respectively, as compared to a net ~~realized gain~~loss of ~~$151~~$94 thousand and net ~~unrealized~~ loss of ~~$156~~$49 thousand, respectively, for the ~~same periods in September~~three and six months ended June 30, ~~2016.~~2019.

Note 5. 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.

Loans, net of unamortized net deferred fees, at ~~September~~June 30, ~~2017,~~2020 (unaudited) and December 31, ~~2016, and September 30, 2016~~2019 are summarized by type as follows:

September 30, 2017 December 31, 2016 September 30, 2016
(dollars in thousands) Amount % Amount % Amount %
Commercial $ 1,244,184 20 % $ 1,200,728 21 % $ 1,130,042 21 %
Income producing - commercial real estate 2,898,948 48 % 2,509,517 44 % 2,551,186 46 %
Owner occupied - commercial real estate 749,580 12 % 640,870 12 % 590,427 11 %
Real estate mortgage - residential 109,460 2 % 152,748 3 % 154,439 3 %
Construction - commercial and residential* 915,493 15 % 932,531 16 % 838,137 15 %
Construction - C&I (owner occupied) 55,828 1 % 126,038 2 % 104,676 2 %
Home equity 101,898 2 % 105,096 2 % 106,856 2 %
Other consumer 8,813 — 10,365 — 6,212 —
Total loans 6,084,204 100 % 5,677,893 100 % 5,481,975 100 %
Less: allowance for credit losses (62,967 ) (59,074 ) (56,864 )
Net loans $ 6,021,237 $ 5,618,819 $ 5,425,111
*Includes land loans.

June 30, 2020

December 31, 2019

(dollars in thousands)

Amount

%

Amount

%

Commercial

$
1,607,056

20
%
$
1,545,906

20
%
PPP loans

456,476

6
%

—

—

Income producing - commercial real estate

3,678,946

46
%

3,702,747

50
%
Owner occupied - commercial real estate

964,077

12
%

985,409

13
%
Real estate mortgage - residential

93,601

1
%

104,221

1
%
Construction - commercial and residential

995,550

12
%

1,035,754

14
%
Construction - C&I (owner occupied)

149,845

2
%

89,490

1
%
Home equity

74,921

1
%

80,061

1
%
Other consumer

1,289

—

2,160

—

Total loans

8,021,761

100
%

7,545,748

100
%
Less: allowance for credit losses

(108,796)

(73,658)

Net loans

$
7,912,965
(1)

$
7,472,090

(1) Excludes accrued interest receivable of $36.2 million and $21.3 million at June 30, 2020 and December 31, 2019, respectively, which is recorded in other assets.
Unamortized net deferred fees amounted to ~~$23.3 million, $22.3~~$34.8 million and ~~$20.9~~$25.2 million at ~~September~~June 30, ~~2017,~~2020 and December 31, ~~2016, and September 30, 2016,~~2019, respectively.
As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the Bank serviced ~~$176.5~~$96 million and ~~$128.8~~$99 million, respectively, of multifamily FHA loans, SBA loans and other loan participations which are not reflected as loan balances on the Consolidated Balance Sheets.

Table of Contents

Loan Origination / Risk Management

The Company’s goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures, evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.

The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing real estate. At ~~September~~June 30, ~~2017,~~2020, owner occupied - commercial real estate and construction - – Commercial and Industrial (“C&I&I”) (owner occupied) represent approximately ~~13%~~14% of the loan ~~portfolio.~~portfolio . At ~~September~~June 30, ~~2017,~~2020, non-owner occupied commercial real estate and real estate construction represented approximately ~~63%~~58% of the loan portfolio. The combined owner occupied and commercial real estate and construction loans represent approximately ~~76%~~72% of the loan portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in 79% of all loans being secured by real estate. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan to value of 80% and minimum cash flow debt service coverage of 1.15 to 1.0. Personal guarantees may be required, but may be limited. In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years.

The Company is also an active traditional commercial lender providing loans for a variety of purposes, including working capital, equipment and account receivable financing. This loan category represents approximately 20% of the loan portfolio at ~~September~~June 30, ~~2017~~2020 and was generally variable or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent approximately 2%1.3% of the commercial loan ~~category of loans.~~category. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the ~~credit.~~credit as well as potential repairs to the SBA guarantees. The Company generally sells the guaranteed portion of the loan generating noninterest income from the gains on sale, as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial loans. SBA loans are subject to a maximum loan size established by the ~~SBA.~~SBA as well as internal loan size guidelines.

Approximately 2%6% of the loan portfolio at ~~September~~June 30, ~~2017~~2020 consists of PPP loans to eligible customers. PPP loans are expected to primarily be repaid via forgiveness from the SBA. These loans are fully guaranteed as to principal and interest by the SBA and ultimately by the full faith and credit of the U.S. Government; as a result, they were approved utilizing different underwriting standards than the Bank's other commercial loans. PPP loans are included in the CECL model but do not carry an allowance for credit loss due to the aforementioned government guarantees.

Approximately 1% of the loan portfolio at June 30, 2020 consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a small portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.

Approximately 2%1% of the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was 1516 months. These credits represent first liens on residential property loans originated by the Bank. While the Bank’s general practice is to originate and sell (servicing released) loans made by its Residential Lending department, from time to time certain loan characteristics do not meet the requirements of third party investors and these loans are instead maintained in the Bank’s portfolio until they are resold to another investor at a later date or mature.

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.

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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;~~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 user commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate Loan Committee.

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 Chief Financial Officer. 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 which 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 ~~ADC~~acquisition, development and construction (“ADC”) real estate loans including both investment and owner occupied projects. ADC loans amounted to ~~$1.44~~$1.47 billion at ~~September~~June 30, ~~2017.~~2020. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination. ADC loans ~~are serviced by loan funded~~that provide for the use of interest reserves ~~and~~ represent approximately ~~79%~~59% of the outstanding ADC loan portfolio at ~~September~~June 30, ~~2017.~~2020. 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 an effective 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 this inherent risk, 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 which are monitored on an ongoing basis which 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 includes 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.

From time to time the Company may make loans for its own portfolio or through its higher risk loan affiliate, ECV. Such loans, which are made to finance projects (which may also be financed at the Bank level), may have higher risk characteristics than loans made by the Bank, such as lower priority interests and/or higher loan to value ratios. The Company seeks an overall financial return on these transactions commensurate with the risks and structure of each individual loan. Certain transactions may bear current interest at a rate with a significant premium to normal market rates. Other loan transactions may carry a standard rate of current interest, but also earn additional interest based on a percentage of the profits of the underlying project or a fixed accrued rate of interest.

~~Allowance for Credit Losses~~

The following tables detail activity in the allowance for credit losses by portfolio segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~2019. 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.

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Government. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Income Producing -

Owner Occupied -

Real Estate

Construction -

Commercial

Commercial

Mortgage -

Commercial and

Home

Other

(dollars in thousands)

Commercial

Real Estate

Real Estate

Residential

Residential

Equity

Consumer

Total
Three Months Ended June 30, 2020

Allowance for credit losses:
















Balance at beginning of period

$
27,346

$
43,551

$
9,867

$
1,369

$
13,341

$
818

$
44

96,336
Loans charged-off

(7,145)

—

—

—

—

—

—

(7,145)
Recoveries of loans previously charged-off

5

—

—

—

—

—

1

6
Net loans charged-off

(7,140)

—

—

—

—

—

1

(7,139)
Provision for credit losses

7,872

8,312

2,474

181

467

294

(1)

19,599
Ending balance

$
28,078

$
51,863

$
12,341

$
1,550

$
13,808

$
1,112

$
44

$
108,796

Six Months Ended June 30, 2020

Allowance for credit losses:

Balance at beginning of period, prior to adoption of ASC 326

$
15,857

$
28,034

$
6,242

$
965

$
18,175

$
599

$
72

$
69,944
Impact of adopting ASC 326

892

11,230

4,674

(301)

(6,143)

245

17

10,614
Loans charged-off

(7,145)

(550)

—

—

(1,768)

—

—

(9,463)
Recoveries of loans previously charged-off

74

—

—

—

—

—

4

78
Net loans (charged-off) recoveries

(7,071)

(550)

—

—

(1,768)

—

4

(9,385)
Provision for credit losses

18,400

13,149

1,425

886

3,544

268

(49)

37,623
Ending balance

$
28,078

$
51,863

$
12,341

$
1,550

$
13,808

$
1,112

$
44

$
108,796

As of June 30, 2020

Allowance for credit losses:

Individually evaluated for impairment

$
8,797

$
5,260

$
405

$
746

$
1,383

$
107

$
3

$
16,701
Collectively evaluated for impairment

19,281

46,603

11,936

804

12,425

1,005

41

92,095
Ending balance

$
28,078

$
51,863

$
12,341

$
1,550

$
13,808

$
1,112

$
44

$
108,796

Three Months Ended June 30, 2019

Allowance for credit losses:

Balance at beginning of period

$
17,195

$
26,765

$
5,980

$
681

$
18,469

$
605

$
248

$
69,943
Loans charged-off

(1)

(1,847)

—

—

—

—

(2)

(1,850)
Recoveries of loans previously charged-off

37

302

2

2

37

—

13

393
Net loans charged-off

36

(1,545)

2

2

37

—

11

(1,457)
Provision for credit losses

905

1,790

(226)

672

500

(24)

(17)

3,600
Ending balance

$
18,136

$
27,010

$
5,756

$
1,355

$
19,006

$
581

$
242

$
72,086

Six Months Ended June 30, 2019

Allowance for credit losses:

Balance at beginning of period

$
15,857

$
28,034

$
6,242

$
965

$
18,175

$
599

$
72

$
69,944
Loans charged-off

(5)

(5,343)

—

—

—

—

(2)

(5,350)
Recoveries of loans previously charged-off

167

302

2

3

37

—

21

532
Net loans (charged-off) recoveries

162

(5,041)

2

3

37

—

19

(4,818)
Provision for credit losses

2,117

4,017

(488)

387

794

(18)

151

6,960
Ending balance

$
18,136

$
27,010

$
5,756

$
1,355

$
19,006

$
581

$
242

$
72,086

As of June 30, 2019

Allowance for credit losses:

Individually evaluated for impairment

$
7,905

$
1,000

$
475

$
650

$
—

$
—

$
—

$
10,030
Collectively evaluated for impairment

10,231

26,010

5,281

705

19,006

581

242

62,056
Ending balance

$
18,136

$
27,010

$
5,756

$
1,355

$
19,006

$
581

$
242

$
72,086

During the first quarter of 2020, we adopted ASU 2016-13, which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. Upon adoption, the allowance for credit losses was increased by $14.7 million, which included a $4.1 million increase to the allowance for unfunded commitments, with no impact to the consolidated statement of operations. We recorded a $19.7 million and $34.0 million provision for credit losses for the three and six months ended second June 30, 2020 under CECL. We recorded $7.1 million and $9.4 million in net charge-offs during the three and six months ended June 30, 2020, respectively, compared to $1.5 million and $4.8 million during the three and six months ended June 30, 2019.
Income Producing - Owner Occupied - Real Estate Construction -
Commercial Commercial Mortgage Commercial and Home Other
(dollars in thousands) Commercial Real Estate Real Estate Residential Residential Equity Consumer Total
Three months ended September 30, 2017
Allowance for credit losses:
Balance at beginning of period $ 14,225 $ 23,308 $ 4,189 $ 1,081 $ 16,727 $ 1,216 $ 301 $ 61,047
Loans charged-off (522 ) — — — (39 ) — (32 ) (593 )
Recoveries of loans previously charged-off 407 30 — 2 146 1 6 592
Net loans (charged-off) recoveries (115 ) 30 — 2 107 1 (26 ) (1 )
Provision for credit losses (2,266 ) (963 ) 1,273 (126 ) 4,052 (120 ) 71 1,921
Ending balance $ 11,844 $ 22,375 $ 5,462 $ 957 $ 20,886 $ 1,097 $ 346 $ 62,967
Nine months ended September 30, 2017
Allowance for credit losses:
Balance at beginning of period $ 14,700 $ 21,105 $ 4,010 $ 1,284 $ 16,487 $ 1,328 $ 160 $ 59,074
Loans charged-off (659 ) (1,470 ) — — (39 ) — (98 ) (2,266 )
Recoveries of loans previously charged-off 675 80 2 5 491 4 18 1,275
Net loans charged-off 16 (1,390 ) 2 5 452 4 (80 ) (991 )
Provision for credit losses (2,872 ) 2,660 1,450 (332 ) 3,947 (235 ) 266 4,884
Ending balance $ 11,844 $ 22,375 $ 5,462 $ 957 $ 20,886 $ 1,097 $ 346 $ 62,967
As of September 30, 2017
Allowance for credit losses:
Individually evaluated for impairment $ 3,246 $ 1,378 $ 1,005 $ — $ 2,900 $ 90 $ 81 $ 8,700
Collectively evaluated for impairment 8,598 20,997 4,457 957 17,986 1,007 265 54,267
Ending balance $ 11,844 $ 22,375 $ 5,462 $ 957 $ 20,886 $ 1,097 $ 346 $ 62,967
Three months ended September 30, 2016
Allowance for credit losses:
Balance at beginning of period $ 13,386 $ 19,072 $ 4,202 $ 1,061 $ 17,024 $ 1,556 $ 235 $ 56,536
Loans charged-off (109 ) (1,751 ) — — — (121 ) (12 ) (1,993 )
Recoveries of loans previously charged-off 7 10 — 2 3 3 8 33
Net loans (charged-off) recoveries (102 ) (1,741 ) — 2 3 (118 ) (4 ) (1,960 )
Provision for credit losses (523 ) 3,178 59 47 (513 ) (69 ) 109 2,288
Ending balance $ 12,761 $ 20,509 $ 4,261 $ 1,110 $ 16,514 $ 1,369 $ 340 $ 56,864
Nine months ended September 30, 2016
Allowance for credit losses:
Balance at beginning of period $ 11,563 $ 14,122 $ 3,279 $ 1,268 $ 21,088 $ 1,292 $ 75 $ 52,687
Loans charged-off (2,802 ) (2,342 ) — — — (217 ) (37 ) (5,398 )
Recoveries of loans previously charged-off 93 14 2 5 207 11 24 356
Net loans charged-off (2,709 ) (2,328 ) 2 5 207 (206 ) (13 ) (5,042 )
Provision for credit losses 3,907 8,715 980 (163 ) (4,781 ) 283 278 9,219
Ending balance $ 12,761 $ 20,509 $ 4,261 $ 1,110 $ 16,514 $ 1,369 $ 340 $ 56,864
As of September 30, 2016
Allowance for credit losses:
Individually evaluated for impairment $ 1,997 $ 1,714 $ 360 $ — $ 300 $ — $ 100 $ 4,471
Collectively evaluated for impairment 10,764 18,795 3,901 1,110 16,214 1,369 240 52,393
Ending balance $ 12,761 $ 20,509 $ 4,261 $ 1,110 $ 16,514 $ 1,369 $ 340 $ 56,864

Table of Contents

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.
The ~~Company’s recorded investments in~~following table presents the amortized cost basis of collateral-dependent loans by class of loans as of ~~September~~June 30, 2017, December 31, 2016 and September 30, 2016 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:2020:

Business/Other

(dollars in thousands)

Assets

Real Estate
Commercial

$
15,105

$
2,895
Income producing - commercial real estate

3,193

24,102
Owner occupied - commercial real estate

—

10,815
Real estate mortgage - residential

—

7,960
Construction - commercial and residential

—

5,385
Construction - C&I (owner occupied)

—

—
Home equity

—

600
Other consumer

6

—
Total

$
18,304

$
51,757

Income Producing - Owner occupied - Real Estate Construction -
Commercial Commercial Mortgage Commercial and Home Other
(dollars in thousands) Commercial Real Estate Real Estate Residential Residential Equity Consumer Total

September 30, 2017
Recorded investment in loans:
Individually evaluated for impairment $ 8,309 $ 10,241 $ 6,570 $ — $ 7,728 $ 594 $ 92 $ 33,534
Collectively evaluated for impairment 1,235,875 2,888,707 743,010 109,460 963,593 101,304 8,721 6,050,670
Ending balance $ 1,244,184 $ 2,898,948 $ 749,580 $ 109,460 $ 971,321 $ 101,898 $ 8,813 $ 6,084,204

December 31, 2016
Recorded investment in loans:
Individually evaluated for impairment $ 10,437 $ 15,057 $ 2,093 $ 241 $ 6,517 $ — $ 126 $ 34,471
Collectively evaluated for impairment 1,190,291 2,494,460 638,777 152,507 1,052,052 105,096 10,239 5,643,422
Ending balance $ 1,200,728 $ 2,509,517 $ 640,870 $ 152,748 $ 1,058,569 $ 105,096 $ 10,365 $ 5,677,893

September 30, 2016
Recorded investment in loans:
Individually evaluated for impairment $ 12,448 $ 14,648 $ 2,517 $ 244 $ 4,878 $ 113 $ — $ 34,848
Collectively evaluated for impairment 1,117,594 2,536,538 587,910 154,195 937,935 106,743 6,212 5,447,127
Ending balance $ 1,130,042 $ 2,551,186 $ 590,427 $ 154,439 $ 942,813 $ 106,856 $ 6,212 $ 5,481,975
At September 30, 2017, nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia Heritage Bank (“Virginia Heritage”) have a carrying value of $476 thousand and $507 thousand, and an unpaid principal balance of $533 thousand and $1.5 million, respectively, and were evaluated separately in accordance with ASC Topic 310-30,~~“Loans and Debt Securities Acquired with Deteriorated Credit Quality~~.” The various impaired loans were recorded at estimated fair value with any excess being charged-off or treated as a non-accretable discount. Subsequent downward adjustments to the valuation of impaired loans acquired will result in additional loan loss provisions and related allowance for credit losses.

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 are to use 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 which 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 which comprise the consumer portfolio segment.

Table of Contents

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.


Watch:	Loan paying as agreed with generally acceptable asset quality; however the obligor’s performance has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not sustain any further setbacks. Credit is expected to be strengthened through improved obligor performance and/or additional collateral within a reasonable period of time.

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.

~~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,~~24

Table of Contents

Based on the ~~basis~~most recent analysis performed, the risk category of ~~currently existing facts, conditions,~~loans by class of loans and ~~values, highly questionable and improbable. The possibility~~year of ~~loss~~origination 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.~~follows:

June 30, 2020 (dollars in thousands)

2016

2017

2018

2019

2020

Prior

Total
Commercial

Pass

128,724

316,829

275,852

227,726

140,233

439,707

1,529,071
Watch

362

16,583

—

2,275

—

18,743

37,963
Special Mention

—

—

10,977

—

—

933

11,910
Substandard

4,667

2,128

2,565

459

—

18,293

28,112
Total

133,753

335,540

289,394

230,460

140,233

477,676

1,607,056
PPP loans

Pass

—

—

—

—

456,476

—

456,476
Total

—

—

—

—

456,476

—

456,476
Income producing - commercial real estate

Pass

412,724

520,542

726,838

807,571

208,386

970,544

3,646,605
Watch

—

—

—

4,324

—

721

5,045
Special Mention

800

—

—

—

—

4,843

5,643
Substandard

—

4,656

4,883

5,542

—

6,572

21,653
Total

413,524

525,198

731,721

817,437

208,386

982,680

3,678,946
Owner occupied - commercial real estate

Pass

107,303

117,523

221,811

92,496

15,673

358,051

912,857
Watch

—

—

—

—

—

40,465

40,465
Substandard

803

—

360

—

—

9,592

10,755
Total

108,106

117,523

222,171

92,496

15,673

408,108

964,077
Real estate mortgage - residential

Pass

3,423

10,394

15,429

28,234

5,701

21,844

85,025
Watch

—

—

—

—

—

617

617
Substandard

4,154

2,619

—

—

—

1,186

7,959
Total

7,577

13,013

15,429

28,234

5,701

23,647

93,601
Construction - commercial and residential

Pass

71,957

431,635

317,131

108,584

25,385

35,473

990,165
Substandard

2,298

408

—

—

—

2,679

5,385
Total

74,255

432,043

317,131

108,584

25,385

38,152

995,550
Construction - C&I (owner occupied)

Pass

11,689

5,482

41,084

27,557

17,441

32,612

135,865
Watch

—

2,124

11,087

—

—

769

13,980
Total

11,689

7,606

52,171

27,557

17,441

33,381

149,845
Home Equity

Pass

4,859

8,942

8,658

4,468

3,785

42,416

73,128
Watch

—

—

—

—

—

944

944
Substandard

—

—

—

—

—

849

849
Total

4,859

8,942

8,658

4,468

3,785

44,209

74,921
Other Consumer

Pass

177

85

121

106

28

764

1,281
Substandard

—

—

—

—

—

8

8
Total

177

85

121

106

28

772

1,289
Total Recorded Investment

$
753,940

$
1,439,950

$
1,636,796

$
1,309,342

$
873,108

$
2,008,625

$
8,021,761

The Company’s credit quality indicators are generally updated ~~generally on a quarterly basis, but no less frequently than annually.~~annually; however, credits rated watch or below are reviewed more frequently. The following table presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of ~~September 30, 2017,~~ December 31, ~~2016 and September 30, 2016.~~2019:

Total
(dollars in thousands)

Pass

Watch

Special Mention

Substandard

Doubtful

Loans
December 31, 2019










Commercial

$
1,470,636

$
38,522

$
11,460

$
25,288

$
—

$
1,545,906
Income producing - commercial real estate

3,667,585

16,069

—

19,093

—

3,702,747
Owner occupied - commercial real estate

925,800

53,146

—

6,463

—

985,409
Real estate mortgage - residential

98,228

628

—

5,365

—

104,221
Construction - commercial and residential

1,113,734

—

—

11,510

—

1,125,244
Home equity

78,626

948

—

487

—

80,061
Other consumer

2,160

—

—

—

—

2,160
Total

$
7,356,769

$
109,313

$
11,460

$
68,206

$
—

$
7,545,748

Watch and Total
(dollars in thousands) Pass Special Mention Substandard Doubtful Loans

September 30, 2017
Commercial $ 1,204,850 $ 31,025 $ 8,309 $ — $ 1,244,184
Income producing - commercial real estate 2,861,346 27,361 10,241 — 2,898,948
Owner occupied - commercial real estate 720,693 22,317 6,570 — 749,580
Real estate mortgage – residential 108,797 663 — — 109,460
Construction - commercial and residential 963,593 — 7,728 — 971,321
Home equity 100,618 686 594 — 101,898
Other consumer 8,719 2 92 — 8,813
          Total $ 5,968,616 $ 82,054 $ 33,534 $ — $ 6,084,204

December 31, 2016
Commercial $ 1,160,185 $ 30,106 $ 10,437 $ — $ 1,200,728
Income producing - commercial real estate 2,489,407 5,053 15,057 — 2,509,517
Owner occupied - commercial real estate 630,827 7,950 2,093 — 640,870
Real estate mortgage – residential 151,831 676 241 — 152,748
Construction - commercial and residential 1,051,445 607 6,517 — 1,058,569
Home equity 103,484 1,612 — — 105,096
Other consumer 10,237 2 126 — 10,365
          Total $ 5,597,416 $ 46,006 $ 34,471 $ — $ 5,677,893

September 30, 2016
Commercial $ 1,099,894 $ 18,599 $ 11,549 $ — $ 1,130,042
Income producing - commercial real estate 2,527,318 9,220 14,648 — 2,551,186
Owner occupied - commercial real estate 577,925 10,399 2,103 — 590,427
Real estate mortgage – residential 153,515 680 244 — 154,439
Construction - commercial and residential 937,198 737 4,878 — 942,813
Home equity 105,126 1,617 113 — 106,856
Other consumer 6,209 3 — — 6,212
          Total $ 5,407,185 $ 41,255 $ 33,535 $ — $ 5,481,975

Table of Contents

Nonaccrual and Past Due Loans
~~Loans~~As part of its comprehensive loan review process, the Loan Committee or Credit Review Committee carefully evaluate loans which are ~~considered past due if the required principal and interest payments have not been received as~~past-due 30 days or more. The Committees make a thorough assessment 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 mayconditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status ~~regardless~~ of ~~whether or not such loans are considered past due. Interest income is subsequently recognized only~~development and construction projects, sales activities and utilization of interest reserves in order to ~~the extent cash payments are received in excess~~carefully and prudently assess potential increased levels 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.~~risk requiring additional reserves.

~~The following table presents, by class of loan, information related to nonaccrual loans as of September 30, 2017, December 31, 2016 and September 30, 2016.~~
(dollars in thousands) September 30, 2017 December 31, 2016 September 30, 2016

Commercial $ 3,242 $ 2,490 $ 2,986
Income producing - commercial real estate 880 10,539 10,098
Owner occupied - commercial real estate 6,570 2,093 2,103
Real estate mortgage - residential 301 555 562
Construction - commercial and residential 4,930 2,072 6,412
Home equity 594 — 113
Other consumer 92 126 —
Total nonaccrual loans (1)(2) $ 16,609 $ 17,875 $ 22,274
~~(1)~~ Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling $12.3 million at September 30, 2017, as compared to $7.9 million at December 31, 2016 and $2.9 million at September 30, 2016.
~~(2)~~ Gross interest income of $176 thousand and $802 thousand would have been recorded for the three and nine months ended September 30, 2017, if nonaccrual loans shown above had been current and in accordance with their original terms while interest actually recorded on such loans was $31 thousand and $56 thousand for the three and nine months ended September 30, 2017. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status.

The following table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~2019:

Loans

Loans

Loans






Total Recorded

30-59 Days

60-89 Days

90 Days or

Total Past

Current

Investment in
(dollars in thousands)

Past Due

Past Due

More Past Due

Due Loans

Loans

Non-Accrual

Loans
June 30, 2020

Commercial

$
603

$
3,046

$
—

$
3,649

$
1,586,686

$
16,721

$
1,607,056
PPP loans

—

—

—

—

456,476

—

$
456,476
Income producing - commercial real estate

—

14,203

—

14,203

3,647,464

17,279

3,678,946
Owner occupied - commercial real estate

542

212

—

754

952,568

10,755

964,077
Real estate mortgage - residential

—

—

—

—

85,385

8,216

93,601
Construction - commercial and residential

—

751

—

751

989,414

5,385

995,550
Construction - C&I (owner occupied)

—

—

—

—

149,845

—

149,845
Home equity

263

254

—

517

73,804

600

74,921
Other consumer

—

3

—

3

1,280

6

1,289
Total

$
1,408

$
18,469

$
—

$
19,877

$
7,942,922

$
58,962

$
8,021,761

December 31, 2019

Commercial

$
3,063

$
781

$
—

$
3,844

$
1,527,134

$
14,928

$
1,545,906
Income producing - commercial real estate

—

5,542

—

5,542

3,687,494

9,711

3,702,747
Owner occupied - commercial real estate

13,008

—

—

13,008

965,938

6,463

985,409
Real estate mortgage – residential

3,533

—

—

3,533

95,057

5,631

104,221
Construction - commercial and residential

—

—

—

—

1,113,735

11,509

1,125,244
Home equity

136

192

—

328

79,246

487

80,061
Other consumer

—

9

—

9

2,151

—

2,160
Total

$
19,740

$
6,524

$
—

$
26,264

$
7,470,755

$
48,729

$
7,545,748

Loans Loans Loans Total Recorded
30-59 Days 60-89 Days 90 Days or Total Past Current Investment in
(dollars in thousands) Past Due Past Due More Past Due Due Loans Loans Loans

September 30, 2017
Commercial $ 401 $ 662 $ 3,242 $ 4,305 $ 1,239,879 $ 1,244,184
Income producing - commercial real estate 3,160 770 880 4,810 2,894,138 2,898,948
Owner occupied - commercial real estate 817 3,268 6,570 10,655 738,925 749,580
Real estate mortgage – residential 1,480 2,123 301 3,904 105,556 109,460
Construction - commercial and residential 197 — 4,930 5,127 966,194 971,321
Home equity 637 100 594 1,331 100,567 101,898
Other consumer 21 4 92 117 8,696 8,813
          Total $ 6,713 $ 6,927 $ 16,609 $ 30,249 $ 6,053,955 $ 6,084,204

December 31, 2016
Commercial $ 1,634 $ 757 $ 2,490 $ 4,881 $ 1,195,847 $ 1,200,728
Income producing - commercial real estate 511 — 10,539 11,050 2,498,467 2,509,517
Owner occupied - commercial real estate 3,987 3,328 2,093 9,408 631,462 640,870
Real estate mortgage – residential 1,015 163 555 1,733 151,015 152,748
Construction - commercial and residential 360 1,342 2,072 3,774 1,054,795 1,058,569
Home equity — — — — 105,096 105,096
Other consumer 101 9 126 236 10,129 10,365
          Total $ 7,608 $ 5,599 $ 17,875 $ 31,082 $ 5,646,811 $ 5,677,893

September 30, 2016
Commercial $ 1,173 $ 495 $ 2,986 $ 4,654 $ 1,125,388 $ 1,130,042
Income producing - commercial real estate — — 10,098 10,098 2,541,088 2,551,186
Owner occupied - commercial real estate — 3,338 2,103 5,441 584,986 590,427
Real estate mortgage – residential — 164 562 726 153,713 154,439
Construction - commercial and residential — — 6,412 6,412 936,401 942,813
Home equity 562 620 113 1,295 105,561 106,856
Other consumer 8 16 — 24 6,188 6,212
          Total $ 1,743 $ 4,633 $ 22,274 $ 28,650 $ 5,453,325 $ 5,481,975
The following presents the nonaccrual loans as of June 30, 2020 and December 31, 2019:

June 30, 2020

December 31, 2019

Nonaccrual with

Nonaccrual with

Total

Total

No Allowance

an Allowance

Nonaccrual

Nonaccrual
(dollars in thousands)

for Credit Loss

for Credit Loss

Loans

Loans

Commercial

1,507

15,214

16,721

14,928
PPP loans

—

—

—

—
Income producing - commercial real estate

8,544

8,735

17,279

9,711
Owner occupied - commercial real estate

7,065

3,690

10,755

6,463
Real estate mortgage - residential

5,503

2,713

8,216

5,631
Construction - commercial and residential

2,298

3,087

5,385

11,509
Home equity

50

550

600

487
Other consumer

—

6

6

—
Total

$
24,967

$
33,995

$
58,962

$
48,729
(1) Excludes TDRs that were performing under their restructured terms totaling $12.3 million at June 30, 2020 and $16.6 million at December 31, 2019.
(2) Gross interest income of $1.7 million and $1.2 million would have been recorded for the six months ended June 30, 2020 and 2019, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while the interest actually recorded on such loans was $57 thousand and $86 thousand for the six months ended June 30, 2020 and 2019, respectively.

Table of Contents

See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status.
~~Impaired Loans~~Pre Adoption of CECL
Loans ~~are~~were considered impaired when, based on current information and events, it iswas probable the Company ~~will~~would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. ~~Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans.~~ If a loan iswas impaired, a specific valuation allowance iswas allocated, if necessary, so that the loan iswas reported ~~net,~~ at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment iswas expected solely from the collateral. ~~Interest payments~~The Bank’s loan policy requires that loans be placed on ~~impaired loans~~nonaccrual if they are ~~typically applied to principal~~ninety days past-due, unless ~~collectability~~they are well secured and in the process of ~~the principal amount is reasonably assured, in which case interest is recognized on a cash basis.~~collection. Impaired loans, or portions thereof, ~~are charged off~~were charged-off when deemed uncollectible.

The following table presents, by class of loan, information related to impaired loans ~~for the periods ended September 30, 2017,~~at December 31, ~~2016 and September 30, 2016.~~2019:

Unpaid

Recorded

Recorded

Average Recorded

Interest Income

Contractual

Investment

Investment

Total

Investment

Recognized

Principal

With No

With

Recorded

Related

Year

Year
(dollars in thousands)

Balance

Allowance

Allowance

Investment

Allowance

To Date

To Date
December 31, 2019

Commercial

$
15,814

$
11,858

$
3,956

$
15,814

$
5,714

$
15,682

$
270
Income producing - commercial real estate

14,093

2,713

11,380

14,093

2,145

18,133

382
Owner occupied - commercial real estate

7,349

6,388

961

7,349

415

6,107

197
Real estate mortgage - residential

5,631

3,175

2,456

5,631

650

5,638

—
Construction - commercial and residential

11,509

11,101

408

11,509

100

8,211

92
Home equity

487

—

487

487

100

487

—
Other consumer

—

—

—

—

—

—

—
Total

$
54,883

$
35,235

$
19,648

$
54,883

$
9,124

$
54,258

$
941
Unpaid Recorded Recorded
Contractual Investment Investment Total Average Recorded Investment Interest Income Recognized
Principal With No With Recorded Related Quarter Year Quarter Year
(dollars in thousands) Balance Allowance Allowance Investment Allowance To Date To Date To Date To Date

September 30, 2017
Commercial $ 6,047 $ 2,363 $ 3,640 $ 6,003 $ 3,246 $ 5,977 $ 5,790 $ 31 $ 97
Income producing - commercial real estate 10,092 828 9,264 10,092 1,378 10,222 11,350 121 373
Owner occupied - commercial real estate 6,890 1,612 5,278 6,890 1,005 5,623 4,182 26 46
Real estate mortgage – residential 301 301 — 301 — 304 368 — —
Construction - commercial and residential 4,930 1,534 3,396 4,930 2,900 4,808 3,736 — 14
Home equity 594 494 100 594 90 446 223 — 2
Other consumer 92 — 92 92 81 93 101 — —
   Total $ 28,946 $ 7,132 $ 21,770 $ 28,902 $ 8,700 $ 27,473 $ 25,750 $ 178 $ 532

December 31, 2016
Commercial $ 8,296 $ 2,532 $ 3,095 $ 5,627 $ 2,671 $ 12,620 $ 12,755 $ 79 $ 191
Income producing - commercial real estate 14,936 5,048 9,888 14,936 1,943 16,742 17,533 54 198
Owner occupied - commercial real estate 2,483 1,691 792 2,483 350 2,233 2,106 — 13
Real estate mortgage – residential 555 555 — 555 — 246 249 — —
Construction - commercial and residential 2,072 1,535 537 2,072 522 5,091 5,174 — —
Home equity — — — — — 78 89 — —
Other consumer 126 — 126 126 113 42 32 2 4
   Total $ 28,468 $ 11,361 $ 14,438 $ 25,799 $ 5,599 $ 37,052 $ 37,938 $ 135 $ 406

September 30, 2016
Commercial $ 15,517 $ 2,370 $ 10,078 $ 12,448 $ 1,997 $ 12,838 $ 12,879 $ 54 $ 112
Income producing - commercial real estate 14,648 — 14,648 14,648 1,714 17,584 15,298 28 144
Owner occupied - commercial real estate 2,517 — 2,517 2,517 360 2,108 1,923 13 13
Real estate mortgage – residential 244 244 — 244 — 249 271 — —
Construction - commercial and residential 4,878 4,340 538 4,878 300 5,146 6,542 — —
Home equity 113 — 113 113 100 117 129 2 2
Other consumer — — — — — — 6 — —
   Total $ 37,917 $ 6,954 $ 27,894 $ 34,848 $ 4,471 $ 38,042 $ 37,048 $ 97 $ 271

Modifications
A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR 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~~The most common change in ~~a TDR often involve reducing~~terms provided by the ~~interest rate for the remaining term~~Company is an extension 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 TDR may also involve extending the interest-only payment period.only term. As of ~~September~~June 30, ~~2017,~~2020, all performing TDRs were categorized as interest-only ~~modifications.~~
modifications.
Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR 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.

In response to the COVID-19 pandemic and its economic impact to our customers, we implemented a short-term modification program that complies with the CARES Act and ASC 310-40 to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. The ~~following table presents by class, the recorded investment of loans modified in a TDR~~deferred payments along with interest accrued during the ~~three months ended September~~deferral period are due and payable on the maturity date. As of June 30, ~~2017~~2020, we granted temporary modifications on approximately 708 loans representing approximately $1.63 billion (20% of total loans) in outstanding exposure. Some of these deferrals may not have met the criteria for treatment under U.S. GAAP as TDR. Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term loan modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and ~~2016.~~confirmed with staff members of the Financial Accounting Standards Board.

Table of Contents

For the Three Months Ended September 30, 2017
Income
Producing - Owner
Occupied - Construction -
(dollars in thousands) Number of
Contracts Commercial Commercial
Real Estate Commercial
Real Estate Commercial
Real Estate Total
Troubled debt restructings

Restructured accruing — $ (356 ) $ — $ (23 ) $ — $ (379 )
Restructured nonaccruing 2 586 (560 ) — — 26
Total 2 $ 230 $ (560 ) $ (23 ) $ — $ (353 )

Specific allowance $ (185 ) $ (559 ) $ — $ — $ (744 )

Restructured and subsequently defaulted $ — $ — $ — $ — $ —

For the Three Months Ended September 30, 2016
Income
Producing - Owner
Occupied - Construction -
(dollars in thousands) Number of
Contracts Commercial Commercial
Real Estate Commercial
Real Estate Commercial
Real Estate Total
Troubled debt restructings

Restructured accruing 1 $ 801 $ — $ — $ — $ 801
Restructured nonaccruing — — — — — —
Total 1 $ 801 $ — $ — $ — $ 801

Specific allowance $ 363 $ — $ — $ — $ 363

Restructured and subsequently defaulted $ — $ — $ — $ — $ —

The following table presents by class, the recorded investment of loans modified in TDRs held by the Company ~~at September~~for the periods ended June 30, ~~2017~~2020 and ~~September 30, 2016.~~2019.

September 30, 2017
Income
Producing - Owner
Occupied - Construction -

For the Six Months Ended June 30, 2020

Income

Owner

Number

Producing -

Occupied -

Construction -

of

Commercial

Commercial

Commercial

(dollars in thousands) Number of
Contracts Commercial Commercial
Real Estate Commercial
Real Estate Commercial
Real Estate Total

Contracts

Commercial

Real Estate

Real Estate

Real Estate

Total
Troubled debt restructings

Troubled debt restructurings












Restructured accruing 9 $ 2,761 $ 9,212 $ 320 $ — $ 12,293

10

$
1,420

$
10,016

$
836

$
—

$
12,272
Restructured nonaccruing 4 776 136 — — 912

3

138

5,542

2,370

—

8,050
Total 13 $ 3,537 $ 9,348 $ 320 $ — $ 13,205

13

$
1,558

$
15,558

$
3,206

$
—

$
20,322

Specific allowance $ 685 $ 1,341 $ — $ — $ 2,026

$
257

$
1,295

$
—

$
—

$
1,552

Restructured and subsequently defaulted $ 237 $ — $ — $ — $ 237

$
138

$
5,542

$
2,370

$
—

$
8,050

September 30, 2016
Income
Producing - Owner
Occupied - Construction -


For the Six Months Ended June 30, 2019

Income

Owner

Number

Producing -

Occupied -

Construction -

of

Commercial

Commercial

Commercial

(dollars in thousands) Number of
Contracts Commercial Commercial
Real Estate Commercial
Real Estate Commercial
Real Estate Total

Contracts

Commercial

Real Estate

Real Estate

Real Estate

Total
Troubled debt restructings

Troubled debt restructurings












Restructured accruing 7 $ 1,725 $ 742 $ 414 $ — $ 2,881

7

$
909

$
4,390

$
3,309

$
—

$
8,608
Restructured nonaccruing 2 199 — — 4,948 5,147

4

2,831

—

—

—

2,831
Total 9 $ 1,924 $ 742 $ 414 $ 4,948 $ 8,028

11

$
3,740

$
4,390

$
3,309

$
—

$
11,439

Specific allowance $ 456 $ — $ — $ — $ 456

$
—

$
1,000

$
—

$
—

$
1,000

Restructured and subsequently defaulted $ — $ — $ — $ 4,948 $ 4,948

$
—

$
2,300

$
—

$
—

$
2,300

The Company had ~~thirteen~~13 TDR’s at ~~September~~June 30, ~~2017~~2020 totaling approximately ~~$13.2~~$20.3 million. ~~Nine~~NaN of these loans totaling approximately $12.3 million are performing under their modified terms. ~~During~~For both the ~~nine~~first six months of ~~2017,~~2020 and 2019, there was ~~one default~~1 performing TDR loan, totaling $5.5 million and $2.3 million, respectively, that defaulted on ~~a $237 thousand restructured loan which was charged off, as compared to the same period in 2016, which had one default on a $5.0 million restructured loan.~~its modified terms. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on ~~nonaccrual. There~~non-accrual status. For the three months ended June 30, 2020, there were ~~two nonperforming TDRs~~2 restructured loans totaling ~~$588~~approximately $870 thousand ~~reclassified~~where the collateral was sold and the loans paid in full, as compared to ~~nonperforming loans~~the same period in 2019, when there was 1 restructured loan totaling approximately $4.8 million that had its collateral property sold for approximately $3 million and the remaining $1.8 million charged-off during the ~~nine~~quarter. During the three months ended ~~September~~June 30, ~~2017. There was one nonperforming~~2020, 0 loans were re-underwritten and removed from TDR ~~totaling $5.0 million reclassified~~status, as compared to ~~nonperforming loans during~~ the ~~nine~~three months ended ~~September~~June 30, ~~2016.~~2019, there was 1 loan totaling $10.4 million that was re-underwritten into 2 new loans which provided better collateral for the Bank. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. ~~There were two loans totaling $251 thousand modified in a TDR during~~For both the three months ended ~~September~~June 30, ~~2017, as compared to the three months ended September 30, 2016 which had one loan totaling $801 thousand~~2020 and 2019, there were no loans modified in a TDR.

Note 6. Leases
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. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and has adopted all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branch offices, ATM locations, and corporate office space. Substantially all of our leases are classified as operating leases, and as such, were previously not recognized on the Company’s Consolidated Statements of Condition. With the adoption of Topic 842, operating lease agreements were

Table of Contents

required to be recognized on the Consolidated Statements of Condition as a right-of-use (“ROU”) asset and a corresponding lease liability.
As of June 30, 2020, the Company had $25.4 million of operating lease ROU assets and $27.1 million of operating lease liabilities on the Company’s Consolidated Balance Sheet. As of December 31, 2019, the Company had $27.4 million of operating lease ROU assets and $30.0 million of operating lease liabilities on the Company’s Consolidated Balance Sheet. 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 Statements of Condition.
Our leases contain terms and conditions of 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 our ROU assets and lease liabilities.
As of June 30, 2020, our leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or the Company’s ability to incur additional financial obligations. As of June 30, 2020, there were 0 leases that have been signed but did not yet commence as of the reporting date that create significant rights and obligations for the Company.
The following table presents lease costs and other lease information.


Six Months Ended

(dollars in thousands)

June 30, 2020

June 30,2019

Lease Cost



Operating Lease Cost (Cost resulting from lease payments)

$
4,005

$
3,898

Variable Lease Cost (Cost excluded from lease payments)

518

535

Sublease Income

(174)

(188)

Net Lease Cost

$
4,349

$
4,245

Operating Lease - Operating Cash Flows (Fixed Payments)

4,419

4,246

Right-of-Use Assets - Operating Leases

25,368

28,214

Weighted Average Lease Term - Operating Leases

4.62
yrs

5.59
yrs
Weighted Average Discount Rate - Operating Leases

4.00%

4.00%

Future minimum payments for operating leases with initial or remaining terms of more than one year as of June 30, 2020 were as follows:

(dollars in thousands)



Twelve Months Ended:


June 30, 2021

$
8,531
June 30, 2022

6,745
June 30, 2023

4,707
June 30, 2024

4,107
June 30, 2025

2,997
Thereafter

2,547
Total Future Minimum Lease Payments

29,634
Amounts Representing Interest

(2,497)
Present Value of Net Future Minimum Lease Payments

$
27,137

Note 6.7. Other 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 and the use of derivative financial instruments.

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Cash Flow Hedges of Interest Rate ~~Swap Derivatives~~

Risk

The Company uses interest rate swap agreements to assist in its interest rate risk management. The Company’s objective in using interest rate derivatives designated as cash flow hedges is to add stability to interest expense and to better manage its exposure to interest rate movements. To accomplish this objective, the Company ~~entered into forward starting~~utilizes interest rate swaps ~~in April 2015~~ as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on the Bank’s cost of funds. The notional amounts of the interest rate swaps designated as cash flow hedges do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties. The interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from ~~two counterparties~~one counterparty in exchange for the Company making fixed ~~payments beginning in April 2016.~~payments. The Company’s intent is to hedge its exposure to the variability in potential future interest rate conditions on existing financial instruments.

As of September 30, 2017, the Company had three forward starting designated cash flow hedge interest rate swap transactions outstanding that had an aggregate notional amount of $250 million associated with the Company’s variable rate deposits. The net unrealized gain before income tax on the swaps was $167 thousand at September 30, 2017 compared to a net unrealized loss before income tax of $692 thousand at December 31, 2016. The net unrealized gain at September 30, 2017 compared to the net unrealized loss at December 31, 2016 is due to the increase in current market expectation of short term interest rates for the remaining term of the designated cash flow hedge interest rate swap.

For derivatives designated as cash flow hedges, ~~the effective portion of~~ changes in the fair value of the derivative isare initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects ~~earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in~~ earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions.

As of June 30, 2020 and December 31, 2019, the Company had one designated cash flow hedge notional interest rate swap transaction outstanding amounting to $100 million associated with the Company’s variable rate deposits. The Company recognized ~~an immaterial amount~~$829 thousand in ~~earnings~~noninterest income during March 2019 due to ~~hedge ineffectiveness during both~~ the ~~nine month periods ended September 30, 2017 and September 30, 2016.~~

termination of two of its interest rate swap transactions as part of the Company’s asset liability strategy as well as declines in market interest rates.

Amounts reported in accumulated other comprehensive income related to designated cash flow hedge derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the ~~quarter ended September 30, 2017, the Company reclassified $307 thousand related to designated cash flow hedge derivatives from accumulated other comprehensive income to interest expense. During the~~ next twelve months, the Company estimates (based on existing interest rates) that ~~$657 thousand~~$1.3 million will be reclassified as an increase in interest expense.

Non-designated Hedges

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 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.

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. 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 ~~swap~~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 ~~swaps.~~derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815,“"Derivatives and Hedging.”" In addition, the interest rate ~~swap~~derivative agreements contain language outlining collateral-pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits.

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The ~~designated cash flow hedge~~ interest rate ~~swap~~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/adequately capitalized~~well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
As of ~~September~~June 30, ~~2017,~~2020, the aggregate fair value of ~~all designated cash flow hedge~~the derivative ~~contracts~~contract with credit risk contingent features (i.e., ~~those~~ containing collateral posting or termination provisions based on our capital status) ~~were in a net asset position of $167 thousand (none of these contracts were~~that was in a net liability position ~~as of September 30, 2017). As of September 30, 2017, the~~totaled $6.1 million. The Company has a minimum collateral posting ~~thresholds~~threshold with ~~certain of~~ its derivative ~~counterparties and has posted~~counterparty. As of June 30, 2020, the Company was required to post collateral ~~of $890 thousand~~totaling $1.9 million with its derivative counterparty against its obligations under ~~these agreements.~~this agreement. If the Company had breached any provisions under the ~~agreements~~agreement at ~~September~~June 30, ~~2017,~~2020, it could have been required to settle its obligations under the ~~agreements~~agreement at the termination value.

The table below identifies the balance sheet category and fair ~~values~~value of the Company’s designated cash flow hedge derivative instruments and non-designated hedges as of ~~September~~June 30, ~~2017~~2020 (unaudited) and December 31, ~~2016.~~2019.

Swap Notional Balance Sheet
September 30, 2017 Number Amount Fair Value Category Receive Rate Pay Rate Maturity

(dollars in thousands)
Interest rate swap (1 ) $ 75,000 $ 116 Other Assets 1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points 1.71 % March 31, 2020
Interest rate swap (2 ) 100,000 (24 ) Other Liabilities Federal Funds Effective Rate +10 basis points 1.74 % April 15, 2021
Interest rate swap (3 ) 75,000 75 Other Assets 1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points 1.92 % March 31, 2022
Total $ 250,000 $ 167

June 30,2020


December 31,2019

Notional

Balance Sheet

Notional

Balance Sheet
Derivatives designated as hedging instruments

Amount

Fair Value

Category

Amount

Fair Value

Category
Interest rate product

$
100,000

$
1,330

Other Liabilities

$
100,000

$
206

Other Liabilities

Derivatives not designated as hedging instruments

(dollars in thousands)

Interest rate product

$
154,447

$
4,523

Other Assets

$
56,806

$
311

Other Assets

(dollars in thousands)

Interest rate product

$
154,447

$
4,818

Other Liabilities

$
56,806

$
319

Other Liabilities
Other Contracts

27,150

150

Other Liabilities

27,384

86

Other Liabilities

$
181,597

$
4,968

Other Liabilities

$
84,190

$
405

Other Liabilities

Swap Notional Balance Sheet
December 31, 2016 Number Amount Fair Value Category Receive Rate Pay Rate Maturity

(dollars in thousands)
Interest rate swap (1 ) $ 75,000 $ (197 ) Other Liabilities 1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points 1.71 % March 31, 2020
Interest rate swap (2 ) 100,000 (514 ) Other Liabilities Federal Funds Effective Rate +10 basis points 1.74 % April 15, 2021
Interest rate swap (3 ) 75,000 19 Other Assets 1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points 1.92 % March 31, 2022
Total $ 250,000 $ (692 )

Table of Contents

The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2020 and 2019 (unaudited):

The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income

Location of Gain or (Loss)

Amount of Gain or (Loss)

Amount of (Loss) Recognized in

Recognized from

Reclassified from Accumulated OCI

OCI on Derivative

Accumulated Other

into Income
Derivatives in Subtopic 815-20 Hedging

Three Months Ended June 30,

Comprehensive Income into

Three Months Ended June 30,
Relationships (dollars in thousands)

2020

2019

Income

2020

2019
Derivatives in Cash Flow Hedging Relationships

Interest Rate Products

$
(27)

$
(834)

Interest Expense

$
(394)

$
313
Total

$
(27)

$
(834)

$
(394)

$
313

Location of Gain or (Loss)

Recognized from

Accumulated Other

Amount of Gain or (Loss)

Amount of (Loss) Recognized in

Comprehensive Income into

Reclassified from Accumulated OCI

OCI on Derivative

Income

into Income
Derivatives in Subtopic 815-20 Hedging

Six Months Ended June 30,

Six Months Ended June 30,
Relationships (dollars in thousands)

2020

2019

2020

2019
Derivatives in Cash Flow Hedging Relationships

Interest Rate Products

$
(1,548)

$
(1,867)

Interest Expense

$
(366)

$
775
Interest Rate Products

—

—

Gain on sale of investment securities

—

829
Total

$
(1,548)

$
(1,867)

$
(366)

$
1,604

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the ~~year~~three and six months ended ~~December 31, 2016.~~June 30, 2020 and 2019 (unaudited):

Nine Months Ended September 30, 2017
Effective Portion Ineffective Portion
Reclassified from AOCI Recognized in Income
Amount of into income on Derivatives
Swap Pre-tax gain (loss) Amount of Amount of
Number Recognized in OCI Category Gain (Loss) Category Gain (Loss)

(dollars in thousands)
Interest rate swap (1 ) $ 116 Interest Expense $ (338 ) Other Expense $ —
Interest rate swap (2 ) (24 ) Interest Expense (525 ) Other Expense —
Interest rate swap (3 ) 75 Interest Expense (458 ) Other Expense (1 )
Total $ 167 $ (1,321 ) $ (1 )

The Effect of Fair Value and Cash Flow Hedge Accounting on the Statements of Operation

Location and Amount of Gain or (Loss) Recognized in Income on

Fair Value and Cash Flow Hedging Relationships (in 000's)

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

2019

Interest

Interest

Interest

Gain on sale of


Expense

Expense

Expense

investment securities
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded

$
(394)

$
313

$
(366)

$
775

$
829



Gain or (loss) on cash flow hedging relationships in Subtopic 815-20








Interest contracts

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income

$
(394)

$
313

$
(366)

$
775

$
—
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring

$
—

$
—

$
—

$
—

$
829
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component

$
(394)

$
313

$
(366)

$
775

$
—
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Excluded Component

$
—

$
—

$
—

$
—

$
—

Year Ended December 31, 2016
Effective Portion Ineffective Portion
Reclassified from AOCI Recognized in Income
Amount of into income on Derivatives
Swap Pre-tax gain (loss) Amount of Amount of
Number Recognized in OCI Category Gain (Loss) Category Gain (Loss)

(dollars in thousands)
Interest rate swap (1 ) $ (197 ) Interest Expense $ (628 ) Other Expense $ —
Interest rate swap (2 ) (514 ) Interest Expense (880 ) Other Expense —
Interest rate swap (3 ) 19 Interest Expense (747 ) Other Expense 1
Total $ (692 ) $ (2,255 ) $ 1

Table of Contents

Effect of Derivatives Not Designated as Hedging Instruments on the Statements of Operation

Amount of Gain or (Loss)

Amount of (Loss)

Recognized in Income on

Recognized in Income on

Location of Gain or

Derivative

Derivative
Derivatives Not Designated as Hedging

(Loss) Recognized in

Three Months Ended June 30,

Six Months Ended June 30,
Instruments under Subtopic 815-20

Income on Derivative

2020

2019

2020

2019
Interest Rate Products

Other income / (expense)

(118)

—

(286)

—
Other Contracts

Other income / (expense)

2

(29)

(64)

(42)
Total

(116)

(29)

(350)

(42)

Balance Sheet Offsetting:Our designated cash flow hedge interest rate ~~swap~~ derivatives are eligible for offset in the Consolidated Balance Sheets and are subject to master netting arrangements. Our derivative transactions with counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. The Company generally offsets such financial instruments for financial reporting purposes. The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s cash flow hedge derivatives as of June 30, 2020 (unaudited) and December 31, 2019.

Nine Months Ended September 30, 2017
Offsetting of Derivative Liabilities(dollars in thousands)
Gross Amounts Not Offset in the Balance Sheet
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Balance Sheet Net Amounts of Liabilities presented in the Balance Sheet Financial Instruments Cash Collateral Posted Net Amount
Counterparty 1 $ 24 $ (75 ) $ (51 ) $ — $ (560 ) $ (611 )
Counterparty 2 (116 ) — (116 ) — (330 ) (446 )
$ (92 ) $ (75 ) $ (167 ) $ — $ (890 ) $ (1,057 )

As of June 30, 2020






Net






Amounts of

Gross

Assets

Gross Amounts Not Offset in the

Gross

Amounts

presented

Balance Sheet

Amounts of

Offset in

in the

Cash

Recognized

the Balance

Balance

Financial

Collateral

Net
Offsetting of Derivative Assets (dollars in thousands)

Assets

Sheet

Sheet

Instruments

Posted

Amount
Derivatives

$
4,523

$
—

$
4,523

$
—

$
—

$
4,523






Net






Amounts of

Gross

Liabilities

Gross Amounts Not Offset in the

Gross

Amounts

presented

Balance Sheet

Amounts of

Offset in

in the

Cash

Recognized

the Balance

Balance

Financial

Collateral

Net
Offsetting of Derivative Liabilities (dollars in thousands)

Liabilities

Sheet

Sheet

Instruments

Posted

Amount
Derivatives

$
6,297

$
—

$
6,297

$
—

$
2,170

$
4,127

Year Ended December 31, 2016
Offsetting of Derivative Liabilities(dollars in thousands)
Gross Amounts Not Offset in the Balance Sheet
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Balance Sheet Net Amounts of Liabilities presented in the Balance Sheet Financial Instruments Cash Collateral Posted Net Amount
Counterparty 1 $ 514 $ (19 ) $ 495 $ — $ (380 ) $ 115
Counterparty 2 197 — 197 — (170 ) 27
$ 711 $ (19 ) $ 692 $ — $ (550 ) $ 142

As of December 31, 2019

Net

Amounts of

Gross

Assets

Gross Amounts Not Offset in the

Gross

Amounts

presented

Balance Sheet

Amounts of

Offset in

in the

Cash

Recognized

the Balance

Balance

Financial

Collateral

Net
Offsetting of Derivative Assets (dollars in thousands)

Assets

Sheet

Sheet

Instruments

Posted

Amount
Derivatives

$
311

$
—

$
311

$
—

$
—

$
311

Net

Amounts of

Gross

Liabilities

Gross Amounts Not Offset in the

Gross

Amounts

presented

Balance Sheet

Amounts of

Offset in

in the

Cash

Recognized

the Balance

Balance

Financial

Collateral

Net
Offsetting of Derivative Liabilities (dollars in thousands)

Liabilities

Sheet

Sheet

Instruments

Posted

Amount
Derivatives

$
611

$
—

$
611

$
—

$
500

$
111

Table of Contents

Note 7.8. Other Real Estate Owned
The activity within Other Real Estate Owned (“OREO”) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (unaudited) is presented in the table below. There were no residential real estate loans in the process of foreclosure as of ~~September~~June 30, ~~2017.~~2020. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, proceeds on sale~~2020 and 2019, there were 0 sales of OREO were $1.2 million and $2.1 million. For the three months ended September 30, 2017, there were two OREO properties with a total carrying value of $1.1 million were sold for a net gain of $60 thousand. For the nine months ended September 30, 2017, there were a total of three OREO properties sold for a net loss of $301 thousand.property.

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended June 30,

Six Months Ended June 30,
(dollars in thousands) 2017 2016 2017 2016

2020

2019

2020

2019

Balance beginning of period $ 1,394 $ 3,152 $ 2,694 $ 5,852
Beginning Balance

$
8,237

$
1,394

$
1,487

$
1,394
Real estate acquired from borrowers 1,145 2,500 1,145 2,500

—

—

6,750

—
Valuation allowance — — — (200 )
Properties sold (1,145 ) (458 ) (2,445 ) (2,958 )

—

—

—

—
Balance end of period $ 1,394 $ 5,194 $ 1,394 $ 5,194
Ending Balance

$
8,237

$
1,394

$
8,237

$
1,394

Note 8.9. Long-Term Borrowings
The following table presents information related to the Company’s long-term borrowings as of ~~September~~June 30, ~~2017,~~2020 (unaudited) and December 31, ~~2016 and September 30, 2016.~~2019.

(dollars in thousands) September 30, 2017 December 31, 2016 September 30, 2016

June 30, 2020

December 31, 2019

Subordinated Notes, 5.75% $ 70,000 $ 70,000 $ 70,000

$
70,000

$
70,000
Subordinated Notes, 5.0% 150,000 150,000 150,000

150,000

150,000
Less: debt issuance costs (3,193 ) (3,486 ) (3,581 )
FHLB Advance, 1.81%

50,000

—
Less: unamortized debt issuance costs

(2,118)

(2,313)
Long-term borrowings $ 216,807 $ 216,514 $ 216,419

$
267,882

$
217,687

On August 5, 2014, the Company completed the sale of $70.0 million of its 5.75% subordinated notes, due September 1, 2024 (the ~~“Notes”~~“2024 Notes”). The 2024 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $68.8 million, which includes $1.2 million in deferred financing costs which are being amortized over the life of the 2024 Notes.
On July 26, 2016, the Company completed the sale of $150.0 million of its 5.00% Fixed-to-Floating Rate Subordinated Notes, due August 1, 2026 (the “2026 Notes”). The 2026 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $147.35 million, which includes $2.6 million in deferred financing costs which are being amortized over the life of the 2026 Notes.
On February 26, 2020, the Bank borrowed $50 million dollars under its borrowing arrangement with the Federal Home Loan Bank of Atlanta at a fixed rate of 1.81% with a maturity date of February 26, 2030 as part of the overall asset liability strategy and to support loan growth.

Table of Contents

Note 9.10. Net Income per Common Share
The calculation of net income per common share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (unaudited) was as ~~follows.~~follows:

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended June 30,

Six Months Ended June 30,
(dollars and shares in thousands, except per share data) 2017 2016 2017 2016

2020

2019

2020

2019
Basic:








Net income $ 29,874 $ 24,523 $ 84,663 $ 71,990

$
28,856

$
37,243

$
51,979

$
70,992
Average common shares outstanding 34,174 33,590 34,124 33,566

32,225

34,540

32,537

34,511
Basic net income per common share $ 0.87 $ 0.73 $ 2.48 $ 2.14

$
0.90

$
1.08

$
1.60

$
2.06

Diluted:



Net income $ 29,874 $ 24,523 $ 84,663 $ 71,990

$
28,856

$
37,243

$
51,979

$
70,992
Average common shares outstanding 34,174 33,590 34,124 33,566

32,225

34,540

32,537

34,511
Adjustment for common share equivalents 164 597 192 596

16

25

24

38
Average common shares outstanding-diluted 34,338 34,187 34,316 34,162

32,241

34,565

32,561

34,549
Diluted net income per common share $ 0.87 $ 0.72 $ 2.47 $ 2.11

$
0.90

$
1.08

$
1.60

$
2.05

Anti-dilutive shares — 8 — 8

49

2

26

19

~~Note 10. Stock-Based Compensation~~

~~The Company maintains the 2016 Stock Plan (“2016 Plan”), the 2006 Stock Plan (“2006 Plan”) and the 2011 Employee Stock Purchase Plan (“2011 ESPP”).~~

~~In connection with the acquisition~~Table of ~~Virginia Heritage, the Company assumed the Virginia Heritage 2006 Stock Option Plan and the 2010 Long Term Incentive Plan (the “Virginia Heritage Plans”).~~Contents

~~No additional options may be granted under the 2006 Plan or the Virginia Heritage Plans.~~

The Company adopted the 2016 Plan upon approval by the shareholders at the 2016 Annual Meeting held on May 12, 2016. The 2016 Plan provides directors and selected employees of the Bank, the Company and their affiliates with the opportunity to acquire shares of stock, through awards of options, time vested restricted stock, performance-based restricted stock and stock appreciation rights. Under the 2016 Plan, 1,000,000 shares of common stock were initially reserved for issuance.

For awards that are service based, compensation expense is being recognized over the service (vesting) period based on fair value, which for stock option grants is computed using the Black-Scholes model. For restricted stock awards granted under the 2006 plan, fair value is based on the average of the high and low stock price of the Company’s shares on the date of grant. For restricted stock awards granted under the 2016 plan, fair value is based on the Company’s closing price on the date of grant. For awards that are performance-based, compensation expense is recorded based on the probability of achievement of the goals underlying the grant.

In February 2017, the Company awarded 91,097 shares of time vested restricted stock to senior officers, directors, and certain employees. The shares vest in three substantially equal installments beginning on the first anniversary of the date of grant.

In February 2017, the Company awarded senior officers a targeted number of 36,523 performance vested restricted stock units (PRSUs). The vesting of PRSUs is 100% after three years with payouts based on threshold, target or maximum average performance targets over the three year period relative to a peer index. There are three performance metrics: 1) average annual earnings per share growth; 2) average annual total shareholder return; and 3) average annual return on average assets. Each metric is measured against companies in the KBW Regional Banking Index.

The Company has unvested restricted stock awards and PRSU grants of 227,324 shares at September 30, 2017. Unrecognized stock based compensation expense related to restricted stock awards totaled $9.3 million at September 30, 2017. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 2.13 years. The following tables summarize the unvested restricted stock awards at September 30, 2017 and 2016.

Nine Months Ended September 30,
2017 2016
Perfomance Awards Shares Weighted-Average Grant Date Fair Value Shares Weighted-Average Grant Date Fair Value

Unvested at beginning 33,226 $ 42.60 — $ —
Issued 36,523 57.49 34,957 42.60
Forfeited (3,097 ) 42.60 (1,731 ) 42.60
Vested (4,314 ) 54.92 — —
Unvested at end 62,338 $ 50.45 33,226 $ 42.60
Nine Months Ended September 30,
2017 2016
Time Vested Awards Shares Weighted-Average Grant Date Fair Value Shares Weighted-Average Grant Date Fair Value

Unvested at beginning 262,966 $ 33.60 369,093 $ 24.43
Issued 91,097 62.70 104,775 46.39
Forfeited (1,477 ) 47.69 (7,815 ) 40.17
Vested (187,600 ) 30.07 (195,738 ) 22.53
Unvested at end 164,986 $ 53.56 270,315 $ 33.87

~~Below is a summary of stock option activity for the nine months ended September 30, 2017 and 2016. The information excludes restricted stock units and awards.~~
Nine Months Ended September 30,
2017 2016
Shares Weighted-Average Exercise Price Shares Weighted-Average Exercise Price

Beginning balance 216,859 $ 8.80 298,740 $ 9.97
Issued — — 3,000 49.49
Exercised (64,420 ) 7.46 (24,458 ) 13.10
Forfeited — — (1,100 ) 15.48
Expired — — (6,637 ) 12.87
Ending balance 152,439 $ 9.36 269,545 $ 10.03
~~The following summarizes information about stock options outstanding at September 30, 2017. The information excludes restricted stock units and awards.~~
Weighted-Average
Outstanding: Stock Options Weighted-Average Remaining
Range of Exercise Prices Outstanding Exercise Price Contractual Life
$5.76 $10.72 101,075 $ 5.76 1.26
$10.73 $11.40 41,389 10.84 0.77
$11.41 $24.86 3,225 22.79 6.02
$24.87 $49.91 6,750 47.83 8.37
152,439 $ 9.36 1.54
Exercisable: Stock Options Weighted-Average
Range of Exercise Prices Exercisable Exercise Price
$5.76 $10.72 66,377 $ 5.76
$10.73 $11.40 41,389 10.84
$11.41 $24.86 2,065 23.18
$24.87 $49.91 750 49.49
110,581 $ 8.28
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions as shown in the table below used for grants during the years ended December 31, 2016 and 2015. There were no grants of stock options during the nine months ended September 30, 2017.
Nine Months Ended Years Ended December 31,
September 30, 2017 2016 2015
Expected volatility n/a 24.23 % 31.21 %
Weighted-Average volatility n/a 24.23 % 31.21 %
Expected dividends — — —
Expected term (in years) n/a 7.0 7.0
Risk-free rate n/a 1.37 % 1.64 %
Weighted-average fair value (grant date) n/a $ 14.27 $ 16.73

The total intrinsic value of outstanding stock options was $8.8 million at September 30, 2017. The total intrinsic value of stock options exercised during the nine months ended September 30, 2017 and 2016 was $3.5 million and $855 thousand, respectively. The total fair value of stock options vested was $50 thousand and $45 thousand for the nine months ended September 30, 2017 and 2016, respectively. Unrecognized stock-based compensation expense related to stock options totaled $90 thousand at September 30, 2017. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 2.09 years.
Approved by shareholders in May 2011, the 2011 ESPP reserved 550,000 shares of common stock (as adjusted for stock dividends) for issuance to employees. Whole shares are sold to participants in the plan at 85% of the lower of the stock price at the beginning or end of each quarterly offering period. The 2011 ESPP is available to all eligible employees who have completed at least one year of continuous employment, work at least 20 hours per week and at least five months a year. Participants may contribute a minimum of $10 per pay period to a maximum of $6,250 per offering period or $25,000 annually (not to exceed more than 10% of compensation per pay period). At September 30, 2017, the 2011 ESPP had 406,081 shares remaining for issuance.
Included in salaries and employee benefits in the accompanying Consolidated Statements of Operations, the Company recognized $4.2 million and $5.2 million in stock-based compensation expense for the nine months ended September 30, 2017 and 2016, respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all awards.

Note 11. Other Comprehensive Income
The following table presents the components of other comprehensive income (loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~2019 (unaudited).

(dollars in thousands) Before Tax Tax Effect Net of Tax

Before Tax

Tax Effect

Net of Tax

Three Months Ended September 30, 2017
Three Months Ended June 30, 2020







Net unrealized gain on securities available-for-sale $ 25 $ 10 $ 15

$
2,506

$
(636)

$
1,870
Less: Reclassification adjustment for net gains included in net income (11 ) (4 ) (7 )

(713)

(176)

(537)
Total unrealized gain 14 6 8

1,793

(812)

1,333

Net unrealized gain on derivatives 557 210 347
Less: Reclassification adjustment for gain included in net income (289 ) (106 ) (183 )

Net unrealized loss on derivatives

(28)

3

(25)
Less: Reclassification adjustment for loss included in net income

393

98

295
Total unrealized gain 268 104 164

365

101

270

Other Comprehensive Income $ 282 $ 110 $ 172

$
2,158

$
(711)

$
1,603

Three Months Ended September 30, 2016
Net unrealized loss on securities available-for-sale $ (1,512 ) $ (605 ) $ (907 )
Less: Reclassification adjustment for net gains included in net income 1 — 1
Total unrealized loss (1,511 ) (605 ) (906 )

Net unrealized gain on derivatives 2,927 1,171 1,756
Less: Reclassification adjustment for losses included in net income (777 ) (311 ) (466 )
Total unrealized gain 2,150 860 1,290

Other Comprehensive Income $ 639 $ 255 $ 384

Nine Months Ended September 30, 2017

Three Months Ended June 30, 2019






Net unrealized gain on securities available-for-sale $ 2,080 $ 837 $ 1,243

$
7,976

$
2,051

$
5,925
Less: Reclassification adjustment for net gains included in net income (542 ) (202 ) (340 )

(563)

(146)

(417)
Total unrealized gain 1,538 635 903

7,413

1,905

5,508

Net unrealized gain on derivatives 2,186 836 1,350

Net unrealized loss on derivatives

(171)

(342)

(513)
Less: Reclassification adjustment for gain included in net income (1,308 ) (487 ) (821 )

(319)

(83)

(236)
Total unrealized gain 878 349 529

Total unrealized loss
��

(490)

259

(749)

Other Comprehensive Income $ 2,416 $ 984 $ 1,432

$
6,923

$
2,164

$
4,759

Nine Months Ended September 30, 2016

Six Months Ended June 30, 2020







Net unrealized gain on securities available-for-sale $ 6,850 $ 2,740 $ 4,110

$
16,172

$
(4,483)

$
11,689
Less: Reclassification adjustment for net gains included in net income (1,123 ) (449 ) (674 )

1,535

391

1,144
Total unrealized gain 5,727 2,291 3,436

17,707

(4,092)

12,833

Net unrealized loss on derivatives (9,132 ) (3,654 ) (5,478 )

(2,017)

671

(1,346)
Less: Reclassification adjustment for losses included in net income (1,519 ) (608 ) (911 )
Less: Reclassification adjustment for gain included in net income

299

77

222
Total unrealized loss (7,613 ) (3,046 ) (4,567 )

(1,718)

748

(1,124)

Other Comprehensive Loss $ (1,886 ) $ (755 ) $ (1,131 )

Other Comprehensive Income

$
15,989

$
(3,344)

$
11,709

Six Months Ended June 30, 2019






Net unrealized gain on securities available-for-sale

$
16,127

$
(4,148)

$
11,979
Less: Reclassification adjustment for net gains included in net income

(1,475)

(383)

(1,092)
Total unrealized gain

14,652

(4,531)

10,887

Net unrealized loss on derivatives

(2,234)

569

(1,665)
Less: Reclassification adjustment for gain included in net income

(1,594)

(414)

(1,180)
Total unrealized loss

(3,828)

155

(2,845)

Other Comprehensive Income

$
10,824

$
(4,376)

$
8,042

Table of Contents

The following table presents the changes in each component of accumulated other comprehensive income (loss) ~~income,~~, net of tax, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~2019 (unaudited).

Securities Accumulated Other

Securities

Accumulated Other

Available

Comprehensive Income
(dollars in thousands) Available For Sale Derivatives Comprehensive (Loss) Income

For Sale

Derivatives

(Loss)

Three Months Ended September 30, 2017
Three Months Ended June 30, 2020






Balance at Beginning of Period $ (1,060 ) $ (61 ) $ (1,121 )

$
14,609

$
(1,544)

$
13,065
Other comprehensive income before reclassifications 15 347 362

1,870

565

2,435
Amounts reclassified from accumulated other comprehensive loss (7 ) (183 ) (190 )
Amounts reclassified from accumulated other comprehensive income (loss)

(537)

(295)

(832)
Net other comprehensive income during period 8 164 172

1,333

270

1,603
Balance at End of Period $ (1,052 ) $ 103 $ (949 )

$
15,942

$
(1,274)

$
14,668

Three Months Ended September 30, 2016
Balance at Beginning of Period $ 5,383 $ (6,707 ) $ (1,324 )
Other comprehensive (loss) income before reclassifications (907 ) 1,756 849
Amounts reclassified from accumulated other comprehensive (loss) income 1 (466 ) (465 )
Net other comprehensive (loss) income during period (906 ) 1,290 384
Balance at End of Period $ 4,477 $ (5,417 ) $ (940 )

Nine Months Ended September 30, 2017
Balance at Beginning of Period $ (1,955 ) $ (426 ) $ (2,381 )
Other comprehensive income before reclassifications 1,243 1,350 2,593
Amounts reclassified from accumulated other comprehensive loss (340 ) (821 ) (1,161 )
Net other comprehensive income during period 903 529 1,432
Balance at End of Period $ (1,052 ) $ 103 $ (949 )

Nine Months Ended September 30, 2016

Securities

Accumulated Other

Available

Comprehensive Income
(dollars in thousands)

For Sale

Derivatives

(Loss)
Three Months Ended June 30, 2019






Balance at Beginning of Period $ 1,041 $ (850 ) $ 191

$
(1,665)

$
673

$
(992)
Other comprehensive income (loss) before reclassifications 4,110 (5,478 ) (1,368 )

5,925

(513)

5,412
Amounts reclassified from accumulated other comprehensive (loss) income (674 ) 911 237
Amounts reclassified from accumulated other comprehensive income

(417)

(236)

(653)
Net other comprehensive income (loss) during period 3,436 (4,567 ) (1,131 )

5,508

(749)

4,759
Balance at End of Period $ 4,477 $ (5,417 ) $ (940 )

$
3,843

$
(76)

$
3,767

Securities

Accumulated Other

Available

Comprehensive Income
(dollars in thousands)

For Sale

Derivatives

(Loss)
Six Months Ended June 30, 2020






Balance at Beginning of Period

$
3,109

$
(150)

$
2,959
Other comprehensive income (loss) before reclassifications

13,977

(902)

13,075
Amounts reclassified from accumulated other comprehensive income

(1,144)

(222)

(1,366)
Net other comprehensive income (loss) during period

12,833

(1,124)

11,709
Balance at End of Period

$
15,942

$
(1,274)

$
14,668

Securities

Accumulated Other

Available

Comprehensive Income
(dollars in thousands)

For Sale

Derivatives

(Loss)
Six Months Ended June 30, 2019






Balance at Beginning of Period

$
(7,044)

$
2,769

$
(4,275)
Other comprehensive income (loss) before reclassifications

11,979

(1,665)

10,314
Amounts reclassified from accumulated other comprehensive income

(1,092)

(1,180)

(2,272)
Net other comprehensive income (loss) during period

10,887

(2,845)

8,042
Balance at End of Period

$
3,843

$
(76)

$
3,767

Table of Contents

The following ~~table presents~~tables present the amounts reclassified out of each component of accumulated other comprehensive income (loss) ~~income~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~2019 (unaudited).


Amount Reclassified from

Accumulated Other

Affected Line Item in
Details about Accumulated Other

Comprehensive (Loss) Income

the Statement Where
Comprehensive Income Components

Three Months Ended June 30,

Net Income is Presented
(dollars in thousands)

2020

2019


Realized gain on sale of investment securities

$
713

$
563

Gain on sale of investment securities
Interest income derivative deposits

393

319

Interest expense on deposits
Income tax expense

(274)

(229)

Income Tax Expense
Total Reclassifications for the Period

$
832

$
653

Net Income


Amount Reclassified from

Accumulated Other

Affected Line Item in
Details about Accumulated Other

Comprehensive (Loss) Income

the Statement Where
Comprehensive Income Components

Six Months Ended June 30,

Net Income is Presented
(dollars in thousands)

2020

2019


Realized gain on sale of investment securities

$
1,535

$
1,475

Gain on sale of investment securities
Realized gain on swap termination

—

829

Gain on sale of investment securities
Interest income derivative deposits

299

765

Interest expense on deposits
Income tax expense

(468)

(797)

Income Tax Expense
Total Reclassifications for the Period

$
1,366

$
2,272

Net Income

Details about Accumulated Other Amount Reclassified from Affected Line Item in
Comprehensive Income Components Accumulated Other the Statement Where
(dollars in thousands) Comprehensive (Loss) Income Net Income is Presented
Three Months Ended September 30,
2017 2016
Realized gain on sale of investment securities $ (11 ) $ (1 ) Gain on sale of investment securities
Interest expense derivative deposits (289 ) (470 ) Interest expense on deposits
Interest expense derivative borrowings — (306 ) Interest expense on short-term borrowings
Income tax expense 110 311 Tax expense
Total Reclassifications for the Period $ (190 ) $ (466 ) Net Income

Details about Accumulated Other Amount Reclassified from Affected Line Item in
Comprehensive Income Components Accumulated Other the Statement Where
(dollars in thousands) Comprehensive (Loss) Income Net Income is Presented
Nine Months Ended September 30,
2017 2016
Realized gain on sale of investment securities $ (542 ) $ (1,123 ) Gain on sale of investment securities
Interest expense derivative deposits (1,308 ) (952 ) Interest expense on deposits
Interest expense derivative borrowings — (567 ) Interest expense on short-term borrowings
Income tax expense 689 2,405 Tax expense
Total Reclassifications for the Period $ (1,161 ) $ (237 ) Net Income

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 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 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 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 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.
~~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.

Table of Contents

Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The ~~table~~tables below ~~presents~~present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of ~~September~~June 30, ~~2017~~2020 (unaudited) and December 31, ~~2016.~~2019.

Significant

Significant

Other

Other

Observable

Unobservable

Quoted Prices

Inputs

Inputs

Total
(dollars in thousands)

(Level 1)

(Level 2)

(Level 3)

(Fair Value)
June 30, 2020

Assets:








Investment securities available-for-sale:








U. S. agency securities

$
—

$
117,054

$
—

$
117,054
Residential mortgage backed securities

—

531,528

—

531,528
Municipal bonds

—

90,694

—

90,694
Corporate bonds

—

—

32,920

32,920
Other equity investments

—

—

198

198
Loans held for sale

—

68,433

—

68,433
Interest Rate Caps

—

4,454

—

4,454
Total assets measured at fair value on a recurring basis as of June 30, 2020

$
—

$
812,163

$
33,118

$
845,281
Liabilities:








Interest rate swap derivatives

$
—

$
1,330

$
—

$
1,330
Derivative liability

—

150

—

150
Interest Rate Caps

—

4,748

—

4,748
Total liabilities measured at fair value on a recurring basis as of June 30, 2020

$
—

$
6,228

$
—

$
6,228
December 31, 2019








Assets:








Investment securities available-for-sale:








U. S. agency securities

$
—

$
179,794

$
—

$
179,794
Residential mortgage backed securities

—

543,852

—

543,852
Municipal bonds

—

73,931

—

73,931
Corporate bonds

—

—

10,733

10,733
U.S. Treasury

—

34,855

—

34,855
Other equity investments

—

—

198

198
Loans held for sale

—

56,707

—

56,707
Interest Rate Caps

—

317

—

317
Mortgage banking derivatives

—

—

280

280
Total assets measured at fair value on a recurring basis as of December 31, 2019

$
—

$
889,456

$
11,211

$
900,667
Liabilities:








Interest rate swap derivatives

$
—

$
203

$
—

$
203
Derivative liability

—

86

—

86
Interest Rate Caps

—

312

—

312
Mortgage banking derivatives

—

—

66

66
Total liabilities measured at fair value on a recurring basis as of December 31, 2019

$
—

$
601

$
66

$
667

(dollars in thousands) Quoted Prices
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant Other
Unobservable
Inputs (Level 3) Total
(Fair Value)
September 30, 2017
Assets:
Investment securities available for sale:
U. S. agency securities $ — $ 177,918 $ — $ 177,918
Residential mortgage backed securities — 301,526 — 301,526
Municipal bonds — 63,147 — 63,147
Corporate bonds — 11,717 1,500 13,217
Other equity investments — — 218 218
Loans held for sale — 25,980 — 25,980
Mortgage banking derivatives — — 63 63
Interest rate swap derivatives — 191 — 191
Total assets measured at fair value on a recurring basis as of September 30, 2017 $ — $ 580,479 $ 1,781 $ 582,260

Liabilities:
Mortgage banking derivatives $ — $ — $ 36 $ 36
Interest rate swap derivatives — 24 — 24
Total liabilities measured at fair value on a recurring basis as of September 30, 2017 $ — $ 24 $ 36 $ 60

December 31, 2016
Assets:
Investment securities available for sale:
U. S. agency securities $ — $ 106,142 $ — $ 106,142
Residential mortgage backed securities — 326,239 — 326,239
Municipal bonds — 95,930 — 95,930
Corporate bonds — 8,079 1,500 9,579
Other equity investments — — 218 218
Loans held for sale — 51,629 — 51,629
Mortgage banking derivatives — — 114 114
Total assets measured at fair value on a recurring basis as of December 31, 2016 $ — $ 588,019 $ 1,832 $ 589,851
Liabilities:
Mortgage banking derivatives $ — $ — $ 55 $ 55
Interest rate swap derivatives — 692 — 692
Total liabilities measured at fair value on a recurring basis as of December 31, 2016 $ — $ 692 $ 55 $ 747

Table of Contents

Investment Securities ~~Available-for-Sale~~
Available-for-Sale: Investment securities available-for-sale 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 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. agency debt securities, mortgage backed securities issued by Government Sponsored Entities (“GSE’s”) and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, the carrying amounts approximate the fair value.

Loans held for sale: The Company has elected to carry loans held for sale at fair value. This election reduces certain timing differences in the Consolidated Statement of Operations and better aligns with the management of the portfolio from a business perspective. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Operations. Gains and losses on sales of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Operations. As such, the Company classifies loans subjected to fair value adjustments as Level 2 valuation.
The following ~~table summarizes~~tables summarize the difference between the aggregate fair value and the aggregate unpaid principal balance for ~~residential real estate~~ loans held for sale measured at fair value as of ~~September~~June 30, ~~2017~~2020 (unaudited) and December 31, ~~2016.~~2019.

June 30, 2020

Aggregate

Unpaid

Principal

(dollars in thousands)

Fair Value

Balance

Difference
Loans held for sale

$
68,433

$
67,397

$
1,036

December 31, 2019

Aggregate

Unpaid

Principal

(dollars in thousands)

Fair Value

Balance

Difference
Loans held for sale

$
56,707

$
55,834

$
873

September 30, 2017
Aggregate Unpaid
(dollars in thousands) Fair Value Principal Balance Difference

Residential mortgage loans held for sale $ 25,980 $ 25,473 $ 507
FHA mortgage loans held for sale $ — $ — $ —
December 31, 2016
Aggregate Unpaid
(dollars in thousands) Fair Value Principal Balance Difference

Residential mortgage loans held for sale $ 51,629 $ 51,021 $ 608
FHA mortgage loans held for sale $ — $ — $ —
NoNaN residential mortgage loans held for sale were 90 or more days past due or on nonaccrual status as of ~~September~~June 30, ~~2017~~2020 or December 31, ~~2016.~~
2019.
Interest rate swap derivatives:These derivative instruments consist of ~~forward starting~~ interest rate swap agreements, which are accounted for as cash flow ~~hedges.~~hedges under ASC 815. The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility. Derivative contracts are executed with a Credit Support Annex, which is a bilateral agreement that requires collateral postings when the market value exceeds certain threshold limits. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration.
Credit Risk Participation Agreements: The Company enters 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. 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.

Table of Contents

Interest Rate Caps: The Company entered into an interest rate cap agreement ("cap") with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the cap's strike rate. The fair value of the cap is calculated by determining the total expected asset or liability exposure of the derivatives. 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 cap falls within Level 2.
Mortgage banking derivatives:The Company relies on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a Level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing.

The following is a reconciliation of activity for assets and liabilities measured at fair value based on Significant Other Unobservable Inputs (Level 3):

Investment

Mortgage Banking

(dollars in thousands)

Securities

Derivatives

Total
Assets:






Beginning balance at January 1, 2020

$
10,931

$
280

$
11,211
Realized gain (loss) included in earnings

442

(280)

162
Unrealized gain included in other comprehensive income

1,280

—

1,280
Purchases of available-for-sale securities

41,547

—

41,547
Principal redemption

(21,082)

—

(21,082)
Ending balance at June 30, 2020

$
33,118

$
—

$
33,118

Liabilities:






Beginning balance at January 1, 2020

$
—

$
66

$
66
Realized loss included in earnings

—

(66)

(66)
Principal redemption

—

—

—
Ending balance at June 30, 2020

$
—

$
—

$
—

Investment Mortgage Banking

Investment

Mortgage Banking

(dollars in thousands) Securities Derivatives Total

Securities

Derivatives

Total
Assets:






Beginning balance at January 1, 2017 $ 1,718 $ 114 $ 1,832
Realized loss included in earnings - net mortgage banking derivatives — (51 ) (51 )
Beginning balance at January 1, 2019

$
9,794

$
229

$
10,023
Realized (loss) gain included in earnings

(20)

51

31
Unrealized gain included in other comprehensive income

131

—

131
Purchases of available-for-sale securities — — —

4,030

—

4,030
Principal redemption — — —

(3,004)

—

(3,004)
Ending balance at September 30, 2017 $ 1,718 $ 63 $ 1,781

Ending balance at December 31, 2019

$
10,931

$
280

$
11,211

Liabilities:






Beginning balance at January 1, 2017 $ — $ 55 $ 55
Realized loss included in earnings - net mortgage banking derivatives — (19 ) (19 )
Beginning balance at January 1, 2019

$
—

$
269

$
269
Realized gain included in earnings

—

(203)

(203)
Principal redemption — — —

—

—

—
Ending balance at September 30, 2017 $ — $ 36 $ 36
Ending balance at December 31, 2019

$
—

$
66

$
66
Investment Mortgage Banking
(dollars in thousands) Securities Derivatives Total
Assets:
Beginning balance at January 1, 2016 $ 219 $ 24 $ 243
Realized gain included in earnings - net mortgage banking derivatives — 90 90
    Purchases of available-for-sale securities 1,500 — 1,500
    Principal redemption (1 ) — (1 )
Ending balance at December 31, 2016 $ 1,718 $ 114 $ 1,832

Liabilities:
Beginning balance at January 1, 2016 $ — $ 30 $ 30
Realized loss included in earnings - net mortgage banking derivatives — 25 25
    Principal redemption — — —
Ending balance at December 31, 2016 $ — $ 55 $ 55

The other equity securities classified as Level 3 consist of equity investments in the form of common stock of two local banking companies which are not publicly traded, and for which the carrying amount approximates fair value.

Table of Contents

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.
~~Impaired loans~~: The Company considers a loan impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management has determined that nonaccrual loans and loans that have had their terms restructured in a troubled debt restructuring meet this impaired loan definition. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company classifies as a Level 3 valuation.

~~Other real estate owned~~: Other real estate owned 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. 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, 2017
Impaired loans:
Commercial $ — $ — $ 2,757 $ 2,757
Income producing - commercial real estate — — 8,714 8,714
Owner occupied - commercial real estate — — 5,885 5,885
Real estate mortgage - residential — — 301 301
Construction - commercial and residential — — 2,030 2,030
Home equity — — 504 504
Other consumer — — 11 11
Other real estate owned — — 1,394 1,394
Total assets measured at fair value on a nonrecurring basis as of September 30, 2017 $ — $ — $ 21,596 $ 21,596
(dollars in thousands) Quoted Prices
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant Other
Unobservable
Inputs (Level 3) Total
(Fair Value)
December 31, 2016
Impaired loans:
Commercial $ — $ — $ 2,956 $ 2,956
Income producing - commercial real estate — — 12,993 12,993
Owner occupied - commercial real estate — — 2,133 2,133
Real estate mortgage - residential — — 555 555
Construction - commercial and residential — — 1,550 1,550
Other consumer — — 13 13
Other real estate owned — — 2,694 2,694
Total assets measured at fair value on a nonrecurring basis as of December 31, 2016 $ — $ — $ 22,894 $ 22,894
~~Loans~~
The Company does not record loans at fair value on a recurring basis; however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310,~~“Receivables.”~~ The fair value of impaired 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 impaired 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~~June 30, ~~2017,~~2020, substantially all of the ~~totally impaired~~Company’s individually evaluated loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, ~~impaired~~individually evaluated loans where an allowance is established based on the fair value of collateral 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.
Pre Adoption of CECL: The Company did not record loans at fair value on a recurring basis; however, from time to time, a loan was considered impaired and an allowance for loan loss was established. The Company considered a loan impaired when it was probable that the Company would be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management had determined that nonaccrual loans and loans that had their terms restructured in a TDR met this impaired loan definition. Once a loan was identified as individually impaired, management measures impairment in accordance with ASC Topic 310, “Receivables.” The fair value of impaired loans was estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represented loans for which the fair value of expected repayments or collateral exceeded the recorded investment in such loans.
Other real estate owned: Other real estate owned 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. Assets measured at fair value on a nonrecurring basis are included in the table below:

Significant

Significant

Other

Other

Observable

Unobservable

Quoted Prices

Inputs

Inputs

Total
(dollars in thousands)

(Level 1)

(Level 2)

(Level 3)

(Fair Value)
June 30, 2020








Commercial

$
—

$
—

$
18,047

$
18,047
Income producing - commercial real estate

—

—

27,295

27,295
Owner occupied - commercial real estate

—

—

10,815

10,815
Real estate mortgage - residential

—

—

7,960

7,960
Construction - commercial and residential

—

—

5,385

5,385
Home equity

—

—

600

600
Other consumer

—

—

6

6
Other real estate owned

—

—

8,237

8,237
Total assets measured at fair value on a nonrecurring basis as of June 30, 2020

$
—

$
—

$
78,345

$
78,345

Table of Contents

Significant

Significant

Other

Other

Observable

Unobservable

Quoted Prices

Inputs

Inputs

Total
(dollars in thousands)

(Level 1)

(Level 2)

(Level 3)

(Fair Value)
December 31, 2019








Impaired loans:








Commercial

$
—

$
—

$
10,100

$
10,100
Income producing - commercial real estate

—

—

11,948

11,948
Owner occupied - commercial real estate

—

—

6,934

6,934
Real estate mortgage - residential

—

—

4,981

4,981
Construction - commercial and residential

—

—

11,409

11,409
Home equity

—

—

387

387
Other real estate owned

—

—

1,487

1,487
Total assets measured at fair value on a nonrecurring basis as of December 31, 2019

$
—

$
—

$
47,246

$
47,246

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 and should not be considered an indication of the fair value of the Company taken as a whole.

~~The following methods and assumptions were used to estimate the fair value~~Table of ~~each category of financial instrument for which it is practicable to estimate value:~~Contents

~~Cash due from banks and federal funds sold:~~ ~~For cash and due from banks and federal funds sold the carrying amount approximates fair value.~~

~~Interest bearing deposits with other banks:~~ ~~For interest bearing deposits with other banks the carrying amount approximates fair value.~~

~~Investment securities:~~ For these instruments, fair values are 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.

~~Federal Reserve and Federal Home Loan Bank stock:~~ ~~The carrying amounts approximate the fair values at the reporting date.~~

~~Loans held for sale:~~ As the Company has elected the fair value option, the fair value of residential mortgage loans held for sale is the carrying value and is based on commitments outstanding from investors as well as what secondary markets are currently offering for portfolios with similar characteristics for residential mortgage loans held for sale since such loans are typically committed to be sold (servicing released) at a profit. The fair value of FHA loans held for sale is the carrying value and is based on commitments outstanding from investors as well as what secondary markets are currently offering for portfolios with similar characteristics for FHA loans held for sale since such loans are typically committed to be securitized and sold (servicing retained) at a profit.

~~Loans:~~ For variable rate loans that re-price on a scheduled basis, fair values are based on carrying values. The fair value of the remaining loans are estimated by discounting the estimated future cash flows using the current interest rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term.

~~Bank owned life insurance:~~ ~~The fair value of bank owned life insurance is the current cash surrender value, which is the carrying value.~~

~~Annuity investment:~~~~The fair value of the annuity investments is the carrying amount at the reporting date.~~

~~Mortgage banking derivatives:~~The Company enters into interest rate lock commitments (IRLCs) with prospective residential mortgage borrowers. These commitments are carried at fair value based on the fair value of the underlying mortgage loans which are based on market data. These commitments are classified as Level 3 in the fair value disclosures, as the valuations are based on market unobservable inputs. The Company hedges the risk of the overall change in the fair value of loan commitments to borrowers by selling forward contracts on securities of GSEs. These forward settling contracts are classified as Level 3, as valuations are based on market unobservable inputs. See Note 4 to the Consolidated Financial Statements for additional detail.

~~Interest rate swap derivatives:~~These derivative instruments consist of forward starting interest rate swap agreements, which are accounted for as cash flow hedges. The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility. Derivative contracts are executed with a Credit Support Annex, which is a bilateral agreement that requires collateral postings when the market value exceeds certain threshold limits. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration.

~~Noninterest bearing deposits:~~ ~~The fair value of these deposits is the amount payable on demand at the reporting date, since generally accepted accounting standards do not permit an assumption of core deposit value.~~

~~Interest bearing deposits:~~The fair value of interest bearing transaction, savings, and money market deposits with no defined maturity is the amount payable on demand at the reporting date, since generally accepted accounting standards do not permit an assumption of core deposit value.

~~Certificates of deposit:~~ ~~The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposits with remaining maturities would be accepted.~~

~~Customer repurchase agreements:~~ ~~The carrying amount approximate the fair values at the reporting date.~~

~~Borrowings:~~ The carrying amount for variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate FHLB advances and the subordinated notes are estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate FHLB advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index.

~~Off-balance sheet items:~~ Management has reviewed the unfunded portion of commitments to extend credit, as well as standby and other letters of credit, and has determined that the fair value of such instruments is equal to the fee, if any, collected and unamortized for the commitment made.

The estimated fair ~~values~~value of the Company’s financial instruments at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 are as follows:

Fair Value Measurements

Significant

Other

Significant

Quoted

Observable

Unobservable

Carrying

Prices

Inputs

Inputs
(dollars in thousands)

Value

Fair Value

(Level 1)

(Level 2)

(Level 3)
June 30, 2020










Assets










Cash and due from banks

$
12,199

$
12,199

$
—

$
12,199

$
—
Federal funds sold

25,466

25,466

—

25,466

—
Interest bearing deposits with other banks

598,377

598,377

—

598,377

—
Investment securities

772,394

772,394

—

719,212

53,182
Federal Reserve and Federal Home Loan Bank stock

40,018

40,018

—

40,018

—
Loans held for sale

68,433

68,433

—

68,433

—
Loans

7,912,965

7,828,639

—

—

7,828,639
Bank owned life insurance

75,913

75,913

—

75,913

—
Annuity investment

14,480

14,480

—

14,480

—
Interest Rate Caps

4,454

4,454

—

4,454

—

Liabilities










Noninterest bearing deposits

2,416,058

2,416,058

—

2,416,058

—
Interest bearing deposits

4,366,421

4,366,421

—

4,366,421

—
Certificates of deposit

1,153,493

1,149,418

—

1,149,418

—
Customer repurchase agreements

31,198

31,198

—

31,198

—
Borrowings

567,882

548,808

—

548,808

—
Interest rate swap derivatives

1,330

1,330

1,330

—
Derivative liability

150

150

—

150

—
Interest Rate Caps

4,748

4,748

—

4,748

—

December 31, 2019










Assets










Cash and due from banks

$
7,539

$
7,539

$
—

$
7,539

$
—
Federal funds sold

38,987

38,987

—

38,987

—
Interest bearing deposits with other banks

195,447

195,447

—

195,447

—
Investment securities

843,363

843,363

—

832,432

10,931
Federal Reserve and Federal Home Loan Bank stock

35,194

35,194

—

35,194

—
Loans held for sale

56,707

56,707

—

56,707

—
Loans

7,472,090

7,550,249

—

—

7,550,249
Bank owned life insurance

75,724

75,724

—

75,724

—
Annuity investment

14,697

14,697

—

14,697

—
Interest Rate Caps

280

280

—

280

—

Liabilities










Noninterest bearing deposits

2,064,367

2,064,367

—

2,064,367

—
Interest bearing deposits

3,876,985

3,876,985

—

3,876,985

—
Certificates of deposit

1,283,039

1,291,688

—

1,291,688

—
Customer repurchase agreements

30,980

30,980

—

30,980

—
Borrowings

467,687

328,330

—

328,330

—
Interest rate swap derivatives

203

203

203

—
Derivative liability

86

86

—

86

—
Interest Rate Caps

312

312

—

312

—
Mortgage banking derivatives

66

66

—

—

66

Fair Value Measurements
Quoted Prices in
Active Markets for
Identical Assets or
Liabilities Significant Other
Observable Inputs Significant
Unobservable
Inputs
(dollars in thousands) Carrying Value Fair Value (Level 1) (Level 2) (Level 3)
September 30, 2017
Assets
Cash and due from banks $ 8,246 $ 8,246 $ — $ 8,246 $ —
Federal funds sold 8,548 8,548 — 8,548 —
Interest bearing deposits with other banks 432,156 432,156 — 432,156 —
Investment securities 556,026 556,026 — 554,308 1,718
Federal Reserve and Federal Home Loan Bank stock 30,980 30,980 — 30,980 —
Loans held for sale 25,980 25,980 — 25,980 —
Loans, net 6,021,237 6,075,997 — — 6,075,997
Bank owned life insurance 61,238 61,238 — 61,238 —
Annuity investment 11,591 11,591 — 11,591 —
Mortgage banking derivatives 63 63 — — 63
Interst rate swap derivatives 191 191 — 191 —

Liabilities
Noninterest bearing deposits 1,843,157 1,843,157 — 1,843,157 —
Interest bearing deposits 3,248,118 3,248,118 — 3,248,118 —
Certificates of deposit 822,677 821,892 — 821,892 —
Customer repurchase agreements 73,569 73,569 — 73,569 —
Borrowings 416,807 448,768 — 448,768 —
Mortgage banking derivatives 36 36 — — 36
Interest rate swap derivatives 24 24 — 24 —

December 31, 2016
Assets
Cash and due from banks $ 10,285 $ 10,285 $ — $ 10,285 $ —
Federal funds sold 2,397 2,397 — 2,397 —
Interest bearing deposits with other banks 355,481 355,481 — 355,481 —
Investment securities 538,108 538,108 — 536,390 1,718
Federal Reserve and Federal Home Loan Bank stock 21,600 21,600 — 21,600 —
Loans held for sale 51,629 51,629 — 51,629 —
Loans, net 5,618,819 5,624,084 — — 5,624,084
Bank owned life insurance 60,130 60,130 — 60,130 —
Annuity investment 11,929 11,929 — 11,929 —
Mortgage banking derivatives 114 114 — — 114

Liabilities
Noninterest bearing deposits 1,775,684 1,775,684 — 1,775,684 —
Interest bearing deposits 3,191,682 3,191,682 — 3,191,682 —
Certificates of deposit 748,748 745,985 — 745,985 —
Customer repurchase agreements 68,876 68,876 — 68,876 —
Borrowings 216,514 203,657 — 203,657 —
Mortgage banking derivatives 55 55 — — 55
Interest rate swap derivatives 692 692 — 692 —

~~Note 13. Supplemental Executive Retirement Plan~~

~~The Bank has entered into Supplemental Executive Retirement and Death Benefit Agreements (the “SERP Agreements”) with certain~~

Table of the Bank’s executive officers other than Mr. Paul, which upon the executive’s retirement, will provide for a stated monthly payment for such executive’s lifetime subject to certain death benefits described below. The retirement benefit is computed as a percentage of each executive’s projected average base salary over the five years preceding retirement, assuming retirement at age 67. The SERP Agreements provide that (a) the benefits vest ratably over six years of service to the Bank, with the executive receiving credit for years of service prior to entering into the SERP Agreement, (b) death, disability and change-in-control shall result in immediate vesting, and (c) the monthly amount will be reduced if retirement occurs earlier than age 67 for any reason other than death, disability or change-in-control. The SERP Agreements further provide for a death benefit in the event the retired executive dies prior to receiving 180 monthly installments, paid either in a lump sum payment or continued monthly installment payments, such that the executive’s beneficiary has received payment(s) sufficient to equate to a cumulative 180 monthly installments.Contents

The SERP Agreements are unfunded arrangements maintained primarily to provide supplemental retirement benefits and comply with Section 409A of the Internal Revenue Code. The Bank financed the retirement benefits by purchasing fixed annuity contracts with four insurance in 2013 carriers totaling $11.4 million that have been designed to provide a future source of funds for the lifetime retirement benefits of the SERP Agreements. The primary impetus for utilizing fixed annuities is a substantial savings in compensation expenses for the Bank as opposed to a traditional SERP Agreement. For the quarter ended September 30, 2017, the annuity contracts accrued $54 thousand of income, which was included in other noninterest income on the Consolidated Statement of Operations. The cash surrender value of the annuity contracts was $11.6 million at September 30, 2017 and is included in other assets on the Consolidated Balance Sheet. For the three and nine months ended September 30, 2017, the Company recorded benefit expense accruals of $103 thousand and $308 thousand, for this post retirement benefit.

Upon death of a named executive, the annuity contract related to such executive terminates. The Bank has purchased additional bank owned life insurance contracts, which would effectively finance payments (up to a 15 year certain amount) to the executives’ named beneficiaries.

~~Item~~ITEM 2 ~~– Management’s Discussion and Analysis of Financial Condition and Results of Operations~~- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion provides information about the results of operations, ~~and~~ financial condition, liquidity, and capital resources of ~~the Company~~Eagle Bancorp, Inc. (the “Company”) and its subsidiaries as of the dates and periods indicated. 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, ~~2016.~~
2019.
This report contains ~~forward looking~~forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward-looking statements can be identified by use of words such ~~words~~ as “may,” “will,” ~~“anticipate,~~“can,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” ~~“continue,~~“assume," "probable," "possible," "continue,” “should,” “could,” “would,” “strive," "seeks," "deem," "projections" "forecast," "consider," "indicative," "uncertainty," "likely," "unknown," "attributable," "depends," "intends," "generally," "feel" "typically," "judgment," "subjective" and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market (including the macroeconomic and other challenges and uncertainties resulting from the coronavirus (“COVID-19”) pandemic, including on our credit quality and business operations), interest rates and interest rate policy, competitive factors and other conditions, which by their nature are not susceptible to accurate forecast, and are subject to significant uncertainty. 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, ~~2016~~2019, the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company’s past results are not necessarily indicative of future performance. 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 ~~statements.~~

~~GENERAL~~statement for any reason.
GENERAL
The Company is a ~~growth oriented,~~growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating ~~nineteen~~twenty-two years of successful operations. The Company provides general commercial and consumer banking services through ~~the Bank,~~EagleBank (the “Bank”), its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System. 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, which 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 ~~twenty-one~~twenty branch offices, including nine in Northern Virginia, ~~seven~~six in ~~Montgomery County,~~Suburban Maryland, and five in Washington, D.C.

Table of Contents

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~~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, residential mortgages and consumer loans, and cash management services. The Bank is also active in the origination and sale of residential mortgage loans and the origination of ~~SBA~~Small Business Administration ("SBA”) loans. The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under best efforts and mandatory delivery commitments with the investors to purchase the loans subject to compliance with pre-established criteria. 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 ~~a small number of FHA~~multifamily Federal Housing Administration ("FHA”) loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”). The Company securitizes these loans through the Government National Mortgage Association (“Ginnie Mae”) MBS I program and sells the resulting securities in the open market to authorized dealers in the normal course of business, and ~~generally retains~~periodically bundles and sells the servicing rights. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages ~~OREO~~other real estate owned (“OREO”) assets. 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. Additionally, the Bank offers investment advisory services through referral programs with third parties. ~~ECV,~~Landroval Municipal Finance, Inc., a subsidiary of the ~~Company, had provided subordinated financing~~Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.

Impact of COVID-19

In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. Governmental responses to the pandemic have included orders closing nonessential businesses, directing individuals to restrict their movements, observe social distancing, and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to COVID-19 pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the ~~acquisition, development and/~~foreseeable future.

Our business and consumer customers are experiencing varying degrees of financial distress. In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including directing employees to work from home insofar as is possible and implementing our business continuity plans and protocols to the extent necessary.

On March 27, 2020, the CARES Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act created the Paycheck Protection Program (the "PPP"), a new program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.

As an SBA preferred lender, the Bank is participating in the PPP program, and at June 30, 2020, had an outstanding balance of PPP loans of $456 million to just over 1,400 businesses. The average interest rate on these loans is 1.00% and the average yield, which includes fee amortization, was 2.91% for the second quarter of 2020.

There have also been various governmental actions taken or ~~construction~~proposed to provide forms of ~~real estate projects. ECV lending involves higher~~relief, such as limiting debt collections efforts, including foreclosures, and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees. Governmental actions taken in response to the COVID-19 pandemic have not always been coordinated or consistent across jurisdictions but, in general, have been expanding in scope and intensity. The efficacy and ultimate effect of these actions is not known.

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Some of these deferrals may not have met the criteria for treatment under U.S. generally accepted accounting principles ("GAAP") as troubled debt restructurings ("TDRs"). Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term loan modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.

Significant uncertainties as to future economic conditions exist, and we have taken deliberate actions in response, including maintaining record levels of ~~risk, together~~on and off -balance sheet liquidity and have maintained well above well capitalized regulatory capital ratios. Furthermore, we suspended our share repurchase program during the first quarter of 2020. Accordingly, we made no share repurchases in the second quarter of 2020. The Board of Directors and management continue to monitor this area and may enter the markets from time to time as determined appropriate. Additionally, the economic pressures, coupled with ~~commensurate~~the implementation of the expected ~~returns.~~loss methodology for determining our provision for credit losses as required by CECL, have contributed to an increased provision for credit losses for the first six months of 2020. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act and other legislative and regulatory developments related to COVID-19; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain.

CRITICAL ACCOUNTING POLICIES

The Company’s Consolidated Financial Statements are prepared in accordance with 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, 2019 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, 2019 except as indicated below and in “Accounting Standards Adopted in 2020” in Note 1 to the Consolidated Financial Statements in this report.

~~Investment Securities~~

The fair values and the information used to record valuation adjustments for investment securities available-for-sale are based either on quoted market prices or are provided by other third-party sources, when available. The Company’s investment portfolio is categorized as available-for-sale with unrealized gains and losses net of income tax being a component of shareholders’ equity and accumulated other comprehensive loss.

~~Allowance~~Provision for Credit Losses and Provision for Unfunded Commitments

~~The~~A consequence of lending activities is that we may incur credit losses, so we record an allowance for credit losses is("ACL") with respect to loan receivables and a reserve for unfunded commitments (“RUC”) as estimates of those losses. The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as changes in interest rates, the financial performance of borrowers and unemployment rates.

As a result of our January 1, 2020, adoption of ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments,” and its related amendments, our methodology for estimating these credit losses changed significantly from December 31, 2019. The standard replaced the “incurred loss” approach with an “expected loss” approach known as CECL. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that ~~may be sustained in our loan portfolio.~~ delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.”

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The ~~allowance~~estimate of expected credit losses under the CECL approach is based on ~~two principles of accounting: (a) ASC Topic 450,~~~~“Contingencies,”~~ ~~which requires~~relevant information about past events, current conditions, and reasonable and supportable forecasts that ~~losses be accrued when they are probable of occurring and are estimable and (b) ASC Topic 310,~~~~“Receivables,”~~ ~~which requires that losses be accrued when it is probable that~~affect the ~~Company will not collect all principal and interest payments according to the contractual terms~~collectability of the ~~loan.~~reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, we consider forecasts about future economic conditions that are reasonable and supportable. The ~~loss, if any, can be~~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 ~~difference between the loan balance and the value of collateral, the present value of~~ expected ~~future cash flows, or values observable in the secondary markets.~~

~~Three components comprise our allowance for credit losses: a specific allowance, a formula allowance and a nonspecific or environmental factors allowance. Each component is determined based~~loss rates on ~~estimates that can and do change when actual events occur.~~

~~The specific allowance allocates a reserve to identified impaired loans. Impaired loans are assigned specific reserves based on an impairment analysis. Under ASC Topic 310,~~~~“Receivables,”~~ a loan for which reserves are individually allocated may show deficiencies in the borrower’s overall financial condition, payment record, support available from financial guarantors and for the fair market value of collateral. When a loan is identified as impaired, a specific reserve is established based on the Company’s assessment of the loss that may be associated with the individual loan.

~~The formula allowance is used to estimate the loss on internally risk rated loans, exclusive of~~ those identified as requiring specific reserves. The portfolio of unimpaired loans is stratified by loan type and risk assessment. Allowance factors relate to the type of loan and level of the internal risk rating, with loans exhibiting higher risk and loss experience receiving a higher allowance factor.

The environmental allowance is also used to estimate the loss associated with pools of non-classified loans. These non-classified loans are also stratified by loan type, and environmental allowance factors are assigned by management based upon a number of conditions, including delinquencies, loss history, changes in lending policy and procedures, changes in business and economic conditions, changes in the nature and volume of the portfolio, management expertise, concentrations within the portfolio, quality of internal and external loan review systems, competition, and legal and regulatory requirements.

The allowance captures losses inherent in the loan portfolio, which have not yet been recognized. Allowance factors and the overall size of the allowance may change from period to period based upon management’s assessment of the above described factors, the relative weights given to each factor, and portfolio composition.

draws.

Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for credit losses ~~including in connection with~~and the ~~valuation~~RUC. Our determination of collateral, a borrower’s prospects of repayment, and in establishing allowance factors on the formula and environmental components of the allowance. The establishment of allowance factors involves a continuing evaluation, based on management’s ongoing assessment of the global factors discussed above and their impact on the portfolio. The allowance factors may change from period to period, resulting in an increase or decrease in the amount of the ~~provision or~~ allowance ~~based upon the same volume and classification of loans. Changes in allowance factors can have a direct impact~~for credit losses requires significant reliance on the credit risk rating we assign to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts. The Company uses the discounted cash flow (“DCF”) method to estimate expected credit losses for the commercial, income producing – commercial real estate, owner occupied – commercial real estate, real estate mortgage – residential, construction – commercial and residential, construction – C&I (owner occupied), home equity, and other consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, probability of default, and loss given default. The modeling of expected prepayment speeds are based on historical internal data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment as an initial loss driver, which is next adjusted to estimate regional unemployment rates. For all DCF models, management has determined that eight quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over twelve months on a straight-line basis. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period. PPP loans are included in the model but do not carry a reserve, 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.

The allowance for credit losses attributable to each portfolio segment 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 inherent in the total loan portfolio and total amount of unfunded credit commitments, respectively.

Going forward, the ~~provision,~~impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and ~~a related after tax effect on net income. Errors in management’s perception~~quality of our loan portfolio, as well as the prevailing economic conditions and ~~assessment of the global~~forecasts utilized. Material changes to these and other relevant factors ~~and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and~~ may result in ~~additional provisions or charge-offs. Alternatively, errors~~greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. For example, the COVID-19 pandemic has negatively impacted unemployment projections, which inform our CECL economic forecast and increased our loss reserve as of June 30, 2020. See Notes 1 and 5 to the Consolidated Financial Statements, the “Provision for Credit Losses” section in ~~management’s perception~~Management’s Discussion and ~~assessment of~~Analysis, and the ~~global~~COVID-19 risk factors ~~and their impact~~in Item 1A for more information on the portfolio could result in the allowance being in excess of amounts necessary to cover losses in the portfolio, and may result in lower provisions in the future. For additional information regarding the provision for credit ~~losses, refer~~losses.

Goodwill

As of June 30, 2020 COVID-19 caused the occurrence of what management deemed to ~~the discussion under the caption “Provision for Credit Losses” below.~~

~~Goodwill~~

~~Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets~~be a triggering event that ~~lack physical substance but can be distinguished from~~caused us to perform a goodwill ~~because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic~~ impairment ~~testing. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives.~~

~~The Company performs a qualitative assessment~~test to determine ~~whether it is more likely than not~~if an impairment charge was required for that the fair value of a reporting unit is less than its carrying amount. If, after assessing updated qualitative factors, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it does not have to perform the two-step goodwill impairment test.period. Determining the fair value of a reporting unit under the ~~first step of the~~ goodwill impairment test ~~and determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment test are judgmental~~involves judgement and often ~~involve~~involves the use of significant estimates and assumptions. ~~Similarly, estimates and assumptions are used in determining the fair value of other intangible assets.~~ Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables. Based on the results of ~~qualitative assessments~~the assessment of all reporting units, the Company concluded that no impairment existed ~~at December 31, 2016.~~as of June 30, 2020. However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the ~~Company’s~~Company's financial condition and results of operations.

~~Stock Based Compensation~~

~~The Company follows the provisions~~Table of ~~ASC Topic 718,~~~~“Compensation,”~~ which requires the expense recognition for the fair value of share based compensation awards, such as stock options, restricted stock awards, and performance based shares. This standard allows management to establish modeling assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates which directly impact estimated fair value. The accounting standard also allows for the use of alternative option pricing models which may impact fair value as determined. The Company’s practice is to utilize reasonable and supportable assumptions.Contents

~~Derivatives~~

Interest rate swap derivatives designated as qualified cash flow hedges are tested for hedge effectiveness on a quarterly basis. Assessments are made at the inception of the hedge and on a recurring basis to determine whether the derivative used in the hedging transaction has been and is expected to continue to be highly effective in offsetting changes in fair values or cash flows of the hedged item. A statistical regression analysis is performed to measure the effectiveness.

If, based on the assessment, a derivative is not expected to be a highly effective hedge or it has ceased to be a highly effective hedge, hedge accounting is discontinued as of the quarter the hedge is not highly effective. As the statistical regression analysis requires the use of estimates regarding the amount and timing of future cash flows which are sensitive to significant changes in future periods based on changes in market rates; we consider this a critical accounting estimate.

RESULTS OF OPERATIONS

Earnings Summary

~~For~~Net income for the three months ended ~~September~~June 30, ~~2017, net income~~2020 was ~~$29.9~~$28.9 million ~~a 22% increase over the $24.5~~compared to $37.2 million net income for the three months ended ~~September~~June 30, ~~2016.~~2019, a 23% decrease. Net income per basic ~~common share for the three months ended September 30, 2017 was $0.87 compared to $0.73 for the same period in 2016, a 19% increase. Net income per~~and diluted common share for the three months ended ~~September~~June 30, ~~2017~~2020 was ~~$0.87~~$0.90 compared to ~~$0.72~~$1.08 per basic and diluted common share for the same period in ~~2016,~~2019, a ~~21% increase.~~17% decrease.

~~For~~Net income declined for the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2020 relative to the ~~Company’s net~~same period in 2019 due substantially to increased provisioning for credit losses offset by higher noninterest income ~~was $84.7~~(as discussed below). In particular, the provision for credit losses increased to $19.7 million ~~an 18% increase over~~for the ~~$72.0~~three months ended June 30, 2020 compared to $3.6 million for the same period in ~~2016. Net~~2019, a 448% increase, as the Company implemented CECL effective January 1, 2020 and increased reserves associated with the impact of COVID-19. See Note 1 and Note 5 for further detail on CECL.

The provision for income ~~per basic common share~~taxes for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2020 was ~~$2.48~~$9.4 million, a decrease of $4.1 million, or 30%, compared to ~~$2.14 for~~ the same period in ~~2016,~~2019. The decrease in income taxes was primarily due to a ~~16% increase. Net income per diluted common share for the nine months ended September 30, 2017 was $2.47 compared to $2.11 for the same period~~significant decline in ~~2016, a 17% increase.~~

~~The increase in net~~pre-tax income for the three months ended ~~September~~June 30, ~~2017 can be attributed primarily~~2020 compared to ~~an increase~~the three months ended June 30, 2019 due to increased credit reserves significantly attributable to COVID-19, and a decrease in ~~total~~disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019.

The most significant portion of revenue (i.e. net interest income plus noninterest income) ~~of 11%~~is net interest income, which remained relatively stable for the three months ended June 30, 2020 over the same period in ~~2016. Net interest income grew 11% for the three months ended September 30, 2017~~2019 ($81.4 million as compared to $81.3 million). This was largely attributable to the ~~same period~~growth in ~~2016 due to~~ average earning ~~asset growth of 10%.~~

assets effectively offset by a decline in the net interest margin.

For the three months ended ~~September~~June 30, ~~2017,~~2020, the Company reported an annualized ~~ROAA~~return on average assets (“ROAA”) of ~~1.66%~~1.12% as compared to ~~1.50%~~1.74% for the three months ended ~~September~~June 30, ~~2016.~~2019. Total shareholders’ equity was $1.19 billion at both June 30, 2020 and December 31, 2019, a decrease of less than 1%. The annualized ~~ROACE~~return on average common equity (“ROACE”) for the three months ended ~~September~~June 30, ~~2017~~2020 was ~~12.86%,~~9.84% as compared to ~~12.04%~~12.81% for the three months ended ~~September~~June 30, ~~2016.~~

2019. The ~~increase in net income~~annualized return on average tangible common equity (“ROATCE”) for the ~~nine~~three months ended ~~September~~June 30, 2017 can be attributed primarily to an increase in total revenue (i.e. net interest income plus noninterest income) of 8% over the same period in 2016. Net interest income grew 9% for the nine months ended September 30, 20172020 was 10.80% as compared to 14.08% for the ~~same period~~three months ended June 30, 2019. Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. The decline in ~~2016~~these ratios was primarily due to ~~average earning asset growth~~the implementation of ~~12%.~~

~~For the nine months ended September 30, 2017, the Company reported an annualized ROAA of 1.63% as compared~~CECL and COVID-19 impacts and to 1.54% for the nine months ended September 30, 2016. The annualized ROACE for the nine months ended September 30, 2017 was 12.71%, as compared to 12.27% for the nine months ended September 30, 2016. The higher ratios are due to increased earnings.

a lower net interest margin.

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, ~~increased 3 basis points from 4.11%~~was 3.26% for the three months ended ~~September~~June 30, ~~2016~~2020 and 3.91% for the same period in 2019. Average earning asset yields decreased 130 basis points to ~~4.14%~~3.91% for the three months ended ~~September~~June 30, ~~2017. Average earning asset yields were 4.74% for the three months ended September 30, 2017 and 4.60%~~2020, as compared to 5.21% for the same period in ~~2016.~~2019. The average cost of interest bearing liabilities ~~increased~~decreased by 20105 basis points (to ~~0.97%~~1.01% from ~~0.77%~~2.06%) for the three months ended ~~September~~June 30, ~~2017~~2020 as compared to the same period in ~~2016.~~2019. Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 625 basis points for the three months ended ~~September~~June 30, ~~2017~~2020 as compared to ~~2016 (3.77% versus 3.83%~~2019 (2.90% as compared to 3.15%).

The benefit of noninterest sources funding earning assets ~~increased~~decreased by 940 basis points to 3736 basis points from 2876 basis points for the three months ended ~~September~~June 30, ~~2017 versus~~2020 as compared to the same period in ~~2016.~~2019, due to significantly lower market interest rates. The combination of a 625 basis point decrease in the net interest spread and a 940 basis point ~~increase~~decrease in the value of noninterest sources resulted in ~~the 3~~a 65 basis point ~~increase~~decrease in the net interest margin for the three months ended ~~September~~June 30, ~~2017~~2020 as compared to the same period in ~~2016.~~ 2019.

The provision for credit losses was $19.7 million for the three months ended June 30, 2020 as compared to $3.6 million for the three months ended June 30, 2019. The higher provisioning in the second quarter of 2020, as compared to the second quarter of 2019, is primarily due to the implementation of the CECL accounting standard for loan loss allowances, as well as COVID-19 impacts and higher net charge-offs primarily related to COVID-19 effects. Net charge-offs of $7.1 million in the second quarter of 2020 represented an annualized 0.36% of average loans, excluding loans held for sale, as compared to $1.5 million, or an annualized 0.08% of average loans, excluding loans held for sale, in the second quarter of 2019. Net charge-offs in the second quarter of 2020 were attributable primarily to one commercial relationship to a personal services company that ceased business operations as a result of COVID-19.

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At June 30, 2020 the allowance for credit losses represented 1.36% of loans outstanding, as compared to 0.98% at December 31, 2019. The allowance for credit losses represented 185% of nonperforming loans at June 30, 2020, as compared to 151% at December 31, 2019. The higher coverage ratio was due to an increase in the allowance at June 30, 2020, substantially due to the implementation of CECL and the impact of COVID-19 on our expected future credit losses.

Total noninterest income for the three months ended June 30, 2020 increased to $12.5 million from $6.4 million for the three months ended June 30, 2019, a 96% increase. Service charges on deposits for the three months ended June 30, 2020 decreased to $942 thousand from $1.6 million for the three months ended June 30, 2019, a 41% decrease, due to lesser insufficient funds fees. Gain on sale of loans for the three months ended June 30, 2020 increased to $3.1 million from $1.9 million for the three months ended June 30, 2019, a 60% increase, due to higher gains on the sale of residential mortgage loans ($1.2 million). Other income for the three months ended June 30, 2020 increased to $6.9 million from $1.8 million for the three months ended June 30, 2019, a 277% increase, due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA loans ($2.5 million), $1.4 million higher small business investment company (“SBIC”) income related to a Community Reinvestment Act (“CRA”) qualified investment fund, $921 thousand higher swap fee income, and $591 thousand higher prepayment fees. Net investment gains on sale were $713 thousand for the three months ended June 30, 2020 compared to $563 thousand for the same period in 2019. Residential mortgage loans closed were $308 million for the second quarter of 2020 as compared to $152 million for the second quarter of 2019.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 37.18% for the second quarter of 2020, as compared to 38.04% for the second quarter of 2019. Noninterest expenses totaled $34.9 million for the three months ended June 30, 2020, as compared to $33.4 million for the three months ended June 30, 2019, a 5% increase.

Salaries and employee benefits were $17.1 million for the three months ended June 30, 2020, as compared to $17.7 million for the same period in 2019, a decrease of $639 thousand or 4%.

Data processing expenses were $2.8 million for the three months ended June 30, 2020 compared to $2.6 million for the same period in 2019, a 6% increase.

Legal, accounting and professional fees increased $1.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The reasons for the decrease in salaries and employee benefits and the increase in legal, accounting and professional fees for the periods noted above are discussed in the “Noninterest Expense” section.

FDIC expenses were $2.0 million for the three months ended June 30, 2020 compared to $1.1 million for the same period in 2019, a 76% increase, due to a higher assessment base resulting from growth in total assets.

Other expenses were $4.5 million for the three months ended June 30, 2020 compared to $4.2 million for the same period in 2019, a 6% increase, due primarily to $940 thousand higher other real estate owned ("OREO") expense offset by lower broker fees ($497 thousand).

Net income for the six months ended June 30, 2020 was $52.0 million compared to $71.0 million for the six months ended June 30, 2019, a 27% decrease. Net income per basic common share for the six months ended June 30, 2020 was $1.60 compared to $2.06 per basic common share for the same period in 2019, a 22% decrease. Net income per diluted common share for the six months ended June 30, 2020 was $1.60 compared to $2.05 per diluted common share for the same period in 2019, a 22% decrease.

Net income declined for the six months ended June 30, 2020 relative to the same period in 2019 due substantially to increased provisioning for credit losses offset by higher noninterest income (as discussed below). In particular, the provision for credit losses increased to $34.0 million for the six months ended June 30, 2020 compared to $7.0 million for the same period in 2019, a 389% increase, as the Company implemented CECL effective January 1, 2020 and increased reserves associated with the impact of COVID-19 through the second quarter of 2020. See Note 1 and Note 5 for further detail on CECL.

The provision for income taxes was $17.8 million for the six months ended June 30, 2020, a decrease of $7.6 million, or 30%, compared to the same period in 2019. The decrease was primarily due to a significant decline in pre-tax income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019. The decrease in the effective income tax rate was recorded in the second quarter of 2020 based on a reduced pre-tax income budget for the year due to increased credit reserves significantly attributable to COVID-19.

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Net interest income decreased by less than 1% for the six months ended June 30, 2020 over the same period in 2019 ($161.1 million as compared to $162.3 million). This was largely attributable to growth in average earning assets effectively offset by a decline in the net interest margin.

For the six months ended June 30, 2020, the Company reported an annualized ROAA of 1.06% as compared to 1.68% for the six months ended June 30, 2019. The annualized ROACE for the six months ended June 30, 2020 was 8.82% as compared to 12.47% for the six months ended June 30, 2019. The annualized ROATCE for the six months ended June 30, 2020 was 9.67% as compared to 13.73% for the six months ended June 30, 2019. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. The decline in these ratios was primarily due to the implementation of CECL and COVID-19 impacts and to a lower net interest margin.

The net interest margin was ~~positively impacted by one basis point in~~3.36% for the ~~three~~six months ended ~~September~~June 30, 2017 as a result of $214 thousand in amortization of the credit mark established in connection with the 2014 merger of Virginia Heritage Bank into EagleBank (the “Merger”). The net interest margin was positively impacted by two basis points in the three months ended September 30, 2016 as a result of $384 thousand in amortization of the credit mark adjustment from the Merger.

The net interest margin decreased 9 basis points from 4.23% for the nine months ended September 30, 2016 to 4.14% for the nine months ended September 30, 2017. Average earning asset yields were 4.72% for the nine months ended September 30, 20172020 and ~~4.65%~~3.97% for the same period in ~~2016.~~2019. Average earning asset yields decreased 100 basis points to 4.21% for the six months ended June 30, 2020, as compared to 5.21% for the same period in 2019. The average cost of interest bearing liabilities ~~increased~~decreased by 2870 basis points (to ~~0.93%~~1.31% from ~~0.65%)~~2.01)% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 as compared to the same period in ~~2016.~~2019. Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 2125 basis points for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 as compared to ~~2016 (3.79% versus 4.00%)~~2019 (2.90% as compared to 3.20)%.

The benefit of noninterest sources funding earning assets ~~increased~~decreased by 1231 basis points to 3546 basis points from 2377 basis points for the ~~nine~~six months ended ~~September~~June 30, ~~2017 versus~~2020 as compared to the same period in ~~2016.~~2019 due to significantly lower market interest rates. The combination of a 2130 basis point decrease in the net interest spread and a 1231 basis point ~~increase~~decrease in the value of noninterest sources resulted in ~~the 9~~a 61 basis point decrease in the net interest margin for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 as compared to the same period in ~~2016. The net~~2019. Despite currently having lesser value resulting from lower interest ~~margin was positively impacted by three basis points in~~rates, the ~~nine months ended September 30, 2017~~Company continues to consider the value of its noninterest sources of funds as ~~a result of $1.7 million in amortization of~~very significant to its business model and its overall profitability over the credit mark established in connection with the Merger. The net interest margin was positively impacted by two basis points in the nine months ended September 30, 2016 as a result of $1.1 million in amortization of the credit mark adjustment from the Merger.

longer term.

The Company believes it has effectively managed its ~~net interest margin and~~ net interest income over the past twelve months as market interest rates ~~(on average)~~ have ~~remained relatively low.~~trended sharply lower. This factor has been significant to overall earnings performance over the past twelve months as net interest income represents ~~91%~~87% of the ~~Company’s~~Company's total revenue for the ~~nine~~three months ended ~~September~~June 30, ~~2017.~~

2020.

For the first ~~nine~~six months ~~of 2017,~~ended June 30, 2020, total loans grew 7%6% over December 31, ~~2016,~~2019, and ~~averaged 11%~~average loans were 10% higher ~~for~~in the ~~nine~~first six months ~~ended September 30, 2017~~of 2020 as compared to the ~~same period in 2016. For the~~ first ~~nine~~six months of ~~2017,~~2019. At June 30, 2020, total deposits ~~increased 4% over~~were 10% higher than deposits at December 31, ~~2016, and averaged 9%~~2019, while average deposits were 17% higher for the ~~nine~~first six months ~~ended September 30, 2017~~of 2020 compared with the ~~same period in 2016.~~

first six months of 2019.

In order to fund growth in average loans of ~~11%~~10% over the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 as compared to the same period in ~~2016,~~2019, as well as sustain significant liquidity, the Company has relied on ~~both core deposit growth and wholesale deposits. The major component of the growth in core deposits has been growth in noninterest~~funding from interest bearing accounts primarily as a result of ~~effectively building new and enhanced client relationships.~~

inflows from certain financial intermediary relationships as their clients moved to a more significant cash position in light of COVID-19 concerns.

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, ~~were 87.0%~~represented 81% and 87% of average earning assets for the ~~nine~~first six months ~~ended September 30, 2017~~of 2020 and ~~87.2% for the same period in 2016.~~2019, respectively. For the ~~nine~~first six months ~~ended September 30, 2017,~~of 2020, as compared to the same period in ~~2016,~~2019, average loans, excluding loans held for sale, increased ~~$596.1~~$683.1 million, ~~an 11% increase. The increase in average loans for the nine months ended September 30, 2017 as compared to the same period in 2016 is~~or 10%, due primarily ~~attributable~~ to growth in income producing - commercial real estate, commercial and ~~industrial, and owner occupied – commercial real estate.~~PPP loans. Average investment securities for ~~both~~ the ~~nine month periods~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 amounted to 8%2% and 3% of average earning ~~assets.~~assets, respectively. The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale ~~averaged 5%~~represented 10% and 4% of average earning assets for ~~both~~ the first ~~nine~~six months of ~~2017~~2020 and ~~2016. On an average basis, the combination of federal funds sold, interest bearing deposits with other banks and loans held~~2019, respectively.

The provision for ~~sale increased $19.8~~credit losses was $34.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 as compared to $7.0 million for the six months ended June 30, 2019. The higher provisioning for the six months ended June 30, 2020, as compared to the same period in ~~2016.~~

The provision for credit losses was $1.9 million for the three months ended September 30, 2017 as compared to $2.3 million for the three months ended September 30, 2016. The lower provisioning in the third quarter of 2017, as compared to the third quarter of 2016,2019, is primarily due to ~~lower net charge-offs~~the implementation of CECL and ~~to overall improved asset quality.~~the impact of COVID-19 on our actual and expected future credit losses. Net charge-offs of ~~$2 thousand in~~$9.4 million for the ~~third quarter of 2017~~six months ended June 30, 2020 represented an annualized ~~0.00%~~0.24% of average loans, excluding loans held for sale, as compared to $2.0 million, or an annualized 0.14% of average loans, excluding loans held for sale, in the third quarter of 2016. Net charge-offs in the third quarter of 2017 were attributable primarily to net charge-offs in commercial and industrial loans ($114 thousand) offset by net recoveries in construction - commercial and residential ($106 thousand).

At September 30, 2017 the allowance for credit losses represented 1.03% of loans outstanding, as compared to 1.04% at both December 31, 2016 and September 30, 2016. The decrease in the allowance for credit losses as a percentage of total loans at September 30, 2017, as compared to September 30, 2016, is the result of continuing improvement in historical losses. The allowance for credit losses represented 379% of nonperforming loans at September 30, 2017, as compared to 330% at December 31, 2016, and 255% at September 30, 2016.

Total noninterest income for the three months ended September 30, 2017 increased to $6.8 million from $6.4 million for the three months ended September 30, 2016, a 6% increase, due substantially to income of $780 thousand on the origination, securitization, servicing and sale of FHA Multifamily-Backed GNMA securities in the third quarter of 2017, offset by lower sales of residential mortgage loans and the resulting gains on the sale of these loans (gain of $1.8 million for the third quarter of 2017 versus $2.9 million for the same period in 2016). There was no revenue related to FHA Multifamily-Backed GNMA securities in the third quarter of 2016. The portfolio sale of $37.0 million in residential mortgages out of the loan portfolio resulted in $168 thousand in revenue during the third quarter of 2017. There was no income related to portfolio sales of residential mortgages out of the loan portfolio during the third quarter of 2016. The sale of the guaranteed portion on SBA loans resulted in $390 thousand in revenue during the third quarter of 2017 compared to $101 thousand for the same period in 2016. Other loan income was $771 thousand for the third quarter of 2017 compared to $632 thousand for the same period in 2016. Residential mortgage loans closed were $135 million for the third quarter of 2017 versus $276 million for the third quarter of 2016. Excluding gains on sales of investment securities, noninterest income was $6.8 million in the third quarter of 2017 as compared to $6.4 million for the third quarter of 2016, an increase of 6%.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 37.49% for the third quarter of 2017, as compared to 40.54% for the third quarter of 2016. Noninterest expenses totaled $29.5 million for the three months ended September 30, 2017, as compared to $28.8 million for the three months ended September 30, 2016, a 2% increase. Legal, accounting, and professional fees increased by $469 thousand primarily due to general bank consulting projects. FDIC insurance premiums increased by $300 thousand primarily due to a larger assessment base. Salaries and benefits expenses decreased $225 thousand due primarily to a decrease in employee benefit costs due to the prior year acceleration of restricted stock awards, offset by merit increases.

The provision for credit losses was $4.9 million for the nine months ended September 30, 2017 as compared to $9.2 million for the nine months ended September 30, 2016. The lower provisioning in the first nine months of 2017, as compared to the first nine months of 2016, is due to a combination of lower net charge-offs, lower loan growth, as net loans increased $406.3 million during the first nine months of 2017, as compared to an increase of $483.6 million during the same period in 2016, and to overall improved asset quality. Net charge-offs of $991 thousand in the first nine months of 2017 represented an annualized 0.02% of average loans, excluding loans held for sale, as compared to $5.0$4.8 million, or an annualized 0.13% of average loans, excluding loans held for sale, in the first ~~nine~~six months of ~~2016.~~2019. Net charge-offs in the first ~~nine~~six months of ~~2017~~2020 were attributable ~~primarily~~ to commercial loans ($7.1 million) and commercial real estate ~~loans.~~loans ($2.3 million).

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Total noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2017 was $19.9~~2020 increased to $18.0 million ~~as compared to $20.3~~from $12.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, a ~~2% decrease. This was primarily~~42% increase. Service charges on deposits for the six months ended June 30, 2020 decreased to $2.4 million from $3.3 million for the six months ended June 30, 2019, a 28% decrease, due to ~~fewer sales~~lesser insufficient funds fees. Gain on sale of ~~SBA and residential mortgage~~ loans ~~resulting in~~for the six months ended June 30, 2020 increased to $4.0 million from $3.3 million for the six months ended June 30, 2019, a ~~$785 thousand and $939 thousand decreased gain~~22% increase, due to higher gains on the sale of ~~these~~residential mortgage loans ~~respectively,~~($718 thousand). Residential lending gains for the first six months of 2020 are net of $2.6 million in hedge and mark to market losses incurred during the first quarter of 2020 attributable to the Federal Reserve’s market actions negatively impacting mortgage backed securities pricing combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19 at the end of March. Other income for the six months ended June 30, 2020 increased to $8.8 million from $3.7 million for the six months ended June 30, 2019, a ~~$581 thousand decreased gain on sale of securities, offset by revenue~~137% increase due substantially to higher gains associated with the origination, securitization, ~~servicing,~~sale and ~~sale~~servicing of FHA ~~Multifamily-Backed GNMA securities of $1.5~~loans ($2.5 million), $1.4 million ~~and a $338 thousand increase in service charges on deposits~~. ~~The portfolio sale of $37.0 million in residential mortgages out of the loan portfolio resulted in $168 thousand in revenue during the nine months ended September 30, 2017. There was no~~higher SBIC income related to ~~portfolio sales~~a CRA qualified investment fund, $1.1 million higher swap fee income, and $380 thousand higher prepayment fees. Net investment gains were $1.5 million for both the six months ended June 30, 2020 and 2019. Residential mortgage loans closed were $501 million for the first six months of ~~residential mortgages out~~2020 as compared to $246 million for the first six months of 2019.

For the ~~loan portfolio~~first six months of 2020, the efficiency ratio was 40.34% as compared to 40.95% for the same period in ~~2016. Excluding investment securities net gains, total noninterest income was $19.3~~2019.

Noninterest expenses totaled $72.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, as compared to ~~$19.1~~$71.7 million for the six months ended June 30, 2019, a 1% increase. Noninterest expenses in 2020 periods increased slightly from the 2019 amounts primarily because of increased legal expenses. This increase was almost entirely offset by not having the nonrecurring costs related to the former CEO retirement that were present in the 2019 period.

Salaries and employee benefits were $34.9 million for the six months ended June 30, 2020, as compared to $41.4 million for the same period in ~~2016, a 1% increase.~~

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 38.86% for the nine months ended September 30, 2017 as compared to 40.32% for the same period in 2016. Noninterest expenses totaled $88.7 million for the nine months ended September 30, 2017, as compared to $85.2 million for the nine months ended September 30, 2016, a 4% increase. Cost increases for salaries and benefits were $1.3 million, due primarily to increased merit and incentive compensation, offset by2019, a decrease ~~in employee benefit costs due to the prior year acceleration~~ of restricted stock awards. Marketing and advertising increased by $322 thousand due to costs associated with digital and print advertising and sponsorships. Data processing increased by $341 thousand due primarily to increased vendor fees associated with higher volumes and rates.$6.5 million or 16%. Legal, accounting and professional fees increased ~~by $694 thousand primarily~~$6.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The reason for the decrease in salaries and employee benefits and increase in legal, accounting and professional fees for the periods noted above are further discussed in the “Noninterest Expense” section.

Data processing expenses were $5.3 million for the six months ended June 30, 2020 compared to $5.0 million for the same period in 2019, a 6% increase.

FDIC expenses were $3.4 million for the six months ended June 30, 2020 compared to $2.2 million for the same period in 2019, a 52% increase, due to ~~enhanced IT risk management and general bank consulting projects.~~ a higher assessment base resulting from growth in total assets.

Other expenses ~~increased $799~~were $8.2 million for the six months ended June 30, 2020 compared to $8.7 million over the same period ended June 30, 2019, a 5% decrease, due primarily to lower broker fees ($1.6 million) partially offset by $940 thousand ~~primarily due to~~ higher ~~broker fees.~~

other real estate owned (“OREO”) expense.

The ratio of common equity to total assets ~~increased~~decreased to ~~12.63%~~12.12% at ~~September~~June 30, ~~2017~~2020 from ~~12.06%~~13.25% at ~~September 30, 2016,~~December 31, 2019, due ~~primarily~~ to ~~an increase of $110.4~~total assets growing faster than common equity, including common equity reductions due to $44 million in ~~retained earnings.~~share repurchase activity, the approximately $11 million charge to common equity due to implementation of CECL on January 1, 2020, and COVID-19’s impact on our loan loss provisioning as discussed in the “Earnings Summary” above. As discussed later in “Capital Resources and Adequacy,” the regulatory capital ratios of the Bank and Company remain above well capitalized levels.

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 and investment securities. The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings. Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations). 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.

~~For~~Net interest income was $81.4 million for the three months ended ~~September~~June 30, ~~2017,~~2020 and $81.3 million for the same period in 2019. The lack of growth was primarily the result of lesser average yields on loans (4.63% as compared to 5.61%) effectively offset by growth in average earning assets of 21%. The addition of the PPP loans at an average yield of 2.91% for the quarter negatively impacted the overall yield of the total loan portfolio by approximately seven basis points.

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For the six months ended June 30, 2020, net interest income ~~increased 11% over the same period for 2016. Average~~decreased by $1.2 million, average loans increased by ~~$523.7~~$683.1 million, and average deposits increased by ~~$474.1 million.~~ $1.15 billion over the same period for 2019. The addition of the PPP loans at an average yield of 2.91% for the six months ended June 30, 2020 negatively impacted the overall yield of the total loan portfolio by approximately four basis points.

The net interest margin was ~~4.14%~~3.26% for the second quarter of 2020 and 3.91% for the second quarter of 2019. In the second quarter of 2020, as average U.S. Treasury rates in the two to five year range declined significantly by about 80-90 basis points and the average yield curve remained fairly flat, we experienced 23 basis points of net interest margin compression (from 3.49% to 3.26%) as compared to the first quarter of 2020. In addition, our cost of funds declined 65 basis points (from 1.30% to 0.65%), while the yield on earning assets declined by 130 basis points (from 5.21% to 3.91%). At June 30, 2020, the Bank had $456 million of outstanding PPP loans with an average rate of 1.00% and an average yield, which includes fee amortization, of 2.91% for the second quarter of 2020. The lower loan yield on these PPP loans negatively affected second quarter loan portfolio yields by seven basis points. Substantially higher average liquidity in the second quarter compared to the first quarter of 2020 contributed to the net interest margin compression as average deposit growth outweighed average loan growth. For the three months ended ~~September~~June 30, ~~2017, as compared to 4.11% for the same period in 2016. The Company believes its net interest margin remains favorable as compared to its peer banking companies.~~

~~For the nine months ended September 30, 2017, net interest income increased 9% over the same period for 2016. Average~~2020, average loans increased by ~~$596.1~~$754.9 million and average deposits increased by ~~$456.0 million.~~ $1.59 billion over the same period for 2019. Average liquidity for the second quarter was $1.1 billion as compared to $229 million for the second quarter of 2019. The yield on our substantial level of variable rate loans was negatively impacted by the much lower interest rate environment in the second quarter of 2020, including a 105 basis point decline in the average one-month LIBOR rate. A substantial portion of the variable rate loans portfolio has interest rate floors which cushioned the decline in loan yields.

The net interest margin was ~~4.14%~~3.36% for the ~~nine~~six months ended ~~September~~June 30, ~~2017, as compared to 4.23%~~2020 and 3.97% for the same period in ~~2016.~~ 2019.

The ~~Company believes its net~~low interest ~~margin remains favorable~~rate environment in the second quarter of 2020 reduced interest income on floating-rate commercial loans as ~~compared~~well as liquid assets and reduced depositor expectations concerning deposit rates. Because of the need to ~~its peer banking companies.~~

maintain higher levels of liquidity and delays in business investment activity due to COVID-19 disruptions, interest rates and margins can be expected to remain low. As business conditions adjust to the new operating environment, deposit competition is expected to be more of a factor in influencing deposit rates than it was in the period immediately following the COVID-19 outbreak.

The tables below ~~present~~presents the average balances and rates of the major categories of the Company’s assets and liabilities for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~2019. Included in the tables are ~~a measurement~~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 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 and~~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 June 30,

2020

2019


Average



Average

Average



Average


Balance

Interest

Yield/Rate

Balance

Interest

Yield/Rate

ASSETS













Interest earning assets:













Interest bearing deposits with other banks and other short-term investments

$
1,102,931

$
161

0.06
%
$
209,096

$
1,105

2.12
%
Loans held for sale (1)

80,227

686

3.42
%

34,760

349

4.02
%
Loans (1) (2)

8,015,751

92,242

4.63
%

7,260,899

101,540

5.61
%
Investment securities available for sale (2)

821,340

4,571

2.24
%

803,207

5,238

2.62
%
Federal funds sold

36,251

12

0.13
%

20,361

47

0.93
%
Total interest earning assets

10,056,500

97,672

3.91
%

8,328,323

108,279

5.21
%

Total noninterest earning assets

373,842



337,172





Less: allowance for credit losses

103,633



69,972





Total noninterest earning assets

270,209



267,200





TOTAL ASSETS

$
10,326,709



$
8,595,523





LIABILITIES AND SHAREHOLDERS’ EQUITY













Interest bearing liabilities:













Interest bearing transaction

$
801,508

$
530

0.27
%
$
705,628

$
1,197

0.68
%
Savings and money market

3,914,916

5,608

0.58
%

2,628,255

12,279

1.87
%
Time deposits

1,199,946

6,376

2.14
%

1,442,197

8,985

2.50
%
Total interest bearing deposits

5,916,370

12,514

0.85
%

4,776,080

22,461

1.89
%
Customer repurchase agreements

30,611

86

1.13
%

33,248

75

0.90
%
Other short-term borrowings

300,003

501

0.66
%

219,508

1,435

2.59
%
Long-term borrowings

267,849

3,208

4.74
%

217,458

2,979

5.42
%
Total interest bearing liabilities

6,514,833

16,309

1.01
%

5,246,294

26,950

2.06
%

Noninterest bearing liabilities:









Noninterest bearing demand

2,566,348



2,117,901





Other liabilities

66,076



64,841





Total noninterest bearing liabilities

2,632,424



2,182,742





Shareholders’ Equity

1,179,452



1,166,487





TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
10,326,709



$
8,595,523





Net interest income

$
81,363



$
81,329



Net interest spread

2.90
%



3.15
%
Net interest margin

3.26
%



3.91
%
Cost of funds

0.65
%



1.30
%
(1)Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $6.3 million and $4.7 million for the three months ended June 30, 2020 and 2019, respectively.
(2)Interest and fees on loans and investments exclude tax equivalent adjustments.

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Eagle Bancorp, Inc.

Consolidated Average Balances, Interest Yields and Rates (Unaudited)

Three Months Ended September 30,
2017 2016
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 $ 331,194 $ 991 1.19 % $ 338,521 $ 376 0.44 %
Loans held for sale (1) 37,146 350 3.77 % 66,791 586 3.51 %
Loans (1)(2) 5,946,411 77,826 5.19 % 5,422,677 69,283 5.08 %
Investment securities available for sale (2) 576,423 3,194 2.20 % 429,207 2,177 2.02 %
Federal funds sold 6,439 9 0.55 % 9,115 9 0.39 %
Total interest earning assets 6,897,613 82,370 4.74 % 6,266,311 72,431 4.60 %

Total noninterest earning assets 292,891 281,784
Less: allowance for credit losses 61,735 55,821
Total noninterest earning assets 231,156 225,963
TOTAL ASSETS $ 7,128,769 $ 6,492,274

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing transaction $ 406,923 $ 506 0.49 % $ 269,230 $ 193 0.29 %
Savings and money market 2,663,762 4,211 0.63 % 2,641,863 2,976 0.45 %
Time deposits 866,595 2,516 1.15 % 784,834 1,671 0.85 %
Total interest bearing deposits 3,937,280 7,233 0.73 % 3,695,927 4,840 0.52 %
Customer repurchase agreements 73,345 58 0.31 % 73,749 39 0.21 %
Other short-term borrowings 54,840 164 1.17 % 50,013 383 3.00 %
Long-term borrowings 216,774 2,979 5.38 % 176,321 2,441 5.42 %
Total interest bearing liabilities 4,282,239 10,434 0.97 % 3,996,010 7,703 0.77 %

Noninterest bearing liabilities:
Noninterest bearing demand 1,890,673 1,657,907
Other liabilities 34,364 28,384
Total noninterest bearing liabilities 1,925,037 1,686,291

Shareholders’ equity 921,493 809,973
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 7,128,769 $ 6,492,274

Net interest income $ 71,936 $ 64,728
Net interest spread 3.77 % 3.83 %
Net interest margin 4.14 % 4.11 %
Cost of funds 0.60 % 0.49 %
(dollars in thousands)

Six Months Ended June 30,

2020

2019


Average



Average

Average



Average


Balance

Interest

Yield/Rate

Balance

Interest

Yield/Rate

ASSETS













Interest earning assets:













Interest bearing deposits with other banks and other short-term investments

$
845,540

$
1,720

0.41
%
$
254,804

$
2,771

2.19
%
Loans held for sale (1)

59,488

1,040

3.50
%

26,386

550

4.17
%
Loans (1) (2)

7,833,372

188,643

4.84
%

7,150,300

199,160

5.62
%
Investment securities available-for-sale (2)

844,503

9,998

2.38
%

806,858

10,836

2.71
%
Federal funds sold

33,434

72

0.43
%

19,063

96

1.02
%
Total interest earning assets

9,616,337

201,473

4.21
%

8,257,411

213,413

5.21
%

Total noninterest earning assets

365,080



338,290





Less: allowance for credit losses

94,231



69,713





Total noninterest earning assets

270,849



268,577





TOTAL ASSETS

$
9,887,186



$
8,525,988





LIABILITIES AND SHAREHOLDERS’ EQUITY













Interest bearing liabilities:













Interest bearing transaction

$
803,321

$
2,196

0.55
%
$
648,557

$
2,378

0.74
%
Savings and money market

3,626,437

16,690

0.93
%

2,709,950

24,242

1.80
%
Time deposits

1,243,628

14,174

2.29
%

1,386,876

16,741

2.43
%
Total interest bearing deposits

5,673,386

33,060

1.17
%

4,745,383

43,361

1.84
%
Customer repurchase agreements

30,310

173

1.15
%

30,536

173

1.14
%
Other short-term borrowings

260,030

858

0.65
%

120,832

1,575

2.59
%
Long-term borrowings

251,866

6,275

4.93
%

217,408

5,958

5.45
%
Total interest bearing liabilities

6,215,592

40,366

1.31
%

5,114,159

51,067

2.01
%

Noninterest bearing liabilities:









Noninterest bearing demand

2,416,355



2,195,084





Other liabilities

69,923



68,963





Total noninterest bearing liabilities

2,486,278



2,264,047





Shareholders’ equity

1,185,316



1,147,782





TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
9,887,186



$
8,525,988





Net interest income

$
161,107



$
162,346



Net interest spread

2.90
%



3.20
%
Net interest margin

3.36
%



3.97
%
Cost of funds

0.85
%



1.24
%
(1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled ~~$4.7~~$10.7 million and ~~$4.1~~$8.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively.
(2) Interest and fees on loans and investments exclude tax equivalent adjustments.

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~~Eagle Bancorp, Inc.~~

~~Consolidated Average Balances, Interest Yields and Rates (Unaudited)~~

~~(dollars in thousands)~~

Nine Months Ended September 30,
2017 2016
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 $ 290,366 $ 2,084 0.96 % $ 254,348 $ 856 0.45 %
Loans held for sale (1) 34,925 1,020 3.89 % 47,786 1,288 3.59 %
Loans (1)(2) 5,849,832 225,523 5.15 % 5,253,742 200,714 5.10 %
Investment securities available for sale (2) 541,378 8,854 2.19 % 462,408 7,121 2.06 %
Federal funds sold 6,163 27 0.59 % 9,550 31 0.43 %
Total interest earning assets 6,722,664 237,508 4.72 % 6,027,834 210,010 4.65 %

Total noninterest earning assets 292,700 280,220
Less: allowance for credit losses 60,416 55,187
Total noninterest earning assets 232,284 225,033
TOTAL ASSETS $ 6,954,948 $ 6,252,867

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing transaction $ 366,521 $ 1,081 0.39 % $ 234,481 $ 445 0.25 %
Savings and money market 2,677,777 12,171 0.61 % 2,656,638 8,324 0.42 %
Time deposits 795,884 6,214 1.04 % 764,099 4,744 0.83 %
Total interest bearing deposits 3,840,182 19,466 0.68 % 3,655,218 13,513 0.49 %
Customer repurchase agreements 70,702 136 0.26 % 71,973 115 0.21 %
Other short-term borrowings 58,797 441 0.99 % 38,873 727 2.46 %
Long-term borrowings 216,675 8,937 5.44 % 105,005 4,515 5.65 %
Total interest bearing liabilities 4,186,356 28,980 0.93 % 3,871,069 18,870 0.65 %

Noninterest bearing liabilities:
Noninterest bearing demand 1,841,645 1,570,586
Other liabilities 36,130 27,713
Total noninterest bearing liabilities 1,877,775 1,598,299

Shareholders’ equity 890,817 783,499
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 6,954,948 $ 6,252,867

Net interest income $ 208,528 $ 191,140
Net interest spread 3.79 % 4.00 %
Net interest margin 4.14 % 4.23 %
Cost of funds 0.58 % 0.42 %
~~(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 $11.7 million for the nine months ended September 30, 2017 and 2016, respectively.
~~(2)~~ ~~Interest and fees on loans and investments exclude tax equivalent adjustments.~~

Provision for Credit Losses
The provision for credit losses represents the amount of expense charged to current earnings to fund the ~~allowance~~ACL on loans and the ACL on available for ~~credit losses.~~sale investment securities. The amount of the allowance for credit losses on loans is based on many factors which reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.
The provision for unfunded commitments is presented separately on the Statement of Operations. This provision considers the probability that unfunded commitments will fund.
Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory ~~agencies.~~ agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. Refer to additional detail regarding these forecasts in the “Discounted Cash Flow Method" section of Note 1 to the Consolidated Financial Statements.
The results of this process, in combination with conclusions of the Bank’s outside consultants’ review of the risk inherent in the loan ~~review consultant,~~portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under ~~the caption~~ “Critical Accounting Policies” above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table aton page ~~60,~~57 which reflects activity in the allowance for credit losses.
During the three months ended ~~September~~June 30, ~~2017,~~2020, the ~~allowance for credit losses increased $1.9 million, reflecting $1.9~~ACL on loans reflected $19.6 million in provision for credit losses attributable to the ACL for loans and ~~$2 thousand~~$7.1 million in net charge-offs, which were attributable primarily to one commercial relationship to a personal services company that ceased business operations as a result of COVID-19. The provision for credit losses on loans was $19.6 million for the three months ended June 30, 2020 as compared to $3.6 million for the same period in 2019. Net charge-offs of $7.1 million in the second quarter of 2020 represented an annualized 0.36% of average loans, excluding loans held for sale, as compared to $1.5 million, or an annualized 0.08% of average loans, excluding loans held for sale, in the second quarter of 2019.
During the six months ended June 30, 2020, the ACL on loans reflected $33.9 million in provision for credit losses attributable to the ACL for loans, a day one CECL impact of $10.6 million charged to retained earnings, and $9.4 million in net charge-offs during the period. The provision for credit losses on loans was ~~$1.9~~$33.9 million for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2020 as compared to ~~$2.3~~$7.0 million for the same period in ~~2016. The lower provisioning in the third quarter of 2017, as compared to the third quarter of 2016, is primarily due to lower net charge-offs and to overall improved asset quality.~~2019. Net charge-offs of ~~$2 thousand~~$9.4 million in the ~~third quarter~~first six months of ~~2017~~2020 represented an annualized ~~0.00%~~0.24% of average loans, excluding loans held for sale, as compared to ~~$2.0 million, or an annualized 0.14% of average loans, excluding loans held for sale, in the third quarter of 2016.~~
During the nine months ended September 30, 2017, the allowance for credit losses increased $3.9 million, reflecting $4.9 million in provision for credit losses and $991 thousand in net charge-offs during the period. The provision for credit losses was $4.9 million for the nine months ended September 30, 2017 as compared to $9.2 million for the nine months ended September 30, 2016. The lower provisioning in the first nine months of 2017, as compared to the first nine months of 2016, is due to a combination of lower net-charge-offs, lower loan growth, as net loans increased $406.3 million during the first nine months of 2017, as compared to an increase of $483.6 million during the same period in 2016, and to overall improved asset quality. Net charge-offs of $991 thousand in the first nine months of 2017 represented an annualized 0.02% of average loans, excluding loans held for sale, as compared to $5.0$4.8 million, or an annualized 0.13% of average loans, excluding loans held for sale, in the first ~~nine~~six months of ~~2016.~~
2019.
As part of its comprehensive loan review process, ~~the Bank’s Board of Directors~~internal loan and ~~Loan Committee or Credit Review Committee~~credit committees carefully evaluate loans which are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves.
The maintenance of a high quality loan portfolio, with an adequate allowance for ~~possible~~ credit losses, will continue to be a primary management objective for the Company.

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The following table sets forth activity in the allowance for credit losses for the periods ~~indicated.~~indicated (unaudited).

	Nine Months Ended September 30,


							Six Months Ended June 30,
(dollars in thousands)	2017			2016			2020			2019
Balance at beginning of period	$	59,074		$	52,687
Balance at beginning of period, prior to adoption of CECL							$	73,658		$	69,944
Impact of adopting CECL								10,614
Charge-offs:
Commercial		659			2,802			7,145			5
Income producing - commercial real estate		1,470			2,342			550			5,343
Owner occupied - commercial real estate		—			—			—			—
Real estate mortgage - residential		—			—			—			—
Construction - commercial and residential		39			—			1,768			—
Construction - C&I (owner occupied)		—			—			—			—
Home equity		—			217			—			—
Other consumer		98			37			—			2
Total charge-offs		2,266			5,398			9,463			5,350


Recoveries:
Commercial		675			93			74			167
Income producing - commercial real estate		80			14			—			302
Owner occupied - commercial real estate		2			2			—			2
Real estate mortgage - residential		5			5			—			3
Construction - commercial and residential		491			207			—			37
Construction - C&I (owner occupied)		—			—			—			—
Home equity		4			11			—			—
Other consumer		18			24			4			21
Total recoveries		1,275			356			78			532
Net charge-offs		991			5,042			9,385			4,818
Provision for Credit Losses		4,884			9,219
Provision for Credit Losses- Loans								33,909			6,960
Balance at end of period	$	62,967		$	56,864		$	108,796		$	72,086


Annualized ratio of net charge-offs during the period to average loans outstanding during the period		0.02	%		0.13	%		0.24	%		0.13	%

The following table reflects the allocation of the allowance for credit losses at the dates indicated. 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. Balances as of June 30, 2020 are calculated under CECL whereas balances as of December 31, 2019 are calculated under GAAP applicable at that time, the incurred loss model.

September 30, 2017 December 31, 2016 September 30, 2016
(dollars in thousands) Amount % (1) Amount % (1) Amount % (1)
Commercial $ 11,844 20 % $ 14,700 21 % $ 12,761 21 %
Income producing - commercial real estate 22,375 48 % 21,105 44 % 20,509 46 %
Owner occupied - commercial real estate 5,462 12 % 4,010 12 % 4,261 11 %
Real estate mortgage - residential 957 2 % 1,284 3 % 1,110 3 %
Construction - commercial and residential 19,686 15 % 15,002 16 % 14,681 15 %
Construction - C&I (owner occupied) 1,200 1 % 1,485 2 % 1,833 2 %
Home equity 1,097 2 % 1,328 2 % 1,369 2 %
Other consumer 346 — 160 — 340 —
Total allowance $ 62,967 100 % $ 59,074 100 % $ 56,864 100 %


June 30, 2020

December 31, 2019

(dollars in thousands)

Amount

% (1)

Amount

% (1)

Commercial

$
28,078

20
%
$
18,169

20
%
PPP loans

—

6
%

—

—

Income producing - commercial real estate

51,863

46
%

28,527

50
%
Owner occupied - commercial real estate

12,341

12
%

5,598

13
%
Real estate mortgage - residential

1,550

1
%

1,352

1
%
Construction - commercial and residential

11,410

12
%

17,739

14
%
Construction - C&I (owner occupied)

2,398

2
%

1,533

1
%
Home equity

1,112

1
%

575

1
%
Other consumer

44

—

227

—

Total allowance

$
108,796

100
%
$
73,720

100
%
(1)Represents the percent of loans in each category to total loans.

57

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For the three months ended June 30, 2020, after the initial adjustment to the allowance for credit losses on loans as of January 1, 2020, we further increased the allowance for credit losses on loans by $19.6 million and $33.9 million, respectively.

Nonperforming Assets

As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, and nonaccrual loans, which includes the nonperforming portion of TDRs and OREO, totaled ~~$18.0~~$67.2 million at ~~September~~June 30, ~~2017~~2020 representing ~~0.24%~~0.69% of total assets, as compared to ~~$20.6~~$50.2 million of nonperforming assets, or ~~0.30%~~0.56% of total assets, at December 31, ~~2016 and $27.5 million of nonperforming assets, or 0.41% of total assets, at September 30, 2016.~~ 2019.

The Company had no accruing loans 90 days or more past due at ~~September~~June 30, ~~2017, December 31, 2016 or September 30, 2016.~~2020. Management remains attentive to early signs of deterioration in borrowers’ financial conditions and to taking the appropriate action to mitigate risk. Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at ~~1.03%~~1.36% of total loans at ~~September~~June 30, ~~2017,~~2020, is adequate to absorb ~~potential~~expected credit losses within the loan portfolio at that date.

The updated standard allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation. This can occur due to credit deterioration, increased collateral dependency or other factors leading to impairment. In particular, the Company individually evaluates loans on non-accrual and those identified as TDRs, 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.

~~Included~~Under the incurred loss methodology that the Company applied as of December 31, 2019 included in nonperforming assets ~~are~~were loans that the Company ~~considers~~considered to be impaired. Impaired loans ~~are~~were defined as those as to which we ~~believe~~believed it is probable that we ~~will~~would not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms ~~have~~had been modified in a TDR that ~~have~~had not shown a period of performance as required under applicable accounting standards. Valuation allowances for those loans determined to be impaired ~~are~~were evaluated in accordance with ASC Topic 310—”“Receivables,” and updated quarterly. For collateral dependent impaired loans, the carrying amount of the loan iswas determined by current appraised value less estimated costs to sell the underlying collateral, which may behave been adjusted downward under certain circumstances for actual events and/or changes in market conditions. For example, current average actual selling prices less average actual closing costs on an impaired multi-unit real estate project may ~~indicate~~have indicated the need for an adjustment in the appraised valuation of the project, which in turn could increase the associated ASC Topic 310 specific reserve for the loan. Generally, all appraisals associated with impaired loans ~~are~~were updated on a not less than annual basis.

Loans are considered to have been modified in a TDR when, due to a ~~borrower’s~~borrower's financial difficulties, the Company makes unilateral concessions to the borrower that it would not otherwise consider. Concessions could include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. 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. Such modifications are not considered to be TDRs, as the accommodation of a ~~borrower’s~~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. The ~~most common change in terms provided by the Company is an extension of an interest only term. The~~ determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the change in terms, and the exercise of prudent business judgment. The Company had thirteen ~~TDR’s~~TDRs at ~~September~~June 30, ~~2017~~2020 totaling approximately ~~$13.2~~$20.3 million. ~~Nine~~Ten of these loans totaling approximately $12.3 million are performing under their modified terms. ~~During~~For the ~~nine~~first six months of ~~2017,~~2020 and 2019, there was one ~~default~~performing TDR loan totaling $5.5 million and one performing TDR loan totaling $2.3 million, respectively, that defaulted on ~~a $237 thousand restructured loan which was charged off, as compared to the same period in 2016, which had one default on a $5.0 million restructured loan.~~its modified terms. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. There were two nonperforming TDRs totaling $588 thousand reclassified to nonperforming loans during the nine months ended September 30, 2017. There was one nonperforming TDR totaling $5.0 million reclassified to nonperforming loans during the nine months ended September 30, 2016. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further

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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. ~~There were two loans totaling $251 thousand modified in a TDR during~~For both the three months ended ~~September~~June 30, ~~2017, as compared to the three months ended September 30, 2016 which had one loan totaling $801 thousand~~2020 and 2019, there were no loans modified in a TDR.

There is uncertainty regarding the region’s overall economic outlook given lack of clarity over how long COVID-19 will continue to impact our region. Management has been working with customers on payment deferrals to assist companies in managing through this crisis. These deferrals amounted to 708 notes and $1.63 billion at June 30, 2020 (approximately 20% of total loans). Through July 31, 2020, we granted approximately 724 temporary modifications representing approximately $1.65 billion in outstanding exposure, including 20 temporary modifications representing $14.5 million that subsequently returned to pre-modification terms. Some of these deferrals may not have met the criteria for treatment under U.S. GAAP as TDRs. Additionally, none of the deferrals are reflected in the Company’s asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term loan modifications as TDRs. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board. Other loan portfolio areas of concern and additional COVID-19 loan related matters are discussed below.

Total nonperforming loans amounted to ~~$16.6~~$59.0 million at ~~September~~June 30, ~~2017 (0.27%~~2020 (0.74% of total loans), compared to ~~$17.9~~$48.7 million at December 31, ~~2016 (0.31%~~2019 (0.65% of total loans) ~~and $22.3 million at September 30, 2016 (0.41% of total loans)~~. ~~The decrease in the ratio of nonperforming loans to total loans at September 30, 2017 as compared to September 30, 2016 was due to a decrease in the level of nonperforming loans.~~

Included in nonperforming assets at ~~September~~June 30, ~~2017~~2020 was ~~$1.4~~$8.2 million of OREO consisting of ~~one~~five foreclosed ~~property.~~ properties. This compared to $1.5 million of OREO, consisting of three foreclosed properties at December 31, 2019. The increase was due to foreclosures involving two ultra high-end residential properties located in Washington, D.C. The Company is continuing to see softness in the market for ultra high-end residential properties. This is particularly true in light of COVID-19 and the related limitations in marketing residential properties.

The Company had ~~three~~one foreclosed ~~properties~~property with a net carrying value of ~~$2.7~~$1.4 million at ~~December 31, 2016 and three foreclosed properties with a net carrying value of $5.2 million at September~~June 30, ~~2016.~~2019. OREO properties are carried at fair value less estimated costs to sell. It is the ~~Company’s~~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 where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. ~~During~~There were no sales of OREO property during the first ~~nine~~six months of ~~2017, three foreclosed properties with a net carrying value~~2020 and 2019.

Table of $2.5 million were sold for a net loss of $301 thousand. The decrease in OREO for the nine months ended September 30, 2017, as compared to the same period in 2016 is due to the sale of two OREO properties.Contents

The following table shows the amounts of nonperforming assets at the dates ~~indicated.~~indicated (unaudited for June 30, 2020).

September 30, December 31,
(dollars in thousands) 2017 2016 2016
Nonaccrual Loans:
Commercial $ 3,242 $ 2,986 $ 2,521
Income producing - commercial real estate 880 10,098 10,508
Owner occupied - commercial real estate 6,570 2,103 2,093
Real estate mortgage - residential 301 562 555
Construction - commercial and residential 4,930 6,412 2,072
Construction - C&I (owner occupied) — — —
Home equity 594 113 —
Other consumer 92 — 126
Accrual loans-past due 90 days — — —
Total nonperforming loans (1) 16,609 22,274 17,875
Other real estate owned 1,394 5,194 2,694
Total nonperforming assets $ 18,003 $ 27,468 $ 20,569

Coverage ratio, allowance for credit losses to total nonperforming loans 379.11 % 255.29 % 330.49 %
Ratio of nonperforming loans to total loans 0.27 % 0.41 % 0.31 %
Ratio of nonperforming assets to total assets 0.24 % 0.41 % 0.30 %

June 30,

December 31,

(dollars in thousands)

2020


2019

Nonaccrual Loans:





Commercial

$
16,721

$
14,928

Income producing - commercial real estate

17,278

9,711

Owner occupied - commercial real estate

10,755

6,463

Real estate mortgage - residential

8,217

5,631

Construction - commercial and residential

5,385

11,509

Construction - C&I (owner occupied)

—

—

Home equity

600

487

Loans held for sale

—

—

Other consumer

6

—

Accrual loans-past due 90 days

—

—

Total nonperforming loans (1)

58,962

48,729

Other real estate owned

8,237

1,487

Total nonperforming assets

$
67,199

$
50,216

Coverage ratio, allowance for credit losses to total nonperforming loans

184.52
%

151.16
%
Ratio of nonperforming loans to total loans

0.74
%

0.65
%
Ratio of nonperforming assets to total assets

0.69
%

0.56
%
(1)
~~(1)~~
Nonaccrual loans reported in the table above include ~~loans~~one loan totaling $5.5 million that migrated from a performing ~~troubled debt restructuring. There were two loans totaling $588 thousand that migrated from performing TDRs~~TDR during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016 where~~2019 when there was one loan totaling ~~$5.0~~$2.3 million that migrated from a performing TDR.
Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio.
At ~~September~~June 30, ~~2017,~~2020, there were ~~$18.8~~$16.0 million of performing loans considered potential problem loans, defined as loans that are not included in the 90 ~~day~~days past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. ~~The $18.8 million in potential~~Potential problem loans decreased to $16.0 million at ~~September~~June 30, ~~2017 compared to $16.9~~2020 from $20.0 million at December 31, ~~2016, and $8.7 million at September 30, 2016.~~2019. The Company has taken a conservative posture with respect to risk rating its loan portfolio. Based upon their status as potential problem loans, these loans 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. See “Provision for Credit Losses” for a description of the allowance methodology.

Noninterest Income
Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, ~~loan servicing income,~~ income from ~~BOLI~~bank owned life insurance (“BOLI”) and other income.
Total noninterest income for the three months ended ~~September~~June 30, ~~2017~~2020 increased to ~~$6.8~~$12.5 million from $6.4 million for the three months ended ~~September~~June 30, ~~2016,~~2019, a 6% increase, due substantially to income of $780 thousand on the origination, securitization, servicing and sale of FHA Multifamily-Backed GNMA securities in the third quarter of 2017, offset by lower sales of residential mortgage loans and the resulting gains on the sale of these loans (gain of $1.8 million for the third quarter of 2017 versus $2.9 million for the same period in 2016). There was no income related to FHA Multifamily-Backed GNMA securities in the third quarter of 2016. The portfolio sale of $37.0 million in residential mortgages out of the loan portfolio resulted in $168 thousand in revenue during the third quarter of 2017. There was no income related to portfolio sales of residential mortgages out of the loan portfolio during the third quarter of 2016. The sale of the guaranteed portion on SBA loans resulted in $390 thousand in revenue during the third quarter of 2017 compared to $101 thousand for the same period in 2016. Other loan income was $771 thousand for the third quarter of 2017 compared to $632 thousand for the same period in 2016. Residential mortgage loans closed were $135 million for the third quarter in 2017 versus $276 million for the third quarter of 2016. Excluding gains on sales of investment securities, noninterest income was $6.8 million in the third quarter of 2017 as compared to $6.4 million for the third quarter of 2016, an increase of 6%.
Total noninterest income for the nine months ended September 30, 2017 was $19.9 million as compared to $20.3 million for the nine months ended September 30, 2016, a 2% decrease. This was primarily due to fewer sales of SBA and residential mortgage loans resulting in a $785 thousand and $939 thousand decreased gain on the sale of these loans, respectively, and a $581 thousand decreased gain on sale of securities, offset by revenue associated with the origination, securitization, servicing, and sale of FHA Multifamily-Backed GNMA securities of $1.5 million and a $338 thousand increase in service charges on deposits. The portfolio sale of $37.0 million in residential mortgages out of the loan portfolio resulted in $168 thousand in revenue during the nine months ended September 30, 2017. There was no revenue related to portfolio sales of residential mortgages out of the loan portfolio for the same period of 2016. Excluding investment securities net gains, total noninterest income was $19.3 million for the nine months ended September 30, 2017, as compared to $19.1 million for the same period in 2016, a 1%96% increase.
Service charges on ~~deposit accounts increased by $195~~deposits for the three months ended June 30, 2020 decreased to $942 thousand ~~or 14%,~~ from ~~$1.4~~$1.6 million for the three months ended ~~September~~June 30, ~~2016~~2019, a 41% decrease, due to ~~$1.6~~lesser insufficient funds fees. Gain on sale of loans for the three months ended June 30, 2020 increased to $3.1 million from $1.9 million for the ~~same period in 2017. Service charges on deposit accounts increased by $338 thousand, or 8%, from $4.3 million for the nine~~three months ended ~~September~~June 30, ~~2016~~2019, a 60% increase, due to ~~$4.6 million for~~higher gains on the ~~same period in 2017. The increase for the three and nine month periods was primarily related to increased transaction volume.~~
~~The Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts” forward loan~~ sale ~~commitments to sell those loans, servicing released. Sales~~ of residential mortgage loans ~~yielded gains~~($1.2 million). Residential mortgage loans closed were $308 million for the second quarter of 2020 as compared to $152 million for the second quarter of 2019. Other income for the three months ended June 30, 2020 increased to $6.9 million from $1.8 million for the three months ended ~~September~~June 30, ~~2017 compared~~2019, a 277% increase, due substantially to ~~$2.9 million in the same period in 2016. Sales of residential mortgage loans yielded~~higher gains of $6.1 million for the nine months ended September 30, 2017 compared to $7.1 million in the same period in 2016. Loans sold are subject to repurchase in circumstances where documentation is deficient or the underlying loan becomes delinquent or pays off within a specified period following loan funding and sale. The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under generally accepted accounting principles for possible repurchases. There were no repurchases due to fraud by the borrower during the three months ended September 30, 2017. The reserve amounted to $95 thousand as of September 30, 2017 and is included in other liabilities on the Consolidated Balance Sheets. The Bank does not originate “sub-prime” loans and has no exposure to this market segment.
The Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium. Income from this source was $390 thousand and $626 thousand for the three and nine months ended September 30, 2017 compared to $101 thousand and $1.4 million for the three and nine month period in 2016. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter.
~~Net investment gains were $542 thousand for the nine months ended September 30, 2017 compared to $1.1 million for the same period in 2016.~~

~~Other income totaled $2.6 million for the three months ended September 30, 2017 as compared to $1.6 million for the same period in 2016, an increase of 66% due primarily to revenue~~ associated with the origination, securitization, ~~servicing~~sale and ~~sale~~servicing of FHA ~~Multifamily-Backed Ginnie Mae securities of $780~~loans ($2.5 million), $1.4 million higher small business investment company (“SBIC”) income related to a Community Reinvestment Act (“CRA”) qualified investment fund, $921 thousand higher swap fee income, and $591 thousand higher prepayment fees. Net investment gains ~~of $168 thousand~~ on ~~the portfolio~~ sale ~~of $37.0 million in residential mortgages out of the loan portfolio, and an increase in other loan income of $139 thousand. ATM fees decreased to $350~~were $713 thousand for the three months ended ~~September~~June 30, ~~2017 from $376~~2020 compared to $563 thousand for the same period in ~~2016, a 7% decrease. Noninterest loan fees~~2019.

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Total noninterest income for the six months ended June 30, 2020 increased to ~~$771 thousand for the three months ended September 30, 2017~~$18.0 million from ~~$632 thousand for the same period in 2016, a 22% increase. Noninterest fee income totaled $1.3~~$12.7 million for the ~~three~~six months ended ~~September~~June 30, ~~2017 an increase of $967 thousand, or 255%, over the balance~~2019, a 42% increase. Service charges on deposits for the ~~same period in 2016 primarily~~six months ended June 30, 2020 decreased to $2.4 million from $3.3 million for the six months ended June 30, 2019, a 28% decrease, due to ~~revenue~~lesser insufficient funds fees. Gain on sale of loans for the six months ended June 30, 2020 increased to $4.0 million from $3.3 million for the six months ended June 30, 2019, a 22% increase, due to higher gains on the sale of residential mortgage loans ($718 thousand). Residential mortgage loans closed were $501 million for the first six months of 2020 as compared to $246 million for the first six months of 2019. Residential lending gains for the first six months of 2020 include $2.6 million in hedge and mark to market losses incurred during the first quarter of 2020 attributable to the Federal Reserve’s market actions negatively impacting mortgage backed securities pricing combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19 at the end of March. Other income for the six months ended June 30, 2020 increased to $8.8 million from $3.7 million for the six months ended June 30, 2019, a 137% increase due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA ~~Multifamily-Backed Ginnie Mae securities of $779 thousand.~~

~~Other~~loans ($2.5 million), $1.4 million higher SBIC income ~~totaled $6.8~~related to a CRA qualified investment fund, $1.1 million for the nine months ended September 30, 2017 as compared to $5.2 million for the same period in 2016, an increase of 31% due primarily to revenue associated with the sale of FHA Multifamily-Backed Ginnie Mae securities ofhigher swap fee income, and $380 thousand higher prepayment fees. Net investment gains were $1.5 ~~million. ATM fees were $1.1~~ million for both the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and 2016, a decrease of $48 thousand or 4%. Noninterest loan fees increased to $2.4 million for the nine months ended September 30, 2017 from $2.1 million for the same period in 2016, a 14% increase. Noninterest fee income totaled $3.0 million for the nine months ended September 30, 2017 an increase of $1.9 million, or 178%, over the balance for the same period in 2016 primarily due to revenue associated with the sale of FHA loans of $1.5 million and higher investment income received on Small Business Investment Company investments during the first nine months of 2017 over the same period in 2016.

2019.

Servicing agreements relating to the Ginnie Mae mortgage-backed securities program require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. The Company will generally recover funds advanced pursuant to these arrangements under the FHA insurance and guarantee program. However, in the ~~meantime,~~interim, the Company must absorb the cost of the funds it advances during the time the advance is outstanding. The Company must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan. At ~~September~~June 30, ~~2017,~~2020, the Company had no funds advanced outstanding under FHA mortgage loan servicing agreements. To the extent the mortgage loans underlying the Company’s servicing portfolio experience delinquencies, the Company would be required to dedicate cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

The Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to sell those loans, servicing released. Loans sold are subject to repurchase in circumstances where documentation is deficient, the underlying loan becomes delinquent, or there is fraud by the borrower. Loans sold are subject to penalty if the loan pays off within a specified period following loan funding and sale. The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under GAAP for possible repurchases. There were no repurchases due to fraud by the borrower during the three months ended June 30, 2020. The reserve amounted to $150 thousand at June 30, 2020 and is included in other liabilities on the Consolidated Balance Sheets.

Beyond the participation in the PPP program, the Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium. There was no income from this source for the three months ended June 30, 2020 compared to $16 thousand for the same period in 2019. Income from this source was $119 thousand for the six months ended June 30, 2020 compared to $124 thousand for the same period in 2019. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter. Refer to page 10 for details regarding the Company’s participation in the PPP program.

Noninterest Expense

Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional, FDIC insurance, and other expenses.

Total noninterest expenses totaled ~~$29.5~~$34.9 million for the three months ended ~~September~~June 30, ~~2017,~~2020, as compared to ~~$28.8~~$33.4 million for the three months ended ~~September~~June 30, ~~2016.~~2019, a 5% increase due substantially to higher legal fees as discussed below. Total noninterest expenses totaled ~~$88.7~~$72.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, as compared to ~~$85.2~~$71.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~

2019, a 1% increase. Noninterest expenses in 2020 periods increased slightly from the 2019 amounts primarily because of increased legal expenses. This increase was almost entirely offset by not having the nonrecurring costs related to the former CEO retirement that were present in the 2019 period.

Salaries and employee benefits were ~~$16.9~~$17.1 million for the three months ended ~~September~~June 30, ~~2017,~~2020, as compared to ~~$17.1~~$17.7 million for the same period in ~~2016,~~2019, a ~~1% decrease. Salaries and benefits cost decreases for the three month period were~~decrease of $639 thousand or 4%. The decrease was primarily due ~~primarily~~ to a ~~decrease in employee benefit costs due~~lower accrual for incentive bonuses and the release of a portion of an accrual related to the ~~prior year acceleration~~charges for share based compensation awards for our former CEO and Chairman in the second quarter of ~~restricted stock awards,~~2020. The decrease was partially offset by ~~merit increases.~~higher salaries and increased headcount in the second quarter of

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2020. Salaries and employee benefits were ~~$50.5~~$34.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, as compared to ~~$49.2~~$41.4 million for the same period in ~~2016, a 3% increase. Salaries and benefits cost increases for the nine month period were due primarily to increased merit and incentive compensation, offset by~~2019, a decrease ~~in employee benefit costs~~of $6.5 million or 16%. The decrease was primarily due to the ~~prior year acceleration~~$6.2 million of ~~restricted stock awards.~~ largely nonrecurring charges accrued in the first quarter of 2019 related to share based compensation awards and the resignation of our former CEO and Chairman in March 2019, as well as a lower accrual for incentive bonuses and the release of a portion of an accrual related to the charges for share based compensation awards for our former CEO and Chairman in the first half of 2020. The decrease was partially offset by higher salaries and increased headcount in the first half of 2020.

At ~~September~~June 30, ~~2017,~~2020, the Company’s full time equivalent staff numbered ~~471,~~506 as compared to ~~469~~492 at December 31, ~~2016~~2019, and ~~464~~496 at ~~September~~June 30, ~~2016.~~

2019.

Premises and equipment expenses amounted to ~~$3.8~~$3.5 million and $3.7 million for the three ~~month periods~~months ended ~~September~~June 30, ~~2017~~2020 and 2016, an increase of $60 thousand, or 2%. Premises and equipment expenses amounted to $11.6 million for the nine month period ended September 30, 2017 and $11.4 million for the same period in 2016, an increase of 2%.2019, respectively, a 5% decrease. For the three ~~and nine~~ months ended ~~September~~June 30, ~~2017,~~2020, the Company recognized ~~$143 thousand and $365~~$120 thousand of sublease revenue as compared to $126 thousand ~~and $424~~for the same period in 2019. For the six months ended June 30, 2020, the Company recognized $224 thousand of sublease revenue as compared to $256 thousand for the same ~~periods~~period in ~~2016. The sublease~~2019. Sublease revenue is accounted for as a reduction to premises and equipment expenses.

Marketing and advertising ~~expense decreased to $732 thousand~~expenses totaled $1.1 million for the three months ended ~~September~~June 30, ~~2017 from $857 thousand~~2020 and $1.3 million for the same period in ~~2016, a decrease of 15%, primarily due to reduced digital and print advertising spend.~~2019. Marketing and advertising expenses totaled $2.2 million for the six months ended June 30, 2020 and $2.4 million for the same period in 2019.

Data processing expense increased to ~~$2.9~~$2.8 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2020 from $2.6 million for the same period in ~~2016,~~2019, a ~~13% increase, primarily due~~6% increase. Data processing expense increased to ~~costs associated with expanded digital and print advertising and sponsorships.~~

$5.3 million for the six months ended June 30, 2020 from $5.0 million for the same period in 2019, a 6% increase.

Legal, accounting and professional fees increased to $1.2 million for the three months ended ~~September~~June 30, ~~2017 from $771 thousand in~~2020 compared to the ~~same period in 2016, a 61% increase.~~three months ended June 30, 2019. Legal fees and expenditures of $2.5 million for the second quarter of 2020 were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit. Legal, accounting and professional fees increased ~~to $3.5~~$6.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017 from $2.8~~2020 compared to the six months ended June 30, 2019. Legal fees and expenditures of $7.1 million infor the ~~same period in 2016, a 24% increase.~~first six months of 2020 were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit. The ~~increase in expense~~amount of legal fees and expenditures for the three and six month ~~period was primarily due~~periods ended June 30, 2020 are net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to ~~general bank consulting projects. The increase~~our D&O insurance policies, but do not include any offset for potential claims we may have in ~~expense for~~ the ~~nine month period was primarily due~~future as to ~~enhanced IT risk management and general bank consulting projects.~~

which recovery is impossible to predict at this time.

FDIC expenses ~~increased to $929 thousand~~were $2.0 million for the three months ended ~~September~~June 30, ~~2017 from $629 thousand~~2020 compared to $1.1 million for the same period in ~~2016.~~2019, a 76% increase. FDIC expenses ~~decreased to $2.1~~were $3.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017 from~~2020 compared to $2.2 million for the same period in ~~2016.~~2019, 52% increase. The increase for the three months ended September 30, 2017 was due to a larger assessment base. The decrease for the nine months ended September 30, 2017 was due to a change in the FDIC insurance premium formula for small institutions effective July 1, 2016, offsetting the effect of a larger assessment base.

~~Other expenses amounted to $3.8 million~~increases for both the three and six months ~~ended September 30, 2017 and 2016, an increase of 2%.~~ periods in 2020 compared to the same periods in 2019 were due to a higher assessment base resulting from growth in total assets.

The major components of ~~cost in this category~~other expenses include broker fees, franchise taxes, core deposit intangible amortization and insurance ~~expenses.~~expense. Other expenses ~~amounted~~increased to ~~$12.2~~$4.5 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017 compared to $11.4~~2020 from $4.2 million for the same period in ~~2016, an~~2019, a 6% increase, ~~of 7%,~~ due primarily to ~~an increase in~~$940 thousand higher other real estate owned (“OREO”) expense offset by lower broker fees ~~of $983 thousand.~~

($497 thousand). Other expenses decreased to $8.2 million for the six months ended June 30, 2020 from $8.7 million for the same period June 30, 2019, a 5% decrease, due primarily to lower broker fees ($1.6 million) partially offset by $940 thousand higher OREO expense.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was ~~37.49%~~37.18% for the ~~third~~second quarter of ~~2017,~~2020, as compared to ~~40.54%~~38.04% for the ~~third~~second quarter of ~~2016.~~ 2019. For the first six months of 2020, the efficiency ratio was 40.34% as compared to 40.95% for the same period in 2019.

As a percentage of average assets, total noninterest expense (annualized) ~~improved to 1.66%~~was 1.35% for the three months ended ~~September~~June 30, ~~2017~~2020 as compared to ~~1.78%~~1.55% for the same period in ~~2016.~~2019. As a percentage of average assets, total noninterest expense (annualized) ~~improved to 2.55%~~was 1.46% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 as compared to ~~2.73%~~1.68% for the same period in ~~2016. Cost control remains a significant operating objective~~2019.

Table of ~~the Company.~~Contents

Income Tax Expense

The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) ~~improved~~for the second quarter of 2020 was 24.6% as compared to ~~36.8%~~26.6% for the second quarter of 2019. The decrease in the effective income tax rate largely relates to a significant decline in pre-tax income for the three months ended ~~September~~June 30, ~~2017 as~~2020 compared to ~~38.7% for~~ the ~~same period in 2016. The Company’s effective tax rate decreased to 37.2% for the nine~~three months ended ~~September~~June 30, ~~2017 as compared~~2019 due to ~~38.4%~~increased credit reserves significantly attributable to COVID-19, and a decrease in disallowed compensation deductions for ~~the same period~~key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in ~~2016.~~ March 2019.

The ~~lower~~ effective income tax rate for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2020 was ~~due primarily~~25.5% as compared to ~~tax credit investments~~26.3% for the six months ended June 30, 2019. The decrease in the ~~third~~effective income tax rate largely relates to a significant decline in pre-tax income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019. The decrease in the effective income tax rate was recorded in the second quarter of ~~2017 and~~2020 based on a ~~lower state tax apportionment factor in the current year. The lower effective tax rate~~reduced pre-tax income budget for the ~~nine months ended September 30, 2017, was~~year due to ~~tax~~increased credit investments, a lower state income tax apportionment factor, and the adoption of the new accounting guidance for share-based transactions. That guidance requires that all excess tax benefits and tax deficiencies associated with share-based compensation be recognized as income tax expense or benefits in the income statement. Previously, tax effects resulting from changes in the Company’s stock price subsequentreserves significantly attributable to the grant date were recorded directly to shareholders’ equity at the time of vesting or exercise. The adoption of this new standard (ASU 2016-09) resulted in a net $460 thousand, or $0.01 per basic common share, reduction to income tax expense for the nine months ended September 30, 2017.COVID-19.

FINANCIAL CONDITION

Summary

Total assets at ~~September~~June 30, ~~2017~~2020 were ~~$7.39~~$9.80 billion, a 9% increase as compared to ~~$6.76 billion at September 30, 2016, and a 7% increase as compared to $6.89~~$8.99 billion at December 31, ~~2016.~~2019. Total loans (excluding loans held for sale) were ~~$6.08~~$8.02 billion at ~~September~~June 30, ~~2017, an 11%~~2020, a 6% increase as compared to ~~$5.48 billion at September 30, 2016, and a 7% increase as compared to $5.68~~$7.55 billion at December 31, ~~2016.~~2019. Loans held for sale amounted to ~~$26.0~~$68.4 million at ~~September~~June 30, ~~2017 as compared to $78.1 million at September 30, 2016, a 67% decrease,~~2020 and ~~$51.6~~$56.7 million at December 31, ~~2016,~~2019, a ~~50% decrease.~~21% increase. The investment portfolio totaled ~~$556.0~~$772.4 million at ~~September~~June 30, ~~2017, a 29% increase from the $430.7 million balance at September 30, 2016.~~2020. As compared to December 31, ~~2016,~~2019, the investment portfolio at ~~September~~June 30, ~~2017 increased~~2020 decreased by ~~$17.9~~$71.0 million, or 3%8%.

Total deposits at ~~September~~June 30, ~~2017~~2020 were ~~$5.91~~$7.94 billion, a 10% increase compared to deposits of ~~$5.56 billion at September 30, 2016, a 6% increase, and deposits of $5.72~~$7.22 billion at December 31, 2016, a 4% increase. Total borrowed funds (excluding customer repurchase agreements) were $416.8 million at September 30, 2017, $266.4 million at September 30, 2016, and $216.5 million at December 31, 2016.2019. We continue to work on expanding the breadth and depth of our existing relationships while we pursue building new relationships.

~~On July 26, 2016, the Company completed the sale of $150.0~~ Total borrowed funds (excluding customer repurchase agreements) were $567.9 million ~~of its 5.00% Fixed-to-Floating Rate Subordinated Notes, due August 1, 2026.~~

~~During the third quarter of 2017, $200.0~~at June 30, 2020, as compared to $467.7 million in FHLB advances were borrowed as part of the overall asset liability strategy and to support loan growth. These advances remained outstanding as of September 30, 2017, $100.0 million of these advances will mature in October 2017 and the remaining $100.0 million will mature in March 2018.

at December 31, 2019.

Total shareholders’ equity was $1.19 billion at ~~September~~both June 30, ~~2017 increased 15%,~~2020 and December 31, 2019. During the six months ended June 30, 2020, growth in retained earnings, $11.7 million in unrealized gains on AFS securities, and $2.8 million in additional paid in capital attributable to ~~$934.0~~share based compensation, were effectively offset by $44 million in stock repurchases, dividends declared of $14.2 million, and the day one CECL entry of $10.9 million net of taxes.

The Company’s capital ratios remain substantially in excess of regulatory minimum and buffer requirements, with a total risk based capital ratio of 16.26% at June 30, 2020, as compared to ~~$815.6 million at September 30, 2016, and increased 11% from $842.8 million~~16.20% at December 31, ~~2016. The increase in shareholders’~~2019, both common equity tier 1 (“CET1”) risk based capital and tier 1 risk based capital ratios of 12.80% at ~~September~~June 30, ~~2017~~2020, as compared to ~~the same period in 2016 was primarily the result~~12.87% at December 31, 2019, and a tier 1 leverage ratio of ~~retained earnings.~~10.63% at June 30, 2020, as compared to 11.62% at December 31, 2019. The ratio of common equity to total assets was ~~12.63%~~12.12% at ~~September~~June 30, ~~2017,~~2020, as compared to ~~12.06% at September 30, 2016 and 12.23%~~13.25% at December 31, ~~2016. The Company’s capital position remains substantially in excess of regulatory requirements for well capitalized status, with~~2019. Book value per share was $36.86 at June 30, 2020, a ~~total risk based capital ratio of 15.30% at September 30, 2017, as compared to 15.05% at September 30, 2016, and 14.89%~~3% increase over $35.82 at December 31, ~~2016.~~2019. In addition, the tangible common equity ratio was ~~11.35%~~11.17% at ~~September~~June 30, ~~2017,~~2020, as compared to ~~10.64% at September 30, 2016 and 10.84%~~12.22% at December 31, ~~2016.~~2019. Tangible book value per share was $33.62 at June 30, 2020, a 3% increase over $32.67 at December 31, 2019. Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.

While the Company’s capital position remains above regulatory well capitalized levels, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19, the Board decided to place the Company’s remaining authorization to repurchase shares on hold during the first quarter of 2020. Accordingly, no shares were repurchased during the second quarter of 2020. The Board of Directors and Management continue to monitor this area and may enter the markets from time to time as determined appropriate.

~~Effective January 1, 2015,~~Under the capital rules applicable to the Company ~~Bank,~~ and all other banks of similar size became subject to capital requirements. These requirements created a new required ratio for common equity Tier 1 (“CETI”) capital, increased the leverage and Tier 1 capital ratios, changed the risk weight of certain assets for purposes of the risk-based capital ratios, created an additional capital conservation buffer over the required capital ratios and changed what qualifies as capital for purposes of meeting these various capital requirements. Under these standards,Bank, in order to be considered well-capitalized, the Bank must have a ~~CETI~~CET1 risk based capital ratio of 6.5% ~~(new)~~, a Tier 1 risk-based ratio of 8.0% ~~(increased from 6.0%)~~, a total risk-based capital ratio of 10.0% ~~(unchanged)~~ and a leverage ratio of 5.0% ~~(unchanged)~~. The Company and the Bank meet all these requirements ~~including~~and satisfy the ~~full~~requirement to maintain the capital conservation ~~buffer. Beginning in 2016, failure~~buffer

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of 2.5% of CET1 capital for capital adequacy purposes. 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.

Loans, net of amortized deferred fees and costs, at ~~September~~June 30, ~~2017,~~2020 (unaudited) and December 31, ~~2016 and September 30, 2016~~2019 by major category are summarized ~~by type as follows:~~below.

September 30, 2017 December 31, 2016 September 30, 2016
(dollars in thousands) Amount % Amount % Amount %
Commercial $ 1,244,184 20 % $ 1,200,728 21 % $ 1,130,042 21 %
Income producing - commercial real estate 2,898,948 48 % 2,509,517 44 % 2,551,186 46 %
Owner occupied - commercial real estate 749,580 12 % 640,870 12 % 590,427 11 %
Real estate mortgage - residential 109,460 2 % 152,748 3 % 154,439 3 %
Construction - commercial and residential * 915,493 15 % 932,531 16 % 838,137 15 %
Construction - C&I (owner occupied) 55,828 1 % 126,038 2 % 104,676 2 %
Home equity 101,898 2 % 105,096 2 % 106,856 2 %
Other consumer 8,813 — 10,365 — 6,212 —
Total loans 6,084,204 100 % 5,677,893 100 % 5,481,975 100 %
Less: allowance for credit losses (62,967 ) (59,074 ) (56,864 )
Net loans $ 6,021,237 $ 5,618,819 $ 5,425,111

*Includes land loans.

June 30, 2020

December 31, 2019

(dollars in thousands)

Amount

%

Amount

%

Commercial

$
1,607,056

20
%
$
1,545,906

20
%
PPP loans

456,476

6
%

—

—

Income producing - commercial real estate

3,678,946

46
%

3,702,747

50
%
Owner occupied - commercial real estate

964,077

12
%

985,409

13
%
Real estate mortgage - residential

93,601

1
%

104,221

1
%
Construction - commercial and residential

995,550

12
%

1,035,754

14
%
Construction - C&I (owner occupied)

149,845

2
%

89,490

1
%
Home equity

74,921

1
%

80,061

1
%
Other consumer

1,289

—

2,160

—

Total loans

8,021,761

100
%

7,545,748

100
%
Less: allowance for credit losses

(108,796)



(73,658)



Net loans

$
7,912,965
(1)


$
7,472,090



(1) Excludes accrued interest receivable of $36.2 million and $21.3 million at June 30, 2020 and December 31, 2019, respectively, which is recorded in other assets.
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 reached ~~$6.08~~$8.02 billion at ~~September~~June 30, ~~2017,~~2020, an increase of ~~$602.2~~$476.0 million, or ~~11%~~6%, as compared to ~~$5.48 billion at September 30, 2016, and an increase of $406.3 million, or 7%, as compared to $5.68~~$7.55 billion at December 31, ~~2016. The loan~~2019. Loan growth during the ~~nine~~six months ended ~~September~~June 30, ~~2017 over the same period in 2016~~2020 was predominantly in ~~the income producing - commercial real estate, owner occupied - commercial real estate, and commercial and industrial categories.~~PPP loans. Despite ~~an increased~~a continued level of in-market competition for business, the Bank continued to experience ~~strong~~ organic loan ~~growth across the portfolio. Multi-family~~production and modest portfolio growth. Notwithstanding increased supply of units, multi-family commercial real estate leasing in the Bank’s market area has held up well, particularly for well-located close-in projects. While as a general comment there has been some softening in the Suburban Maryland office leasing market, in certain well located pockets and submarkets, the sector has evidenced some positive absorption. Overall, commercial real estate values have generally held up well with price escalation in prime ~~pockets. The~~pockets, but we continue to be cautious of the cap rates at which some assets are trading and we are being careful with valuations as a result. While the ultra high-end real estate market has softened, the moderately priced housing market has remained stable to increasing, with well-located, Metro accessible properties garnering a premium. However, the potential impact from COVID-19 has not yet been fully reflected in the market. Please refer to the COVID-19 risk factors in Item 1A below.
Loan Portfolio Exposures- COVID-19:
~~Owner occupied - commercial real estate~~Industry areas of potential concern within the Loan Portfolio are presented below as of June 30, 2020 (unaudited):

Principal Balance

% of Loan

Industry

(in 000’s)

Portfolio

Accommodation & Food Services

$
840,961
¹

10.5
%
Retail Trade

106,544
²

1.3
%

¹ Includes $82,154 of PPP loans.
² Includes $13,498 of PPP loans.
Concerns over exposures to the Accommodation and ~~construction - C&I (owner occupied) represent 13%~~Food Service industry and retail are the most immediate at this time. Accommodation and Food Service exposure represents 10.5% of the Bank’s loan portfolio as of June 30, 2020 among 485 customers. Retail trade exposure represents 1.3% of the Bank’s loan portfolio. The Bank has ~~a large portion~~ongoing extensive outreach to these customers and is

Table of ~~its loan portfolio related~~Contents

assisting where necessary with PPP loans and payment deferrals or interest only periods in the short term while customers work with the Bank to ~~real estate, with 76% consisting~~develop longer term stabilization strategies as the landscape of ~~commercial real estate~~the COVID-19 pandemic evolves. The uncertain duration and ~~real estate construction loans. When owner occupied - commercial real estate~~severity of the pandemic will likely impact future credit challenges in these areas.

The table below is collateral driven and ~~construction - C&I (owner occupied) is excluded, the percentage of total~~shows exposures on loans ~~represented~~secured by commercial real estate ~~decreases to 63%~~(“CRE”) by property type as of June 30, 2020 (unaudited). ~~Real estate also serves as collateral for~~This table excludes loans ~~made for other purposes, resulting~~disclosed in ~~85%~~the industry table above.

Principal Balance

% of Loan

Property Type

(in 000’s)

Portfolio

Restaurant

$
31,364

0.4
%
Hotel

35,815

0.4
%
Retail

405,918

5.1
%

Although not evidenced at June 30, 2020, it is anticipated that some portion of ~~all~~the CRE loans ~~being~~ secured by ~~real estate.~~the above property types could be impacted by the tenancies associated with impacted industries. The Bank is working with CRE investor borrowers and monitoring rent collections as part of our portfolio management process.
Deposits and Other Borrowings
The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, ~~and~~ savings ~~accounts. Additionally, the Bank obtains~~accounts and certificates of ~~deposits from the local market areas surrounding the Bank’s offices.~~deposit. The deposit base includes transaction accounts, time and savings ~~accounts and~~ accounts, which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the ~~FHLB,~~Federal Home Loan Banks (the “FHLB”), federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and Promontory Interfinancial Network, LLC (“Promontory”).
For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, noninterest bearing deposits increased ~~$67.5~~$351.7 million as compared to December 31, ~~2016,~~2019, while interest bearing deposits increased by ~~$130.4~~$359.9 million during the same period. ~~Average total deposits for the first nine months of 2017 were $5.68 billion, as compared to $5.23 billion for the same period in 2016, a 9% increase.~~

From time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from ~~a regional brokerage firm, and other~~ national brokerage networks, including Promontory. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service ~~(“CDARS”~~(the “CDARS”) and the Insured Cash Sweep product (“ICS”), which ~~provides~~provide for reciprocal (“two-way”) transactions among banks facilitated by Promontory for the purpose of maximizing FDIC insurance. These reciprocal CDARS and ICS funds are classified as brokered deposits, although the federal banking agencies have recognized that these reciprocal deposits have many characteristics of core deposits and therefore provide for separate identification of such deposits in the quarterly Call Report data. The Bank also is able to obtain ~~one way~~one-way CDARS deposits and participates in Promontory’s Insured Network Deposit (“IND”). At ~~September~~June 30, ~~2017,~~2020, total deposits included ~~$883.5 million~~$1.79 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented ~~15%~~23% of total deposits. At December 31, ~~2016,~~2019, total brokered deposits (excluding the CDARS and ICS two-way) were ~~$676.7 million,~~$1.80 billion, or ~~12%~~25% of total deposits. The CDARS and ICS two-way component represented ~~$493.4~~$489.7 million, or 8%6%, of total deposits and ~~$432.1~~$502.9 million, or 8%7%, of total deposits at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank. However, to the extent that the condition, regulatory position or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits. In that event, we would be required to obtain alternate sources for funding.
At ~~September~~June 30, ~~2017~~2020, the Company had ~~$1.84~~$2.42 billion in noninterest bearing demand deposits, representing ~~32%~~30% of total deposits, compared to ~~$1.78~~$2.06 billion of noninterest bearing demand deposits at December 31, ~~2016,~~2019, or ~~31%~~29% of total deposits. ~~These deposits are primarily business checking accounts on which the payment of interest was prohibited by regulations~~A portion of the ~~Federal Reserve prior to July 2011. Since July 2011, banks are not prohibited from paying interest on~~growth in noninterest bearing demand deposits ~~account, including those from businesses. To date, the Bank has elected not to pay interest on business checking accounts, nor is the payment of such interest a prevalent practice~~ in the ~~Bank’s market area~~second quarter was the result of funding PPP loans into operating accounts at ~~present.~~the Bank. Average noninterest bearing deposits were 30% of total deposits for the first six months of 2020 and 32% for the first six months of 2019. The Bank ~~is prepared~~also offers business NOW accounts and business savings accounts to ~~evaluate options~~accommodate those customers who may have excess short term cash to deploy in ~~this area should competition intensify for these deposits, which is not occurring at this time. Payment of~~ interest on these deposits could have a significant negative impact on the Company’s net interest income and net interest margin, net income, and the return on assets and equity, although no such effect is currently anticipated.
earning assets.
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 ~~$73.6~~$31.2 million at ~~September~~June 30, ~~2017~~2020 compared to ~~$68.9~~$31.0 million at December 31, ~~2016.~~2019. Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized

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by U.S. agency securities and/or U.S. agency backed mortgage backed securities. 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.

At June 30, 2020 the Company had $1.15 billion in time deposits. Time deposits decreased by $129.5 million from year end December 31, 2019. The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered CDs to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning.

The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016. The Bank~~2019. At June 30, 2020, the Company had ~~$200.0~~$300.0 million ~~in short-term borrowings outstanding under its credit facility from~~of FHLB advances borrowed as part of the ~~FHLB at September 30, 2017. There were no borrowings outstanding under its credit facility from the FHLB~~overall asset liability strategy and to support loan growth, as compared to $250 million at December 31, ~~2016.~~2019. Outstanding FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank’s commercial mortgage, residential mortgage and home equity loan portfolios.

Long-term borrowings outstanding at ~~September~~June 30, ~~2017~~2020 included the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024, and the Company’s July 26, 2016 issuance of $150.0 million of subordinated notes, due August 1, 2026. At June 30, 2020, the Company had $50 million of FHLB long-term advances borrowed as part of the overall asset liability strategy and to support loan growth. For additional information on the subordinated notes, please refer to ~~“Capital Resources and Adequacy” below.~~Note 9 to the Consolidated Financial Statements included in this report.

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. The Bank’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. These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial. ~~The Company’s secondary sources of liquidity include~~Additionally, the ~~ability to~~Bank can purchase up to ~~$137.5~~$172.5 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at ~~September~~June 30, ~~2017,~~2020, and ~~access to borrow~~can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of ~~$1.11~~$1.47 billion, against which there was ~~$176.9~~$2.1 million outstanding at ~~September~~June 30, ~~2017.~~2020. The Bank also has a commitment from Promontory to place up to ~~$700.0~~$700 million of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of ~~$291.1~~$565 million at ~~September~~June 30, ~~2017.~~2020. At ~~September~~June 30, ~~2017~~2020, the Bank was also eligible to make advances from the FHLB up to ~~$1.27~~$1.88 billion based on collateral at the FHLB, of which there was ~~$200.0~~$300 million outstanding at ~~September~~June 30, ~~2017.~~2020. The Bank may enter into repurchase agreements as well as obtain additional borrowing capabilities from the FHLB, provided adequate collateral exists to secure these lending relationships. The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank of Richmond (“Federal Reserve Bank”). This facility, which amounts to approximately ~~$485.0~~$660 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only.

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 was founded under a philosophy of relationship banking and, therefore, believes that it has less of an exposure to disintermediation and resultant liquidity concerns than do many banks. The Bank makes competitive deposit interest rate comparisons weekly and feels its interest rate offerings are competitive. There is, however, a risk that some deposits would be lost if rates were 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. 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 of the ~~Bank’s~~Bank (the “ALCO”) and the full Board of Directors ~~(“ALCO”) has~~of the Bank have adopted policy guidelines which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan. Additionally, as noted above, if the condition, regulatory treatment or reputation of the Company or Bank deteriorates, we

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may experience an outflow of brokered deposits as a result of our inability to attract them or to accept or renew them. In that event, we would be required to obtain alternate sources for funding.

Our primary and secondary sources of liquidity remain strong. Average deposits increased 10% for the second quarter of 2020 as compared to the first quarter of 2020. We maintain a very liquid investment portfolio, including significant overnight liquidity. Average short term liquidity was $1.14 billion in second quarter of 2020, which is above EagleBank’s average needs. Secondary sources of liquidity amount to $3.4 billion.

At ~~September~~June 30, ~~2017,~~2020, under the Bank’s liquidity formula, it had ~~$3.78~~$5.24 billion of primary and secondary liquidity sources. The amount is deemed adequate to meet current and projected funding needs.

Commitments and Contractual Obligations

Loan commitments outstanding and lines and letters of credit at ~~September~~June 30, ~~2017~~2020 are as ~~follows:~~follows (unaudited):

(dollars in thousands)

Unfunded loan commitments

$
2,208,726
Unfunded lines of credit

90,704
Letters of credit

59,455
Total

$
2,358,885
(dollars in thousands) September 30, 2017
Unfunded loan commitments $ 2,447,076
Unfunded lines of credit 93,334
Letters of credit 70,767
Total $ 2,611,177

Unfunded loan commitments are agreements whereby the Bank has made a commitment and the borrower has accepted the commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract. 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. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. ~~Unfunded~~As of June 30, 2020, unfunded loan commitments ~~of $66.1~~included $253.9 million ~~as of September 30, 2017 were~~ related to interest rate lock commitments on residential mortgage loans and were of a short-term nature.

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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.
The pipeline of loan commitments remains strong. The Bank did see additional draws on committed lines of credit during the second half of the first quarter which were largely paid back down in the second quarter.
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.
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 net income 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 the full Board of Directors and through review of detailed reports discussed ~~monthly.~~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 ~~re-pricing~~repricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives.

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During the ~~quarter~~six months ended ~~September~~June 30, ~~2017,~~2020, as compared to the same ~~three months~~period in ~~2016,~~2019, the Company was able to ~~increase its net interest income (by 11%),~~ produce a net interest ~~spread~~margin of ~~3.77%~~3.36% as compared to 3.97%, ~~which was six basis points lower than the 3.83% for the same quarter in 2016,~~ and continue 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. In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and ~~prepayment~~ risk in its portfolio of mortgage backed securities should interest rates remain at current levels. Further, the Company has been managing the investment portfolio to ~~mitigate extension risk~~provide liquidity and ~~related declines in market values in that same portfolio should interest rates increase.~~some additional yield over cash. Additionally, the Company has limited call risk in its U.S. agency investment portfolio. During the three months ended ~~September~~June 30, ~~2017,~~2020, the average investment portfolio balances increased by $12 million, or 1.6%, as compared to ~~balances at September~~average balance for the three months ended June 30, ~~2016.~~2019. The cash received from deposit growth ~~and borrowings~~ along with cash flows ~~off of~~from the investment portfolio were deployed into loans, ~~and~~ the purchase of ~~additional investments.~~

replacement investments and held in cash.

The percentage mix of municipal securities was ~~11%~~12% of total investments at ~~September~~June 30, ~~2017~~2020 and ~~23%~~9% at ~~September~~June 30, ~~2016, the~~2019. The portion of the portfolio invested in mortgage backed securities ~~decreased to 54%~~was 68% at ~~September~~June 30, ~~2017 from 60%~~2020 and 59% at ~~September~~June 30, ~~2016.~~2019. The portion of the portfolio invested in U.S. agency investments was ~~24%~~7% at ~~September~~June 30, ~~2017~~2020 and ~~13%~~20% at ~~September~~June 30, ~~2016.~~2019. Shorter duration floating rate ~~SBA bonds and~~ corporate bonds were ~~11%~~4% of total investments at ~~September~~June 30, ~~2017~~2020 and 5%1% at ~~September~~June 30, ~~2016. Despite the rolling forward~~2019, and SBA bonds, which are included in mortgage backed securities, were 9% and 10% of ~~the investment portfolio~~total investments at June 30, 2020 and ~~the changing mix through the purchase of shorter duration instruments (inclusive of shorter U.S. agency investments), the~~June 30, 2019, respectively. The duration of the investment portfolio ~~was 3.5~~remained relatively consistent at 3.1 years at ~~September~~June 30, ~~2017 and 3.4~~2020 from 3.0 years at ~~September~~June 30, ~~2016, owing to slower prepayment speeds on mortgage back securities, but those cash flows still position the Company well for expected increases in market interest rates.~~

2019.

The re-pricing duration of the loan portfolio was ~~fairly stable at 22~~18 months at ~~September~~June 30, ~~2017 versus 23~~2020 as compared to 19 months at ~~September~~June 30, ~~2016,~~2020, with fixed rate loans amounting to ~~34%~~44% of total loans at ~~both September~~June 30, ~~2017~~2020 and ~~2016.~~39% at June 30, 2019. Variable and adjustable rate loans comprised ~~66%~~56% (offset by 3% from the dilution impact of PPP loans) and 61% of total loans at both ~~September~~June 30, ~~2017~~2020 and ~~September 30, 2016.~~2019, respectively. Variable rate loans are generally indexed to either the one month LIBOR interest rate, or the Wall Street Journal prime interest rate, while adjustable rate loans are ~~generally~~ indexed primarily to the five year U.S. Treasury interest rate.

The duration of the deposit portfolio ~~decreased~~increased to 2039 months at ~~September~~June 30, ~~2017~~2020 from 2833 months at ~~September 30, 2016.~~March 31, 2020. The ~~change~~increase since ~~September 30, 2016~~March was due substantially to a change in the deposit mix and the duration of money market ~~deposits.~~

accounts as deposit competition waned with rates at all-time lows.

The Company has continued its emphasis on funding loans in its marketplace, ~~and has been able to achieve favorable loan pricing, including interest rate floors on many loan originations,~~ although competition for new loans ~~persists.~~has diminished. A disciplined approach to loan pricing, ~~together~~ with ~~loan floors existing in 61%~~variable and adjustable rate loans comprising 56% of total loans ~~(at September~~(offset by 3% from the dilution impact of PPP loans) at June 30, ~~2017),~~2020, has resulted in a loan portfolio yield of ~~5.19%~~4.84% for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2020 as compared to ~~5.08%~~5.62% for the same period in ~~2016. Subject to interest rate floors, variable~~2019. Variable and adjustable rate loans provide additional income opportunities should interest rates rise from current levels.

The net unrealized ~~loss~~gain before income tax on the investment portfolio was ~~$1.7~~$21.8 million at ~~September~~June 30, ~~2017~~2020 as compared to a net unrealized gain before tax of ~~$7.4~~$20.1 million at ~~September 30, 2016.~~March 31, 2019. The increase in the net unrealized ~~loss~~gain on the investment portfolio was due primarily to lower interest rates at ~~September~~June 30, ~~2017 as compared to~~2020. At June 30, 2020, the net unrealized gain at September 30, 2016 was due primarily to the higher interest rates at September 30, 2017 and the sale of more valuable municipal bonds in the first quarter of 2017. At September 30, 2017, the net unrealized loss position represented ~~0.3%~~3.0% of the investment portfolio’s book value.

There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, as a result of competitive pressures, customer preferences and the inability to perfectly forecast future interest rates and movements.

One of the tools used by the Company to manage its interest rate risk is a static ~~GAP~~gap analysis presented below. The Company also employs an earnings simulation model 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, and the level of noninterest income and noninterest expense. The data is then subjected to a “shock test” which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from ~~September~~June 30, ~~2017.~~2020. In addition to analysis of simultaneous changes in interest rates along the yield curve, changes based on interest rate “ramps” is also performed. This analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes.

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For the analysis presented below, at ~~September~~June 30 ~~2017,~~, 2020, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor of 10 basis points in the same analysis as of March 31, 2020), and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.

The floor rate in the analysis was lowered due to the fact that in the current interest rate environment, there are interest bearing accounts with current rates less than 10 basis points.

As quantified in the table below, the Company’s analysis at ~~September~~June 30, ~~2017~~2020 shows a ~~change in~~moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points. This moderate impact is due substantially to the significant level of variable rate and ~~re-priceable~~repriceable assets and liabilities and related shorter relative durations. The ~~re-pricing~~repricing duration of the investment portfolio at ~~September~~June 30, ~~2017~~2020 is ~~3.5~~3.1 years, the loan portfolio ~~1.8~~1.5 years, the interest bearing deposit portfolio ~~1.7~~3.3 years, and the borrowed funds portfolio ~~2.4~~6.3 years.

The following table reflects the result of simulation analysis on the ~~September~~June 30, ~~2017~~2020 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 +21.8% +40.8% +10.6%
+300 +16.2% +30.3% +7.4%
+200 +10.7% +20.0% +4.8%
+100 +5.1% +9.7% +2.4%
0 — — —
-100 -5.5% -10.2% -1.5%
-200 -13.8% -23.3% -2.6%

Percentage change in
Change in interest

Percentage change in net

Percentage change in

market value of portfolio
rates (basis points)

interest income

net income

equity
+400

+17.4%

+31.6%

+17.3%
+300

+12.0%

+21.8%

+13.8%
+200

+6.7%

+12.1%

+10.0%
+100

+23%

+4.2%

+5.7%
0

—

—

—
-100

-0.3%

-0.5%

-15.8%
-200

-0.8%

-1.4%

-28.1%
~~Considering the likelihood of general market interest rate changes, the~~
The results of the simulation are ~~deemed to be~~ within the relevant policy limits adopted by the ~~Company.~~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%~~400 basis point change. ~~Due~~The amounts in the second quarter exceeded these limits due to ~~a very~~the already low ~~probability~~level of ~~further declines in~~rates on non-maturing deposit instruments. Management has determined that due to the level of market rates at June 30, 2020, interest ~~rates, ALCO~~rate shocks of -100, -200, -300 and ~~management have accepted the policy exception associated with the percentage of net interest income lost in a down 200~~-400 basis points ~~scenario.~~leave the Bank with near zero down to negative rate instruments and are not considered practical or informative. The changes in net interest income, net income and the economic value of equity in ~~both a~~ higher ~~and lower~~ interest rate shock ~~scenario~~scenarios at ~~September~~June 30, ~~2017~~2020 are not considered to be excessive. The ~~positive~~ impact of ~~+5.1%~~-0.3% in net interest income and ~~+9.7%~~-0.5% in net income given a 100 basis point ~~increase~~decrease in market interest rates reflects in large measure the impact of variable rate loans and fed funds sold repricing ~~counteracted by a~~downward while deposits remain at expected floor rates and are not expected to have lower ~~level of expected residential mortgage activity.~~
interest rates.
In the ~~third~~second quarter of ~~2017,~~2020, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above. ~~Except for the higher level of asset liquidity at September 30, 2017 as compared to December 31, 2016, the~~The interest rate risk position at ~~September~~June 30, ~~2017~~2020, was relatively similar to the March 31, 2020 position for the up rate scenarios, but the down rate scenarios are now limited by the already low interest rate risk position at December 31, 2016. As compared to December 31, 2016, the sum of federal funds sold, interest bearing deposits with banks and other short-term investments and loans held for sale increased by $57.2 million at September 30, 2017.
environment.
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.
During the ~~third~~second quarter of ~~2017,~~2020, average market interest rates ~~increased on~~decreased across the ~~short end of the~~ yield ~~curve while decreasing on the mid and long end of the~~ curve. Overall, there was a ~~flattening~~slight steepening of the yield curve as compared to the ~~third~~second quarter of ~~2016~~2019 with rate ~~increases within~~decreases being generally more significant at the ~~three year maturity term and decreases further out on~~shorter end of the yield curve.

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As compared to the ~~third~~second quarter of ~~2016,~~2019, the average two-year U.S. Treasury rate ~~increased~~decreased by 6194 basis points from ~~1.30%~~2.13% to ~~1.36%~~0.19%, the average five year U.S. Treasury rate ~~was stable at 1.81%~~decreased by 176 basis points from 2.12% to 0.36% and the average ten year U.S. Treasury rate decreased by 2165 basis points from ~~2.26%~~2.34% to ~~2.24%~~0.69%. The Company’s net interest ~~spread~~margin was 3.26% for the ~~third~~second quarter of ~~2017 was 3.77% compared to 3.83% for~~2020 and 3.91% in the ~~third~~second quarter of ~~2016. The decline was due in large part to the increase in the cost of interest bearing liabilities.~~2019. The Company believes that the ~~change in the~~ net interest ~~spread~~margin in the most recent quarter as compared to ~~2016’s third~~2019’s second quarter has been consistent with its interest rate risk ~~analysis at December 31, 2016.~~analysis.

~~GAP~~Gap Position

Banks and other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities. This revenue represented ~~91%~~87% and 93% of the Company’s revenue for the ~~third~~second quarter of ~~both 2017~~2020 and ~~2016.~~

2019, respectively.

In falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by lower yielding short-term funds, or what is referred to as a negative mismatch or ~~GAP.~~gap. Conversely, in a rising interest rate environment, net interest income is maximized with shorter term, higher yielding assets being funded by longer-term liabilities or what is referred to as a positive mismatch or ~~GAP.~~gap.

The ~~GAP~~gap position, which is a measure of the difference in maturity and repricing volume between assets and liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indication of the sensitivity of the Company to changes in interest rates. A negative ~~GAP~~gap indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods.

At ~~September~~June 30, ~~2017,~~2020, the Company had a positive ~~GAP~~gap position of approximately ~~$515.5~~$476 million, or 7%5% of total assets, out to three months, and a positive cumulative ~~GAP~~gap position of ~~$117.0~~$624 million, or 2%6% of total assets out to 12twelve months; as compared to a ~~positive GAP~~negative gap position of approximately ~~$1.14 billion~~$370 million or ~~17%~~4% of total assets out to three months, and a ~~positive~~negative cumulative ~~GAP~~gap position of ~~$1.13 billion~~$269 million or ~~16%~~3% of total assets out to 12twelve months at ~~December~~March 31, ~~2016.~~2019. The change in the ~~positive GAP~~gap position at ~~September~~June 30, ~~2017~~2020, as compared to ~~December~~March 31, ~~2016,~~2020, was due ~~substantially~~ to ~~a new methodology~~expected rate sensitivity of non-interest bearing accounts and the time frame in which took effect September 30, 2017. Under the new methodology, rate sensitive liabilities have been remodeled to reflect a more conservative repricing model. This resulted in significant changes to the GAP analysis due tothey might migrate interest bearing transaction and savings and money market deposits being assumed to reprice entirely in the 0-3 month category. Changes in the GAP position between September 30, 2017 and December 31, 2016 were also due to the higher amount of asset liquidity on the balance sheet including an increase in interest bearing balances. There was also a decrease in the mix of variable rate loans from 67% of total loans to 66%.accounts. The change in the ~~GAP~~gap position at ~~September~~June 30, ~~2017~~2020 as compared to ~~December~~March 31, ~~2016~~2020 is not deemed material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis ~~that~~which captures the full optionality within the balance sheet. The current position is within guideline limits established by the ALCO. While management believes that this overall position creates a reasonable balance in managing its interest rate risk and maximizing its net interest margin within plan objectives, there can be no assurance as to actual results.

Management has carefully considered its strategy to maximize interest income by reviewing interest rate levels, economic indicators and call features within its investment portfolio, as well as interest rate floors within its loan portfolio. These factors have been discussed with the ALCO and management believes that current strategies ~~are~~remain appropriate to current economic and interest rate trends.

If interest rates increase by 100 basis points, the Company’s net interest income and net interest margin are expected to increase modestly due to the impact of significant volumes of variable rate assets ~~repricing ahead of liabilities and~~more than offsetting the assumption of an increase in money market interest rates by 70% of the change in market interest rates.

If interest rates decline by 100 basis points, the Company’s net interest income and margin are expected to decline modestly as the impact of lower market rates on a large amount of liquid assets more than offsets the ability to lower interest rates on interest bearing liabilities.

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 ~~GAP~~gap model. If this were to occur, the effects of a declining interest rate environment may not be in accordance with management’s expectations.

GAP Analysis
September 30, 2017
(dollars in thousands)
Total Rate
Repricible in: 0-3 months 4-12 months 13-36 months 37-60 months Over 60 months Sensitive Non Sensitive Total
RATE SENSITIVE ASSETS:
Investment securities $ 24,085 $ 63,870 $ 150,900 $ 115,917 $ 232,233 $ 587,006
Loans (1)(2) 3,669,502 669,010 849,157 625,567 296,949 6,110,184
Fed funds and other short-term investments 440,704 — — — — 440,704
Other earning assets 61,238 — — — — 61,238
Total $ 4,195,529 $ 732,880 $ 1,000,057 $ 741,484 $ 529,182 $ 7,199,132 $ 194,524 $ 7,393,656
��
RATE SENSITIVE LIABILITIES:
Noninterest bearing demand $ 219,573 $ 513,867 $ 707,452 $ 256,447 $ 145,818 $ 1,843,157
Interest bearing transaction 429,247 — — — — 429,247
Savings and money market 2,818,871 — — — — 2,818,871
Time deposits 188,788 367,444 242,910 23,535 — 822,677
Customer repurchase agreements and fed funds purchased 73,569 — — — — 73,569
Other borrowings 200,000 — — 147,663 69,144 416,807
Total $ 3,930,048 $ 881,311 $ 950,362 $ 427,645 $ 214,962 $ 6,404,328 $ 55,345 $ 6,459,674
GAP $ 265,481 $ (148,431 ) $ 49,695 $ 313,839 $ 314,220 $ 794,804
Cumulative GAP $ 265,481 $ 117,050 $ 166,745 $ 480,584 $ 794,804

Cumulative gap as percent of total assets 3.59 % 1.58 % 2.26 % 6.50 % 10.75 %

OFF BALANCE-SHEET:
Interest Rate Swaps - LIBOR based $ 150,000 $ — $ (75,000 ) $ (75,000 ) $ — $ —
Interest Rate Swaps - Fed Funds based 100,000 — — (100,000 ) — —
Total $ 250,000 $ — $ (75,000 ) $ (175,000 ) $ — $ — $ — $ —
GAP $ 515,481 $ (148,431 ) $ (25,305 ) $ 138,839 $ 314,220 $ 794,804
Cumulative GAP $ 515,481 $ 367,050 $ 341,745 $ 480,584 $ 794,804 $ —
Cumulative gap as percent of total assets 6.97 % 4.96 % 4.62 % 6.50 % 10.75 %

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GAP Analysis

June 30, 2020

(dollars in thousands)

Total




0-3

4-12

13-36

37-60

Over 60

Rate

Non

Repricible in:

months

months

months

months

months

Sensitive

Sensitive

Total
RATE SENSITIVE ASSETS:
















Investment securities

$
155,966

$
114,656

$
146,829

$
119,774

$
235,169

$
772,394

Loans (1)(2)

4,025,799

881,156

1,586,143

793,459

803,637

8,090,194

Fed funds and other short-term investments

623,843

—

—

—

—

623,843

Other earning assets

75,912

—

—

—

—

75,912

Total

$
4,881,520

$
995,812

$
1,732,972

$
913,233

$
1,038,806

$
9,562,343

237,327

$
9,799,670

RATE SENSITIVE LIABILITIES:

Noninterest bearing demand

$
88,262

$
245,520

$
532,958

$
393,206

$
1,156,112

$
2,416,058

Interest bearing transaction

861,703

—

—

—

—

861,703

Savings and money market

3,279,718

—

—

—

225,000

3,504,718

Time deposits

244,371

502,658

341,655

61,676

3,133

1,153,493

Customer repurchase agreements and fed funds purchased

31,198

—

—

—

—

31,198

Other borrowings

—

—

148,307

69,574

350,000

567,881

Total

$
4,505,252

$
748,178

$
1,022,920

$
524,456

$
1,734,245

$
8,535,051

76,724

$
8,611,775
GAP

$
376,269

$
247,634

$
710,052

$
388,776

$
(695,438)

$
1,027,292

Cumulative GAP

$
376,269

$
623,902

$
1,333,954

$
1,722,731

$
1,027,292

Cumulative gap as percent of total assets

3.84
%

6.37
%

13.61
%

17.58
%

10.48
%

OFF BALANCE-SHEET:

Interest Rate Swaps - LIBOR based

$
—

$
—

$
—

$
—

$
—

$
—

Interest Rate Swaps - Fed Funds based

100,000

(100,000)

—

—

—

—

Total

$
100,000

$
(100,000)

$
—

$
—

$
—

$
—

—

$
—
GAP

$
476,269

$
147,634

$
710,052

$
388,776

$
(695,438)

$
1,027,292




Cumulative GAP

$
476,269

$
623,902

$
1,333,954

$
1,722,731

$
1,027,292

$
—




Cumulative gap as percent of total assets

4.86
%

6.37
%

13.61
%

17.58
%

10.48
%






(1) Includes loans held for sale
(2) Nonaccrual loans are included in the over 60 months category
~~(1) Includes loans held for sale.~~
~~(2) Nonaccrual loans are included in the over 60 months category.~~
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 a concentration in commercial real estate loans, and the Company has experienced ~~significant~~ growth in its commercial real estate portfolio in recent years. At ~~September~~June 30, ~~2017~~2020, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represent ~~334%~~342% of total risk based capital. Construction, land and land development loans represent ~~131%~~106% 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, 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 has an extensive Capital Plan and Policy, which includes pro-forma

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projections including stress testing within which the Board of Directors has established internal ~~policy limits~~minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines 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.

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.

~~In July 2013, the~~The Board of Governors of the Federal Reserve Board and the FDIC ~~approved final~~have adopted rules (the “Basel III Rules”) implementing the Basel Committee on Banking ~~Supervision’s~~Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the ~~final rules, which became applicable to~~Basel III Rules, the Company and ~~the~~ Bank ~~on January 1, 2015 and~~ are ~~subject~~required to ~~a phase-in period through January 1, 2019, minimum requirements will increase for both~~maintain, inclusive of the ~~quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a~~ capital conservation buffer of 2.5% ~~of risk-weighted assets, which when fully phased-in, effectively results in~~, a minimum CET1 ratio of 7.0%~~. Basel III raises the~~, a minimum ratio of Tier 1 capital to risk-weighted assets ~~from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio~~ of 8.5% ~~when fully phased-in)~~, ~~effectively results in~~ a minimum total capital to risk-weighted assets ratio of 10.5% ~~(with the capital conservation buffer fully phased-in)~~, and ~~requires~~ a minimum leverage ratio of 4.0%. ~~Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures.~~

~~On July 26, 2016,~~At June 30, 2020, the Company ~~completed~~and the ~~sale~~Bank meet all these requirements, and satisfy the requirement to maintain a capital conservation buffer of ~~$150.0 million~~2.5% of CET1 capital for capital adequacy purposes.

During the fourth quarter of 2019, the Company extended the Repurchase Program. Under the Board approval in December, the Company may repurchase up to an aggregate of 1,641,000 shares of its ~~5.00% Fixed-to-Floating Rate Subordinated Notes,~~common stock (inclusive of shares remaining under the initial authorization), through December 31, 2020, subject to earlier termination by the Board of Directors (the “Repurchase Program Extension”).

While the Company’s capital position remains well above regulatory well capitalized levels, due ~~August 1, 2026 (the “Notes”). The Notes were offered~~ to the ~~public at par.~~heightened volatility of the stock market and uncertainty regarding the impact of COVID-19, the Company’s remaining authorization to repurchase shares was put on hold during the first quarter of 2020 and there were no shares repurchased during the second quarter of 2020. The ~~notes qualify~~Board of Directors and Management continue to monitor this area and may enter the markets from time to time as ~~Tier 2 capital for regulatory purposes~~determined appropriate.

The Company announced a regular quarterly cash dividend on June 24, 2020 of $0.22 per share to ~~the fullest extent permitted under the Basel III Rule.~~shareholders of record on July 15, 2020 and payable July 31, 2020.

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The actual capital amounts and ratios for the Company and Bank as of ~~September~~June 30, ~~2017,~~2020 (unaudited) and December 31, ~~2016 and September 30, 2016~~2019 are presented in the table below.

To Be Well

Minimum

Capitalized

Required For

Under Prompt

Company

Bank

Capital

Corrective


Actual

Actual

Adequacy

Action

(dollars in thousands)

Amount

Ratio

Amount

Ratio

Purposes

Regulations*

As of June 30, 2020









CET1 capital (to risk weighted assets)

$
1,085,861

12.80
%
$
1,244,976

14.69
%
7.00
%
6.50
%
Total capital (to risk weighted assets)

1,379,471

16.26
%

1,332,586

15.72
%
10.50
%
10.00
%
Tier 1 capital (to risk weighted assets)

1,085,861

12.80
%

1,244,976

14.69
%
8.50
%
8.00
%
Tier 1 capital (to average assets)

1,085,861

10.63
%

1,244,976

12.20
%
4.00
%
5.00
%

As of December 31, 2019









CET1 capital (to risk weighted assets)

$
1,082,516

12.87
%
$
1,225,486

14.64
%
7.00
%
6.50
%
Total capital (to risk weighted assets)

1,362,253

16.20
%

1,299,223

15.52
%
10.50
%
10.00
%
Tier 1 capital (to risk weighted assets)

1,082,516

12.87
%

1,225,486

14.64
%
8.50
%
8.00
%
Tier 1 capital (to average assets)

1,082,516

11.62
%

1,225,486

13.18
%
4.00
%
5.00
%

To Be Well
Company Bank Minimum Capitalized Under
Required For Prompt Corrective
Actual Actual Capital Action
(dollars in thousands) Amount Ratio Amount Ratio Adequacy Purposes Regulations *
As of September 30, 2017
CET1 capital (to risk weighted aseets) $ 827,220 11.40 % $ 949,487 13.12 % 5.750 % 6.5 %
Total capital (to risk weighted assets) 1,110,282 15.30 % 1,012,072 13.98 % 9.250 % 10.0 %
Tier 1 capital (to risk weighted assets) 827,220 11.40 % 949,487 13.12 % 7.250 % 8.0 %
Tier 1 capital (to average assets) 827,220 11.78 % 949,487 13.54 % 5.000 % 5.0 %

As of December 31, 2016
CET1 capital (to risk weighted aseets) $ 737,512 10.80 % $ 854,226 12.55 % 5.125 % 6.5 %
Total capital (to risk weighted assets) 1,016,712 14.89 % 913,100 13.41 % 8.625 % 10.0 %
Tier 1 capital (to risk weighted assets) 737,512 10.80 % 854,226 12.55 % 6.625 % 8.0 %
Tier 1 capital (to average assets) 737,512 10.72 % 854,226 12.44 % 5.000 % 5.0 %

As of September 30, 2016
CET1 capital (to risk weighted assets) $ 710,104 10.83 % $ 825,879 12.63 % 5.125 % 6.5 %
Total capital (to risk weighted assets) 987,068 15.05 % 882,602 13.50 % 8.625 % 10.0 %
Tier 1 capital (to risk weighted assets) 710,104 10.83 % 825,879 12.63 % 6.625 % 8.0 %
Tier 1 capital (to average assets) 710,104 11.12 % 825,879 12.95 % 5.000 % 5.0 %
* Applies to Bank ~~only.~~only

The regulatory capital ratios presented above vary slightly from what was presented in our second quarter earnings release, reflecting adjustments to fully capture the delay in reflecting the impact of the adoption of the CECL methodology provided by the federal banking regulators in March 2020, as described below.
Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At ~~September~~June 30, ~~2017~~2020 the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained the minimum required capital ~~ratios.~~ratios listed in the table above.
In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020. 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 March 2020 interim final rule.
Use of Non-GAAP Financial Measures
The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP.
Tangible common equity to tangible assets (the ~~“tangible~~"tangible common equity ~~ratio”~~ratio") ~~and~~, tangible book value per common share, the annualized return on average tangible common equity, and efficiency ratio are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common ~~shareholders’~~shareholders' 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’~~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 the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income. The efficiency ratio measures a bank’s overhead as a percentage of its revenue.

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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.~~

Non-GAAP Reconciliation (Unaudited)

(dollars in thousands except per share data)

Three Months Ended Twelve Months Ended Three Months Ended
September 30, 2017 December 31, 2016 September 30, 2016
Common shareholders’ equity $ 933,982 $ 842,799 $ 815,639
Less: Intangible assets (107,150 ) (107,419 ) (107,694 )
Tangible common equity $ 826,832 $ 735,380 $ 707,945

Book value per common share $ 27.33 $ 24.77 $ 24.28
Less: Intangible book value per common share (3.14 ) (3.16 ) (3.20 )
Tangible book value per common share $ 24.19 $ 21.61 $ 21.08

Total assets $ 7,393,656 $ 6,890,096 $ 6,762,132
Less: Intangible assets (107,150 ) (107,419 ) (107,694 )
Tangible assets $ 7,286,506 $ 6,782,677 $ 6,654,438
Tangible common equity ratio 11.35 % 10.84 % 10.64 %
ratios and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions.
GAAP Reconciliation (Unaudited)
(dollars in thousands except per share data)

Three Months Ended

Six Months Ended

Year Ended

Three Months Ended

Six Months Ended


June 30, 2020

June 30, 2020

December 31, 2019

June 30, 2019

June 30, 2019

Common shareholders’ equity

$
1,187,895

$
1,190,681

$
1,184,582

Less: Intangible assets

(104,651)

(104,739)

(105,219)

Tangible common equity

$
1,083,244

$
1,085,942

$
1,079,363

Book value per common share

$
36.86

$
35.82

$
34.30

Less: Intangible book value per common share

(3.24)

(3.15)

(3.05)

Tangible book value per common share

$
33.62

$
32.67

$
31.25

Total assets

$
9,799,670

$
8,988,719

$
8,670,003

Less: Intangible assets

(104,651)

(104,739)

(105,219)

Tangible assets

$
9,695,019

$
8,883,980

$
8,564,784

Tangible common equity ratio

11.17
%

12.22
%

12.60
%

Average common shareholders’ equity

$
1,179,452

$
1,185,316

$
1,172,051

$
1,166,487

$
1,147,782

Less: Average intangible assets

(104,672)

(104,684)

(105,167)

(105,280)

(105,430)

Average tangible common equity

$
1,074,780

$
1,080,632

$
1,066,884

$
1,061,206

$
1,042,352

Net Income Available to Common Shareholders

$
28,856

$
51,979

$
142,943

$
37,243

$
70,992

Average tangible common equity

$
1,074,780

$
1,080,632

$
1,066,884

$
1,061,206

$
1,042,352

Annualized Return on Average Tangible Common Equity

10.80
%

9.67
%

13.40
%

14.08
%

13.73
%

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. ~~Based on~~The Company’s management, under the ~~evaluation~~supervision and with the participation of ~~our~~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~~as defined in ~~Rules~~Rule 13a-15(e) ~~and 15d-15(e))~~ under the ~~Securities~~ Exchange ~~Act of 1934) required by Rules 13a-15(b) or 15d-15(b) under~~Act. Based on that evaluation, the ~~Securities Exchange Act of 1934, our~~ Chief Executive Officer, Executive Chairman and ~~our~~the Chief Financial Officer ~~have~~ concluded that the ~~Company did not maintain effective~~Company’s disclosure controls and procedures as of ~~September~~June 30, ~~2017 as a result of the material weakness~~2020 were effective to provide reasonable assurance that information required to be disclosed in the ~~Company’s internal control relating~~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 ~~income tax accounting, discussed below.~~our management, including the Chief Executive Officer, Executive Chairman and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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Changes in internal ~~controls~~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~~second quarter of ~~2017~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than as described below under the caption ~~“Remediation Plan.~~“Remediation.”

Remediation.

~~Management assessed~~As previously described in Part I, Item 4 of our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, management has been testing the Company’s ~~system~~enhanced controls to determine whether they operate effectively over time. That testing process is now complete and management believes that the enhanced controls are operating effectively and the deficiencies that contributed to the material weakness have been remediated, subject to the results of the year-end audit of the Company’s internal control over financial reporting ~~as of September 30, 2017. This assessment was conducted based on the Committee of Sponsoring Organizations~~by Dixon Hughes Goodman LLP (“~~COSO”~~DHG”) of the Treadway Commission “Internal Control – Integrated Framework (2013).” Based on this assessment, management believes that the Company did not maintain effective internal control over financial reporting as of September 30, 2017 as a result of a material weakness in, the Company’s ~~internal control relating to income tax accounting, as discussed below.~~

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

independent auditors.

The Company did not maintain effective controls over its income tax accounting. Specifically, the Company did not maintain effective controls related to: state income tax apportionment; an error in federal tax rates; financial statementfollowing contributed to tax return reconciliation errors; and matters related to accounting for share based compensation. While these errors were determined not to be material to the consolidated financial statements, and no adjustments were made as a result of these errors, this control deficiency could result in a misstatement of the tax accruals or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

~~Remediation Plan~~. As previously described in Part II, Item 9A of our 2016 Form 10-K, we began implementing a remediation plan to address the control deficiency that led to the material weakness mentioned above. The remediation plan includes the following:

remediation:

●

~~Implementing specific review procedures, including~~ the ~~enhanced involvement~~split of ~~outside independent tax consulting services in~~ the ~~review~~roles of ~~tax accounting, designed to enhance~~Chairman and Chief Executive Officer and the appointment of our ~~income tax accruals~~current Chairman, Norman R. Pozez, and ~~deferrals;~~our current President and Chief Executive Officer, Susan G. Riel;

●

~~Stronger quarterly income tax controls~~the restructuring of the Board of Directors to reduce its size and strengthen its risk and financial reporting oversight functions, including the addition of two new independent directors with ~~improved documentation standards, technical oversight~~extensive experience in risk management and ~~training.~~public accounting;

●

adjustment of the membership of the committees of the Board of Directors, the appointment of new committee chairs and the establishment of a Risk Committee;

●

the process of hiring a new Chief Legal Officer (effective January 2020);

●

formalizing the Company's ethics program, including establishing an Ethics Office and appointing an Ethics officer with accountability to the Audit Committee, and increased ethics training for Company employees;

●

the enhancement of the Company's policies and procedures for the identification, review and reporting of related party transactions;

●

the reinforcement of the Company's risk management function, including the addition of personnel and the enhanced review and monitoring of vendor contracts; and

●

the active encouragement by management, with the assistance of the Chairman and the rest of the Board of Directors, of an open and collaborative culture, to set an appropriate “tone at the top.”

~~Our enhanced review procedures and documentation standards were~~In addition, in ~~place and operating during~~ the ~~third~~first quarter of ~~2017. We are in~~2020, the ~~process~~following further contributed to this remediation: upon the appointment of ~~testing~~our Chairman, Norman R. Pozez, as Executive Chairman of the ~~newly implemented internal controls and related procedures. The material weakness cannot be considered remediated until~~Board of Directors, the ~~control has operated for a sufficient period~~Board of ~~time and until management has concluded, through testing, that~~Directors appointed Theresa G. LaPlaca as Lead Independent Director of the ~~control is operating effectively. Our goal is to remediate this material weakness for the year ending December 31, 2017.~~Board of Directors.

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PART II –- OTHER INFORMATION
Item 1 –- Legal Proceedings
From time to time the Company may become involved in legal proceedings. At the present time there are no proceedings which the Company believes will have a material adverse impact on the financial condition or earnings of the Company.
~~Item 1A – Risk Factors~~
There have been no material changes ~~as of September 30, 2017~~ in the ~~risk factors from those~~status of the legal proceedings previously disclosed in Part I, Item 3 of the ~~Company’s~~Company's Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019, except as follows.
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. Based on information currently available, the Company does not believe that the liabilities (if any) resulting from such legal proceedings will have a material effect on the financial position of the Company. However, in light of the 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.
On July 24, 2019, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York against the Company, its current and former President and Chief Executive Officer and its current and former Chief Financial Officer, on behalf of persons similarly situated, who purchased or otherwise acquired Company securities between March 2, 2015 and July 17, 2019. On November 7, 2019, the court appointed a lead plaintiff and lead counsel in that matter, and on January 21, 2020, the lead plaintiff filed an amended complaint on behalf of the same class against the same defendants as well as the Company’s former General Counsel. The plaintiff alleges that certain of the Company’s 10-K reports and other public statements and disclosures contained materially false or misleading statements about, among other things, the effectiveness of its internal controls and related party loans, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 20 (a) of that act, resulting in injury to the purported class members as a result of the decline in the value of the Company’s common stock following the disclosure of increased legal expenses associated with certain government investigations involving the Company. The Company intends to defend vigorously against the claims asserted. On April 2, 2020, the defendants filed a motion to dismiss the amended complaint. On May 15, 2020, the plaintiffs filed their opposition to the defendants' motion to dismiss, and on June 15, 2020, the defendants filed their reply brief. Briefing on the defendants' motion is now complete, and the motion is under consideration by the court.
The Company has received various document requests and subpoenas from securities and banking regulators and U.S. Attorney’s offices in connection with investigations, which the Company believes relate to the Company’s identification, classification and disclosure of related party transactions; the retirement of certain former officers and directors; and the relationship of the Company and certain of its former officers and directors with a local public official, among other things. The Company is cooperating with these investigations. There have been no regulatory restrictions placed on the Company’s ability to fully engage in its banking business as presently conducted as a result of these ongoing investigations. We are, however, unable to predict the duration, scope or outcome of these investigations.

Item 1A - Risk Factors
The COVID-19 pandemic has adversely affected, and is likely to continue to adversely affect, our customers and other businesses in our market area, as well as counterparties and third party vendors. The resulting adverse impacts on our business, financial condition, liquidity and results of operations will likely be significant.
The COVID-19 pandemic and the resulting containment measures have resulted in widespread economic and financial disruptions that have adversely affected, and are likely to continue to adversely effect, our customers and other businesses in our market area, as well as counterparties and third-party vendors. We are starting to see the impact of the pandemic on our business, which we expect to continue and potentially worsen. This impact has been, in certain areas, and could continue to be significant, adverse and potentially material. The extent of this impact, and the resulting impact on our business, financial condition, liquidity and results of operations, is unknown at this time, and will depend on a number of evolving factors and future developments beyond our control and that we are unable to predict, including the duration, spread and severity of the pandemic; the nature, extent and effectiveness of containment measures; the timing of development and widespread availability of medical treatments or vaccines; the extent and duration of the effect on the economy, unemployment, consumer confidence and consumer and business spending; the impact and continued availability of monetary, fiscal and other economic policies and programs designed to provide economic assistance to individuals and small businesses; and how quickly and to what extent normal economic and operating conditions can resume. It is also possible that any adverse impacts of the pandemic and containment measures may continue once the pandemic is controlled and the containment measures are lifted.

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Many of the risks described 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, 2019, the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and in other periodic and current reports filed by the Company with the Securities and Exchange Commission will likely be exacerbated, and the impact of such risks will likely be magnified, as a result of the COVID-19 pandemic. We expect the negative impacts of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations to be the most severe in the following areas:

●Loan Credit Quality. The significant disruption resulting from the COVID-19 pandemic has been materially affecting the businesses of our customers and of their customers, which impacts their creditworthiness, their ability to pay amounts owed to us and our ability to collect those amounts. Among the industry’s most clearly impacted by the pandemic are the Accommodation and Food Service industry, exposure to which represents 10.5% of our loan portfolio as of June 30, 2020, and the Retail Trade industry, which represents 1.3% of our loan portfolio as of June 30, 2020. In addition, approximately 6% of our loan portfolio as of June 30, 2020 is secured by commercial real estate loans secured by restaurants, hotels or retail properties. These areas may have a longer recovery period than other industries. Deteriorating economic conditions are also likely to result in declines in real estate values and home sales volumes, and an increase in tenants failing to make or deferring rent payments. A large portion of our loan portfolio is related to real estate, with 72% consisting of commercial real estate and real estate construction loans, and 79% of our loans being secured by real estate. As a result of actual or expected credit losses, we may downgrade loans, increase our allowance for loan losses, and write-down or charge-off credit relationships, any of which would negatively impact our results of operations. In addition, market upheavals are likely to affect the value of real estate and commercial assets. In the event of foreclosure, it is unlikely that we will be able to sell the foreclosed property at a price that will allow us to recoup a significant portion of the delinquent loan.

●Allowance for Credit Losses. As discussed in the Management’s Discussion and Analysis, we began using a new credit reserving methodology known as the CECL methodology effective January 1, 2020. Our ability to accurately forecast future losses under that methodology may be impaired by the significant uncertainty surrounding the pandemic and containment measures and the lack of a comparable precedent. For the three and six months ended June 30, 2020, after the initial adjustment to the allowance for credit losses as of January 1, 2020, we further increased the allowance for credit losses by $19.7 million and $34.0 million, respectively, inclusive of $138 thousand of allowance for credit losses on AFS debt securities recorded in the second quarter of 2020. We may need to record additional provisions for credit losses in future, as the COVID-19 pandemic continues to evolve, and our losses on our loans and other exposures could exceed our allowance.

●Increased Demands on Capital and Liquidity. We have begun to experience increased volume of loan originations, particularly SBA loans pursuant to the PPP created by recent legislation. Certain of these SBA loans have mandated interest rates that are lower than our usual rates and may not be purchased by the SBA or other third parties within expected timeframes. In addition, borrowers may draw on existing lines of credit or seek additional loans to finance their businesses. These factors may result in reduced levels of capital and liquidity being available to originate more profitable loans, which will negatively impact our ability to serve our existing customers and our ability to attract new customers.

●Deposit Business. As a result of the COVID-19 pandemic, deposit customers are expected to retain higher levels of cash. While increased low-interest deposits could have a positive impact in the short-term, we would not expect these funds to be replenished as customers use deposit funds for liquidity for their business and individual needs. If deposit levels decline, our available liquidity would decline, and we could be forced to obtain liquidity on terms less favorable than current deposit terms, which would in turn compress margins and negatively impact our results of operations.

●Interest Rate Risk. Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from the COVID-19 pandemic. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results or financial condition.

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●Operational Risk. Current and future restrictions on our workforce's access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices by directing a portion of our employees to work remotely from their homes to minimize interruptions to our operations. These actions will likely result in increased spending on our business continuity efforts, such as technology and readiness procedures for returning to our offices. We could also experience an increased strain on our risk management policies, including, but not limited to, the effectiveness and accuracy of our models, given the lack of data inputs and comparable precedent. Further, technology in employees' homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including related to the effectiveness of our anti-money laundering and other compliance programs, as well as increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.

●External Vendors and Service Providers. We rely on many outside service providers that support our day-to-day operations including data processing and electronic communications, real estate appraisal, loan servicers and local and federal government agencies, offices and courthouses. In light of the containment measures responding to COVID- 19, many of these entities may limit the availability and access of their services, which may impact our business. For example, loan origination could be delayed due to the limited availability of real estate appraisers for the collateral. Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses, which slows the process for title work, mortgage and UCC filings. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

●Strategic and Reputational Risk. The pandemic and containment measures have caused us to modify our strategic plans and business practices, and we may take further actions that we determine are in the best interests of our colleagues, customers and business partners. If we do not respond appropriately to the pandemic, or if customers or other stakeholders do not perceive our response to be adequate, we could suffer damage to our reputation and our brand, which could materially adversely affect our business. We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions governmental authorities take in response to those conditions, including as a result of our participation in the PPP as detailed in the Note 1 to the Consolidated Financial Statements.

Item 2 –- Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Sales of Unregistered Securities.
None

(b)
Use of Proceeds.
Not Applicable

(c)
Issuer Purchases of Securities.
~~None~~

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Total Number of

Average Price

Total Number of Shares Purchased as Part

Maximum Number of Shares that May Yet Be
Period

Shares Purchased (2)

Paid Per Share

of Publicly Announced Plans or Programs

Purchased Under the Plans or Programs (1)
April 1-30, 2020

58

$
44.60

58

447,890
May 1-31, 2020

—

—

—

447,890
June 1-30, 2020

—

—

—

447,890
Total

58

44.60

58

(1) In August 2019, the Company’s Board of Directors authorized the purchase of up to 1,715,547 shares of the Company’s common stock from the date of approval of the plan through December 31, 2019, subject to earlier termination by the Board of Directors. The program was announced by a press release dated August 9, 2019 and a Form 8-K filed on August 9, 2019. On December 18, 2019, the Company’s Board of Directors extended and expanded the program, authorizing the purchase of up to an aggregate of 1,641,000 shares of the Company’s common stock (inclusive of shares remaining under the initial authorization), through December 31, 2020, subject to earlier termination by the Board of Directors (as extended, the “Repurchase Program”). The extension of the program was announced by a press release dated December 18, 2019 and a Form 8-K filed on December 18, 2019. Under the Repurchase Program, the Company may acquire its common stock in the open market or in privately negotiated transactions, including 10b5-1 plans. The Repurchase Program may be modified, suspended or terminated by the Board of Directors at any time without notice. We suspended our share repurchase program during the first quarter of 2020, and did not repurchase any shares during the second quarter of 2020.
(2) Includes shares of the Company’s common stock acquired by the Company in connection with satisfaction of tax withholding obligations on vested restricted shares.

Item 3 - Defaults Upon Senior Securities
None

Item 4 - Mine Safety Disclosures
Not Applicable

Item 5 - Other Information
~~Item 3 – Defaults Upon Senior Securities~~ ~~None~~
~~Item 4 – Mine Safety Disclosures~~ ~~Not Applicable~~
~~Item 5 – Other Information~~
(a)
Required 8-K Disclosures
None

(b)
Changes in Procedures for Director Nominations
None

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Item 6 - Exhibits
3.1
~~3.1~~
Certificate of Incorporation of the Company, as amended (1)
3.2

Bylaws of the Company (2)
4.1

Subordinated Indenture, dated as of August 5, 2014, between the Company and Wilmington Trust, National Association, as Trustee (3)
4.2

First Supplemental Indenture, dated as of August 5, 2014, between the Company and Wilmington Trust, National Association, as Trustee (4)

4.3

Form of Global Note representing the 5.75% Subordinated Notes due September 1, 2024 (included in Exhibit 4.2)
4.4

Second Supplemental Indenture, dated as of July 26, 2016, between the Company and Wilmington Trust, National Association, as Trustee (5)
4.5

Form of Global Note representing the 5.00% ~~Fix-to-Floating~~Fixed-to-Floating Rate Subordinated Notes due August 1, 2026 (included in Exhibit 4.4)
10.1
~~2016~~

Restricted Stock ~~Option Plan~~Award Agreement for Norman R. Pozez dated April 2, 2020 (6)
~~10.2~~
31.1
~~2006 Stock Plan (7)~~
~~10.3~~

~~Employment Agreement dated as~~
Certification of ~~April 7, 2017, between EagleBank and Charles D. Levingston (8)~~
~~10.4~~ ~~Amended and Restated Employment Agreement dated as of January 31, 2017, between EagleBank and Antonio F. Marquez (9)~~
~~10.5~~ ~~Amended and Restated Employment Agreement dated as of January 31, 2017, between Eagle Bancorp, Inc., EagleBank and Ronald D. Paul (10)~~
~~10.6~~ ~~Amended and Restated Employment Agreement dated as of January 31, 2017, between EagleBank and~~ Susan G. Riel ~~(11)~~
~~10.7~~
31.2
~~Amended and Restated Employment Agreement dated as~~

Certification of ~~January 31, 2017, between EagleBank and Janice L. Williams (12)~~Norman R. Pozez
~~10.8~~
31.3
~~Non-Compete Agreement dated as of April 7, 2017, between EagleBank and Charles D. Levingston (13)~~
~~10.9~~

~~Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Antonio F. Marquez (14)~~
~~10.10~~
~~Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Ronald D. Paul (15)~~
~~10.11~~ ~~Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Susan G. Riel (16)~~
~~10.12~~ ~~Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Janice L. Williams (17)~~
~~10.13~~ ~~Amended and Restated Employment Agreement dated as of January 31, 2017, between EagleBank and Laurence E. Bensignor (18)~~
~~10.14~~ ~~Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Laurence E. Bensignor (19)~~
~~10.15~~ ~~Form of Supplemental Executive Retirement Plan Agreement (20)~~
~~10.16~~ ~~Amended and Restated Employment Agreement dated as of January 31, 2017 between EagleBank and Lindsey S. Rheaume (21)~~
~~10.17~~ ~~Non-Compete Agreement dated as of December 15, 2014, between EagleBank and Lindsey S. Rheaume (22)~~
~~10.18~~ ~~Virginia Heritage Bank 2006 Stock Option Plan (23)~~
~~10.19~~ ~~Virginia Heritage Bank 2010 Long-Term Incentive Plan (24)~~
~~10.20~~ ~~Fidelity & Trust Financial Corporation 2004 Long Term Incentive Plan (25)~~
~~10.21~~ ~~Fidelity & Trust Financial Corporation 2005 Long Term Incentive Plan (26)~~
11 ~~Statement Regarding Computation of Per Share Income~~
~~See Note 9 of the Notes to Consolidated Financial Statements~~
21 ~~Subsidiaries of the Registrant~~
~~31.1~~ ~~Certification of Ronald D. Paul~~
~~31.2~~ Certification of Charles D. Levingston
32.1

Certification of ~~Ronald D. Paul~~Susan G. Riel
32.2

Certification of Norman R. Pozez
32.3

Certification of Charles D. Levingston
101

Interactive data files pursuant to Rule 405 of Regulation S-T:

(i)
Consolidated Balance Sheets at ~~September~~June 30, ~~2017,~~2020, December 31, ~~2016 and September 30, 2016.~~
2019
(ii)
Consolidated Statement of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~
2019
(iii)
Consolidated Statement of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~
2019

(iv) Consolidated Statement of Changes in Shareholders’ Equity for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~
2019
(v)
Consolidated Statement of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~
2019
(vi)
Notes to the Consolidated Financial ~~Statements.~~Statements
104
~~(1)~~

~~Incorporated by reference to the Exhibit~~
The cover page of ~~the same number to the Company’s Current Report on Form 8-K filed on May 17, 2016.~~
~~(2)~~ ~~Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on May 17, 2016.~~
~~(3)~~ ~~Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 5, 2014.~~
~~(4)~~ ~~Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 5, 2014.~~
~~(5)~~ ~~Incorporated by Reference to Exhibit 4.2 to the Company’s Current report on Form 8-K filed on July 22, 2016.~~
~~(6)~~ ~~Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 (Registration No. 333-211857) filed on June 6, 2016.~~
~~(7)~~ ~~Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 (No. 333-187713).~~
~~(8)~~ ~~Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 11, 2017.~~
~~(9)~~ ~~Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 6, 2017.~~
~~(10)~~ ~~Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 6, 2017.~~
~~(11)~~ ~~Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 6, 2017.~~
~~(12)~~ ~~Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 6, 2017.~~
~~(13)~~ ~~Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 11, 2017.~~
~~(14)~~ ~~Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on December 15, 2014.~~
~~(15)~~ ~~Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on December 15, 2014.~~
~~(16)~~ ~~Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on December 15, 2014.~~
~~(17)~~ ~~Incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on December 15, 2014.~~
~~(18)~~ ~~Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on February 6, 2017.~~
~~(19)~~ ~~Incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed on December 15, 2014.~~
~~(20)~~ ~~Incorporated by reference to Exhibit 10.22 to the Company’s~~this Annual Report on Form 10-K, ~~for the Year ended December 31, 2013.~~
~~(21)~~ ~~Incorporated by reference to Exhibit 10.7 to the Company’s current Report on Form 8-K filed on February 6, 2017.~~
~~(22)~~ ~~Incorporated by reference to Exhibit 10.29 to the Company’s Form 10-Q for the Quarter ended March 31, 2015.~~
~~(23)~~ ~~Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (No. 333-199875).~~
~~(24)~~
~~Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (No. 333-199875).~~
formatted in Inline XBRL
~~(25)~~
~~Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (No. 333- 153426).~~
~~(26)~~
~~Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (No. 333- 153426).~~

(1)Incorporated by reference to the Exhibit of the same number to the Company’s Current Report on Form 8-K filed on May 17, 2016.
(2)Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on December 18, 2017.
(3)Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 5, 2014.
(4)Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 5, 2014.
(5)Incorporated by reference to Exhibit 4.2 to the Company’s Current report on Form 8-K filed on July 22, 2016.
(6)Incorporated by reference to Exhibit 10.16 to the Company’s Form 10-Q for the Quarter ended March 31, 2020.

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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 9, 2017~~August 10, 2020
By:
/s/ ~~Ronald D. Paul~~Susan G. Riel

~~Ronald D. Paul, Chairman,~~
Susan G. Riel, President and Chief Executive Officer of the Company

Date: ~~November 9, 2017~~August 10, 2020
By:
/s/ Charles D. Levingston

Charles D. Levingston, Executive Vice President and Chief Financial Officer of the Company

~~PART I.~~	~~FINANCIAL INFORMATION~~
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)		3
	Consolidated Balance Sheets		3
	Consolidated Statements of Operations		4
	Consolidated Statements of Comprehensive Income		5
	Consolidated Statements of Changes in Shareholders’ Equity		6
	Consolidated Statements of Cash Flows		7
	Notes to Consolidated Financial Statements		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		49 45

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		77 74

Item 4.	Controls and Procedures		77 74

PART II.	OTHER INFORMATION		78

Item 1.	Legal Proceedings		78 76

Item 1A.	Risk Factors		78 76

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		78

Item 3.	Defaults Upon Senior Securities		78 79

Item 4.	Mine Safety Disclosures		78 79

Item 5.	Other Information		78 79

Item 6.	Exhibits		78 80

Signatures		81

Assets	September 30, 2017			December 31, 2016			September 30, 2016
Cash and due from banks	$	8,246		$	10,285		$	8,678
Federal funds sold		8,548			2,397			5,262
Interest bearing deposits with banks and other short-term investments		432,156			355,481			505,087
Investment securities available-for-sale, at fair value		556,026			538,108			430,668
Federal Reserve and Federal Home Loan Bank stock		30,980			21,600			19,920
Loans held for sale		25,980			51,629			78,118
Loans		6,084,204			5,677,893			5,481,975
Less allowance for credit losses		(62,967	)		(59,074	)		(56,864	)
Loans, net		6,021,237			5,618,819			5,425,111
Premises and equipment, net		19,546			20,661			19,370
Deferred income taxes		45,432			48,220			41,065
Bank owned life insurance		61,238			60,130			59,747
Intangible assets, net		107,150			107,419			107,694
Other real estate owned		1,394			2,694			5,194
Other assets		75,723			52,653			56,218
Total Assets	$	7,393,656		$	6,890,096		$	6,762,132

Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand	$	1,843,157		$	1,775,684		$	1,668,271
Interest bearing transaction		429,247			289,122			297,973
Savings and money market		2,818,871			2,902,560			2,802,519
Time, $100,000 or more		482,325			464,842			452,015
Other time		340,352			283,906			337,371
Total deposits		5,913,952			5,716,114			5,558,149
Customer repurchase agreements		73,569			68,876			71,642
Other short-term borrowings		200,000			—			50,000
Long-term borrowings		216,807			216,514			216,419
Other liabilities		55,346			45,793			50,283
Total Liabilities		6,459,674			6,047,297			5,946,493

Shareholders’ Equity
Common stock, par value $.01 per share; shares authorized 100,000,000, shares issued and outstanding 34,174,009, 34,023,850, and 33,590,880, respectively		340			338			333
Warrant		—			—			946
Additional paid in capital		518,616			513,531			509,706
Retained earnings		415,975			331,311			305,594
Accumulated other comprehensive loss		(949	)		(2,381	)		(940	)
Total Shareholders’ Equity		933,982			842,799			815,639
Total Liabilities and Shareholders’ Equity	$	7,393,656		$	6,890,096		$	6,762,132

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Interest Income
Interest and fees on loans	$	78,176	$	69,869	$	226,543	$	202,002
Interest and dividends on investment securities		3,194		2,177		8,854		7,121
Interest on balances with other banks and short-term investments		991		376		2,084		856
Interest on federal funds sold		9		9		27		31
Total interest income		82,370		72,431		237,508		210,010
Interest Expense
Interest on deposits		7,233		4,840		19,466		13,513
Interest on customer repurchase agreements		58		39		136		115
Interest on short-term borrowings		164		383		441		727
Interest on long-term borrowings		2,979		2,441		8,937		4,515
Total interest expense		10,434		7,703		28,980		18,870
Net Interest Income		71,936		64,728		208,528		191,140
Provision for Credit Losses		1,921		2,288		4,884		9,219
Net Interest Income After Provision For Credit Losses		70,015		62,440		203,644		181,921

Noninterest Income
Service charges on deposits		1,626		1,431		4,641		4,303
Gain on sale of loans		2,173		3,009		6,740		8,464
Gain on sale of investment securities		11		1		542		1,123
Increase in the cash surrender value of bank owned life insurance		369		391		1,108		1,171
Other income		2,605		1,573		6,846		5,209
Total noninterest income		6,784		6,405		19,877		20,270
Noninterest Expense
Salaries and employee benefits		16,905		17,130		50,451		49,157
Premises and equipment expenses		3,846		3,786		11,613		11,419
Marketing and advertising		732		857		2,873		2,551
Data processing		2,019		1,879		6,057		5,716
Legal, accounting and professional fees		1,240		771		3,539		2,845
FDIC insurance		929		629		2,063		2,193
Other expenses		3,845		3,786		12,153		11,354
Total noninterest expense		29,516		28,838		88,749		85,235
Income Before Income Tax Expense		47,283		40,007		134,772		116,956
Income Tax Expense		17,409		15,484		50,109		44,966
Net Income	$	29,874	$	24,523	$	84,663	$	71,990

Earnings Per Common Share
Basic	$	0.87	$	0.73	$	2.48	$	2.14
Diluted	$	0.87	$	0.72	$	2.47	$	2.11


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Interest Income
Interest and fees on loans	$	92,928	$	101,889	$	189,683	$	199,710
Interest and dividends on investment securities		4,571		5,238		9,998		10,836
Interest on balances with other banks and short-term investments		161		1,105		1,720		2,771
Interest on federal funds sold		12		47		72		96
Total interest income		97,672		108,279		201,473		213,413
Interest Expense
Interest on deposits		12,514		22,461		33,060		43,361
Interest on customer repurchase agreements		86		75		173		173
Interest on short-term borrowings		501		1,435		858		1,575
Interest on long-term borrowings		3,208		2,979		6,275		5,958
Total interest expense		16,309		26,950		40,366		51,067
Net Interest Income		81,363		81,329		161,107		162,346
Provision for Credit Losses		19,737		3,600		34,047		6,960
Provision for Unfunded Commitments		940		—		3,052		—
Net Interest Income After Provision For Credit Losses		60,686		77,729		124,008		155,386

Noninterest Income
Service charges on deposits		942		1,606		2,367		3,300
Gain on sale of loans		3,079		1,923		4,023		3,311
Gain on sale of investment securities		713		563		1,535		1,475
Increase in the cash surrender value of bank owned life insurance		828		429		1,242		854
Other income		6,933		1,839		8,798		3,711
Total noninterest income		12,495		6,360		17,965		12,651
Noninterest Expense
Salaries and employee benefits		17,104		17,743		34,901		41,387
Premises and equipment expenses		3,468		3,652		7,289		7,504
Marketing and advertising		1,111		1,268		2,189		2,416
Data processing		2,759		2,603		5,255		4,978
Legal, accounting and professional fees		3,979		2,740		10,967		4,449
FDIC insurance		1,980		1,126		3,404		2,242
Other expenses		4,491		4,227		8,234		8,687
Total noninterest expense		34,892		33,359		72,239		71,663
Income Before Income Tax Expense		38,289		50,730		69,734		96,374
Income Tax Expense		9,433		13,487		17,755		25,382
Net Income	$	28,856	$	37,243	$	51,979	$	70,992

Earnings Per Common Share
Basic	$	0.90	$	1.08	$	1.60	$	2.06
Diluted	$	0.90	$	1.08	$	1.60	$	2.05

													Accumulated
													Other			Total
	Common							Additional Paid			Retained		Comprehensive			Shareholders’
	Shares			Amount		Warrant		in Capital			Earnings		Income (Loss)			Equity

Balance January 1, 2017		34,023,850		$	338	$	—	$	513,531		$	331,311	$	(2,381	)	$	842,799

Net Income		—			—		—		—			84,663		—			84,663
Other comprehensive gain, net of tax		—			—		—		—			—		1,432			1,432
Stock-based compensation expense		—			—		—		4,198			1		—			4,199
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes		60,925			1		—		258			—		—			259
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(16,962	)		1		—		(2	)		—		—			(1	)
Vesting of performance based stock awards, net of shares withheld for payroll taxes		3,589			—		—		—			—		—			—
Time based stock awards granted		91,097			—		—		—			—		—			—
Issuance of common stock related to employee stock purchase plan		11,510			—		—		631			—		—			631
Balance September 30, 2017		34,174,009		$	340	$	—	$	518,616		$	415,975	$	(949	)	$	933,982

Balance January 1, 2016		33,467,893		$	331	$	946	$	503,529		$	233,604	$	191		$	738,601

Net Income		—			—		—		—			71,990		—			71,990
Other comprehensive loss, net of tax		—			—		—		—			—		(1,131	)		(1,131	)
Stock-based compensation expense		—			—		—		5,159			—		—			5,159
Issuance of common stock related to options exercised,		23,614			—		—		282			—		—			282
net of shares withheld for payroll taxes		—			—		—					—		—			—
Excess tax benefits realized from stock compensation		—			—		—		166			—		—			166
Vesting of time based stock awards issued at date of grant,		(17,556	)		2		—		(2	)		—		—			—
net of shares withheld for payroll taxes		—			—		—		—			—		—			—
Time based stock awards granted		104,775			—		—		—			—		—			—
Issuance of common stock related to employee stock purchase plan		12,154			—		—		572			—		—			572

Balance September 30, 2016		33,590,880		$	333	$	946	$	509,706		$	305,594	$	(940	)	$	815,639


									Accumulated
									Other
		Common			Additional Paid		Retained		Comprehensive		Shareholders'
		Shares	Amount		in Capital		Earnings		Income		Equity
Balance April 1, 2020		32,197,258	$	320	$	439,321	$	710,072	$	13,065	$	1,162,778

Net Income		—		—		—		28,856		—		28,856
Other comprehensive income, net of tax		—		—		—		—		1,603		1,603
Stock-based compensation expense		—		—		1,427		—		—		1,427
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(2,738)		—		—		—		—		—
Time based stock awards granted		24,068		—		—		—		—		—
Issuance of common stock related to employee stock purchase plan		6,168		—		186		—		—		186
Cash dividends declared ($0.22 per share)		—		—		—		(6,955)		—		(6,955)
Balance June 30, 2020		32,224,756	$	320	$	440,934	$	731,973	$	14,668	$	1,187,895

Balance April 1, 2019		34,537,193	$	343	$	530,894	$	618,243	$	(992)	$	1,148,488
Net Income		—		—		—		37,243		—		37,243
Other comprehensive income, net of tax		—		—		—		—		4,759		4,759
Stock-based compensation expense		—		—		1,471		—		—		1,471
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes		750		—		37		—		—		37
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(1,800)		—		—		—		—		—
Issuance of common stock related to employee stock purchase plan	��	3,710		—		183		—		—		183
Cash dividends declared ($0.22 per share)		—		—		—		(7,599)		—		(7,599)
Balance June 30, 2019		34,539,853	$	343	$	532,585	$	647,887	$	3,767	$	1,184,582


								Accumulated
				Additional				Other
	Common			Paid		Retained		Comprehensive			Shareholders’
	Shares	Amount		in Capital		Earnings		Income			Equity
Balance January 1, 2020	33,241,496	$	331	$	482,286	$	705,105	$	2,959		$	1,190,681
										��
Cumulative effect adjustment due to the adoption of ASC 326, net of tax	—		—		—		(10,931)		—			(10,931)
Net Income	—		—		—		51,979		—			51,979
Other comprehensive income, net of tax	—		—		—		—		11,709			11,709
Stock-based compensation expense	—		—		2,423		—		—			2,423
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes	(24,921)		—		—		—		—			—
Vesting of performance based stock awards, net of shares withheld for payroll taxes	4,126		—		—		—		—			—
Time based stock awards granted	176,252		—		—		—		—			—
Issuance of common stock related to employee stock purchase plan	10,644		—		382		—		—			382
Cash dividends declared ($0.44 per share)	—		—		—		(14,180)		—			(14,180)
Common stock repurchased	(1,182,841)		(11)	$	(44,157)		—		—			(44,168)
Balance June 30, 2020	32,224,756	$	320	$	440,934	$	731,973	$	14,668		$	1,187,895

Balance January 1, 2019	34,387,919	$	342	$	528,380	$	584,494	$	(4,275)		$	1,108,941

Net Income	—		—		—		70,992		—			70,992
Other comprehensive income, net of tax	—		—		—		—		8,042			8,042
Stock-based compensation expense	—		—		3,501		—		—			3,501
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes	26,784		—		332		—		—			332
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes	(12,744)		1		(1)		—		—			—
Vesting of performance based stock awards, net of shares withheld for payroll taxes	17,655		—		—		—		—			—
Time based stock awards granted	112,636		—		—		—		—			—
Issuance of common stock related to employee stock purchase plan	7,603		—		373		—		—			373
Cash dividends declared ($0.22 per share)	—		—		—		(7,599)		—			(7,599)
Balance June 30, 2019	34,539,853	$	343	$	532,585	$	647,887	$	3,767		$	1,184,582


	Three Months Ended	Six Months Ended
(dollars in thousands)	June 30, 2020	June 30, 2020
Provision for credit losses- loans	19,599	33,909
Provision for credit losses- AFS debt securities	138	138
Total provision for credit losses	19,737	34,047


			Gross		Gross		Estimated
September 30, 2017	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
U. S. agency securities	$	179,100	$	342	$	1,524	$	177,918
Residential mortgage backed securities		303,822		374		2,670		301,526
Municipal bonds		61,593		1,673		119		63,147
Corporate bonds		13,011		206		—		13,217
Other equity investments		218		—		—		218
	$	557,744	$	2,595	$	4,313	$	556,026

				Gross		Gross		Estimated
December 31, 2016		Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)		Cost		Gains		Losses		Value
U. S. agency securities	$	107,425	$	519	$	1,802	$	106,142
Residential mortgage backed securities		329,606		324		3,691		326,239
Municipal bonds		94,607		1,723		400		95,930
Corporate bonds		9,508		82		11		9,579
Other equity investments		218		—		—		218
	$	541,364	$	2,648	$	5,904	$	538,108


			Gross		Gross		Allowance		Estimated
June 30, 2020	Amortized		Unrealized		Unrealized		for Credit		Fair
(dollars in thousands)	Cost		Gains		Losses		Losses		Value
U. S. agency securities	$	116,223	$	1,580	$	749	$	—	$	117,054
Residential mortgage backed securities		516,297		15,346		115		—		531,528
Municipal bonds		86,374		4,333		—		13		90,694
Corporate bonds		31,561		1,562		78		125		32,920
Other equity investments		198		—		—		—		198
	$	750,653	$	22,821	$	942	$	138	$	772,394

			Less than				12 Months
			12 Months				or Greater				Total
			Estimated				Estimated				Estimated
September 30, 2017	Number of		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized

																Less than				12 Months
																12 Months				or Greater				Total
																Estimated				Estimated				Estimated
June 30, 2020															Number of	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Securities		Value		Losses		Value		Losses		Value		Losses		Securities	Value		Losses		Value		Losses		Value		Losses
U. S. agency securities		32	$	97,832	$	1,101	$	28,299	$	423	$	126,131	$	1,524	25	$	24,653	$	99	$	37,287	$	650	$	61,940	$	749
Residential mortgage backed securities		113		198,670		1,523		55,920		1,147		254,590		2,670	20		41,864		66		7,721		49		49,585		115
Municipal bonds		5		13,301		119		—		—		13,301		119
		150	$	309,803	$	2,743	$	84,219	$	1,570	$	394,022	$	4,313

				Less than				12 Months
				12 Months				or Greater				Total
			Estimated				Estimated				Estimated
December 31, 2016	Number of		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Securities		Value		Losses		Value		Losses		Value		Losses
U. S. agency securities		27	$	88,991	$	1,764	$	3,768	$	38	$	92,759	$	1,802
Residential mortgage backed securities		112		232,347		3,110		19,402		581		251,749		3,691
Municipal bonds		16		34,743		400		—		—		34,743		400
Corporate bonds		2		4,998		11		—		—		4,998		11	2		4,447		78		—		—		4,447		78
		157	$	361,079	$	5,285	$	23,170	$	619	$	384,249	$	5,904
															47	$	70,964	$	243	$	45,008	$	699	$	115,972	$	942


			Income Producing -		Owner Occupied -		Real Estate		Construction -
			Commercial		Commercial		Mortgage -		Commercial and		Home		Other
(dollars in thousands)	Commercial		Real Estate		Real Estate		Residential		Residential		Equity		Consumer		Total
Three Months Ended June 30, 2020
Allowance for credit losses:
Balance at beginning of period	$	27,346	$	43,551	$	9,867	$	1,369	$	13,341	$	818	$	44		96,336
Loans charged-off		(7,145)		—		—		—		—		—		—		(7,145)
Recoveries of loans previously charged-off		5		—		—		—		—		—		1		6
Net loans charged-off		(7,140)		—		—		—		—		—		1		(7,139)
Provision for credit losses		7,872		8,312		2,474		181		467		294		(1)		19,599
Ending balance	$	28,078	$	51,863	$	12,341	$	1,550	$	13,808	$	1,112	$	44	$	108,796

Six Months Ended June 30, 2020
Allowance for credit losses:
Balance at beginning of period, prior to adoption of ASC 326	$	15,857	$	28,034	$	6,242	$	965	$	18,175	$	599	$	72	$	69,944
Impact of adopting ASC 326		892		11,230		4,674		(301)		(6,143)		245		17		10,614
Loans charged-off		(7,145)		(550)		—		—		(1,768)		—		—		(9,463)
Recoveries of loans previously charged-off		74		—		—		—		—		—		4		78
Net loans (charged-off) recoveries		(7,071)		(550)		—		—		(1,768)		—		4		(9,385)
Provision for credit losses		18,400		13,149		1,425		886		3,544		268		(49)		37,623
Ending balance	$	28,078	$	51,863	$	12,341	$	1,550	$	13,808	$	1,112	$	44	$	108,796

As of June 30, 2020
Allowance for credit losses:
Individually evaluated for impairment	$	8,797	$	5,260	$	405	$	746	$	1,383	$	107	$	3	$	16,701
Collectively evaluated for impairment		19,281		46,603		11,936		804		12,425		1,005		41		92,095
Ending balance	$	28,078	$	51,863	$	12,341	$	1,550	$	13,808	$	1,112	$	44	$	108,796

Three Months Ended June 30, 2019
Allowance for credit losses:
Balance at beginning of period	$	17,195	$	26,765	$	5,980	$	681	$	18,469	$	605	$	248	$	69,943
Loans charged-off		(1)		(1,847)		—		—		—		—		(2)		(1,850)
Recoveries of loans previously charged-off		37		302		2		2		37		—		13		393
Net loans charged-off		36		(1,545)		2		2		37		—		11		(1,457)
Provision for credit losses		905		1,790		(226)		672		500		(24)		(17)		3,600
Ending balance	$	18,136	$	27,010	$	5,756	$	1,355	$	19,006	$	581	$	242	$	72,086

Six Months Ended June 30, 2019
Allowance for credit losses:
Balance at beginning of period	$	15,857	$	28,034	$	6,242	$	965	$	18,175	$	599	$	72	$	69,944
Loans charged-off		(5)		(5,343)		—		—		—		—		(2)		(5,350)
Recoveries of loans previously charged-off		167		302		2		3		37		—		21		532
Net loans (charged-off) recoveries		162		(5,041)		2		3		37		—		19		(4,818)
Provision for credit losses		2,117		4,017		(488)		387		794		(18)		151		6,960
Ending balance	$	18,136	$	27,010	$	5,756	$	1,355	$	19,006	$	581	$	242	$	72,086

As of June 30, 2019
Allowance for credit losses:
Individually evaluated for impairment	$	7,905	$	1,000	$	475	$	650	$	—	$	—	$	—	$	10,030
Collectively evaluated for impairment		10,231		26,010		5,281		705		19,006		581		242		62,056
Ending balance	$	18,136	$	27,010	$	5,756	$	1,355	$	19,006	$	581	$	242	$	72,086

				Income Producing -			Owner Occupied -		Real Estate			Construction -
				Commercial			Commercial		Mortgage			Commercial and			Home			Other
(dollars in thousands)	Commercial			Real Estate			Real Estate		Residential			Residential			Equity			Consumer			Total
Three months ended September 30, 2017
Allowance for credit losses:
Balance at beginning of period	$	14,225		$	23,308		$	4,189	$	1,081		$	16,727		$	1,216		$	301		$	61,047
Loans charged-off		(522	)		—			—		—			(39	)		—			(32	)		(593	)
Recoveries of loans previously charged-off		407			30			—		2			146			1			6			592
Net loans (charged-off) recoveries		(115	)		30			—		2			107			1			(26	)		(1	)
Provision for credit losses		(2,266	)		(963	)		1,273		(126	)		4,052			(120	)		71			1,921
Ending balance	$	11,844		$	22,375		$	5,462	$	957		$	20,886		$	1,097		$	346		$	62,967
Nine months ended September 30, 2017
Allowance for credit losses:
Balance at beginning of period	$	14,700		$	21,105		$	4,010	$	1,284		$	16,487		$	1,328		$	160		$	59,074
Loans charged-off		(659	)		(1,470	)		—		—			(39	)		—			(98	)		(2,266	)
Recoveries of loans previously charged-off		675			80			2		5			491			4			18			1,275
Net loans charged-off		16			(1,390	)		2		5			452			4			(80	)		(991	)
Provision for credit losses		(2,872	)		2,660			1,450		(332	)		3,947			(235	)		266			4,884
Ending balance	$	11,844		$	22,375		$	5,462	$	957		$	20,886		$	1,097		$	346		$	62,967
As of September 30, 2017
Allowance for credit losses:
Individually evaluated for impairment	$	3,246		$	1,378		$	1,005	$	—		$	2,900		$	90		$	81		$	8,700
Collectively evaluated for impairment		8,598			20,997			4,457		957			17,986			1,007			265			54,267
Ending balance	$	11,844		$	22,375		$	5,462	$	957		$	20,886		$	1,097		$	346		$	62,967
Three months ended September 30, 2016
Allowance for credit losses:
Balance at beginning of period	$	13,386		$	19,072		$	4,202	$	1,061		$	17,024		$	1,556		$	235		$	56,536
Loans charged-off		(109	)		(1,751	)		—		—			—			(121	)		(12	)		(1,993	)
Recoveries of loans previously charged-off		7			10			—		2			3			3			8			33
Net loans (charged-off) recoveries		(102	)		(1,741	)		—		2			3			(118	)		(4	)		(1,960	)
Provision for credit losses		(523	)		3,178			59		47			(513	)		(69	)		109			2,288
Ending balance	$	12,761		$	20,509		$	4,261	$	1,110		$	16,514		$	1,369		$	340		$	56,864
Nine months ended September 30, 2016
Allowance for credit losses:
Balance at beginning of period	$	11,563		$	14,122		$	3,279	$	1,268		$	21,088		$	1,292		$	75		$	52,687
Loans charged-off		(2,802	)		(2,342	)		—		—			—			(217	)		(37	)		(5,398	)
Recoveries of loans previously charged-off		93			14			2		5			207			11			24			356
Net loans charged-off		(2,709	)		(2,328	)		2		5			207			(206	)		(13	)		(5,042	)
Provision for credit losses		3,907			8,715			980		(163	)		(4,781	)		283			278			9,219
Ending balance	$	12,761		$	20,509		$	4,261	$	1,110		$	16,514		$	1,369		$	340		$	56,864
As of September 30, 2016
Allowance for credit losses:
Individually evaluated for impairment	$	1,997		$	1,714		$	360	$	—		$	300		$	—		$	100		$	4,471
Collectively evaluated for impairment		10,764			18,795			3,901		1,110			16,214			1,369			240			52,393
Ending balance	$	12,761		$	20,509		$	4,261	$	1,110		$	16,514		$	1,369		$	340		$	56,864


	Business/Other
(dollars in thousands)	Assets		Real Estate
Commercial	$	15,105	$	2,895
Income producing - commercial real estate		3,193		24,102
Owner occupied - commercial real estate		—		10,815
Real estate mortgage - residential		—		7,960
Construction - commercial and residential		—		5,385
Construction - C&I (owner occupied)		—		—
Home equity		—		600
Other consumer		6		—
Total	$	18,304	$	51,757


June 30, 2020 (dollars in thousands)	2016		2017		2018		2019		2020		Prior		Total
Commercial
Pass		128,724		316,829		275,852		227,726		140,233		439,707		1,529,071
Watch		362		16,583		—		2,275		—		18,743		37,963
Special Mention		—		—		10,977		—		—		933		11,910
Substandard		4,667		2,128		2,565		459		—		18,293		28,112
Total		133,753		335,540		289,394		230,460		140,233		477,676		1,607,056
PPP loans
Pass		—		—		—		—		456,476		—		456,476
Total		—		—		—		—		456,476		—		456,476
Income producing - commercial real estate
Pass		412,724		520,542		726,838		807,571		208,386		970,544		3,646,605
Watch		—		—		—		4,324		—		721		5,045
Special Mention		800		—		—		—		—		4,843		5,643
Substandard		—		4,656		4,883		5,542		—		6,572		21,653
Total		413,524		525,198		731,721		817,437		208,386		982,680		3,678,946
Owner occupied - commercial real estate
Pass		107,303		117,523		221,811		92,496		15,673		358,051		912,857
Watch		—		—		—		—		—		40,465		40,465
Substandard		803		—		360		—		—		9,592		10,755
Total		108,106		117,523		222,171		92,496		15,673		408,108		964,077
Real estate mortgage - residential
Pass		3,423		10,394		15,429		28,234		5,701		21,844		85,025
Watch		—		—		—		—		—		617		617
Substandard		4,154		2,619		—		—		—		1,186		7,959
Total		7,577		13,013		15,429		28,234		5,701		23,647		93,601
Construction - commercial and residential
Pass		71,957		431,635		317,131		108,584		25,385		35,473		990,165
Substandard		2,298		408		—		—		—		2,679		5,385
Total		74,255		432,043		317,131		108,584		25,385		38,152		995,550
Construction - C&I (owner occupied)
Pass		11,689		5,482		41,084		27,557		17,441		32,612		135,865
Watch		—		2,124		11,087		—		—		769		13,980
Total		11,689		7,606		52,171		27,557		17,441		33,381		149,845
Home Equity
Pass		4,859		8,942		8,658		4,468		3,785		42,416		73,128
Watch		—		—		—		—		—		944		944
Substandard		—		—		—		—		—		849		849
Total		4,859		8,942		8,658		4,468		3,785		44,209		74,921
Other Consumer
Pass		177		85		121		106		28		764		1,281
Substandard		—		—		—		—		—		8		8
Total		177		85		121		106		28		772		1,289
Total Recorded Investment	$	753,940	$	1,439,950	$	1,636,796	$	1,309,342	$	873,108	$	2,008,625	$	8,021,761


											Total
(dollars in thousands)	Pass		Watch		Special Mention		Substandard		Doubtful		Loans
December 31, 2019
Commercial	$	1,470,636	$	38,522	$	11,460	$	25,288	$	—	$	1,545,906
Income producing - commercial real estate		3,667,585		16,069		—		19,093		—		3,702,747
Owner occupied - commercial real estate		925,800		53,146		—		6,463		—		985,409
Real estate mortgage - residential		98,228		628		—		5,365		—		104,221
Construction - commercial and residential		1,113,734		—		—		11,510		—		1,125,244
Home equity		78,626		948		—		487		—		80,061
Other consumer		2,160		—		—		—		—		2,160
Total	$	7,356,769	$	109,313	$	11,460	$	68,206	$	—	$	7,545,748

			Watch and						Total
(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Loans

September 30, 2017
Commercial	$	1,204,850	$	31,025	$	8,309	$	—	$	1,244,184
Income producing - commercial real estate		2,861,346		27,361		10,241		—		2,898,948
Owner occupied - commercial real estate		720,693		22,317		6,570		—		749,580
Real estate mortgage – residential		108,797		663		—		—		109,460
Construction - commercial and residential		963,593		—		7,728		—		971,321
Home equity		100,618		686		594		—		101,898
Other consumer		8,719		2		92		—		8,813
Total	$	5,968,616	$	82,054	$	33,534	$	—	$	6,084,204

December 31, 2016
Commercial	$	1,160,185	$	30,106	$	10,437	$	—	$	1,200,728
Income producing - commercial real estate		2,489,407		5,053		15,057		—		2,509,517
Owner occupied - commercial real estate		630,827		7,950		2,093		—		640,870
Real estate mortgage – residential		151,831		676		241		—		152,748
Construction - commercial and residential		1,051,445		607		6,517		—		1,058,569
Home equity		103,484		1,612		—		—		105,096
Other consumer		10,237		2		126		—		10,365
Total	$	5,597,416	$	46,006	$	34,471	$	—	$	5,677,893

September 30, 2016
Commercial	$	1,099,894	$	18,599	$	11,549	$	—	$	1,130,042
Income producing - commercial real estate		2,527,318		9,220		14,648		—		2,551,186
Owner occupied - commercial real estate		577,925		10,399		2,103		—		590,427
Real estate mortgage – residential		153,515		680		244		—		154,439
Construction - commercial and residential		937,198		737		4,878		—		942,813
Home equity		105,126		1,617		113		—		106,856
Other consumer		6,209		3		—		—		6,212
Total	$	5,407,185	$	41,255	$	33,535	$	—	$	5,481,975


	June 30, 2020						December 31, 2019
	Nonaccrual with		Nonaccrual with		Total		Total
	No Allowance		an Allowance		Nonaccrual		Nonaccrual
(dollars in thousands)	for Credit Loss		for Credit Loss		Loans		Loans

Commercial		1,507		15,214		16,721		14,928
PPP loans		—		—		—		—
Income producing - commercial real estate		8,544		8,735		17,279		9,711
Owner occupied - commercial real estate		7,065		3,690		10,755		6,463
Real estate mortgage - residential		5,503		2,713		8,216		5,631
Construction - commercial and residential		2,298		3,087		5,385		11,509
Home equity		50		550		600		487
Other consumer		—		6		6		—
Total	$	24,967	$	33,995	$	58,962	$	48,729


	Unpaid		Recorded		Recorded						Average Recorded		Interest Income
	Contractual		Investment		Investment		Total				Investment		Recognized
	Principal		With No		With		Recorded		Related		Year		Year
(dollars in thousands)	Balance		Allowance		Allowance		Investment		Allowance		To Date		To Date
December 31, 2019
Commercial	$	15,814	$	11,858	$	3,956	$	15,814	$	5,714	$	15,682	$	270
Income producing - commercial real estate		14,093		2,713		11,380		14,093		2,145		18,133		382
Owner occupied - commercial real estate		7,349		6,388		961		7,349		415		6,107		197
Real estate mortgage - residential		5,631		3,175		2,456		5,631		650		5,638		—
Construction - commercial and residential		11,509		11,101		408		11,509		100		8,211		92
Home equity		487		—		487		487		100		487		—
Other consumer		—		—		—		—		—		—		—
Total	$	54,883	$	35,235	$	19,648	$	54,883	$	9,124	$	54,258	$	941

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average Recorded Investment				Interest Income Recognized
	Principal		With No		With		Recorded		Related		Quarter		Year		Quarter		Year
(dollars in thousands)	Balance		Allowance		Allowance		Investment		Allowance		To Date		To Date		To Date		To Date

September 30, 2017
Commercial	$	6,047	$	2,363	$	3,640	$	6,003	$	3,246	$	5,977	$	5,790	$	31	$	97
Income producing - commercial real estate		10,092		828		9,264		10,092		1,378		10,222		11,350		121		373
Owner occupied - commercial real estate		6,890		1,612		5,278		6,890		1,005		5,623		4,182		26		46
Real estate mortgage – residential		301		301		—		301		—		304		368		—		—
Construction - commercial and residential		4,930		1,534		3,396		4,930		2,900		4,808		3,736		—		14
Home equity		594		494		100		594		90		446		223		—		2
Other consumer		92		—		92		92		81		93		101		—		—
Total	$	28,946	$	7,132	$	21,770	$	28,902	$	8,700	$	27,473	$	25,750	$	178	$	532

December 31, 2016
Commercial	$	8,296	$	2,532	$	3,095	$	5,627	$	2,671	$	12,620	$	12,755	$	79	$	191
Income producing - commercial real estate		14,936		5,048		9,888		14,936		1,943		16,742		17,533		54		198
Owner occupied - commercial real estate		2,483		1,691		792		2,483		350		2,233		2,106		—		13
Real estate mortgage – residential		555		555		—		555		—		246		249		—		—
Construction - commercial and residential		2,072		1,535		537		2,072		522		5,091		5,174		—		—
Home equity		—		—		—		—		—		78		89		—		—
Other consumer		126		—		126		126		113		42		32		2		4
Total	$	28,468	$	11,361	$	14,438	$	25,799	$	5,599	$	37,052	$	37,938	$	135	$	406

September 30, 2016
Commercial	$	15,517	$	2,370	$	10,078	$	12,448	$	1,997	$	12,838	$	12,879	$	54	$	112
Income producing - commercial real estate		14,648		—		14,648		14,648		1,714		17,584		15,298		28		144
Owner occupied - commercial real estate		2,517		—		2,517		2,517		360		2,108		1,923		13		13
Real estate mortgage – residential		244		244		—		244		—		249		271		—		—
Construction - commercial and residential		4,878		4,340		538		4,878		300		5,146		6,542		—		—
Home equity		113		—		113		113		100		117		129		2		2
Other consumer		—		—		—		—		—		—		6		—		—
Total	$	37,917	$	6,954	$	27,894	$	34,848	$	4,471	$	38,042	$	37,048	$	97	$	271

	For the Three Months Ended September 30, 2017
						Income Producing -			Owner Occupied -			Construction -
(dollars in thousands)	Number of Contracts		Commercial			Commercial Real Estate			Commercial Real Estate			Commercial Real Estate		Total
Troubled debt restructings

Restructured accruing		—	$	(356	)	$	—		$	(23	)	$	—	$	(379	)
Restructured nonaccruing		2		586			(560	)		—			—		26
Total		2	$	230		$	(560	)	$	(23	)	$	—	$	(353	)

Specific allowance			$	(185	)	$	(559	)	$	—		$	—	$	(744	)

Restructured and subsequently defaulted			$	—		$	—		$	—		$	—	$	—

	For the Three Months Ended September 30, 2016
						Income Producing -			Owner Occupied -			Construction -
(dollars in thousands)	Number of Contracts		Commercial			Commercial Real Estate			Commercial Real Estate			Commercial Real Estate		Total
Troubled debt restructings

Restructured accruing		1	$	801		$	—		$	—		$	—	$	801
Restructured nonaccruing		—		—			—			—			—		—
Total		1	$	801		$	—		$	—		$	—	$	801

Specific allowance			$	363		$	—		$	—		$	—	$	363

Restructured and subsequently defaulted			$	—		$	—		$	—		$	—	$	—


(dollars in thousands)
Twelve Months Ended:
June 30, 2021	$	8,531
June 30, 2022		6,745
June 30, 2023		4,707
June 30, 2024		4,107
June 30, 2025		2,997
Thereafter		2,547
Total Future Minimum Lease Payments		29,634
Amounts Representing Interest		(2,497)
Present Value of Net Future Minimum Lease Payments	$	27,137

	Swap			Notional					Balance Sheet
September 30, 2017	Number			Amount		Fair Value			Category	Receive Rate	Pay Rate			Maturity

(dollars in thousands)
Interest rate swap		(1	)	$	75,000	$	116		Other Assets	1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points		1.71	%	March 31, 2020
Interest rate swap		(2	)		100,000		(24	)	Other Liabilities	Federal Funds Effective Rate +10 basis points		1.74	%	April 15, 2021
Interest rate swap		(3	)		75,000		75		Other Assets	1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points		1.92	%	March 31, 2022
		Total		$	250,000	$	167


	June 30,2020						December 31,2019
	Notional				Balance Sheet	Notional				Balance Sheet
Derivatives designated as hedging instruments	Amount		Fair Value		Category	Amount		Fair Value		Category
Interest rate product	$	100,000	$	1,330	Other Liabilities	$	100,000	$	206	Other Liabilities

Derivatives not designated as hedging instruments

(dollars in thousands)
Interest rate product	$	154,447	$	4,523	Other Assets	$	56,806	$	311	Other Assets

(dollars in thousands)
Interest rate product	$	154,447	$	4,818	Other Liabilities	$	56,806	$	319	Other Liabilities
Other Contracts		27,150		150	Other Liabilities		27,384		86	Other Liabilities
	$	181,597	$	4,968	Other Liabilities	$	84,190	$	405	Other Liabilities


The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
					Location of Gain or (Loss)	Amount of Gain or (Loss)
	Amount of (Loss) Recognized in				Recognized from	Reclassified from Accumulated OCI
	OCI on Derivative				Accumulated Other	into Income
Derivatives in Subtopic 815-20 Hedging	Three Months Ended June 30,				Comprehensive Income into	Three Months Ended June 30,
Relationships (dollars in thousands)	2020		2019		Income	2020		2019
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(27)	$	(834)	Interest Expense	$	(394)	$	313
Total	$	(27)	$	(834)		$	(394)	$	313

					Location of Gain or (Loss)
					Recognized from
					Accumulated Other	Amount of Gain or (Loss)
	Amount of (Loss) Recognized in				Comprehensive Income into	Reclassified from Accumulated OCI
	OCI on Derivative				Income	into Income
Derivatives in Subtopic 815-20 Hedging	Six Months Ended June 30,					Six Months Ended June 30,
Relationships (dollars in thousands)	2020		2019			2020		2019
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(1,548)	$	(1,867)	Interest Expense	$	(366)	$	775
Interest Rate Products		—		—	Gain on sale of investment securities		—		829
Total	$	(1,548)	$	(1,867)		$	(366)	$	1,604

				Nine Months Ended September 30, 2017
				Effective Portion							Ineffective Portion
							Reclassified from AOCI				Recognized in Income
				Amount of			into income				on Derivatives
	Swap			Pre-tax gain (loss)				Amount of				Amount of
	Number			Recognized in OCI			Category	Gain (Loss)			Category	Gain (Loss)

(dollars in thousands)
Interest rate swap		(1	)	$	116		Interest Expense	$	(338	)	Other Expense	$	—
Interest rate swap		(2	)		(24	)	Interest Expense		(525	)	Other Expense		—
Interest rate swap		(3	)		75		Interest Expense		(458	)	Other Expense		(1	)
		Total		$	167			$	(1,321	)		$	(1	)


The Effect of Fair Value and Cash Flow Hedge Accounting on the Statements of Operation
	Location and Amount of Gain or (Loss) Recognized in Income on
	Fair Value and Cash Flow Hedging Relationships (in 000's)
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2019

	Interest				Interest		Interest		Gain on sale of
	Expense				Expense		Expense		investment securities
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded	$	(394)	$	313	$	(366)	$	775	$	829

Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	(394)	$	313	$	(366)	$	775	$	—
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring	$	—	$	—	$	—	$	—	$	829
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component	$	(394)	$	313	$	(366)	$	775	$	—
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Excluded Component	$	—	$	—	$	—	$	—	$	—

				Year Ended December 31, 2016
				Effective Portion							Ineffective Portion
							Reclassified from AOCI				Recognized in Income
				Amount of			into income				on Derivatives
	Swap			Pre-tax gain (loss)				Amount of				Amount of
	Number			Recognized in OCI			Category	Gain (Loss)			Category	Gain (Loss)

(dollars in thousands)
Interest rate swap		(1	)	$	(197	)	Interest Expense	$	(628	)	Other Expense	$	—
Interest rate swap		(2	)		(514	)	Interest Expense		(880	)	Other Expense		—
Interest rate swap		(3	)		19		Interest Expense		(747	)	Other Expense		1
		Total		$	(692	)		$	(2,255	)		$	1

Nine Months Ended September 30, 2017
Offsetting of Derivative Liabilities(dollars in thousands)
										Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Liabilities			Gross Amounts Offset in the Balance Sheet			Net Amounts of Liabilities presented in the Balance Sheet			Financial Instruments		Cash Collateral Posted			Net Amount
Counterparty 1	$	24		$	(75	)	$	(51	)	$	—	$	(560	)	$	(611	)
Counterparty 2		(116	)		—			(116	)		—		(330	)		(446	)
	$	(92	)	$	(75	)	$	(167	)	$	—	$	(890	)	$	(1,057	)

						Weighted-Average
Outstanding:		Stock Options		Weighted-Average		Remaining
Range of Exercise Prices		Outstanding		Exercise Price		Contractual Life
$5.76	$10.72		101,075	$	5.76		1.26
$10.73	$11.40		41,389		10.84		0.77
$11.41	$24.86		3,225		22.79		6.02
$24.87	$49.91		6,750		47.83		8.37
			152,439	$	9.36		1.54

Exercisable:		Stock Options		Weighted-Average
Range of Exercise Prices		Exercisable		Exercise Price
$5.76	$10.72		66,377	$	5.76
$10.73	$11.40		41,389		10.84
$11.41	$24.86		2,065		23.18
$24.87	$49.91		750		49.49
			110,581	$	8.28