What changed in this filing

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Item 1. Financial Statements

2020-11-18 compared with 2019-08-12 · 886 added, 711 removed, 620 unchanged (72% of the section changed)

3 unchanged sentences

(dollars in thousands, except per share data)

June 30, 2019

December 31, 2018

September 30, 2020 December 31, 2019

Cash and due from banks $ 7,559 $ 7,539

1 unchanged sentence

Interest bearing deposits with banks and other short-term investments 818,719 195,447

Investment securities available-for-sale, at fair value

Investment securities available for sale, at fair value (amortized cost of $ 956,803 and $ 839,192 and allowance for credit losses of $ 156 and $ 0 as of September 30, 2020 and December 31, 2019, respectively).

977,570 843,363

Federal Reserve and Federal Home Loan Bank stock 40,061 35,194

Loans held for sale 79,084 56,707

Loans 7,880,255 7,545,748

Less allowance for credit losses ( 110,215 ) ( 73,658 )

Loans, net 7,770,040 7,472,090

Premises and equipment, net 12,204 14,622

4 unchanged sentences

Other real estate owned 4,987 1,487

Other assets 120,206 85,644

Total Assets $ 10,106,294 $ 8,988,719

Liabilities and Shareholders’ Equity

3 unchanged sentences

Time, $ 100,000 or more

553,949 663,987

Other time 460,568 619,052

Total deposits 8,178,785 7,224,391

3 unchanged sentences

Operating lease liabilities 30,457 29,959

Reserve for unfunded commitments 5,092 —

Other liabilities 76,285 45,021

5 unchanged sentences

Retained earnings 766,219 705,105

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income 14,271 2,959

Total Shareholders’ Equity 1,223,402 1,190,681

2 unchanged sentences

EAGLE BANCORP, INC.

Consolidated Statements of Operations (Unaudited)

Consolidated Statements of Income (Unaudited)

(dollars in thousands, except per share data)

Three Months Ended June 30 ,

Six Months Ended June 30 ,

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

2020 2019 2020 2019

Interest Income

12 unchanged sentences

Provision for Credit Losses 6,607 3,186 40,654 10,146

Provision for Unfunded Commitments ( 2,078 ) — 974 —

Net Interest Income After Provision For Credit Losses 74,509 77,803 198,517 233,189

4 unchanged sentences

Increase in the cash surrender value of bank owned life insurance 413 431 1,655 1,285

Other income 4,029 1,673 12,827 5,384

Total noninterest income 17,844 6,314 35,809 18,965

10 unchanged sentences

Income Tax Expense 14,092 14,149 31,847 39,531

Net Income $ 41,346 $ 36,495 $ 93,325 $ 107,487

Earnings Per Common Share

Basic $ 1.28 $ 1.07 $ 2.88 $ 3.12

Diluted $ 1.28 $ 1.07 $ 2.88 $ 3.12

See notes to consolidated financial statements.

2 unchanged sentences

(dollars in thousands)

Three Months Ended June 30 ,

Six Months Ended June 30 ,

Other comprehensive income (loss), net of tax:

Unrealized gain (loss) on securities available for sale

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

2020 2019 2020 2019

Net Income $ 41,346 $ 36,495 $ 93,325 $ 107,487

Other comprehensive income, net of tax:

Unrealized (loss) gain on securities available for sale ( 624 ) 1,174 13,354 13,140

Reclassification adjustment for net gains included in net income ( 86 ) ( 110 ) ( 1,231 ) ( 1,190 )

Total unrealized gain (loss) on investment securities

Unrealized (loss) gain on derivatives

Total unrealized (loss) gain on investment securities ( 710 ) 1,064 12,123 11,950

Unrealized gain (loss) on derivatives 24 11 ( 1,324 ) ( 1,664 )

Reclassification adjustment for amounts included in net income 289 ( 205 ) 513 ( 1,374 )

Total unrealized (loss) gain on derivatives

Other comprehensive income (loss)

Total unrealized gain (loss) on derivatives 313 ( 194 ) ( 811 ) ( 3,038 )

Other comprehensive (loss) income ( 397 ) 870 11,312 8,912

Comprehensive Income $ 40,949 $ 37,365 $ 104,637 $ 116,399

3 unchanged sentences

(dollars in thousands except share data)

Additional Paid

Other Comprehensive

Total Shareholders’

Income (Loss)

Balance April 1, 2019

Other comprehensive income, net of tax

Common Additional Paid Retained Comprehensive Shareholders'

Shares Amount in Capital Earnings Income Equity

Balance July 1, 2020 32,224,756 $ 320 $ 440,934 $ 731,973 $ 14,668 $ 1,187,895

Net Income — — — 41,346 — 41,346

Other comprehensive loss, net of tax — — — — ( 397 ) ( 397 )

Stock-based compensation expense — — 1,452 — — 1,452

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

Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 3,297 ) — — — — —

1 unchanged sentence

Cash dividends declared ($ 0.22 per share)

Balance June 30, 2019

Balance April 1, 2018

Other comprehensive loss, net of tax

— — — ( 7,100 ) — ( 7,100 )

Balance September 30, 2020 32,228,636 $ 320 $ 442,592 $ 766,219 $ 14,271 $ 1,223,402

Balance July 1, 2019 34,539,853 $ 343 $ 532,585 $ 647,887 $ 3,767 $ 1,184,582

Net Income — — — 36,495 — 36,495

Other comprehensive income, net of tax — — — — 870 870

Stock-based compensation expense — — 3,147 — — 3,147

1 unchanged sentence

Issuance of common stock related to employee stock purchase plan 4,120 — 213 — — 213

Balance June 30, 2018

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars in thousands except share data)

Additional Paid

Comprehensive

Shareholders’

Income (Loss)

Cash dividends declared ($ 0.22 per share)

— — ( 7,327 ) — ( 7,327 )

Common stock repurchased ( 822,200 ) $ ( 7 ) $ ( 33,379 ) $ — $ — $ ( 33,386 )

Balance September 30, 2019 33,720,522 $ 336 $ 502,566 $ 677,055 $ 4,637 $ 1,184,594

Common Additional 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 — — — 93,325 — 93,325

Other comprehensive income, net of tax — — — — 11,312 11,312

Stock-based compensation expense — — 3,874 — — 3,874

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

Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 28,218 ) — — — — —

3 unchanged sentences

Cash dividends declared ($ 0.66 per share)

Balance June 30, 2019

— — — ( 21,280 ) — ( 21,280 )

Common stock repurchased ( 1,182,841 ) ( 11 ) ( 44,157 ) — — ( 44,168 )

Balance September 30, 2020 32,228,636 $ 320 $ 442,592 $ 766,219 $ 14,271 $ 1,223,402

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

Other comprehensive loss, net of tax

Net Income — — — 107,487 — $ 107,487

Other comprehensive income, net of tax — — — — 8,912 $ 8,912

Stock-based compensation expense — — 6,648 — — $ 6,648

1 unchanged sentence

Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 13,995 ) 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 11,723 — 585 — — $ 585

Reclassification of the income tax effects of the Tax Cuts and Jobs Act from AOCI (ASU 2018 -02 )

Balance June 30, 2018

Cash dividends declared ($ 0.44 per share)

— — — ( 14,926 ) — $ ( 14,926 )

Common stock repurchased ( 822,200 ) $ ( 7 ) $ ( 33,378 ) $ — $ — $ ( 33,385 )

Balance September 30, 2019 33,720,522 $ 336 $ 502,566 $ 677,055 $ 4,637 $ 1,184,594

See notes to consolidated financial statements.

2 unchanged sentences

(dollars in thousands)

Six Months Ended June 30 ,

Nine Months Ended September 30,

Cash Flows From Operating Activities:

Net Income $ 93,325 $ 107,487

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for credit losses 40,654 10,146

Provision for unfunded commitments 974 —

Depreciation and amortization 3,515 5,653

6 unchanged sentences

Net increase in cash surrender value of BOLI ( 1,655 ) ( 1,285 )

Deferred income tax expense (benefit)

Deferred income tax (benefit) expense ( 6,559 ) 3,305

Net gain on sale of other real estate owned ( 1,180 ) —

Net gain on sale of investment securities ( 1,650 ) ( 1,628 )

1 unchanged sentence

Net tax benefits from stock compensation 99 10

Decrease (increase) in other assets

Decrease in other liabilities

(Increase) decrease in other assets ( 45,493 ) 7,274

Increase (decrease) in other liabilities 35,880 ( 19,314 )

Net cash provided by operating activities 107,585 92,339

6 unchanged sentences

Net increase in loans ( 343,665 ) ( 574,177 )

Decrease (increase) in premises and equipment

Increase (decrease) in premises and equipment ( 445 ) ( 2,171 )

Net cash used in investing activities ( 475,566 ) ( 499,399 )

Cash Flows From Financing Activities:

(Decrease) increase in deposits

Increase (decrease) in customer repurchase agreements

Increase (decrease) in short-term borrowings

Increase in deposits 954,394 428,228

Decrease in customer repurchase agreements ( 6,687 ) ( 116 )

Increase in short-term borrowings 50,000 100,000

Increase in long-term borrowings 50,293 —

Proceeds from exercise of equity compensation plans — 332

Proceeds from employee stock purchase plan 564 585

Common stock repurchased ( 44,168 ) ( 33,385 )

Cash dividends paid ( 21,280 ) ( 14,926 )

Net cash provided by financing activities 983,116 480,718

Net (Decrease) Increase In Cash and Cash Equivalents

Net Increase In Cash and Cash Equivalents 615,135 73,658

Cash and Cash Equivalents at Beginning of Period 241,973 321,864

5 unchanged sentences

Initial recognition of operating lease right-of-use assets $ 998 $ 29,574

Initial recognition of operating lease liabilities

Transfers from loans to other real estate owned $ 3,500 $ 93

See notes to consolidated financial statements.

11 unchanged sentences

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.

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, 2018.

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, 2018 except as indicated in the “Accounting Standards Adopted in 2019” section below.

generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").

In addition to the “Critical Accounting Policies” 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, 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 audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results of operations to be expected for the remainder of the year, or for any other period.

Nature of Operations

The Company, through the Bank,

conducts a full service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C.

The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as

traditional deposit and repurchase agreement products.

The Bank is also active in the origination and sale of residential

mortgage loans, the origination of small business loans, and the origination, securitization and sale of multifamily Federal

Housing Administration (“FHA”) loans.

The guaranteed portion of small business loans, guaranteed by the Small

Business Administration (“SBA”), is typically sold to third party investors in a transaction apart from the

loan’s origination.

The Bank offers its products and services through twenty banking

offices, five lending

centers and various electronic capabilities, including remote deposit services and mobile banking services.

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.

The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C.

The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products.

The Bank is also active in the origination and sale of residential mortgage loans, the origination of small business loans, and the origination, securitization and sale of multifamily Federal Housing Administration (“FHA”) loans.

The guaranteed portion of small business loans, guaranteed by the Small Business Administration (“SBA”), is typically sold to third party investors in a transaction apart from the loan’s origination.

The Bank offers its products and services through twenty banking offices, five lending centers and various electronic capabilities, including remote deposit services and 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.

Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.

Bethesda Leasing, a subsidiary of the Bank, holds title to repossessed real 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 in the financial statements and accompanying notes.

Actual results may differ from those estimates and such differences could be material to the financial statements.

New Authoritative Accounting Guidance

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.

Actual results could differ from those estimates.

The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change.

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 ability to fulfill their financial obligations to the Company.

The World Health Organization has declared COVID-19 to be a global pandemic indicating that 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 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 adverse impact to the Company’s employees and operations to date, COVID-19 could still potentially create widespread business continuity or credit issues for the Company depending on how much longer the pandemic lasts.

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 March 2020 as a $2 trillion legislative package.

The goal of the CARES Act is to prevent a 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 follow-up stimulus legislative and regulatory relief efforts have had and are expected to continue to have a 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 control and manage 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 has been and could be further 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 expected COVID-19 related economic crisis.

At this time, the Company is unable to project the full extent of 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 scenario, interest income in future periods could be negatively impacted.

At this time the Company is unable to project the full extent of the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to 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 short term funding have recently been very low.

If funding costs were to become elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin.

If an extended recession caused large numbers of the Company’s customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

Asset valuation

Currently, the Company does not expect COVID-19 to affect its ability to account timely for the 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 as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

COVID-19 could cause a further and sustained decline in the Company’s stock price.

As of June 30, 2020, the Company performed a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount.

As of June 30, 2020, 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 the reporting unit with its carrying amount (including goodwill).

Determining the fair value of a reporting unit under the goodwill impairment test is subjective and often involves the use of significant estimates and assumptions.

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 comparable factors.

Based on the results of the assessment of all reporting units, the Company concluded that no impairment existed as of June 30, 2020.

The Company determined that there were no triggering events and an impairment analysis was not performed as of September 30, 2020.

An impairment analysis will next be performed during the fourth quarter as part of our regularly scheduled annual impairment testing.

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

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.

We have established general guidelines for returning to the workplace that include having employees maintain safe distances, staggered work schedules to limit the number of employees in a single location, more frequent cleaning of our facilities and other practices encouraging a safe working environment during this challenging time, including required COVID-19 training programs.

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 and consistent with regulatory guidance, we have also implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications.

At September 30, 2020, the Company had no accruing loans 90 days or more past due.

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 September 30, 2020, we had ongoing temporary modifications on approximately 321 loans representing approximately $ 851 million (approximately 10.8 % of total loans) in outstanding balances, as compared to 708 loans representing approximately $ 1.6 billion (approximately 20 % of total loans) at June 30, 2020.

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 troubled debt restructurings ("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.

The Company actively participates in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”).

The PPP loans originated by the Bank generally have a two-year term and earn interest at 1 % plus fees.

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 September 30, 2020, PPP loans totaled $ 456.1 million to just over 1,400 businesses.

The Company understands that loans funded through the PPP program are fully guaranteed by the U.S.

Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charges to earnings.

The Company is working with customers directly affected by COVID-19.

The Company 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.

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 replaced 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 2016-2 "Leases (Topic 842)" ("ASU 2016-2") .

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 write-down of 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 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 does not own HTM investment debt securities.

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

Three Months Ended Nine Months Ended

(dollars in thousands) September 30, 2020 September 30, 2020

Provision for credit losses- loans $ 6,589 $ 40,498

Provision for credit losses- AFS debt securities 18 156

Total provision for credit losses $ 6,607 $ 40,654

Loans held for investment are stated at the amount 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 commitment fees are deferred and amortized as an adjustment to yield over the life of 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 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.

The most common change in terms provided by the Company is an extension of an interest-only term.

As of September 30, 2020, all performing TDRs were categorized as interest-only modifications.

Refer to the subsection above "Lendi ng operations and accommodations to borrowers" for a discussion on the impact of the CARES Act on TDRs.

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 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 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 loans held for investment and available-for-sale debt securities portfolios.

ASU 2016-13 replaced 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 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.

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).

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.

These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments.

A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in reserve for unfunded commitments on the Consolidated Balance Sheets.

For periods beyond which we are able to develop reasonable and supportable forecasts, we revert to the historical loss rate on a straight line basis over a twelve month period.

See further detail regarding our forecasting methodology in the “Discounted Cash Flow Method” section below.

Even though portions of 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 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:

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 – commerical and industrial ("C&I") (owner occupied) .

The construction C&I (owner occupied) portfolio comprises loans to operating companies and their related entities for new construction or renovation of the real or leased property in which they operate.

Generally these loans contain provisions for conversion to an owner occupied commercial real estate 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.

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 estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions.

Changes are reflected in the pool-basis allowance and 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' reports to the Board are part of the Board's review on a quarterly basis of our consolidated financial statements.

When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the 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 reasonable expectation that a loan will be in a trouble debt restructuring or the 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 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 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 September 30, 2020.

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.

The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level.

Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level Net Present Value ("NPV").

An ACL is established for the difference between the instrument’s NPV and amortized cost basis.

Collateral Dependent Financial Assets

Loans that do not share risk characteristics are evaluated on an individual basis.

For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the 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.

A loan that has been modified or renewed is considered a TDR when two conditions are met:

1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics.

The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR.

The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default.

Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL.

Refer to the subsection above "Lendi ng operations and accommodations to borrowers" for a discussion on the impact of the CARES Act on TDRs.

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

Although ASU No.

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 September 30, 2020 and December 31, 2019 were issued by US agencies.

However, as of September 30, 2020, the Company determined that part of the unrealized loss positions in AFS corporate and municipal securities could be the result of credit losses, and therefore, an allowance for credit losses of $ 156 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 Statement of Income.

The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company’s Consolidated Balance Sheets.

Other New Authoritative Accounting Guidance

Accounting Standards Adopted in 2020

ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 has, among other things, required lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments, measured on a discounted basis;

and a right-of-use (“ROU”) 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.

ASU 2016-02 did not significantly change lease accounting requirements applicable to lessors;

however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 became effective for us on January 1, 2019 and initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) – Targeted Improvements,” which, among other things, provides an additional transition method that allows entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs.

Upon adoption of ASU 2016-02, ASU 2018-11 and ASU 2018-20 on January 1, 2019, we recognized ROU assets of $ 29.6 million and related lease liabilities of $ 33.5 million which reduced the March 31, 2019 total risk based capital ratio by six basis points.

We elected to apply certain practical expedients provided under ASU 2016-02 whereby we did not reassess (i) whether any expired or existing contracts were or contained leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases.

We also elected to not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance).

We utilized the modified-retrospective transition approach prescribed by ASU 2018-11.

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 has had, and is expected to continue to have, a material impact on the Company’s financial statements;

however, the full extent of such impact cannot be quantified at this time.

See Note 5 to the Consolidated Financial Statements for further detail.

ASU 2016-13, “Measurement of Credit Losses on Financial Instruments (Topic 326).” Under the CECL standard and based on the January 1, 2020 effective date, the Company made an initial adjustment to the allowance for credit losses of $ 10.6 million along with $ 4.1 million to the reserve for unfunded commitments.

In accordance with adoption of CECL, the initial January 1, 2020 cumulative-effect adjustment was to retained earnings (net of taxes) under the modified retrospective approach.

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.

Refer to the “Allowance for Credit Losses- Loans” section above for additional detail.

ASU 2020-2 "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842) " ("ASU 2020-2") 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 2020-2 was effective on January 1, 2020 and had no significant impact on our documentation requirements, financial statement or disclosures.

ASU 2020-3 "Codification Improvements to Financial Instruments" ("ASU 2020-3") revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications.

ASU 2020-3 was effective immediately upon its release in March 2020 and did not have a material impact on our consolidated financial statements.

Accounting Standards Pending Adoption

“Measurement of Credit Losses on Financial Instruments (Topic 326).”

This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

In issuing the standard, the FASB is responding to criticism that today’s guidance for determining the allowance for credit losses delays recognition of expected future 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.

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.

In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.

2016-13 is effective for the Company beginning on January 1, 2020.

Entities will apply any changes resulting from the application of the new 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).

We have substantially concluded our data gap analysis and have contracted with third parties to develop and evaluate a model to comply with CECL requirements.

We have entered our data into the model and are working on the qualitative and forecasting aspects of the methodology.

We have established a steering committee with representation from various departments across the enterprise.

The committee has agreed to a project plan and has regular meetings to ensure adherence to our implementation timeline.

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.

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 2019-12 will be effective for us on January 1, 2021 and is not expected to have a material impact on our consolidated financial statements.

ASU 2020-4, " Reference Rate Ref orm (Topic 848)" ("ASU 2020-4") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks.

For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts.

ASU 2020-4 also provides numerous optional expedients for derivative accounting.

ASU 2020-4 is effective March 12, 2020 through December 31, 2022.

An entity may elect to apply ASU 2020-4 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.

Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic.

We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs.

We 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.

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 2019, the Bank maintained balances at the Federal Reserve sufficient to meet reserve requirements, as well as significant excess reserves, on which interest is paid.

During the first nine months of 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.

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Amortized cost and estimated fair value of securities available-for-sale are summarized as follows:

June 30, 2019

(dollars in thousands)

Gross Gross Allowance Estimated

September 30, 2020 Amortized Unrealized Unrealized for Credit Fair

(dollars in thousands) Cost Gains Losses Losses Value

agency securities $ 130,313 $ 1,638 $ ( 665 ) $ — $ 131,286

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Other equity investments 198 — — — 198

December 31, 2018

(dollars in thousands)

$ 956,803 $ 22,363 $ ( 1,440 ) $ ( 156 ) $ 977,570

Gross Gross Estimated

December 31, 2019 Amortized Unrealized Unrealized Fair

(dollars in thousands) Cost Gains Losses Value

agency securities $ 180,228 $ 621 $ ( 1,055 ) $ 179,794

2 unchanged sentences

Corporate bonds 10,530 203 — 10,733

Treasury 34,844 11 — 34,855

Other equity investments 198 — — 198

In addition, at June 30, 2019 and December 31, 2018 the Company held $ 34.0 million and $ 23.5 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.

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

June 30, 2019

(dollars in thousands)

$ 839,192 $ 7,206 $ ( 3,035 ) $ 843,363

In addition, at September 30, 2020 and December 31, 2019 the Company held $ 40.1 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 $ 3.1 million and $ 3.2 million at September 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 individual securities have been in a continuous unrealized loss position are as follows:

Less than 12 Months

12 Months or Greater Total

Estimated Estimated Estimated

September 30, 2020 Number of Fair Unrealized Fair Unrealized Fair Unrealized

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

agency securities 25 $ 20,762 $ 32 $ 43,607 $ 633 $ 64,369 $ 665

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Municipal bonds 4 14,086 114 — — 14,086 114

December 31, 2018

(dollars in thousands)

Corporate bonds 1 2,954 71 — — 2,954 71

63 $ 177,650 $ 766 $ 50,941 $ 674 $ 228,591 $ 1,440

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

agency securities 36 $ 75,159 $ 439 $ 51,481 $ 616 $ 126,640 $ 1,055

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Municipal bonds 1 1,994 5 — — 1,994 5

Corporate bonds

The unrealized losses that exist are generally the result of changes in market interest rates and interest spread relationships since original purchases.

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 September 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 September 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.

The weighted average duration of debt securities, which comprise 99.9 % of total investment securities, is relatively short at 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 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 June 30, 2019 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.

The amortized cost and estimated fair value of investments available-for-sale at June 30, 2019 and December 31, 2018 by contractual maturity are shown in the table below.

Expected maturities for residential mortgage backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2019

December 31, 2018

(dollars in thousands)

The amortized cost and estimated fair value of investments available-for-sale at September 30, 2020 and December 31, 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, 2020 December 31, 2019

Amortized Estimated Amortized Estimated

(dollars in thousands) Cost Fair Value Cost Fair Value

agency securities maturing:

Oneyear or less

Afteroneyear throughfiveyears

Fiveyears throughtenyears

One year or less $ 38,000 $ 38,111 $ 96,332 $ 96,226

After one year through five years 81,181 82,057 76,121 75,821

Five years through ten years 11,132 11,224 7,775 7,747

Residential mortgage backed securities 702,655 716,643 541,490 543,852

Municipal bonds maturing:

Oneyear or less

Afteroneyear throughfiveyears

Fiveyears throughtenyears

Aftertenyears

One year or less 4,834 4,868 5,897 5,969

After one year through five years 26,677 27,912 21,416 21,953

Five years through ten years 56,781 59,771 42,589 44,015

After ten years 2,000 2,072 2,000 1,994

Corporate bonds maturing:

Afteroneyear throughfiveyears

Aftertenyears

One year or less 5,214 5,257 502 508

After one year through five years 21,156 22,124 8,528 8,725

After ten years 6,975 7,489 1,500 1,500

treasury — — 34,844 34,855

Other equity investments 198 198 198 198

For thesixmonths ended June 30, 2019, gross realized gains on sales of investments securities were $ 1.5 million, primarily due to $ 829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations, and there were no gross realized losses on sales of investment securities.

For thesixmonths ended June 30, 2018, gross realized gains on sales of investments securities were $ 93 thousand and gross realized losses on sales of investment securities were $ 25 thousand.

Proceeds from sales and calls of investment securities for thethreemonths ended June 30, 2019 were $ 42.1 million compared to $ 29.0 million for the same period in2018 .

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 June 30, 2019 and December 31, 2018 was $ 460.6 million and $ 528.2 million, respectively, which is well in excess of required amounts in order to operationally provide significant reserve amounts for new business.

As of June 30, 2019 and December 31, 2018, there were no holdings of securities of anyoneissuer, other than the U.S.

Allowance for Credit Losses — ( 156 ) — —

$ 956,803 $ 977,570 $ 839,192 $ 843,363

For the nine months ended September 30, 2020, gross realized gains on sales of investments securities were $ 1.7 million and there were no gross realized losses on sales of investment securities.

For the nine months ended September 30, 2019, gross realized gains on sales of investments securities were $ 1.6 million, of which $ 829 thousand was recognized during March 2019 on interest rate swap terminations, and there were no gross realized losses on sales of investment securities.

Proceeds from sales and calls of investment securities for the nine months ended September 30, 2020 were $ 130.3 million compared to $ 83.0 million for the same period in 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 30, 2020 and December 31, 2019 was $ 320 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 30, 2020 and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S.

Government and U.S.

agency securities, which exceededtenpercent of shareholders’ equity.

Mortgage Banking Derivative

agency securities, which exceeded ten percent of shareholders’ equity.

Mortgage Banking 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”).

Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed securities.

Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income.

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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 June 30, 2019 the Bank had mortgage banking derivative financial instruments with a notional value of $ 124.5 million related to its forward contracts as compared to $ 49.6 million at December 31, 2018.

The fair value of these mortgage banking derivative instruments at June 30, 2019 was $ 387 thousand included in other assets and $ 309 thousand included in other liabilities as compared to $ 229 thousand included in other assets and $ 269 thousand included in other liabilities at December 31, 2018.

Included in other noninterest income for the three and six months ended June 30, 2019 was a net gain of $ 84 thousand and a net gain $ 219 thousand, respectively, relating to mortgage banking derivative instruments as compared to a net gain of $ 55 thousand and net loss of $ 31 thousand as of June 30, 2018.

The amount included in other noninterest income for the three and six months ended June 30, 2019 pertaining to its mortgage banking hedging activities was a net realized loss of $ 94 thousand and a net realized loss of $ 49 thousand, respectively, as compared to a net realized loss of $147 thousand and a net realized loss of $ 56 thousand as of June 30, 2018.

During the second quarter of 2020, the Company suspended locking loans for sale on a mandatory basis as a result of elevated origination volumes and market dislocations associated with the current COVID-19 pandemic.

In connection with this shift in pipeline strategy from mandatory to best efforts, beginning in the third quarter of 2020, the Company adjusted its accounting treatment of loans sold on a best efforts basis which accelerated revenue recognition associated with the pipeline to when the loans are committed, in accordance with GAAP.

The change reflects the timely recognition of non-interest income associated with the gains and fees attributable to the best efforts sale and aligns the accounting treatment of best efforts with the accounting treatment of loans sold on a mandatory basis.

Under the adjustment to the accounting for best efforts implemented in the third quarter of 2020, the Company recognized an additional $ 1.6 million in noninterest income associated with the residential mortgage operations.

Had the company utilized the adjusted accounting method for best efforts in prior quarters, non-interest income would have been higher by an immaterial amount.

At September 30, 2020, the Bank had mortgage banking derivative financial instruments totaling $ 6.0 million.

At September 30, 2019 the Bank had mortgage banking derivative financial instruments of $ 134.3 million notional value.

The fair value of these mortgage banking derivative instruments at December 31, 2019 was $ 280 thousand included in other assets and $ 66 thousand included in other liabilities.

Included in other noninterest income for the three and nine months ended September 30, 2020 was a net loss of $ 145 thousand and a net loss of $ 309 thousand relating to mortgage banking derivative instruments as compared to a net gain of $ 30 thousand and a net gain of $ 249 thousand for the three and nine months ended September 30, 2019.

The amount included in other noninterest income for the three and nine months ended September 30, 2020 pertaining to its mortgage banking hedging activities was a net realized gain of $ 34 thousand and a net gain of $ 27 thousand, respectively, as compared to a net gain of $ 277 thousand and a net gain of $ 228 thousand, respectively, for the three and nine months ended September 30, 2019.

Loans and Allowance for Credit Losses

2 unchanged sentences

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 June 30, 2019 and December 31, 2018 are summarized by type as follows:

June 30, 2019

December 31, 2018

(dollars in thousands)

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

September 30, 2020 December 31, 2019

(dollars in thousands) Amount % Amount %

Commercial $ 1,524,613 19 % $ 1,545,906 20 %

PPP loans 456,115 6 % — —

Income producing - commercial real estate 3,724,839 47 % 3,702,747 50 %

3 unchanged sentences

Construction - C&I (owner occupied) 140,357 2 % 89,490 1 %

Home equity 72,648 1 % 80,061 1 %

Other consumer 2,509 — 2,160 —

Total loans 7,880,255 100 % 7,545,748 100 %

allowance for credit losses ( 110,215 ) ( 73,658 )

Unamortized net deferred fees amounted to $ 25.2 million and $ 26.5 million at June 30, 2019 and December 31, 2018, respectively.

As of June 30, 2019 and December 31, 2018, the Bank serviced $ 101.8 million and $ 111.1 million, respectively, of multifamily FHA loans, SBA loans and other loan participations which are not reflected as loan balances on the Consolidated Balance Sheets.

Net loans (1)

$ 7,770,040 $ 7,472,090

________________________________________

(1) Excludes accrued interest receivable of $ 43.7 million and $ 21.3 million at September 30, 2020 and December 31, 2019, respectively, which is recorded in other assets.

Unamortized net deferred fees amounted to $ 33.0 million and $ 25.2 million at September 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020 and December 31, 2019, the Bank serviced $ 94 million and $ 99 million, respectively, of multifamily FHA loans, SBA loans and other loan participations that are not reflected as loan balances on the Consolidated Balance Sheets.

Loan Origination / Risk Management

4 unchanged sentences

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

At June 30, 2019, owner occupied - commercial real estate and construction - C&I (owner occupied) represent

approximately 14 %

of the loan portfolio.

At June 30, 2019, non-owner occupied commercial real estate and real estate construction

represented approximately 64 %

of the loan portfolio.

The combined owner occupied and commercial real estate loans represent approximately 78 %

of the loan portfolio.

Real estate also serves as collateral for loans made for other purposes, resulting in 84 %

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.

Bank typically requires a maximum loan to value of 80 %

and minimum cash flow debt service coverage of 1.15 to

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 30, 2020, owner occupied - commercial real estate and construction – C&I (owner occupied) represent approximately 14 % of the loan portfolio.

At September 30, 2020, non-owner occupied commercial real estate and real estate construction represented approximately 58 % of the loan portfolio.

The combined owner occupied and commercial real estate and construction loans represent approximately 73 % 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 thanfiveyears.

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 2 0% of the loan portfolio at June 30, 2019 and was generally variable or adjustable rate.

This loan category represents approximately 19 % of the loan portfolio at September 30, 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.

1 unchanged sentence

SBA loans represent approximately 1 % of the commercial loan category.

In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit as well as potential repairs to the SBA guarantees.

In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit as well as potential recourse 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.

1 unchanged sentence

SBA loans are subject to a maximum loan size established by the SBA as well as internal loan size guidelines.

Approximately 1 %

of the loan portfolio at June 30, 2019 consists of home equity loans and lines of credit and other consumer loans.

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 1 %

of the loan portfolio consists of residential mortgage loans.

The repricing duration of these loans was 20 months.

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.

Approximately 6 % of the loan portfolio at September 30, 2020 consists of PPP loans to eligible customers.

PPP loans are expected to primarily be repaid via forgiveness provisions (under the CARES Act) 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.

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 September 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 1 % of the loan portfolio consists of residential mortgage loans.

The repricing duration of these loans was 17 months at September 30, 2020.

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.

5 unchanged sentences

Loans intended for residential land acquisition, lot development and construction are made on the premise that the land:

1) is or will be developed for building sites for residential structures, and;

2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing.

1) is or will be developed for building sites for residential structures, and 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing.

Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums.

12 unchanged sentences

The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.

The Company’s loan portfolio

includes ADC real estate loans including both investment and owner occupied projects.

ADC loans amounted to $ 1.62 billion

at June 30, 2019.

A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest

reserves at origination.

ADC loans that provide for the use of interest reserves represent approximately 71 %

of the outstanding ADC loan portfolio at June 30, 2019.

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:

The Company’s loan portfolio includes acquisition, development and construction (“ADC”) real estate loans including both investment and owner occupied projects.

ADC loans amounted to $ 1.4 billion at September 30, 2020.

A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination.

ADC loans that provide for the use of interest reserves represent approximately 58 % of the outstanding ADC loan portfolio at September 30, 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

( 4) borrower equity contribution;

(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.

Company recognizes thatoneof 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;

When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics of a properly underwritten ADC loan.

The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan.

In order to mitigate these inherent risks, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including:

(1) construction and development timelines 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.

The following tables detail activity in the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2019 and 2018.

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

Occupied - Commercial

Construction -

Commercial and

(dollars in thousands)

ThreeMonths Ended June 30, 2019

(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.

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

Allocation of a portion of the allowance to one category of loans does not restrict the use of the allowance to absorb losses in other categories.

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, 2020

Allowance for credit losses:

5 unchanged sentences

Ending balance $ 27,224 $ 55,440 $ 13,090 $ 1,871 $ 11,541 $ 1,007 $ 42 $ 110,215

SixMonths Ended June 30, 2019

Nine Months Ended September 30, 2020

Allowance for credit losses:

Balance at beginning of period

Balance at beginning of period, prior to adoption of ASC 326 $ 18,832 $ 29,265 $ 5,838 $ 1,557 $ 17,485 $ 656 $ 25 $ 73,658

Impact of adopting ASC 326 892 11,230 4,674 ( 301 ) ( 6,143 ) 245 17 10,614

Loans charged-off ( 7,332 ) ( 4,300 ) ( 20 ) — ( 2,947 ) ( 92 ) — ( 14,691 )

3 unchanged sentences

Ending balance $ 27,224 $ 55,440 $ 13,090 $ 1,871 $ 11,541 $ 1,007 $ 42 $ 110,215

As of June 30, 2019

As of September 30, 2020

Allowance for credit losses:

2 unchanged sentences

Ending balance $ 27,224 $ 55,440 $ 13,090 $ 1,871 $ 11,541 $ 1,007 $ 42 $ 110,215

ThreeMonths Ended June 30, 2018

Three Months Ended September 30, 2019

Allowance for credit losses:

2 unchanged sentences

Recoveries of loans previously charged-off 210 — — 15 — 17 242

Net loans (charged-off) recoveries

Net loans charged-off ( 1,584 ) — — — 15 — 17 ( 1,552 )

Provision for credit losses 1,617 1,517 ( 158 ) ( 3 ) 251 ( 6 ) ( 32 ) 3,186

Ending balance $ 18,169 $ 28,527 $ 5,598 $ 1,352 $ 19,272 $ 575 $ 227 $ 73,720

SixMonths Ended June 30, 2018

Nine Months Ended September 30, 2019

Allowance for credit losses:

5 unchanged sentences

Ending balance $ 18,169 $ 28,527 $ 5,598 $ 1,352 $ 19,272 $ 575 $ 227 $ 73,720

As of June 30, 2018

As of September 30, 2019

Allowance for credit losses:

2 unchanged sentences

Ending balance $ 18,169 $ 28,527 $ 5,598 $ 1,352 $ 19,272 $ 575 $ 227 $ 73,720

The Company’s recorded investments in loans as of June 30, 2019 and December 31, 2018 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:

Income Producing -

Owner Occupied -

Construction -

Commercial and

(dollars in thousands)

June 30, 2019

Recorded investment in loans:

Individually evaluated for impairment

Collectively evaluated for impairment

Ending balance

December 31, 2018

Recorded investment in loans:

Individually evaluated for impairment

Collectively evaluated for impairment

Ending balance

At June 30, 2019, nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia Heritage Bank (“Virginia Heritage”) have a carrying value of $ 273 thousandand $ 155 thousand, respectively, and an unpaid principal balance of $ 323 thousandand $ 968 thousand, respectively, and were evaluated separately in accordance with ASC Topic 310 -30,

“Loans and Debt Securities Acquired with Deteriorated Credit Quality

.” At December 31, 2018, nonperforming loans acquired from Fidelity and Virginia Heritage had a carrying value of $ 282 thousandand $ 202 thousand, respectively, and an unpaid principal balance of $ 332 thousandand $ 995 thousand, respectively, and were evaluated separately in accordance with ASC Topic 310-30.

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.

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 Income, as the charges were recorded directly to Retained Earnings (net of taxes).

We recorded a $ 6.6 million and $ 40.7 million provision for credit losses for the three and nine months ended September 30, 2020, respectively, under CECL.

We recorded $ 5.2 million and $ 14.6 million in net charge-offs during the three and nine months ended September 30, 2020, respectively, compared to $ 1.6 million and $ 6.4 million during the three and nine months ended September 30, 2019, respectively.

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 following table presents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2020:

(dollars in thousands) Business/Other Assets Real Estate

Commercial $ 14,075 $ 2,948

Income producing - commercial real estate 3,193 26,063

Owner occupied - commercial real estate — 14,215

Real estate mortgage - residential — 5,335

Construction - commercial and residential — 2,274

Home equity — 109

Other consumer 8 —

Total $ 17,276 $ 50,944

Credit Quality Indicators

17 unchanged sentences

Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention.

Classified (a) Substandard

- Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

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.

1 unchanged sentence

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.

Classified (b) Doubtful – Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.

The Company’s credit quality indicators are updated generally on a quarterly basis, but no less frequently than annually.

The following table presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of June 30, 2019 and December 31, 2018.

(dollars in thousands)

Based on the most recent analysis performed, the risk category of loans by class of loans and year of origination is as follows:

September 30, 2020 (dollars in thousands) Prior 2016 2017 2018 2019 2020 Total

Pass 375,848 124,678 306,487 249,287 193,594 155,505 1,405,399

Watch 32,430 3,125 32,399 9,478 3,674 — 81,106

Special Mention 1,302 — — 451 — — 1,753

June 30, 2019

Substandard 16,915 4,766 2,046 12,421 207 — 36,355

Total 426,495 132,569 340,932 271,637 197,475 155,505 1,524,613

Pass — — — — — 456,115 456,115

Total — — — — — 456,115 456,115

Income producing - commercial real estate

Pass 756,002 402,690 421,428 685,804 705,972 377,721 3,349,617

Watch 150,215 15,480 74,168 53,616 4,640 — 298,119

Special Mention 203 — — — 47,644 — 47,847

Substandard 13,375 800 4,656 4,883 5,542 — 29,256

Total 919,795 418,970 500,252 744,303 763,798 377,721 3,724,839

Owner occupied - commercial real estate

Pass 344,863 105,381 115,144 139,991 74,286 29,169 808,834

Watch 50,018 2,038 2,645 95,171 24,761 — 174,633

Substandard 9,584 764 — 355 3,475 — 14,178

Total 404,465 108,183 117,789 235,517 102,522 29,169 997,645

Real estate mortgage - residential

Pass 18,121 3,410 10,377 14,593 23,100 6,837 76,438

Watch 612 — — — — — 612

Substandard 1,181 4,154 — — — — 5,335

Total 19,914 7,564 10,377 14,593 23,100 6,837 82,385

Construction - commercial and residential

Pass 32,535 65,703 286,922 314,061 104,335 46,832 850,388

Watch 853 — 25,629 — — — 26,482

Substandard — 1,866 408 — — — 2,274

Total 33,388 67,569 312,959 314,061 104,335 46,832 879,144

Construction - C&I (owner occupied)

Pass 11,162 10,577 6,501 29,963 18,761 43,997 120,961

Watch 787 — 2,121 3,251 13,237 — 19,396

Total 11,949 10,577 8,622 33,214 31,998 43,997 140,357

Pass 38,049 4,970 8,274 8,314 4,369 6,918 70,894

Watch 1,401 — — — — — 1,401

Substandard 304 — — — 49 — 353

Total 39,754 4,970 8,274 8,314 4,418 6,918 72,648

Other Consumer

Pass 2,039 169 108 50 100 33 2,499

Substandard 10 — — — — — 10

Total 2,049 169 108 50 100 33 2,509

Total Recorded Investment $ 1,857,809 $ 750,571 $ 1,299,313 $ 1,621,689 $ 1,227,746 $ 1,123,127 $ 7,880,255

The Company’s credit quality indicators are generally updated 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 December 31, 2019:

(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

2 unchanged sentences

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

Nonaccrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.

Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.

Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.

Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following table presents, by class of loan, information related to nonaccrual loans as of June 30, 2019 and December 31, 2018.

(dollars in thousands)

Income producing - commercial real estate

Owner occupied - commercial real estate

Real estate mortgage - residential

Construction - commercial and residential

Total nonaccrual loans ( 1)( 2)

Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling $ 8.6 million at June 30, 2019 and $ 24.0 million at December 31, 2018.

Gross interest income of $ 1.2 million and $ 321 thousand would have been recorded for thesixmonths ended June 30, 2019 and 2018, 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 $ 86 thousand and $ 6 thousand for thesixmonths ended June 30, 2019 and 2018, respectively.

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 June 30, 2019 and December 31, 2018.

Total Recorded

Investment in

(dollars in thousands)

More Past Due

June 30, 2019

As part of its comprehensive loan review process, the Loan Committee or Credit Review Committee 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 following table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of September 30, 2020 (unaudited) and December 31, 2019:

Loans Loans Loans Total Recorded

Current 30-59 Days 60-89 Days 90 Days or Total Past Investment in

(dollars in thousands) Loans Past Due Past Due More Past Due Due Loans Non-Accrual Loans

September 30, 2020

Commercial $ 1,494,038 $ 4,585 $ 10,154 $ — $ 14,739 $ 15,836 $ 1,524,613

PPP loans 456,115 — — — — — 456,115

Income producing - commercial real estate 3,696,949 — 7,822 — 7,822 20,068 3,724,839

2 unchanged sentences

Construction - commercial and residential 876,361 — 509 — 509 2,274 879,144

Construction - C&I (owner occupied) 138,837 1,520 — — 1,520 — 140,357

Home equity 71,837 656 46 — 702 109 72,648

Other consumer 2,492 9 — — 9 8 2,509

Total $ 7,796,448 $ 6,770 $ 18,977 $ — $ 25,747 $ 58,060 $ 7,880,255

December 31, 2019

Commercial $ 1,527,134 $ 3,063 $ 781 $ — $ 3,844 $ 14,928 $ 1,545,906

Income producing - commercial real estate 3,687,494 — 5,542 — 5,542 9,711 3,702,747

2 unchanged sentences

Construction - commercial and residential 1,113,735 — — — — 11,509 1,125,244

Home equity 79,246 136 192 — 328 487 80,061

Other consumer 2,151 — 9 — 9 — 2,160

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable the Company will 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 is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is 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 is expected solely from the collateral.

Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.

Impaired loans, or portions thereof, are charged-off when deemed uncollectible.

The following table presents, by class of loan, information related to impaired loans for the periods ended June 30, 2019 and December 31, 2018.

Average Recorded Investment

Interest Income Recognized

(dollars in thousands)

June 30, 2019

Total $ 7,470,755 $ 19,740 $ 6,524 $ — $ 26,264 $ 48,729 $ 7,545,748

The following presents the nonaccrual loans as of September 30, 2020 (unaudited) and December 31, 2019:

September 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 572 15,262 15,834 14,928

PPP loans — — — —

Income producing - commercial real estate 6,690 13,379 20,069 9,711

2 unchanged sentences

Construction - commercial and residential 1,866 408 2,274 11,509

Home equity 109 — 109 487

Other consumer 5 3 8 —

$ 23,303 $ 34,757 $ 58,060 $ 48,729

________________________________________

(1) Excludes TDRs that were performing under their restructured terms totaling $ 10.1 at September 30, 2020 and $ 16.6 million at December 31, 2019.

(2) Gross interest income of $ 2.6 million and $ 2.7 million would have been recorded for the nine months ended September 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 $ 282 thousand and $ 598 thousand for the nine months ended September 30, 2020 and 2019, respectively.

See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status.

Pre Adoption of CECL

Loans were considered impaired when, based on current information and events, it was probable the Company 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.

If a loan was impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral.

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.

Impaired loans, or portions thereof, were charged-off when deemed uncollectible.

The following table presents, by class of loan, information related to impaired loans at December 31, 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

2 unchanged sentences

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

Modifications

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession.

A modification of a loan constitutes a TDR when the borrower is experiencing financial difficulty and the modification constitutes a concession.

The Company offers various types of concessions when modifying a loan.

1 unchanged sentence

Additional collateral, a co-borrower, or a guarantor is often requested.

Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.

Construction loans modified in a TDR may also involve extending the interest-only payment period.

As of June 30, 2019, all performing TDRs were categorized as interest-only modifications.

The most common change in terms provided by the Company is an extension of an interest-only term.

As of September 30, 2020, all performing TDRs were categorized as interest-only modifications .

Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan.

1 unchanged sentence

Management exercises significant judgment in developing these estimates.

The following table presents by class, the recorded investment of loans modified in TDRs held by the Company for the periods ended June 30, 2019 and 2018.

For theSixMonths Ended June 30, 2019

Income Producing -

Owner Occupied -

Construction -

(dollars in thousands)

Commercial Real Estate

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 extended for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis.

The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date.

As of September 30, 2020, we granted ongoing temporary modifications on approximately 321 loans representing approximately $ 851 million ( 10.8 % of total loans) in outstanding exposure.

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 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.

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

Nine Months Ended September 30, 2020

Number Producing - Occupied - Construction -

of Commercial Commercial Commercial

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

Troubled debt restructurings

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Restructured nonaccruing 4 138 6,342 2,370 — 8,850

Total 11 $ 1,435 $ 15,530 $ 2,407 $ — $ 19,372

Specific allowance $ 227 $ 629 $ — $ — $ 856

Restructured and subsequently defaulted $ 138 $ 11,161 $ 2,370 $ — $ 13,669

For theSixMonths Ended June 30, 2018

Income Producing -

Owner Occupied -

Construction -

(dollars in thousands)

Commercial Real Estate

Troubled debt restructings

Nine Months Ended September 30, 2019

Number Producing - Occupied - Construction -

of Commercial Commercial Commercial

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

Troubled debt restructurings

Restructured accruing 7 $ 898 $ 4,387 $ 3,283 $ — $ 8,568

Restructured nonaccruing 3 1,521 — — — 1,521

Total 10 $ 2,419 $ 4,387 $ 3,283 $ — $ 10,089

Specific allowance $ — $ 1,000 $ — $ — $ 1,000

Restructured and subsequently defaulted $ — $ 2,300 $ — $ — $ 2,300

The Company had eleven TDR’s

at June 30, 2019 totaling approximately $ 11.4 million.Sevenof

these loans totaling approximately $ 8.6 million

are performing under their modified terms.

There wasoneperforming TDR totaling $2.3 million that defaulted on its

modified terms which was reclassified to nonperforming loans during thesixmonths ended June 30, 2019.

During thesixmonths

ended June 30, 2018, there weretwoperforming TDRs totaling $ 937 thousand

that defaulted on their modified terms which were reclassified to nonperforming loans.

A default is considered to have

occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

For thethreemonths ended June 30,

2019, there wasonerestructured loan totaling approximately $ 4.8 million

that had its collateral property sold for approximately $ 3 million

and the remaining $ 1.8 million

was charged-off during the quarter, as compared to the same period in 2018, there wasonedefaulted loan totaling approximately

$ 315 thousand

that was charged-off.

During thethreemonths ended June 30, 2019, there wasoneloan totaling $ 10.4 million

that was re-underwritten intotwonew loans which provided better collateral for the Bank, as compared to thethreemonths ended

June 30, 2018, there wasoneloan totaling $ 274 thousand

that was partially paid off from the sale proceeds of the business which totaled approximately $ 236 thousand.

The remaining balance on the loan of $ 38 thousand

was charged-off.

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.

For thethreemonths ended June 30, 2019, there

were no loans modified in a TDR, as compared to thethreemonths ended June 30, 2018 which hadtwoloans totaling

$ 4.0 million

modified in a TDR.

The Company had eleven TDRs at September 30, 2020 totaling approximately $ 19.4 million.

Seven of these loans totaling approximately $ 10.5 million are performing under their modified terms.

For the first nine months of 2020 and 2019, there were two performing TDR loans each, totaling $ 6.3 million and $ 0.9 million, respectively, that defaulted on their 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 non-accrual status.

For the three months ended September 30, 2020, there were no restructured loans where the collateral was sold and the loans paid in full, as compared to the same period in 2019, when there was one restructured loan totaling approximately $ 309 thousand that was paid off from the sale proceeds of the collateral property.

During the three months ended September 30, 2020 and 2019, no loans were re-underwritten and removed from TDR status.

Comme rcial 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.

For both the three months ended September 30, 2020 and 2019, there were no loans modified in a TDR.

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.

“Leases” (Topic 842)

and all subsequent ASUs that modified Topic 842.

2016-2 “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 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, 2019, the Company had $ 28.2 million of operating lease ROU assets and $ 31.7 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.

Substantially all of our leases are classified as operating leases, and as such, were previously not recognized on the Company’s Consolidated Balance Sheets.

With the adoption of Topic 842, operating lease agreements were required to be recognized on the Consolidated Balance Sheets as a right-of-use (“ROU”) asset and a corresponding lease liability.

As of September 30, 2020, the Company had $ 27.2 million of operating lease ROU assets and $ 30.5 million of operating lease liabilities on the Company’s Consolidated Balance Sheets.

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 Sheets.

In accordance with ASC 842 on Leases, a $ 1.7 million one-time adjustment to rent expense was recorded during the third quarter as our internal review process identified a lease extension that was not originally recorded in the lease balances reflected in the Consolidated Balance Sheets upon implementation of the new lease accounting standard.

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, 2019, 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, 2019, there were no leases that have been signed but did not yet commence as of the reporting date that create significant rights and obligations for the Company.

As of September 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 September 30, 2020, there were no 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, 2019

Nine Months Ended

(dollars in thousands) September 30, 2020 September 30, 2019

Operating Lease Cost (Cost resulting from lease payments) $ 6,253 $ 5,857

3 unchanged sentences

Operating Lease - Operating Cash Flows (Fixed Payments) $ 6,648 $ 6,382

Operating Lease - Operating Cash Flows (Liability Reduction)

Right-of-Use Assets - Operating Leases $ 27,180 $ 26,552

Weighted Average Lease Term - Operating Leases

Weighted Average Lease Term - Operating Leases 5.27 yrs 5.11 yrs

Weighted Average Discount Rate - Operating Leases 4.00 % 4.00 %

Future minimum payments for operating leases with initial or remaining terms of one year or more as of June 30, 2019 were as follows:

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

(dollars in thousands)

Twelve Months Ended:

June 30, 2020

June 30, 2021

June 30, 2022

June 30, 2023

June 29, 2024

September 30, 2021 $ 8,384

September 30, 2022 6,592

September 30, 2023 5,296

September 30, 2024 4,595

September 30, 2025 3,847

Thereafter 5,162

Total Future Minimum Lease Payments 33,876

1 unchanged sentence

Present Value of Net Future Minimum Lease Payments $ 30,457

Note 7 – Affordable Housing Projects Tax Credit Partnerships

Included in Other Assets, the Company makes equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code.

The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of affordable housing products offerings, and to assist in achieving goals associated with the Community Reinvestment Act.

The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants.

Generally, these types of investments are funded through a combination of debt and equity.

The Company is a limited partner in each LIHTC limited partnership.

Each limited partnership is managed by an unrelated third party general partner who exercises significant control over the affairs of the limited partnership.

The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership.

Duties entrusted to the general partner of each limited partnership include, but are not limited to:

investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds.

Except for limited rights granted to the limited partner(s) relating to the approval of certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership.

In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement or is negligent in performing its duties.

The general partner of each limited partnership has both the power to direct the activities which most significantly affect the performance of each partnership and the obligation to absorb losses or the right to receive benefits that could be significant to the entities.

Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC partnership.

The Company accounts for its affordable housing tax credit investments using the proportional amortization method.

The Company’s net affordable housing tax credit investments were $ 28.8 million and related unfunded commitments were $ 15.2 million as of June 30, 2019 and are included in Other Assets and Other Liabilities in the Consolidated Statements of Condition.

The Company’s net affordable housing tax credit investments were $ 28.2 million and related unfunded commitments were $ 15.0 million as of December 31, 2018.

Other Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions.

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.

9 unchanged sentences

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, 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, as compared to three designated cash flow hedge notional interest rate swap transactions outstanding as of December 31, 2018 amounting to $ 250 million associated with the Company’s variable rate deposits.

The decline in the amount of hedged variable rate deposits was due to a reduction in such deposits.

The net unrealized loss before income tax on the swap was $ 101 thousand at June 30, 2019 compared to a net unrealized gain before income tax of $ 3.7 million at December 31, 2018.

The unrealized loss in value since year end 2018 was due to the termination of two of the interest rate swap transactions as part of the Company’s asset liability strategy.

As a result of the swap terminations, the Company recognized $829 thousand in noninterest income during March 2019.

Additionally, the Company will amortize $372 thousand of realized gain as a reduction to interest expense through the swap’s original maturity date of March 31, 2020.

As of September 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 $ 829 thousand in noninterest income during March 2019 due to the 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 June 30, 2019, the Company reclassified $313 thousand related to designated cash flow hedge derivatives from accumulated other comprehensive income to decrease interest expense.

During the next twelve months, the Company estimates (based on existing interest rates) that $ 114 thousand will be reclassified as a decrease in interest expense.

During the next twelve months, the Company estimates (based on existing interest rates) that $ 842 thousand will be reclassified as an increase in interest expense.

Non-designated Hedges

10 unchanged sentences

The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate derivatives.

The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815,

“Derivatives and Hedging.”

In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty.

Collateral must be posted when the market value exceeds certain threshold limits.

The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815, "Derivatives and Hedging." In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty.

The interest rate derivative agreements detail:

2 unchanged sentences

3) if the Company fails to maintain its status as a well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of June 30, 2019, the aggregate fair value of derivative contracts with credit risk contingent features (i.e., containing collateral posting or termination provisions based on our capital status) that was in a net liability position totaled $101 thousand.

As of September 30, 2020, the aggregate fair value of the derivative contract with credit risk contingent features (i.e., containing collateral posting or termination provisions based on our capital status) that was in a net liability position totaled $ 5.5 million.

The Company has a minimum collateral posting threshold with its derivative counterparty.

As of June 30, 2019, the Company was not required to post collateral with its derivative counterparty against its obligations under this agreement.

If the Company had breached any provisions under the agreement at June 30, 2019, it could have been required to settle its obligations under the agreement at the termination value.

The table below identifies the balance sheet category and fair value of the Company’s designated cash flow hedge derivative instruments and non-designated hedges as of June 30, 2019 and December 31, 2018.

June 30, 2019

December 31, 2018

Balance Sheet

Derivatives designated as hedging instruments

(dollars in thousands)

Interest rate product

(dollars in thousands)

Interest rate product

Other Liabilities

Derivatives not designated as hedging instruments

(dollars in thousands)

Interest rate product

(dollars in thousands)

Interest rate product

Other Liabilities

Other Contracts

Other Liabilities

The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the three and six months ended June 30, 2019 and 2018.

Derivatives in Subtopic 815-20 Hedging Relationships (dollars in thousands)

Amount of Gain or (Loss) Recognized in OCI on Derivative

Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income

Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income

Three Months Ended June 30,

Months Ended June 30,

As of September 30, 2020, the Company was required to post collateral totalin g $ 2.2 million with its derivative counterparty against its obligations under this agreement.

If the Company had breached any provisions under the agreement at September 30, 2020, it could have been required to settle its obligations under the agreement at the termination value.

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

September 30, 2020 December 31, 2019

Notional Balance Sheet Notional Balance Sheet

Derivatives designated as hedging instruments (dollars in thousands) Amount Fair Value Category Amount Fair Value Category

Interest rate product $ 100,000 $ 910 Other Liabilities $ 100,000 $ 206 Other Liabilities

Derivatives not designated as hedging instruments (dollars in thousands

Interest rate product $ 176,851 $ 4,306 Other Assets $ 56,806 $ 311 Other Assets

Mortgage banking derivatives 409,988 6,015 Other Assets 49,869 280 Other Assets

586,839 10,321 586,839 10,321 106,675 591

Interest rate product $ 176,851 $ 4,561 Other Liabilities $ 56,806 $ 319 Other Liabilities

Other Contracts 27,031 136 Other Liabilities 27,384 86 Other Liabilities

Mortgage banking derivatives $ — $ — Other Liabilities $ 49,869 $ 66 Other Liabilities

$ 203,882 $ 4,697 Other Liabilities $ 134,059 $ 471 Other Liabilities

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

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 Gain (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 September 30, Comprehensive Income into Three Months Ended September 30,

Relationships (dollars in thousands) 2020 2019 Income 2020 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Products

Interest Expense

Derivatives in Subtopic 815-20 Hedging Relationships

(dollars in thousands)

Amount of Gain or (Loss) Recognized in OCI on Derivative

Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income

Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income

Six Months Ended June 30,

Interest Rate Products 31 ( 107 ) Interest Expense ( 389 ) 264

Total 31 ( 107 ) ( 389 ) 264

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

Relationships (dollars in thousands) 2020 2019 2020 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Products

Interest Expense

Interest Rate Products

Gain on sale of investment securities

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018.

The Effect of Fair Value and Cash Flow Hedge Accounting on the Statement of Financial Performance

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,

Interest Expense

Gain on sale of investment securities

Interest Expense

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

Interest Rate Products ( 1,517 ) ( 1,974 ) Interest Expense ( 755 ) 1,039

Interest Rate Products — — Gain on sale of investment securities — 829

Total ( 1,517 ) ( 1,974 ) ( 755 ) 1,868

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019:

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

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

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

Three Months Ended September 30, Nine Months Ended September 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 consolidated statement of income in which the effects of fair value or cash flow hedges are recorded $ 389 $ 264 $ 755 $ 1,039 $ 829

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

2 unchanged sentences

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

Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance

Derivatives Not Designated as

Hedging Instruments under Subtopic

Location of Gain or

(Loss) Recognized in

Income on Derivative

Amount of Gain or (Loss)

Recognized in Income on

Amount of Gain or (Loss)

Recognized in Income on

Three Months Ended June 30,

Six Months Ended June 30,

Other Contracts

Other income / (expense)

Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component $ 389 $ 264 $ 755 $ 1,039 $ 829

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

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

Amount of Income (Loss) Amount of Income (Loss)

Recognized in Income on Recognized in Income on

Location of Derivative Derivative

Derivatives Not Designated as Hedging (Loss) Recognized in Three Months Ended September 30, Nine Months Ended September 30,

Instruments under Subtopic 815-20 Income on Derivative 2020 2019 2020 2019

Interest Rate Products Other income / (expense) ( 40 ) ( 7 ) ( 326 ) ( 7 )

Mortgage banking derivatives Other income / (expense) 6,015 ( 380 ) 6,015 316

Other Contracts Other income / (expense) ( 13 ) ( 16 ) ( 77 ) ( 58 )

Total 5,962 ( 403 ) 5,612 251

Balance Sheet Offsetting :

3 unchanged sentences

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, 2019 and December 31, 2018.

As of June 30, 2019

Offsetting of Derivative Assets

(dollars in thousands)

Gross Amounts Not Offset in the Balance Sheet

Gross Amounts of Recognized Assets

Gross Amounts Offset in the Balance Sheet

Net Amounts of Assets presented in the Balance Sheet

Financial Instruments

Cash Collateral Posted

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

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 September 30, 2020 (unaudited) and December 31, 2019.

As of September 30, 2020

Gross Gross Amounts Not Offset in the

Gross Amounts Net Amounts of Assets presented in the Balance Sheet Balance Sheet

Amounts of Offset in Cash

Offsetting of Derivative Assets (dollars in thousands) Recognized the Balance Financial Collateral Net

Assets Sheet Instruments Posted Amount

Derivatives $ 4,306 $ — $ 4,306 $ — $ — $ 4,306

Gross Gross Amounts Not Offset in the

Gross Amounts Net Amounts of Liabilities presented in the Balance Sheet Balance Sheet

Amounts of Offset in Cash

Recognized the Balance Financial Collateral Net

Offsetting of Derivative Liabilities (dollars in thousands) Liabilities Sheet Instruments Posted Amount

Derivatives $ 5,216 $ — $ 5,216 $ — $ 230 $ 4,986

As of December 31, 2019

Offsetting of Derivative Assets

(dollars in thousands)

Gross Amounts Not Offset in the Balance Sheet

Gross Amounts of Recognized Assets

Gross Amounts Offset in the Balance Sheet

Net Amounts of Assets presented in the Balance Sheet

Financial Instruments

Cash Collateral Posted

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

Gross Gross Amounts Not Offset in the

Gross Amounts Net Amounts of Assets presented in the Balance Sheet Balance Sheet

Amounts of Offset in Cash

Offsetting of Derivative Assets (dollars in thousands) Recognized the Balance Financial Collateral Net

Assets Sheet Instruments Posted Amount

Derivatives $ 311 — $ 311 — — $ 311

Gross Gross Amounts Not Offset in the

Gross Amounts Net Amounts of Liabilities presented in the Balance Sheet Balance Sheet

Amounts of Offset in Cash

Recognized the Balance Financial Collateral Net

Offsetting of Derivative Liabilities (dollars in thousands) Liabilities Sheet Instruments Posted Amount

Derivatives $ 611 — $ 611 — $ 500 $ 111

Other Real Estate Owned

The activity within Other Real Estate Owned (“OREO”) for the three and six months ended June 30, 2019 and 2018 is presented in the table below.

There was one residential real estate loan in the process of foreclosure as of June 30, 2019 totaling $ 985 thousand.

For the three and six months ended June 30, 2019 and 2018 , there were no sales of OREO property.

Three Months Ended June 30 ,

Six Months Ended June 30 ,

The activity within Other Real Estate Owned (“OREO”) for the three and nine months ended September 30, 2020 and 2019 (unaudited) is presented in the table below.

There were no residential real estate loans in the process of foreclosure as of September 30, 2020.

For the three and nine months ended September 30, 2020 there was one sale of an OREO property, while there were zero sales in the same periods in 2019.

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

(dollars in thousands) 2020 2019 2020 2019

4 unchanged sentences

Long-Term Borrowings

The following table presents information related to the Company’s long-term borrowings as of June 30, 2019 and December 31, 2018.

(dollars in thousands)

The following table presents information related to the Company’s long-term borrowings as of September 30, 2020 (unaudited) and December 31, 2019.

(dollars in thousands) September 30, 2020 December 31, 2019

Subordinated Notes, 5.75 %

$ 70,000 $ 70,000

Subordinated Notes, 5.0 %

150,000 150,000

FHLB Advance, 1.81 %

unamortized debt issuance costs ( 2,020 ) ( 2,313 )

3 unchanged sentences

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 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 $ 147.4 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.

Net Income per Common Share

The calculation of net income per common share for the three and six months ended June 30, 2019 and 2018 was as follows:

Three Months Ended June 30 ,

Six Months Ended June 30 ,

The calculation of net income per common share for the three and nine months ended September 30, 2020 and 2019 (unaudited) was as follows:

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

(dollars and shares in thousands, except per share data) 2020 2019 2020 2019

Net income $ 41,346 $ 36,495 $ 93,325 $ 107,487

Average common shares outstanding 32,229 34,233 32,434 34,418

Basic net income per common share $ 1.28 $ 1.07 $ 2.88 $ 3.12

Net income $ 41,346 $ 36,495 $ 93,325 $ 107,487

Average common shares outstanding 32,229 34,233 32,434 34,418

4 unchanged sentences

Other Comprehensive Income

The following table presents the components of other comprehensive income (loss) for the three and six months ended June 30, 2019 and 2018 .

(dollars in thousands)

Three Months Ended June 30, 2019

The following table presents the components of other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019.

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

Three Months Ended September 30, 2020

Net unrealized loss on securities available-for-sale $ ( 840 ) $ 216 $ ( 624 )

Reclassification adjustment for net gains included in net income ( 115 ) 29 ( 86 )

Total unrealized loss ( 955 ) 245 ( 710 )

Net unrealized gain on derivatives 31 ( 7 ) 24

Reclassification adjustment for loss included in net income 389 ( 100 ) 289

Total unrealized gain 420 ( 107 ) 313

Other Comprehensive Income $ ( 535 ) $ 138 $ ( 397 )

Three Months Ended September 30, 2019

Net unrealized gain on securities available-for-sale $ 1,585 $ 411 $ 1,174

1 unchanged sentence

Total unrealized gain 1,432 368 1,064

Net unrealized loss on derivatives

Net unrealized gain on derivatives 24 ( 13 ) 11

Reclassification adjustment for gain included in net income ( 285 ) ( 80 ) ( 205 )

1 unchanged sentence

Other Comprehensive Income $ 1,171 $ 301 $ 870

Three Months Ended June 30, 2018

Net unrealized loss on securities available-for-sale

Reclassification adjustment for net gains included in net income

Total unrealized loss

Net unrealized gain on derivatives

Reclassification adjustment for losses included in net income

Total unrealized gain

Other Comprehensive Loss

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020

Net unrealized gain on securities available-for-sale $ 18,402 $ ( 5,048 ) $ 13,354

5 unchanged sentences

Other Comprehensive Income $ 15,454 $ ( 4,142 ) $ 11,312

Six Months Ended June 30, 2018

Net unrealized loss on securities available-for-sale

Nine Months Ended September 30, 2019

Net unrealized gain on securities available-for-sale $ 17,712 $ ( 4,572 ) $ 13,140

Reclassification adjustment for net gains included in net income ( 1,628 ) ( 438 ) ( 1,190 )

Total unrealized loss

Net unrealized gain on derivatives

Reclassification adjustment for losses included in net income

Total unrealized gain 16,084 ( 5,010 ) 11,950

Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and six months ended June 30, 2019 and 2018 .

(dollars in thousands)

Securities Available For Sale

Accumulated Other Comprehensive Income (Loss)

Three Months Ended June 30, 2019

Net unrealized loss on derivatives ( 2,210 ) 546 ( 1,664 )

Reclassification adjustment for gain included in net income ( 1,879 ) ( 505 ) ( 1,374 )

Total unrealized loss ( 4,089 ) 41 ( 3,038 )

Other Comprehensive Income $ 11,995 $ ( 4,969 ) $ 8,912

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

Securities Accumulated Other

Available Comprehensive Income

(dollars in thousands) For Sale Derivatives (Loss)

Three Months Ended September 30, 2020

Balance at Beginning of Period $ 15,942 $ ( 1,274 ) $ 14,668

Other comprehensive income (loss) before reclassifications ( 624 ) 24 ( 600 )

Amounts reclassified from accumulated other comprehensive income

Amounts reclassified from accumulated other comprehensive income (loss) ( 86 ) 289 203

Net other comprehensive income (loss) during period ( 710 ) 313 ( 397 )

Balance at End of Period $ 15,232 $ ( 961 ) $ 14,271

Three Months Ended June 30, 2018

Securities Accumulated Other

Available Comprehensive Income

(dollars in thousands) For Sale Derivatives (Loss)

Three Months Ended September 30, 2019

Balance at Beginning of Period $ 3,842 $ ( 75 ) $ 3,767

Other comprehensive income (loss) before reclassifications 1,174 11 1,185

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive (loss) income during period

Amounts reclassified from accumulated other comprehensive loss ( 110 ) ( 205 ) ( 315 )

Net other comprehensive income (loss) during period 1,064 ( 194 ) 870

Balance at End of Period $ 4,906 $ ( 269 ) $ 4,637

(dollars in thousands)

Securities Available For Sale

Accumulated Other Comprehensive Income (Loss)

Six Months Ended June 30, 2019

Securities Accumulated Other

Available Comprehensive Income

(dollars in thousands) For Sale Derivatives (Loss)

Nine Months Ended September 30, 2020

Balance at Beginning of Period $ 3,109 $ ( 150 ) $ 2,959

Other comprehensive income (loss) before reclassifications 13,354 ( 1,324 ) 12,030

Amounts reclassified from accumulated other comprehensive income

Amounts reclassified from accumulated other comprehensive income (loss) ( 1,231 ) 513 ( 718 )

Net other comprehensive income (loss) during period 12,123 ( 811 ) 11,312

Balance at End of Period $ 15,232 $ ( 961 ) $ 14,271

Six Months Ended June 30, 2018

Securities Accumulated Other

Available Comprehensive Income

(dollars in thousands) For Sale Derivatives (Loss)

Nine Months Ended September 30, 2019

Balance at Beginning of Period $ ( 7,044 ) $ 2,769 $ ( 4,275 )

Other comprehensive income (loss) before reclassifications 13,140 ( 1,664 ) 11,476

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive (loss) income during period

Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI

Amounts reclassified from accumulated other comprehensive loss ( 1,190 ) ( 1,374 ) ( 2,564 )

Net other comprehensive income (loss) during period 11,950 ( 3,038 ) 8,912

Balance at End of Period $ 4,906 $ ( 269 ) $ 4,637

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2019 and 2018 .

Details about Accumulated Other

Comprehensive Income Components

(dollars in thousands)

The following tables present the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019.

Amount Reclassified from

Accumulated Other

Comprehensive Income (Loss)

Affected Line Item in

the Statement Where

Net Income is Presented

Three Months Ended June 30 ,

Realized gain on sale of investment securities

Gain on sale of investment securities

Interest income (expense) derivative deposits

Interest expense on deposits

Income tax (expense) benefit

Income Tax Expense

Total Reclassifications for the Period

Details about Accumulated Other

Comprehensive Income Components

Accumulated Other Affected Line Item in

Details about Accumulated Other Comprehensive (Loss) Income the Statement Where

Comprehensive Income Components Three Months Ended September 30, Net Income is Presented

(dollars in thousands) 2020 2019

Realized gain on sale of investment securities $ 115 $ 153 Gain on sale of investment securities

Interest income derivative deposits ( 389 ) 285 Interest expense on deposits

Income tax expense 71 ( 123 ) Income Tax Expense

Total Reclassifications for the Period $ ( 203 ) $ 315 Net Income

Amount Reclassified from

Accumulated Other

Comprehensive Income

Affected Line Item in

the Statement Where

Net Income is Presented

Six Months Ended June 30 ,

Realized gain on sale of investment securities

Gain on sale of investment securities

Realized gain on swap termination

Gain on sale of investment securities

Interest income (expense) derivative deposits

Interest expense on deposits

Income tax expense

Income Tax Expense

Total Reclassifications for the Period

Accumulated Other Affected Line Item in

Details about Accumulated Other Comprehensive (Loss) Income the Statement Where

Comprehensive Income Components Nine Months Ended September 30, Net Income is Presented

(dollars in thousands) 2020 2019

Realized gain on sale of investment securities $ 1,650 $ 1,628 Gain on sale of investment securities

Realized gain on swap termination — 829 Gain on sale of investment securities

Interest income derivative deposits ( 688 ) 1,050 Interest expense on deposits

Income tax expense ( 244 ) ( 943 ) Income Tax Expense

Total Reclassifications for the Period $ 718 $ 2,564 Net Income

Fair Value Measurements

3 unchanged sentences

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.

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:

Quoted prices in active exchange markets for identical assets or liabilities;

Level 1 Quoted prices in active exchange markets for identical assets or liabilities;

also includes certain U.S.

1 unchanged sentence

Government and agency securities actively traded in over-the-counter markets.

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;

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.

1 unchanged sentence

Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.

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;

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.

1 unchanged sentence

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018.

(dollars in thousands)

Quoted Prices (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Other Unobservable Inputs (Level 3)

June 30, 2019

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 (unaudited) and December 31, 2019.

Significant Significant

Observable Unobservable

Quoted Prices Inputs Inputs Total

(dollars in thousands) (Level 1) (Level 2) (Level 3) (Fair Value)

September 30, 2020

Investment securities available-for-sale:

7 unchanged sentences

Mortgage banking derivatives — — 6,015 6,015

Total assets measured at fair value on a recurring basis as of June 30, 2019

Total assets measured at fair value on a recurring basis as of September 30, 2020 $ — $ 1,059,189 $ 7,713 $ 1,066,902

Interest rate swap derivatives $ — $ 910 $ — $ 910

1 unchanged sentence

Interest Rate Caps — 4,487 — 4,487

Mortgage banking derivatives

Total liabilities measured at fair value on a recurring basis as of June 30, 2019

Total liabilities measured at fair value on a recurring basis as of September 30, 2020 $ — $ 5,533 $ — $ 5,533

December 31, 2019

4 unchanged sentences

Corporate bonds — — 10,733 10,733

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

Interest rate swap derivatives

Total assets measured at fair value on a recurring basis as of December 31, 2019 $ — $ 889,456 $ 11,211 $ 900,667

Interest rate swap derivatives $ — $ 203 $ — $ 203

Derivative liability — 86 — 86

Interest Rate Caps — 312 — 312

Mortgage banking derivatives — — 66 66

6 unchanged sentences

Level 2 securities include U.S.

agency debt securities, mortgage backed securities issued by Government Sponsored Entities (“GSE’s”) and municipal bonds.

agency debt securities, mortgage backed securities issued by Government Sponsored Entities and municipal bonds.

Securities classified as Level 3 include securities in less liquid markets, the carrying amounts approximate the fair value.

1 unchanged sentence

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.

This election reduces certain timing differences in the Consolidated Statement of Income 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.

Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Income.

Gains and losses on sales of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Income.

As such, the Company classifies loans subjected to fair value adjustments as Level 2 valuation.

The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of June 30, 2019 and December 31, 2018.

June 30, 2019

(dollars in thousands)

Aggregate Unpaid Principal Balance

Residential mortgage loans held for sale

FHA mortgage loans held for sale

The following tables summarize the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of September 30, 2020 (unaudited) and December 31, 2019.

September 30, 2020

(dollars in thousands) Fair Value Balance Difference

Loans held for sale $ 79,084 $ 77,572 $ 1,512

December 31, 2019

(dollars in thousands)

Aggregate Unpaid Principal Balance

Residential mortgage loans held for sale

FHA mortgage loans held for sale

No residential mortgage loans held for sale were 90 or more days past due or on nonaccrual status as of June 30, 2019 or December 31, 2018.

(dollars in thousands) Fair Value Balance Difference

Loans held for sale $ 56,707 $ 55,834 $ 873

There were no residential mortgage loans held for sale that were 90 or more days past due or on nonaccrual status as of September 30, 2020 or December 31, 2019.

Interest rate swap derivatives:

15 unchanged sentences

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.

Mortgage banking derivatives for loans settled on a mandatory basis:

The Company relied 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.

Mortgage banking derivative for loans settled best efforts basis :

The significant unobservable input (Level 3) used in the fair value measurement of the Company's interest rate lock commitments is the pull through ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close.

An increase in the pull through ratio (i.e.

higher percentage of loans are estimated to close) will increase the gain or loss.

The pull through ratio is largely dependent on the loan processing stage that a loan is currently in.

The pull through rate is computed by the Company's secondary marketing consultant using historical data and the ratio is periodically reviewed by the Company for reasonableness.

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

(dollars in thousands)

Investment Securities

Mortgage Banking Derivatives

Investment Mortgage Balancing

(dollars in thousands) Securities Derivatives Total

Beginning balance at January 1, 2020 $ 10,931 $ 280 $ 11,211

Realized gain included in earnings

Unrealized loss included in other comprehensive income

Realized gain (loss) included in earnings — 5,735 5,735

Unrealized gain included in other comprehensive income — — —

Purchases of available-for-sale securities — — —

Principal redemption — — —

Ending balance at June 30, 2019

Migrated to Level 2 valuation $ ( 9,233 ) $ — $ ( 9,233 )

Ending balance at September 30, 2020 $ 1,698 $ 6,015 $ 7,713

Beginning balance at January 1, 2020 $ — $ 66 $ 66

Realized gain included in earnings

Realized loss included in earnings — ( 66 ) ( 66 )

Principal redemption — — —

Ending balance at June 30, 2019

(dollars in thousands)

Investment Securities

Mortgage Banking Derivatives

Ending balance at September 30, 2020 $ — $ — $ —

Investment Mortgage Balancing

(dollars in thousands) Securities Derivatives Total

Beginning balance at January 1, 2019 $ 9,794 $ 229 $ 10,023

Realized gain included in earnings

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

2 unchanged sentences

Beginning balance at January 1, 2019 $ — $ 269 $ 269

Realized loss included in earnings

Realized gain included in earnings — ( 203 ) ( 203 )

Principal redemption — — —

Ending balance at December 31, 2019 $ — $ 66 $ 66

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.

The other equity and debt securities classified as Level 3 consist of one corporate bond of a local banking company and equity investments in the form of common stock of two local banking companies which are not publicly traded, and for which the carrying amounts approximate fair value.

Form Level 3 assets measured at fair value on a recurring or nonrecurring basis as of September 30, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:

September 30, 2020 December 31, 2019

(dollars in thousands) Valuation Technique Description Range Weighted Average (1)

Fair Value Weighted Average (1)

Mortgage banking derivatives Pricing Model Pull Through Rate 69.9 % - 81.4 %

78.44 % $ 6,015 0 76.25 % 76.25 $ 280

(1) Unobservable inputs for mortgage banking derivatives were weighted by loan amount.

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 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.

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.

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 June 30, 2019, substantially all of the Company’s impaired loans were evaluated based upon the fair value of the collateral.

In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.

At September 30, 2020, substantially all of the Company’s individually evaluated loans were evaluated based upon the fair value of the collateral.

In accordance with ASC Topic 820, individually evaluated loans where an allowance is established based on the fair value of collateral 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.

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.

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 :

2 unchanged sentences

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)

June 30, 2019

Impaired loans:

Significant Significant

Observable Unobservable

Quoted Prices Inputs Inputs Total

(dollars in thousands) (Level 1) (Level 2) (Level 3) (Fair Value)

September 30, 2020

Commercial $ — $ 824 $ 16,307 $ 17,131

Income producing - commercial real estate — 22,220 7,036 29,256

2 unchanged sentences

Construction - commercial and residential — — 2,274 2,274

Home equity — 109 — 109

Other consumer — — 8 8

Other real estate owned — — — —

Total assets measured at fair value on a nonrecurring basis as of June 30, 2019

(dollars in thousands)

Quoted Prices (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Other Unobservable Inputs (Level 3)

Total assets measured at fair value on a nonrecurring basis as of September 30, 2020 $ — $ 36,581 $ 31,747 $ 68,328

Significant Significant

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

2 unchanged sentences

Construction - commercial and residential — — 11,409 11,409

Home equity — — 387 387

Other real estate owned — — 1,487 1,487

8 unchanged sentences

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 estimated fair value of the Company’s financial instruments at June 30, 2019 and December 31, 2018 are as follows:

The estimated fair value of the Company’s financial instruments at September 30, 2020 (unaudited) and December 31, 2019 are as follows:

Fair Value Measurements

(dollars in thousands)

Carrying Value

Quoted Prices (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

June 30, 2019

Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)

(dollars in thousands) Value Fair Value

September 30, 2020

Cash and due from banks $ 7,559 $ 7,559 $ — $ 7,559 $ —

4 unchanged sentences

Loans held for sale 79,084 79,084 — 79,084 —

Loans 7,770,040 7,733,020 — — 7,733,020

Bank owned life insurance 76,326 76,326 — 76,326 —

Annuity investment 14,541 14,541 — 14,541 —

Interest Rate Caps

Mortgage banking derivatives 6,015 6,015 — — 6,015

Interest Rate Caps 4,233 4,233 — 4,233 —

Noninterest bearing deposits 2,384,108 2,384,108 — 2,384,108 —

2 unchanged sentences

Customer repurchase agreements 24,293 24,293 — 24,293 —

Borrowings 567,980 573,641 — 573,641 —

Interest rate swap derivatives 910 910 — 910 —

1 unchanged sentence

Interest Rate Caps 4,487 4,487 — 4,487 —

Mortgage banking derivatives

December 31, 2019

5 unchanged sentences

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 —

Mortgage banking derivatives

Interest rate swap derivatives

Interest Rate Caps 280 280 — 280 —

Noninterest bearing deposits 2,064,367 2,064,367 — 2,064,367 —

2 unchanged sentences

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

Supplemental Executive Retirement Plan

The Bank has entered into Supplemental

Executive Retirement and Death Benefit Agreements (the “SERP Agreements”) with certain of the Bank’s

executive officers, 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.

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 carriers in

2013 totaling $ 11.4 million

that have been designed to provide a future source of funds for the lifetime retirement benefits of the SERP Agreements.

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 three and six months ended June 30, 2019, the annuity contracts accrued $ 40 thousand

of income offset by annual fees of $ 141 thousand

and $ 81 thousand

of income offset by $ 150 thousand

of annual fees, respectively, which were included in other noninterest income on the Consolidated Statement of Operations.

For the three and six months ended June 30, 2018, the annuity contracts accrued $ 65 thousand

of income offset by $110 thousand of annual fees and and $102 thousand of income offset by $ 119 thousand

of annual fees, respectively, which were included in other noninterest income on the Consolidated Statement of Operations.

The cash surrender value of the annuity contracts was $ 12.1 million

and $ 12.4 million

at June 30, 2019 and December 31, 2018, respectively, and is included in other assets on the Consolidated Balance Sheet.

the three and six months ended June 30, 2019, the Company recorded benefit expense accruals of $ 65 thousand

of income offset by $ 110 thousand of annual fees, and $ 202 thousand, respectively, for this post retirement benefit.

For the three and six months ended June 30, 2018, the Company recorded benefit expense accruals of $ 385 thousand and $ 486 thousand, respectively, 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q/A

Item 1. Financial Statements