What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-03-01 compared with 2020-03-02 · 1037 added, 667 removed, 1209 unchanged (58% of the section changed)

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We have audited the accompanying consolidated balance sheets of Eagle Bancorp, Inc.

and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three year period ended December 31, 2019 and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S.

and Subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S.

generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”) the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2020 expressed an adverse opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2021 expressed an unqualified opinion thereon.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective January 1, 2020, due to the adoption of Accounting Standards Codification ("ASC") Topic 326, Financial Instruments – Credit Losses .

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) related to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses

As described in Note 4 to the consolidated financial statements, the Company’s consolidated allowance for credit losses was $73.7 million at December 31, 2019.

As described by management in Note 1, the allowance for credit losses is comprised of three components:

a specific allowance, a formula allowance and a nonspecific or environmental factors allowance.

Each component is determined based on estimates that can and do change when actual events occur:

● The specific allowance allocates a reserve to identified impaired loans, which are based on the results of the Company’s impairment analysis.

● The formula allowance is used to estimate the loss on internally risk rated loans, exclusive of those identified as requiring specific reserves.

The portfolio of unimpaired loans is stratified by loan type and risk assessment.

Allowance factors relate to the type of loan and level of the internal risk rating, with loans exhibiting higher risk and loss experience receiving a higher allowance factor.

● The environmental factors allowance is based on management’s evaluation of various internal and external environmental conditions, including delinquencies, loss history, changes in lending policy and procedures, changes in business and economic conditions, changes in the nature and volume of the portfolio, management expertise, concentrations within the portfolio, quality of internal and external loan review systems, competition, and legal and regulatory requirements.

Estimating an appropriate allowance for credit losses requires management to make certain assumptions about losses that have been incurred but not yet realized in the loan portfolio as of the balance sheet date.

Significant judgments in estimating the allowance for credit losses include the determination of the impact of external and internal environmental factors and the identification and valuation of impaired loans.

Impaired loan identification can be more complicated given that, as described in Note 4, approximately sixty-five percent of the Company’s $1.6 billion of acquisition, development and construction loans contain interest reserves that are funded at loan origination.

The presence of an interest reserve may require more judgment to determine whether or not the loan is performing as expected.

As described in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for credit losses was $109.6 million at December 31, 2020.

As described by management in Note 1, the Company adopted ASC Topic 326 Financial Instruments – Credit Losses on January 1, 2020.

The allowance is estimated using information about past events, current conditions and reasonable and supportable forecasts.

Estimates that can and do change when actual events occur are made for the following components:

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• Reserves on pools of loans sharing similar risk characteristics using a lifetime loss rate model adjusted for a reasonable and supportable forecast.

• Reserves on loans that do not share similar risk characteristics are evaluated on an individual basis.

• Incremental reserves on pools of loans sharing similar risk characteristics for any necessary qualitative adjustments.

Estimating an appropriate allowance for credit losses requires management to make certain assumptions about expected losses on loans in the loan portfolio over their remaining contractual life as of the balance sheet date.

Significant judgments in estimating the allowance for credit losses include determining:

• The appropriate historical loss experience to use in calculating a lifetime loss rate.

• A reasonable and supportable forecast.

• The nature and amount of qualitative adjustments.

We identified the allowance for credit losses as a critical audit matter.

The principal considerations for our determination of the allowance for credit losses as a critical audit matter included management’s judgment applied in determining the impact of external and internal environmental factors and the risks involved in appropriately identifying and valuing impaired loans.

In turn, auditing management’s judgments regarding the valuation and identification of impaired loans and external and internal environmental factors applied in the allowance calculation involved a high degree of subjectivity.

The primary procedures we performed to address this critical audit matter included:

The principal considerations for that determination included management’s judgment necessary in subjectively determining appropriate historical loss experience, specifically the use of peer data, selecting a reasonable and supportable forecast and determining the nature and amount of qualitative adjustments.

In turn, auditing management’s judgments around those estimates involved a high degree of subjectivity.

The primary procedures we performed to address this critical audit matter included, among others:

• We evaluated the design and operating effectiveness of controls relating to management’s determination of the allowance for credit losses, including:

Controls over management’s credit administration function, which are designed to ensure the timely and complete identification of impaired loans.

Controls over management’s review and approval of the allowance reserves, including management’s evaluation of the internal and external environmental factors and other portfolio trends that might impact the calculation of the allowance.

● We tested the calculation of losses on identified impaired loans and performed procedures over loan data to determine the completeness of the impaired loan population.

This included reviewing a sample of construction loan files for evidence of support for draw requests and progress of the construction according to plan.

We also tested the loan data to ensure delinquent and non-accrual loans were appropriately treated in the allowance for credit losses.

● We tested a sample of identified impaired loan valuations by comparing inputs in the valuation to source data, evaluating appraisals obtained from third party appraisers, and testing the mathematical calculations in the valuation.

● We evaluated management’s application of internal and external environmental factor adjustments to the allowance for credit losses, which included obtaining support for those adjustments and comparing to third party or internal sources, as applicable.

● We assessed overall trends in credit quality at the Company by analyzing key performance indicators as well as changes in the industry and how the Company’s allowance model and environmental and other risk factors compared to those trends.

We also considered the weight of confirming and disconfirming evidence from internal and external sources, loan portfolio performance and third-party data, and whether such assumptions were applied consistently period over period.

Loss Contingencies

As described in Note 21 to the consolidated financial statements, the Company has received various document requests and subpoenas from securities and banking regulators and U.S.

Attorney’s Offices in connection with investigations, which the Company believes relate to the Company’s identification, classification and disclosure of related party transactions;

the retirement of certain former officers and directors;

and the relationship of the Company and certain of its former officers and directors with a local public official, among other things.

Estimating an amount or range of possible losses resulting from litigation, government actions and other legal proceedings is inherently difficult and requires an extensive degree of judgment.

Therefore, the Company is unable to predict the duration, scope or outcome of these investigations.

We identified the ongoing investigations as a critical audit matter.

The principal considerations for this determination are the nature of the items under investigation, about which the Company engaged outside specialists to perform extensive investigations, and the related identified material weakness in its internal control over financial reporting.

Auditing management’s evaluation of these matters, including accounting for and disclosure of loss contingencies from these matters, involved challenging and subjective auditor judgement.

In addition, the audit effort involved the use of the firm’s forensic specialist to assist in performing procedures and evaluating the audit evidence obtained.

We also used significant auditor judgment in assessing the evidence provided by the Company related to its remediation of the material weakness.

The primary procedures we performed to address this critical audit matter included:

● We evaluated the design and operating effectiveness of the Company’s internal controls over the identification of related parties and related party transactions, including training provided to members of management and the board.

● We evaluated the results of the Company’s internal investigations into the matters that were performed by the Company’s engaged specialists.

This included interviewing the Company’s specialists, obtaining and evaluating evidence that was key to their conclusions, and evaluating letters of audit inquiry from the Company’s external legal counsel.

Professionals with specialized skills and knowledge were used to assist in the evaluation of the completeness and results of the Company’s investigations.

● We assessed the Company’s disclosures in consideration of the material weakness identified and the results of the Company’s internal investigations, including their determination of whether a loss is probable or reasonably estimable.

• Controls over the development of the allowance for credit losses model, including validation of the model.

• Controls over management’s selection of appropriate historical loss experience.

• Controls over management’s review and approval of the allowance for credit losses, including management’s evaluation of qualitative adjustments that might impact the calculation of the allowance and management’s determination of a reasonable and supportable forecast.

• We evaluated, with the support of specialists, management’s use of peer loss data in calculating historical loss rates by comparing the resulting historical loss experience to a group of the Company’s peers.

• We evaluated management’s application of qualitative adjustments to the allowance for credit losses, which included substantively testing management’s process for developing and applying qualitative factors and assessing relevance of data used to develop factors including evaluating their judgements and assumptions for reasonableness.

• We evaluated, with the support of specialists, management’s selection of a reasonable and supportable forecast and tested the accuracy of the application of that forecast to the lifetime historical loss rate calculation.

We also evaluated with the support of specialists, the conceptual design of the credit loss model and the independent model validation.

/s/ Dixon Hughes Goodman LLP

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March 1, 2021

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Report of Independent Registered Public Accounting Firm

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We have audited Eagle Bancorp Inc.

and Subsidiaries’ (the “Company”)’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, Eagle Bancorp Inc.

has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, due to the material weakness described below.

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

The following material weakness has been identified and included in management’s assessment.

Management has identified a material weakness in internal controls resulting from tone at the top issues that contributed to a control environment that was insufficiently tailored to the culture of deference afforded to the former Chairman, President and Chief Executive Officer.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of Eagle Bancorp, Inc.

and subsidiaries as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three year period ended December 31, 2019 and the related notes (collectively referred to as the "consolidated financial statements"), and our report dated March 2, 2020, expressed an unqualified opinion on those consolidated financial statements.

The material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the consolidated financial statements described above, and this report does not affect our report dated March 2, 2020 on those consolidated financial statements.

and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2020 and 2019, and for each of the three years in the period ended December 31, 2020, and our report dated March 1, 2021 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Effectiveness of Internal Control over Financial Reporting (included in Item 9A).

The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.

Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

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March 1, 2021

Baltimore, Maryland

March 2, 2020

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EAGLE BANCORP, INC.

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(dollars in thousands, except per share data)

December 31, 2019

December 31, 2018

Assets December 31, 2020 December 31, 2019

Cash and due from banks $ 8,435 $ 7,539

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Interest bearing deposits with banks and other short-term investments 1,752,420 195,447

Investment securities available-for-sale, at fair value

Investment securities available-for-sale, at fair value (amortized cost of $ 1,129,057 and $ 838,994 and allowance for credit losses of $ 167 and $ 0 as of December 31, 2020 and December 31, 2019, respectively).

1,151,083 843,363

Federal Reserve and Federal Home Loan Bank stock 40,104 35,194

Loans held for sale 88,205 56,707

Loans 7,760,212 7,545,748

Less allowance for credit losses ( 109,579 ) ( 73,658 )

Loans, net 7,650,633 7,472,090

Premises and equipment, net 13,553 14,622

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Bank owned life insurance 76,729 75,724

Intangible assets, net

Goodwill and intangible assets, net 105,114 104,739

Other real estate owned 4,987 1,487

Other assets 134,531 85,644

Total Assets $ 11,117,802 $ 8,988,719

Liabilities and Shareholders’ Equity

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Time, $ 100,000 or more

546,173 663,987

Other time 431,587 619,052

Total deposits 9,189,203 7,224,391

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Operating lease liabilities 28,022 29,959

Reserve for unfunded commitments 5,498 —

Other liabilities 59,384 45,021

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Retained earnings 798,061 705,105

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income 15,500 2,959

Total Shareholders’ Equity 1,240,892 1,190,681

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See Notes to Consolidated Financial Statements.

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EAGLE BANCORP, INC.

Consolidated Statements of Operations

Consolidated Statements of Income

Years Ended December 31,

(dollars in thousands, except per share data)

2020 2019 2018

Interest Income

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Provision for Credit Losses 45,571 13,091 8,660

Provision for Unfunded Commitments 1,380 — —

Net Interest Income After Provision For Credit Losses 274,611 310,954 308,333

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Increase in the cash surrender value of bank owned life insurance 2,071 1,703 1,507

Other income 15,305 7,758 8,005

Total noninterest income 45,696 25,699 22,586

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Income Tax Expense 43,928 53,848 51,932

Net Income 132,217 142,943 152,276

Earnings Per Common Share

Basic $ 4.09 $ 4.18 $ 4.44

Diluted $ 4.09 $ 4.18 $ 4.42

See Notes to Consolidated Financial Statements.

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EAGLE BANCORP, INC.

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(dollars in thousands)

2020 2019 2018

Net Income $ 132,217 $ 142,943 $ 152,276

Other comprehensive income (loss), net of tax:

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Unrealized (loss) gain on derivatives ( 1,378 ) ( 2,049 ) 1,806

Reclassification adjustment for amounts included in net income

Reclassification adjustment for gain (loss) included in net income 860 ( 870 ) ( 418 )

Total unrealized (loss) gain on derivatives ( 518 ) ( 2,919 ) 1,388

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See Notes to Consolidated Financial Statements.

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EAGLE BANCORP, INC.

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(dollars in thousands except share data)

Additional Paid

Common Additional Paid

in Capital Retained

Earnings Accumulated

Comprehensive

Income (Loss) Total

Shareholders’

Income (Loss)

Shares Amount

Balance January 1, 2018 34,185,163 $ 340 $ 520,304 $ 431,544 $ ( 1,750 ) $ 950,438

Net Income — — — 152,276 — $ 152,276

Other comprehensive income, net of tax — — — — ( 1,851 ) ( 1,851 )

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Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 14,162 ) 1 ( 1 ) — — —

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

Time based stock awards granted 94,344 — — — — —

Issuance of common stock related to employee stock purchase plan 14,373 — 808 — — 808

Balance Reclassification of the income tax effects of the Tax Cuts and Jobs Act from AOCI (ASU 2018-02) — — — 674 ( 674 ) —

Balance December 31, 2018 34,387,919 $ 342 $ 528,380 $ 584,494 $ ( 4,275 ) $ 1,108,941

Net Income — — — 142,943 — $ 142,943

Other comprehensive loss, net of tax — — — — 7,234 7,234

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Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 15,127 ) 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 16,129 — 782 — — 782

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

Cash dividends declared ($ 0.66 per share)

— — — ( 22,332 ) — ( 22,332 )

Common stock repurchased ( 1,304,500 ) ( 12 ) ( 54,891 ) — — ( 54,903 )

Balance December 31, 2019 33,241,496 331 482,286 705,105 2,959 1,190,681

Net Income — — — 132,217 — 132,217

Cumulative effect adjustment due to the adoption of

ASC 326, net of tax — $ — $ — $ ( 10,931 ) $ — ( 10,931 )

Other comprehensive income, net of tax — — — — 12,541 12,541

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Cash dividends declared ($ 0.88 per share)

Common stock repurchased

— — — ( 28,330 ) — ( 28,330 )

Common stock repurchased ( 1,640,910 ) ( 16 ) ( 61,416 ) — — ( 61,432 )

Balance December 31, 2020 31,779,663 $ 315 $ 427,016 $ 798,061 $ 15,500 $ 1,240,892

See Notes to Consolidated Financial Statements.

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EAGLE BANCORP, INC.

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(dollars in thousands)

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Years Ended December 31,

2020 2019 2018

Cash Flows From Operating Activities:

Net Income $ 132,217 $ 142,943 $ 152,276

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

Provision for credit losses 45,571 13,091 8,660

Provision for unfunded commitments 1,380 — —

Depreciation and amortization 4,696 6,174 6,969

Gains on sale of loans ( 22,089 ) ( 8,474 ) ( 5,963 )

Gains on sale of GNMA loans

Gain on MSRs ( 667 ) — —

Securities premium amortization (discount accretion), net 8,196 5,186 4,445

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Deferred income tax (benefit) expense ( 8,332 ) ( 61 ) ( 3,497 )

Net loss (gain) on sale of other real estate owned

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

Net gain on sale of investment securities ( 1,815 ) ( 1,517 ) ( 97 )

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Proceeds from sale of other real estate owned 4,430 — —

Increase in premises and equipment

Purchases of premises and equipment ( 2,945 ) ( 2,839 ) ( 1,482 )

Net cash used in investing activities ( 557,676 ) ( 637,127 ) ( 784,801 )

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Increase (decrease) in short-term borrowings 50,000 250,000 ( 325,000 )

Increase in long-term borrowings 50,000 — —

Proceeds from exercise of equity compensation plans 63 332 776

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Transfers from loans to other real estate owned $ 6,750 $ 93 $ —

Change in fair value of cash flow hedge $ ( 904 ) $ — $ —

Change in fair value of investments $ 17,822 $ — $ —

See Notes to Consolidated Financial Statements.

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Eagle Bancorp, Inc.

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The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc.

and its subsidiaries (the “Company”) with all significant intercompany transactions eliminated.

(the "Parent") and its subsidiaries (together with the Parent, the “Company”) with all significant intercompany transactions eliminated.

EagleBank (the “Bank”), a Maryland chartered commercial bank, is the Company’s principal subsidiary.

The investment in subsidiaries is recorded on the Company’s books (Parent Only) on the basis of its equity in the net assets of the subsidiary.

The investment in subsidiaries is recorded on the Company’s books (Parent Only) on the basis of its equity in the net assets of the subsidiary (see Note 26 "Parent Company Financial Information" for further detail).

The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America (“GAAP”) and to general practices in the banking industry.

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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 Authority (“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.

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

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest bearing deposits with other banks which have an original maturity of three months or less.

Risks and Uncertainties

The outbreak of COVID-19 and the ongoing pandemic has adversely impacted a broad range of industries in which the Company’s customers operate and has impaired and could continue to impair their ability to fulfill their financial obligations to the Company.

The World Health Organization 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 ongoing pandemic 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 on 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.

The CARES Act also created the Paycheck Protection Program (the “PPP”), a program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks.

These loans are intended to guarantee payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.

On December 27, 2020, The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was enacted, which includes additional funding for the PPP.

In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other follow-up legislative and regulatory relief efforts have had and are expected to continue to have a material impact on the Company’s operations.

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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.

The ongoing COVID-19 pandemic has caused and could continue to cause prolonged volatility and potential declines 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 only 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 the reporting unit, the Company concluded that no impairment existed as of June 30, 2020.

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

An impairment analysis was performed during the fourth quarter (as of December 31, 2020) as part of our regularly scheduled annual impairment testing and again found no impairment existed.

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

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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 December 31, 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 December 31, 2020, we had ongoing temporary modifications on 36 loans representing approximately $ 72 million (approximately 0.9 % of total loans) in outstanding balances.

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 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 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 December 31, 2020, PPP loans totaled $ 454.8 million to just over 1,400 businesses.

The Company understands that loans funded through the PPP 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.

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest bearing deposits with other banks that have an original maturity of three months or less.

Loans Held for Sale

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Fair value is derived from secondary market quotations for similar instruments.

Gains and losses on sales of these loans are recorded as a component of noninterest income in the Consolidated Statements of Operations.

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

The Company’s current practice is to sell residential mortgage loans held for sale on a servicing released basis, and, therefore, it has no intangible asset recorded in the normal course of business for the value of such servicing as of December 31, 2020 and December 31, 2019.

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The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e.

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Such interest rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives.

To protect against the price risk inherent in residential mortgage loan commitments, the Company utilizes both “best efforts” and “mandatory delivery” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

Under a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor and the investor commits to a price that it will purchase the loan from the Company if the loan to the underlying borrower closes.

The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the investor commits to purchase a loan at a price representing a premium on the day the borrower commits to an interest rate with the intent

that the buyer/investor has assumed the interest rate risk on the loan.

To protect against the price risk inherent in residential mortgage loan commitments, the Company utilizes either or both “best efforts” and “mandatory delivery” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

Under a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor.

The investor commits to a price, representing a premium on the day the borrower commits to an interest rate, that it will purchase the loan from the Company if the loan to the underlying borrower closes with the intent that the buyer/investor has assumed the interest rate risk on the loan as the Company protects itself from changes in interest rates.

As a result, the Bank is not generally exposed to losses on loans sold utilizing best efforts, nor will it realize gains related to rate lock commitments due to changes in interest rates.

The market values of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded.

Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss should occur on the interest rate lock commitments.

Because of the high correlation between rate lock commitments and best efforts contracts, very little gain or loss should occur on the interest rate lock commitments.

Under a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date.

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The Company manages the interest rate risk on interest rate lock commitments by entering into forward sale contracts of mortgage-backed securities, whereby the Company obtains the right to deliver securities to investors in the future at a specified price.

Such contracts are accounted for as derivatives and are recorded at fair value in derivative assets or liabilities, carried on the Consolidated Balance Sheet within other assets or other liabilities with changes in fair value recorded in other income within the Consolidated Statements of Operations.

The period of time between issuance of a loan commitment to the customer and closing and sale of the loan to an investor generally ranges from 30 to 90 days under current market conditions.

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The sale of the guaranteed portion of SBA loans on a servicing retained basis gives rise to an excess servicing asset, which is computed on a loan by loan basis with the unamortized amount being included in intangible assets in the Consolidated Balance Sheets.

This excess servicing asset is being amortized on a straight-line basis (with adjustment for prepayments) as an offset to servicing fees collected and is included in other income in the Consolidated Statements of Operations.

The Company originates multifamily FHA loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”).

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Securities available-for-sale are acquired as part of the Company’s asset/liability management strategy and may be sold in response to changes in interest rates, current market conditions, loan demand, changes in prepayment risk and other factors.

Securities available-for-sale are carried at fair value, with unrealized gains or losses being reported as accumulated other comprehensive income/(loss), a separate component of shareholders’ equity, net of deferred income tax.

Realized gains and losses, using the specific identification method, are included as a separate component of noninterest income in the Consolidated Statements of Operations.

Securities available-for-sale are carried at fair value, with unrealized gains or losses, other than impairment losses, being reported as accumulated other comprehensive income/(loss), a separate component of shareholders’ equity, net of deferred income tax.

Realized gains and losses, using the specific identification method, are included as a separate component of noninterest income in the Consolidated Statements of Income.

Premiums and discounts on investment securities are amortized/accreted to the earlier of call or maturity based on expected lives, which lives are adjusted based on prepayment assumptions and call optionality.

Declines in the fair value of individual available-for-sale securities below their cost that are other-than-temporary in nature result in write-downs of the individual securities to their fair value.

Declines in the fair value of

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individual available-for-sale securities below their cost that are other-than-temporary in nature result in write-downs of the individual securities to their fair value.

Factors affecting the determination of whether other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or a change in management’s intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value.

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and (3) structure of the security.

The entire amount of an impairment loss is recognized in earnings only when:

(1) the Company intends to sell the security;

or (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis;

or (3) the Company does not expect to recover the entire amortized cost basis of the security.

In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes.

For the impairment of investment securities please see "Allowance for Credit Losses - Available-for-Sale Debt Securities" below.

Loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees.

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Deferred fees and costs are being amortized on the interest method over the term of the loan.

Management considers loans impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments according to contractual terms.

Management considers individual loans impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments according to contractual terms.

Loans are evaluated for impairment in accordance with the Company’s portfolio monitoring and ongoing risk assessment procedures.

Management considers the financial condition of the borrower, cash flow of the borrower, payment status of the loan, and the value of the collateral, if any, securing the loan.

Generally, impaired loans do not include large groups of smaller balance homogeneous loans such as residential real estate and consumer type loans which are evaluated collectively for impairment and are generally placed on nonaccrual when the loan becomes 90 days past due as to principal or interest.

Generally, individually assessed loans do not include large groups of smaller balance homogeneous loans such as residential real estate and consumer type loans which are evaluated collectively for impairment and are generally placed on nonaccrual when the loan becomes 90 days past due as to principal or interest.

Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (90 days or less) provided eventual collection of all amounts due is expected.

The impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if repayment is expected to be provided solely by the collateral.

In appropriate circumstances, interest income on impaired loans may be recognized on a cash basis.

In appropriate circumstances, interest income on individually assessed loans may be recognized on a cash basis.

Allowance for Credit Losses

The allowance for credit losses is an estimate of the losses that may be sustained in our loan portfolio.

The allowance is based on two principles of accounting:

(a) ASC Topic 450, “Contingencies,” which requires that losses be accrued when they are probable of occurring and are estimable and (b) ASC Topic 310, “Receivables,” which requires that losses be accrued when it is probable that the Company will not collect all principal and interest payments according to the contractual terms of the loan.

The loss, if any, can be determined by the difference between the loan balance and the value of collateral, the present value of expected future cash flows, or values observable in the secondary markets.

Three components comprise our allowance for credit losses:

a specific allowance, a formula allowance and a nonspecific or environmental factors allowance.

Each component is determined based on estimates that can and do change when actual events occur.

The specific allowance allocates a reserve to identified impaired loans.

Impaired loans are assigned specific reserves based on an impairment analysis.

Under ASC Topic 310, “Receivables,” a loan for which reserves are individually allocated may show deficiencies in the borrower’s overall financial condition, payment record, support available from financial guarantors and for the fair market value of collateral.

When a loan is identified as impaired, a specific reserve is established based on the Company’s assessment of the loss that may be associated with the individual loan.

The formula allowance is used to estimate the loss on internally risk rated loans, exclusive of those identified as requiring specific reserves.

The portfolio of unimpaired loans is stratified by loan type and risk assessment.

Allowance factors relate to the type of loan and level of the internal risk rating, with loans exhibiting higher risk and loss experience receiving a higher allowance factor.

The environmental factors allowance is also used to estimate the loss associated with pools of non-classified loans.

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

The allowance captures losses inherent in the loan portfolio, which have not yet been recognized.

Allowance factors and the overall size of the allowance may change from period to period based upon management’s assessment of the above described factors, the relative weights given to each factor, and portfolio composition.

Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for credit losses, including in connection with the valuation of collateral, a borrower’s prospects of repayment, and in establishing allowance factors on the formula and environmental components of the allowance.

The establishment of allowance factors involves a continuing evaluation, based on management’s ongoing assessment of the global factors discussed above and their impact on the portfolio.

The allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based upon the same volume and classification of loans.

Changes in allowance factors can have a direct impact on the amount of the provision, and a related after tax effect on net income.

Errors in management’s perception and assessment of the global factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs.

Alternatively, errors in management’s perception and assessment of the global factors and their impact on the portfolio could result in the allowance being in excess of amounts necessary to cover losses in the portfolio, and may result in lower provisions in the future.

On January 1, 2020, we adopted ASC 326 “Financial Instruments - Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments” (“ASC 326”), which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses ("ACL") with an expected loss methodology that is referred to as the current expected credit loss ("CECL") 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 ASC 842 "Leases" .

In addition, ASC 326 changed the accounting for available-for-sale (“AFS”) debt securities.

One such change is to require credit-related impairments to be recognized as an ACL 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 ASC 326 using the modified retrospective method.

Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 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 illustrates the impact of ASC 326.

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January 1, 2020

(dollars in thousands) As Reported Under ASC 326 Pre-ASC 326 Adoption Impact of ASC 326 Adoption

Commercial $ 1,545,906 $ 1,545,906 $ —

Income producing - commercial real estate 3,702,747 3,702,747 —

Owner occupied - commercial real estate 985,409 985,409 —

Real estate mortgage - residential 104,221 104,221 —

Construction - commercial and residential 1,035,754 1,035,754 —

Construction - C&I (owner occupied) 89,490 89,490 —

Home equity 80,061 80,061 —

Other consumer 2,160 2,160 —

Allowance for credit losses on loans $ ( 84,272 ) $ ( 73,658 ) $ ( 10,614 )

Reserve for Unfunded Commitments $ ( 4,118 ) $ — $ ( 4,118 )

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):

For the Year Ended

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

Provision for credit losses- loans $ 45,404 $ 13,091

Provision for credit losses- AFS debt securities 167 —

Total provision for credit losses $ 45,571 $ 13,091

Allowance for Credit Losses- Loans

The ACL is an estimate of the expected credit losses in the loans held for investment portfolio.

ASC 326 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 ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans.

Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged- off.

Reserves on loans that do not share risk characteristics are evaluated on an individual basis (nonaccrual, TDR).

Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation.

The remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated by call report codes and a loan-level probability of default (“PD”) / Loss Given Default (“LGD”) cash flow method with and using an exposure at default (“EAD”) model.

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

The Company uses regression analysis of historical internal and peer data (as Company loss data is insufficient) to determine suitable credit loss drivers to utilize when modeling lifetime PD and LGD.

This analysis also determines how expected PD will be impacted by different forecasted levels of the loss drivers.

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

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

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The Company uses a loan-level PD/LGD cash flow method with an EAD model to estimate expected credit losses.

In accordance with ASC 326, expected credit losses are measured on a collective (pooled) basis for financial assets with similar risk characteristics.

The bank groups collectively assessed loans using a call report code.

Some unique loan types, such as PPP loans, are grouped separately due to their specific risk characteristics.

For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates.

The modeling of expected prepayment speeds is based on historical internal data.

EAD is based on each instrument's underlying amortization schedule in order to estimate the bank's expected credit loss exposure at the time of the borrower's potential default.

For our cash flow model, management utilizes and forecasts regional unemployment by using a national forecast and estimating a regional adjustment based on historical differences between the two as the loss driver over our reasonable and supportable period of two years and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity.

In 2020, COVID-19 negatively impacted unemployment projections, which inform our CECL economic forecast and resulted in increased our ACL during 2020.

Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.

The ACL also includes an amount for inherent risks not reflected in the historical analyses.

Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff, and trends in delinquencies.

While our methodology in establishing the ACL attributes portions of the ACL and RUC to the separate loan pools or segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively.

Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses.

A summary of our primary portfolio segments is as follows:

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 a 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.

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

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

Generally these loans contain provisions for conversion to an owner occupied commercial real estate 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 nonaccrual depending on the circumstances of the individual loans.

Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable.

The possibility of loss is extremely high.

All doubtful loans are on nonaccrual.

Classified loans represent the sum of loans graded substandard and doubtful.

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

Changes are reflected in the pool-basis allowance and in specific 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 estimated fair value of the collateral adjusted for selling costs, when appropriate.

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.

The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation that a loan will be in a trouble debt restructuring.

We do not measure an ACL on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on nonaccrual status.

Collateral Dependent Financial Assets

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

For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date.

When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the 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.

For further detail on TDRs regarding the CARES Act, please see Note 1 - "Summary of Significant Accounting Principles" - "Impact of COVID."

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

Although ASC 326 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 is compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment.

The entire amount of an impairment loss is recognized in earnings only when:

(1) the Company intends to sell the security;

or (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis;

or (3) the Company does not expect to recover the entire amortized cost basis of the security.

Changes in the ACL are recorded as a provision for (or reversal of) credit losses.

Losses are charged against the allowance when management believes the uncollectability of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

The majority of available-for-sale debt securities as of December 31, 2020 and 2019 were issued by U.S.

However, as of December 31, 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 ACL of $ 167 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 nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due.

Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status.

Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.

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Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs.

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments.

Such financial instruments are recorded when they are funded.

The Company records a reserve for unfunded commitments (“RUC”) on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company’s Consolidated Statement of Income.

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

Premises and Equipment

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The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred.

These costs are included as a component of premises and equipment expenses on the Consolidated Statements of Operations.

These costs are included as a component of premises and equipment expenses on the Consolidated Statements of Income.

Other Real Estate Owned (OREO)

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Goodwill and Other Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.

Other intangible assets represent purchased assets and mortgage servicing rights (“MSRs”) that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights.

Intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic impairment testing.

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired, including other intangible assets.

Other intangible assets include purchased assets and mortgage servicing rights (“MSRs”) that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights.

Intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives.

All intangible assets are subject to periodic impairment testing.

Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives.

Goodwill is subject to impairment testing at the reporting unit level, which must be conducted at least annually or upon the occurrence of a triggering event.

The Company’s reporting units were identified based upon an analysis of each of its individual operating segments.

If the fair values of the reporting units exceed their book values, no write-down of recorded goodwill is required.

The Company has determined that it has a single reporting unit.

If the fair values of the reporting unit exceed the book value, no write-down of recorded goodwill is required.

If the fair value of a reporting unit is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value.

Any impairment would be realized through a reduction of goodwill or the intangible and an offsetting charge to non-interest expense.

The Company performs impairment testing as of December 31, 2019, or when events or changes in circumstances indicate the assets might be impaired.

The Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

Any impairment would be recorded through a reduction of goodwill or the intangible and an offsetting charge to noninterest expense.

The Company performs impairment testing at any quarter-end when events or changes in circumstances indicate the assets might be impaired, or at least annually as of December 31.

The Company performs a qualitative impairment assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

The Company assesses qualitative factors on a quarterly basis.

Based on the assessment of these qualitative factors, if it is determined that it is more likely than not that the fair value of a reporting unit is not less than the carrying value, then performing the two-step impairment process, previously required, is unnecessary.

Based on the results of qualitative assessments of all reporting units, the Company concluded that no impairment existed at December 31, 2019.

However, if it is determined that it is more likely than not that the carrying value exceeds the fair value a quantified analysis is required to determine whether an impairment exists.

Based on the results of qualitative assessments of the reporting unit, the Company concluded that no impairment existed at December 31, 2020.

However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss.

Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

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Interest Rate Swap Derivatives

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value.

As required by ASC Topic 815 " Derivatives and Hedging ", the Company records all derivatives on the Consolidated Balance Sheets at fair value.

The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.

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Marketing and advertising costs are generally expensed as incurred.

The Company employs the asset and liability method of accounting for income taxes as required by ASC Topic 740, “ Income Taxes .” Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e.

The Company employs the asset and liability method of accounting for income taxes as required by ASC 740, “ Income Taxes .” Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e.

temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse.

The Company utilizes statutory requirements for its income tax accounting, and limits risks associated with potentially problematic tax positions that may incur challenge upon audit, where an adverse outcome is more likely than not.

Therefore, no provisions are necessary for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax reserves.

In accordance with ASC Topic 740, the Company may establish a reserve against deferred tax assets in those cases where realization is less than certain, although no such reserves exist at December 31, 2019 or December 31, 2018.

The Company’s policy is to recognize interest and penalties on income taxes in other non-interest expenses.

Therefore, no provisions are necessary for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax valuation allowance.

In accordance with ASC 740, the Company may establish a reserve against deferred tax assets in those cases where realization is less than certain.

The Company’s policy is to recognize interest and penalties on income taxes in other noninterest expenses.

The Company remains subject to examination for income tax returns by the Internal Revenue Service, as well as all of the states where it conducts business, for the years ending after December 31, 2017.

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In certain cases, the recourse to the Bank to repurchase assets may exist but is deemed immaterial based on the specific facts and circumstances.

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Earnings per Common Share

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Stock-Based Compensation

In accordance with ASC Topic 718, “Compensation,” the Company records as compensation expense an amount equal to the amortization (over the remaining service period) of the fair value of option and restricted stock awards computed at the date of grant.

Compensation expense on variable stock grants (i.e., performance based grants) is recorded based on the probability of achievement of the goals underlying the performance grant.

Refer to Note 17 to the Consolidated Financial Statements for a description of stock-based compensation awards, activity and expense for the years ended December 31, 2019, 2018 and 2017.

In accordance with ASC Topic 718, “Compensation,” the Company records as salaries and employee benefits expense on its Consolidated Statements of Income an amount equal to the amortization (over the remaining service period) of the fair value of option and restricted stock awards computed at the date of grant.

Salary and employee benefits expense on variable stock grants (i.e., performance based grants) is recorded based on the probability of achievement of the goals underlying the performance grant.

Refer to Note 17 - "Stock-Based Compensation" for a description of stock-based compensation awards, activity and expense for the years ended December 31, 2020, 2019 and 2018.

The Company records the discount from the fair market value of shares issued under its Employee Share Purchase Plan as a component of Salaries and employee benefits expense in its Consolidated Statement of Income.

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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.

Refer to Note 6 to the Consolidated Financial Statements for additional disclosure regarding leases.

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 and disclosures for loan modifications.

Under Accounting Standards Codification ("ASC") 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 4 - "Loans and Allowance for Credit Losses" 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 ACL 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 ASC 326 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 2017-04, " Intangibles-Goodwill and Other (Topic 350") :

Simplifying the Test for Goodwill Impairment, in January 2017.

The objective of this guidance is to simplify an entity’s required test for impairment of goodwill by eliminating Step 2 from the goodwill impairment test.

In Step 2 an entity measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.

Under this Update, an entity should perform its annual or quarterly goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount and record an impairment charge for the excess of the carrying amount over the reporting unit’s fair value.

The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit and the entity must consider the income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

The Company adopted this standard during the current year and it did not have a material impact on the Company’s financial position, results of operations or cash flows.

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ASU 2018-13, " Fair Value Measurement" (Topic 820) :

The ASU removes, modifies, and adds certain disclosures related to Level 3 investments, including:

to disclose changes in unrealized gains and losses, the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty.

The ASU became effective January 1, 2020 and had no significant impact on the Company's documentation requirements, financial statement or disclosures.

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 the Company's 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 the Company's Consolidated Financial Statements.

Accounting Standards Pending Adoption

ASU 2016-13, “Measurement of Credit Losses on Financial Instruments (Topic 326).” This ASU significantly changes how entities will measure credit losses for most financial assets 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 was 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 plan to elect the Federal Reserve and FDIC’s rule providing for an optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard.

We preliminarily expect this rule to increase the reserve for credit losses 10 - 20 % inclusive of the impact on commitments to lend upon implementation on January 1, 2020.

The ultimate impact may change as we finalize our model validations as well as the execution of our implementation controls and processes.

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 was effective for us on January 1, 2021 and is not expected to have a material impact on our consolidated financial statements for fiscal year 2021.

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

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

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

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

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

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

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

We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on the Company's business operations and consolidated financial statements.

Note 2 – Cash and Due from Banks

Regulation D of the Federal Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits.

Regulation D of the Federal Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank ("FRB") based principally on the type and amount of their deposits.

During 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.

The average balance maintained in 2019 was $307 million and in 2018 was $327 million.

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.

The average daily balance maintained in 2020 was $ 1.1 billion a nd in 2019 was $ 307 million.

The Company also has deposits with other banks that serve as collateral for derivative positions it holds, totaling $ 5.1 million at December 31, 2020 and $ 780 thousand at December 31, 2019.

Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank ("FHLB") of Atlanta and noninterest bearing balances with domestic correspondent banks to cover associated costs for services they provide to the Bank.

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Note 3 – Investment Securities Available-for-Sale

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

December 31, 2019

(dollars in thousands)

December 31, 2020 Amortized

Losses Allowance for Estimated

(dollars in thousands) Credit Losses

agency securities $ 181,087 $ 1,461 $ ( 627 ) $ — $ 181,921

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Corporate bonds 34,383 1,624 ( 8 ) ( 149 ) 35,850

Other equity investments

December 31, 2018

$ 1,129,057 $ 23,463 $ ( 1,468 ) $ ( 167 ) $ 1,150,885

December 31, 2019 Amortized

Losses Estimated

(dollars in thousands)

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Corporate bonds 10,530 203 — 10,733

Other equity investments

In addition, at December 31, 2019 and December 31, 2018, the Company held $ 35.2 million and $ 23.5 million in equity securities, respectively, 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.

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

Treasury 34,844 11 — 34,855

$ 838,994 $ 7,206 $ ( 3,035 ) $ 843,165

In addition, at December 31, 2020 and December 31, 2019, the Company held $ 40.1 million and $ 35.2 million in equity securities, respectively, in a combination of FRB and FHLB stocks, which are required to be held for regulatory purposes and which are not marketable, and therefore are carried at cost.

The unrealized losses that exist at December 31, 2020 are generally the result of changes in market interest rates and interest spread relationships since original purchases.

However, as of December 31, 2020, the Company determined that part of the unrealized loss positions in AFS corporate and municipal securities were due to credit-related events, and therefore, an ACL of $ 167 thousand was recorded.

The weighted average duration of debt securities, which comprise 99.9 % of total investment securities, is relatively short at 3.2 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 December 31, 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.

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 as of December 31, 2020 and 2019 are as follows:

December 31, 2019

12 Months 12 Months

or Greater Total

December 31, 2020 Number of

Securities Estimated

Value Unrealized

Losses Estimated

Value Unrealized

Losses Estimated

Value Unrealized

(dollars in thousands)

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Residential mortgage backed securities 35 170,178 782 6,419 51 176,597 833

Municipal bonds

December 31, 2018

Corporate bonds 3 5,764 8 — — 5,764 8

66 $ 222,354 $ 857 $ 47,739 $ 611 $ 270,093 $ 1,468

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12 Months 12 Months

or Greater Total

December 31, 2019 Number of

Securities Estimated

Value Unrealized

Losses Estimated

Value Unrealized

Losses Estimated

Value Unrealized

(dollars in thousands)

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Municipal bonds 1 1,994 5 — — 1,994 5

Corporate bonds

148 $ 274,947 $ 1,592 $ 142,223 $ 1,443 $ 417,170 $ 3,035

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

December 31, 2019

December 31, 2018

(dollars in thousands)

December 31, 2020 December 31, 2019

(dollars in thousands) Amortized

Cost Estimated

Fair Value Amortized

Cost Estimated

agency securities maturing:

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After one year through five years 22,189 23,267 8,528 8,725

Five years through ten years 6,976 7,511 — —

After ten years — — 1,500 1,500

Other equity investments

treasury — — 34,844 34,855

Allowance for credit losses — ( 167 ) — —

$ 1,129,057 $ 1,150,885 $ 838,994 $ 843,165

In 2020, gross realized gains on sales of investment securities were $ 1.9 million and gross realized losses on sales of investment securities were $ 46 thousand.

In 2018, gross realized gains on sales of investment securities were $ 391 thousand and gross realized losses on sales of investment securities were $ 294 thousand.

In 2019, gross realized gains on sales of investment securities were $ 1.7 million and gross realized losses on sales of investment securities were $ 153 thousand.

In 2018, gross realized gains on sales of investment securities were $ 391 thousand and gross realized losses on sales of investment securities were $ 294 thousand.

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

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Note 4 – Loans and Allowance for Credit Losses

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

December 31, 2019

December 31, 2018

(dollars in thousands)

December 31, 2020 December 31, 2019

(dollars in thousands) Amount % Amount %

Commercial $ 1,437,433 19 % $ 1,545,906 20 %

PPP loans 454,771 6 % — — %

Income producing - commercial real estate 3,687,000 47 % 3,702,747 50 %

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Construction - C&I (owner occupied) 158,905 2 % 89,490 1 %

Home equity 73,167 1 % 80,061 1 %

Other consumer 1,389 — 2,160 —

Total loans 7,760,212 100 % 7,545,748 100 %

allowance for credit losses ( 109,579 ) ( 73,658 )

Net loans $ 7,650,633 $ 7,472,090

Unamortized net deferred fees amounted to $ 30.8 million and $ 25.2 million at December 31, 2020 and 2019, of which $ 30 thousand and $ 32 thousand at December 31, 2020 and 2019, respectively, represented net deferred costs on home equity loans.

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Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis.

A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.

The remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated by call report codes and a loan-level PD/LGD cash flow method using an EAD model is applied.

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

The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing.

At December 31, 2020, owner occupied commercial real estate and construction – C&I (owner occupied) represent approximately 15 % of the loan portfolio while 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 loans represented approximately 78 % of the loan portfolio.

The combined owner and non-owner occupied and commercial real estate loans represented approximately 73 % of the loan portfolio.

Real estate also serves as collateral for loans made for other purposes, resulting in 85 % of all loans being secured or partially 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.

The Bank typically requires a maximum loan to value of 80 % and minimum debt service coverage of 1.15 to 1.0.

Personal guarantees may be required, but may be limited.

In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years .

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The Company is also an active traditional commercial lender providing loans for a variety of purposes, including working capital, equipment and account receivable financing.

This loan category represents approximately 20 % of the loan portfolio at December 31, 2019 and was generally variable or adjustable rate.

This loan category represents approximately 19 % of the loan portfolio at December 31, 2020 and generally with variable or adjustable rate.

Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service.

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

Approximately 6 % of the loan portfolio at December 31, 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 December 31, 2020 consists of home equity loans and lines of credit and other consumer loans.

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

The repricing duration of these loans was 22 months.

The repricing duration of these loans was 22 months as December 31, 2020.

These credits represent first liens on residential property loans originated by the Bank.

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As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.

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Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower.

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

The preferred term is between five to seven 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.

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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 years ended December 31, 2019 and 2018.

The following tables detail activity in the ACL by portfolio segment for the years ended December 31, 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 preclude its availability to absorb losses in other categories.

Income Producing -

Owner Occupied -

Construction -

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(dollars in thousands) Commercial Income Producing -

Real Estate Owner Occupied -

Real Estate Real Estate

Residential Construction -

Commercial and

(dollars in thousands)

Residential Home

Consumer Total

Year Ended December 31, 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 ( 12,082 ) ( 4,300 ) ( 20 ) ( 815 ) ( 2,947 ) ( 92 ) ( 3 ) ( 20,259 )

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Ending balance $ 26,569 $ 55,385 $ 14,000 $ 1,020 $ 11,529 $ 1,039 $ 37 $ 109,579

For the Year Ended December 31, 2019

At December 31, 2020

Allowance for credit losses:

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Ending balance $ 18,832 $ 29,265 $ 5,838 $ 1,557 $ 17,485 $ 656 $ 25 $ 73,658

For the Year Ended December 31, 2018

At December 31, 2019

Allowance for credit losses:

2 unchanged sentences

Ending balance $ 18,832 $ 29,265 $ 5,838 $ 1,557 $ 17,485 $ 656 $ 25 $ 73,658

The Company’s recorded investments in loans as of December 31, 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)

December 31, 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

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2020:

(dollars in thousands) Business/Other Assets Real Estate

Commercial $ 11,326 $ 4,026

PPP loans — —

Income-producing-commercial real estate 3,193 15,686

Owner occupied - commercial real estate — 23,159

Real estate mortgage- residential — 2,932

Construction - commercial and residential — 206

Home Equity — 415

Other consumer — —

Total $ 14,519 $ 46,424

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Credit Quality Indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner.

The Company’s primary credit quality indicators are to use an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories.

The Company’s primary credit quality indicators is an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories.

Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation.

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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 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 on an ongoing basis along with our credits rated watch or below reviews.

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, 2020 and 2019.

(dollars in thousands)

The December 31, 2020 data is further defined by year of loan origination.

December 31, 2020 (dollars in thousands) Prior 2016 2017 2018 2019 2020 Total

Pass 323,660 111,886 249,541 211,551 164,166 227,095 1,287,899

Watch 31,903 5,315 19,145 21,013 7,740 7,979 93,095

Special Mention 4,969 1,692 8,969 3,385 5,599 2,169 26,783

December 31, 2019

Substandard 17,679 5,803 1,820 3,525 829 — 29,656

Total 378,211 124,696 279,475 239,474 178,334 237,243 1,437,433

Pass — — — — — 454,771 454,771

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Total — — — — — 454,771 454,771

Income producing - commercial real estate —

Pass 560,915 347,946 397,953 622,276 643,388 512,387 3,084,865

Watch 152,367 62,912 91,636 89,852 44,555 34,195 475,517

Special Mention 213 — — — 51,969 — 52,182

Substandard 58,555 800 4,656 4,883 5,542 — 74,436

Total 772,050 411,658 494,245 717,011 745,454 546,582 3,687,000

Owner occupied - commercial real estate —

Pass 343,371 100,272 111,996 136,644 59,681 49,584 801,548

Watch 16,014 5,011 2,640 10,338 15,501 — 49,504

Special Mention 418 — — 83,110 19,091 — 102,619

Substandard 28,228 784 1,908 2,048 10,151 904 44,023

Total 388,031 106,067 116,544 232,140 104,424 50,488 997,694

Real estate mortgage - residential —

Pass 16,310 2,693 10,199 12,746 18,209 10,116 70,273

Watch 1,996 699 — 728 — — 3,423

Substandard 1,198 1,698 — — — — 2,896

Total 19,504 5,090 10,199 13,474 18,209 10,116 76,592

Construction - commercial and residential —

Pass 21,290 60,486 266,788 297,480 105,679 71,297 823,020

Watch 929 — 42,751 3,448 — — 47,128

Special Mention 12 — — 2,895 — — 2,907

Substandard — — 206 — — — 206

Total 22,231 60,486 309,745 303,823 105,679 71,297 873,261

Construction - C&I (owner occupied) —

Pass 8,278 10,476 6,637 30,340 22,209 40,101 118,041

Watch 3,573 — 2,118 4,935 — — 10,626

Special Mention 124 — — — 14,436 15,678 30,238

Total 11,975 10,476 8,755 35,275 36,645 55,779 158,905

Home Equity —

Pass 33,226 4,493 8,227 7,827 4,224 12,924 70,921

Watch 1,596 — — — — — 1,596

Substandard 603 — — — 47 — 650

Total 35,425 4,493 8,227 7,827 4,271 12,924 73,167

Other Consumer —

Pass 929 190 64 74 94 31 1,382

Substandard 7 — — — — — 7

Total 936 190 64 74 94 31 1,389

Total Recorded Investment $ 1,628,363 $ 723,156 $ 1,227,254 $ 1,549,098 $ 1,193,110 $ 1,439,231 $ 7,760,212

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

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

5 unchanged sentences

The following table presents, by class of loan, information related to nonaccrual loans as of December 31, 2020 and 2019.

(dollars in thousands)

December 31, 2020 December 31, 2019

(dollars in thousands) Nonaccrual with No Allowance for Credit Loss Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans Total Nonaccrual Loans

Commercial $ 3,263 $ 12,089 $ 15,352 $ 14,928

Income producing - commercial real estate 6,500 12,380 18,880 9,711

2 unchanged sentences

Construction - commercial and residential — 206 206 11,509

Home equity 416 — 416 487

Total nonaccrual loans (1)(2)

(1) Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling $ 16.6 million at December 31, 2019, and $ 24.0 million at December 31, 2018.

$ 30,354 $ 30,589 $ 60,943 $ 48,729

(1) Excludes TDRs that were performing under their restructured terms totaling $ 10.5 million at December 31, 2020, and $ 16.6 million at December 31, 2019.

(2) Gross interest income of $ 3.7 million and $ 3.0 million would have been recorded for 2020 and 2019, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans were $ 679 thousand and $ 630 thousand at December 31, 2020 and 2019, respectively.

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

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

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The following table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of December 31, 2020 and 2019.

Total Recorded

(dollars in thousands) Loans

Past Due Loans

More Past Due Total Past

Due Loans Current

Loans Nonaccrual Loans Total Recorded

Investment in

(dollars in thousands)

More Past Due

December 31, 2020

Commercial $ 6,411 $ 21,426 $ — $ 27,837 $ 1,394,244 $ 15,352 $ 1,437,433

PPP loans — — — 454,771 — $ 454,771

Income producing - commercial real estate — 51,913 — 51,913 3,616,207 18,880 3,687,000

2 unchanged sentences

Construction - commercial and residential 2,992 340 — 3,332 869,723 206 873,261

Construction - C&I (owner occupied) — — — 158,905 — $ 158,905

Home equity 467 4,552 — 5,019 67,732 416 73,167

Other consumer 21 1 — 22 1,367 — 1,389

Total $ 21,951 $ 81,774 $ — $ 103,725 $ 7,595,544 $ 60,943 $ 7,760,212

December 31, 2019

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

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

2 unchanged sentences

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

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

Other consumer — 9 — 9 2,151 — 2,160

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 years ended December 31, 2019 and 2018.

Average Recorded Investment

Interest Income Recognized

(dollars in thousands)

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

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 required that loans be placed on nonaccrual if they were ninety days past-due, unless they were well secured and in the process of collection.

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

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The following table presents, by class of loan, information related to impaired loans for the year ended December 31, 2019.

Average Recorded

Investment Interest Income

(dollars in thousands) Unpaid

Balance Recorded

Allowance Recorded

Allowance Total

Investment Related

Allowance Year

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

The Company’s recorded investments in loans as of December 31, 2019 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:

(dollars in thousands) Commercial Income Producing -

Real Estate Owner Occupied -

Real Estate Real Estate

Residential Construction -

Commercial and

Residential Home

Consumer Total

December 31, 2019

Income producing - commercial real estate

Owner occupied - commercial real estate

Real estate mortgage - residential

Construction - commercial and residential

Other consumer

Modifications

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

Recorded investment in loans:

Individually evaluated for impairment $ 25,288 $ 19,093 $ 6,463 $ 5,365 $ 11,510 $ 487 $ — $ 68,206

Collectively evaluated for impairment 1,520,618 3,683,654 978,946 98,856 1,113,734 79,574 2,160 7,477,542

Ending balance $ 1,545,906 $ 3,702,747 $ 985,409 $ 104,221 $ 1,125,244 $ 80,061 $ 2,160 $ 7,545,748

Loan Modifications

A modification of a loan constitutes a troubled debt restructuring ("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.

7 unchanged sentences

Management exercises significant judgment in developing these estimates.

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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 allowed for a deferral of payments for 90 days, which we extended for an additional 90 days for certain loans, 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.

Through December 31, 2020, we granted temporary modifications on approximately 750 loans representing $ 1.6 billion.

These deferrals amounted to 36 loans representing approximately $ 72.4 million ( 0.9 % of total loans) in outstanding exposure at December 31, 2020 as many deferrals have migrated back to current payments, were placed on watch list or placed on nonaccrual.

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 during the years ended December 31, 2020 and 2019.

For the Year Ended December 31, 2020

Construction -

(dollars in thousands)

(dollars in thousands) Number

Contracts Commercial Income

Real Estate Owner

Real Estate Construction -

Real Estate Total

Troubled debt restructurings

1 unchanged sentence

Restructured nonaccruing 3 — 6,342 2,370 — 8,712

Total 10 $ 1,276 $ 15,525 $ 2,383 $ — $ 19,184

Specific allowance $ 733 $ 2,989 $ — $ — $ 3,722

1 unchanged sentence

For the Year Ended December 31, 2019

Construction -

(dollars in thousands)

(dollars in thousands) Number

Contracts Commercial Income

Real Estate Owner

Real Estate Construction -

Real Estate Total

Troubled debt restructings

1 unchanged sentence

Restructured nonaccruing 2 142 — 2,370 — 2,512

Total 9 $ 1,027 $ 14,806 $ 3,257 $ — $ 19,090

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

Restructured and subsequently defaulted $ — $ 7,115 $ 2,370 $ — $ 9,485

The Company had nine TDRs at December 31, 2019, totaling approximately $ 19.1 million, as compared to twelve TDRs totaling approximately $ 24.6 million at December 31, 2018.

At December 31, 2019, seven of these TDR loans, totaling approximately $ 16.6 million, are performing under their modified terms, as compared to December 31, 2018, when there were nine performing TDR loans totaling approximately $ 24.0 million.

During 2019, there were three performing TDRs totaling $ 9.5 million that defaulted on their modified terms which were reclassified to nonperforming loans, as compared to 2018, during which there were two performing TDR loans totaling approximately $ 460 thousand that defaulted on their modified terms and were reclassified to nonperforming loans.

The Company had ten TDRs at December 31, 2020, totaling approximately $ 19.2 million, as compared to nine TDRs totaling approximately $ 19.1 million at December 31, 2019.

At December 31, 2020, six of these TDR loans, totaling approximately $ 10.5 million, were performing under their modified terms, as compared to December 31, 2019, when there were seven performing TDR loans totaling approximately $ 16.6 million.

During 2020, there were two performing TDRs totaling $ 6.3 million that defaulted on their modified terms that were reclassified to nonperforming loans, as compared to 2019, during which there were three performing TDR loans totaling approximately $ 9.5 million that defaulted on their modified terms and either charged-off or 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.

During 2019, there were three restructured loans totaling approximately $ 9.5 million, one loan totaling $ 4.8 million had its collateral property sold for approximately $ 3 million and the remaining $ 1.8 million charged-off, the second loan totaling $ 2.3 million defaulted on its modified terms and was charged off, the third loan totaling $ 2.4 million defaulted on its modified terms and migrated to nonperforming.

During 2018, there were four defaulted loans totaling approximately $ 1.4 million that were charged off.

During 2019 there was one loan totaling $ 10.4 million that was re-underwritten into two new loans which provided better collateral for the Bank, and there was one restructured loan totaling approximately $ 309 thousand that was paid off from the sale proceeds of the collateral property, as compared to 2018, during which there were two loan payoffs on performing loans totaling approximately $ 3.9 million that were modified during the year.

During 2018, there was a pay down of approximately $ 176 thousand on one nonperforming loan totaling approximately $ 183 thousand at December 31, 2017.

During 2020, there were two restructured loans totaling approximately $ 870 thousand which had their collateral property sold and were paid in full and one restructured loan totaling $ 138 thousand that had previously defaulted that 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.

During 2019, there was one loan modified in a TDR totaling approximately $ 2.3 million, as compared to 2018, during which there were two loans totaling approximately $ 12.8 million modified in a TDR.

The allowance may be increased, adjustments may be made in the allocation

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of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.

During 2020, there were two loans modified in a TDR totaling approximately $ 572 thousand, as compared to 2019, during which there was one loan totaling approximately $ 2.3 million modified in a TDR.

Loan Charge Off Criteria

The criteria used to determine if a loan should be considered for charge off relates to its ultimate collectability includes the following:

3 unchanged sentences

If all or a portion of a loan is deemed uncollectible, such amount shall be charged off in the month in which the loan or portion thereof is determined to be uncollectible.

Loans approved for non-accrual status, or charge off, are managed by the Chief Credit Officer or as dictated by the Directors Loan Committee and/or Credit Review Committee.

Loans approved for nonaccrual status, or charge off, are managed by the Chief Credit Officer or as dictated by the Directors Loan Committee and/or Management Credit Review Committee.

The Chief Credit Officer is expected to position the loan in the best possible posture for recovery, including, among other actions, liquidating collateral, obtaining additional collateral, filing suit to obtain judgment or restructuring of repayment terms.

4 unchanged sentences

These actions may in turn result in the necessity of carrying real property or chattels as an asset of the Company pending sale.

Purchased Loans

For purchased loans acquired that are not deemed impaired at acquisition, credit marks representing the principal losses expected over the life of the loans are a component of the initial fair value.

Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans;

Subsequent to the purchase date, the methods utilized to estimate the required ACL for these loans is similar to originated loans;

however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit mark.

The differences between the initial fair value and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.

The following table presents changes in the credit mark accretable yield, which includes income recognized from contractual interest cash flows, for the dates indicated.

The following table presents changes in the accretable yield, which includes income recognized from contractual interest cash flows, for the dates indicated.

(dollars in thousands) 2020 2019

1 unchanged sentence

Net reclassifications from nonaccretable yield — —

Accretion 370 520

Balance at December 31, $ ( 605 ) $ ( 975 )

5 unchanged sentences

The following table summarizes changes in amounts of loans outstanding, both direct and indirect, to those persons during 2020 and 2019.

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(dollars in thousands) 2020 2019

Balance at January 1, $ 52,368 $ 167,884

Additions 30,920 30,153

Repayments ( 10,332 ) ( 38,204 )

Additions due to Changes in Related Parties — 9,034

1 unchanged sentence

Balance at December 31, $ 72,956 $ 52,368

During 2019, our related party loan balances decreased primarily due to the retirement of our former Chairman and Chief Executive Officer and the resignation of certain directors .

Note 5 – Premises and Equipment

6 unchanged sentences

Total depreciation and amortization expense for the years ended December 31, 2020, 2019 and 2018, was $ 4.0 million, $ 5.8 million and $ 5.6 million, respectively.

Note 6 – Leases

A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration.

On January 1, 2019, the Company adopted ASU No.

2016-02 “Leases” (Topic 842) and 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.

2016-2 “Leases” (Topic 842) and all subsequent ASUs that modified ASC 842.

For the Company, ASC 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.

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 ASC 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 December 31, 2020, the Company had $ 25.2 million of operating lease ROU assets and $ 28.0 million of operating lease liabilities on the Company’s Consolidated Balance Sheet.

The Company elects not to recognize ROU assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Statements of Condition.

The Company has elected not to recognize ROU assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Balance Sheets.

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.

1 unchanged sentence

As of December 31, 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 December 31, 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 December 31, 2020, the Company signed two new leases for which occupancy had not yet commenced as of December 31, 2020.

The Company oversaw construction of landlord-owned leasehold improvements to prepare the property for its intended use.

The Company expects to occupy the leased spaces starting in the first quarter of 2021.

The following table presents lease costs and other lease information.

(dollars in thousands)

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

Operating lease cost (cost resulting from lease payments) $ 8,411 $ 7,829

4 unchanged sentences

Right-of-use assets - operating leases $ 25,237 $ 27,372

Weighted Average Lease Term - Operating Leases

Weighted average lease term - operating leases 6.20 yrs 4.94 yrs

Weighted average discount rate - operating leases 4.00 % 4.00 %

7 unchanged sentences

December 31, 2025 4,146

Thereafter 9,500

Total Future Minimum Lease Payments 39,866

3 unchanged sentences

Intangible assets are included in the Consolidated Balance Sheets as a separate line item, net of accumulated amortization and consist of the following items:

(dollars in thousands)

(dollars in thousands) Gross

Assets Additions Accumulated

Amortization FHA

MSR Sales Net

December 31, 2020

Goodwill $ 104,168 $ — $ — $ — $ 104,168

Core deposit 7,070 — ( 7,070 ) — —

Excess servicing (1)

2,478 667 ( 2,199 ) — 946

Non-compete agreements 345 — ( 345 ) — —

$ 114,061 $ 667 $ ( 9,614 ) $ — $ 105,114

December 31, 2019

Goodwill $ 104,168 $ — $ — $ — $ 104,168

Core deposit 7,070 — ( 7,027 ) — 43

Excess servicing (1)

1,465 1,013 ( 1,971 ) — 507

Non-compete agreements 345 — ( 324 ) — 21

The aggregate amortization expense was $ 1.2 million , $ 1.6 million, and $ 1.5 million for the years ended December 31, 2019, 2018, and 2017, respectively.

(1) The Company recorded an initial amount of unidentified intangible (goodwill) incident to the acquisition of Fidelity of approximately $ 360 thousand.

Based on allowable adjustments through August 31, 2009, the unidentified intangible (goodwill)

amounted to approximately $ 2.2 million.

The Company recorded an initial amount of unidentified intangible (goodwill) incident to the acquisition of Virginia Heritage of approximately $ 102 million.

(2) In connection with the Fidelity and Virginia Heritage acquisitions, the Company made an allocation of the purchase price to core deposit intangibles which were $ 2.3 million and $ 4.6 million, respectively, based off of an independent evaluation which is included in intangible assets, net of accumulated amortization on the Consolidated Balance Sheets.

The initial amount recorded for the Fidelity acquisition was $ 2.3 million.

The amount of the core deposit intangible relating to the Fidelity acquisition was fully amortized at December 31, 2018, as a component of other noninterest expense.

The initial amount recorded for the Virginia Heritage acquisition was $ 4.6 million.

The amount of the core deposit intangible relating to the Virginia Heritage acquisition at December 31, 2019 was $ 43 thousand, which is being amortized over its remaining economic life through 2020 as a component of other noninterest expense.

$ 113,048 $ 1,013 $ ( 9,322 ) $ — $ 104,739

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(1) The Company recognizes a servicing asset for the computed value of servicing fees on the sale of multifamily FHA loans and the sale of the guaranteed portion of SBA loans.

Assumptions related to loan terms and amortization is made to arrive at the initial recorded values, which are included in other assets.

(4) The Company entered into a non-compete agreement for three years with its former Vice Chairman of the Bank.

The amount of the non-compete intangible was $ 21 thousand as of December 31, 2019, which is being amortized over its remaining term through 2020 as a component of professional fees.

Assumptions related to loan terms and amortization are made to arrive at the initial recorded values, which are included in other assets.

The aggregate amortization expense was $ 292 thousand, $ 1.2 million, and $ 1.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.

The future estimated annual amortization expense is presented below:

Years Ending December 31:

(dollars in thousands)

(dollars in thousands) Amount

Thereafter 616

Total annual amortization $ 946

1 unchanged sentence

The activity within OREO for the years ended December 31, 2020 and 2019 is presented in the table below.

There were two residential real estate loans totaling $ 4.0 million in the process of foreclosure as of December 31, 2019.

For the year ended December 31, 2019 and 2018, there were no sales of OREO.

There were no properties in the process of foreclosure as of December 31, 2020.

For the years ended December 31, 2020 and 2019, there was one sale and no sales of OREO, respectively.

Years Ended December 31,

10 unchanged sentences

Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives.

The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets.

The market value of interest rate lock commitments, best efforts, and mandatory delivery contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets.

The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.

3 unchanged sentences

Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.

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

At December 31, 2019 the Bank had mortgage banking derivative financial instruments with a notional value of $ 71.7 million related to its forward contracts.

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.

The fair values of the mortgage banking derivatives are recorded as freestanding assets or liabilities with the change in value being recognized in current earnings during the period of change.

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At December 31, 2020 the Bank had mortgage banking derivative financial instruments with a notional value of $ 367.7 million related to its interest rate lock commitments.

The fair value of these mortgage banking derivative instruments at December 31, 2020 was $ 5.2 million included in other assets.

At December 31, 2019 the Bank had mortgage banking derivative financial instruments with a notional value of $ 71.7 million related to its forward contracts.

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 gain on sale of loans for the year ended December 31, 2019 and 2018 was a net gain of $ 186 thousand and a net gain of $ 57 thousand, respectively, relating to mortgage banking derivative instruments.

Included in gain on sale of loans for the year ended December 31, 2020 and 2019 was a net loss of $ 309 thousand and a net gain of $ 186 thousand, respectively, relating to mortgage banking derivative instruments.

The amount included in gain on sale of loans for year ended December 31, 2020 and 2019 pertaining to its mortgage banking hedging activities was a net realized gain of $ 27 thousand and a net realized loss of $ 116 thousand, respectively.

Note 10 – Interest Rate Swap Derivatives

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

Note 10 – Other Derivatives

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

The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities.

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 December 31, 2019 and 2018, the Company had one and three designated cash flow hedge interest rate swap transactions outstanding, respectively, associated with the Company's variable rate deposits.

As of December 31, 2020 and 2019, the Company had one designated cash flow hedge interest rate swap transaction outstanding 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.

6 unchanged sentences

As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

The Company entered into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts.

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The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure.

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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 815, "Derivatives and Hedging." In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty.

The designated interest rate derivative agreements detail:

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and 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 December 31, 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 $ 515 thousand.

The aggregate fair value of all derivative contracts with credit risk contingent features that were a net asset position totaled $ 3.8 million as of December 31, 2018.

As of December 31, 2020, 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 $ 4.2 million.

The aggregate fair value of all derivative contracts with credit risk contingent features that were a net asset position totaled $ 515 thousand as of December 31, 2019.

The Company has minimum collateral posting thresholds with certain of its derivative counterparties.

As of December 31, 2019 the Company posted $ 500 thousand with its derivative counterparties against its obligations under these agreements because these agreements were in a net liability position.

At December 31, 2018, the Company was not required to post collateral with its derivative counterparties against its obligations under these agreements because these agreements were in a net asset position.

As of December 31, 2020 the Company posted $ 1.5 million with its derivative counterparties against its obligations under these agreements because these agreements were in a net liability position.

At December 31, 2019, the Company posted $ 500 thousand with its derivative counterparties against its obligations under these agreements because these agreements were in a net liability position.

If the Company had breached any provisions under the agreements at December 31, 2020 or December 31, 2019, it could have been required to settle its obligations under the agreements at the termination value.

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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 December 31, 2020 and December 31, 2019.

December 31, 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

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

Amount Fair Value Balance Sheet

Category Fair Value Balance Sheet

Derivatives not designated as hedging instruments

(dollars in thousands)

Interest rate product

Interest rate product $ 195,065 $ 3,491 Other Assets $ 311 Other Assets

Mortgage banking derivatives 367,708 5,213 Other Assets 280 Other Assets

$ 562,773 $ 8,704 Other Assets $ 591 Other Assets

Derivatives designated as hedging instruments

Interest rate product 100,000 $ 516 Other Liabilities $ 206 Other Liabilities

Derivatives not designated as hedging instruments

(dollars in thousands)

Interest rate product

Other Liabilities

Interest rate product

Other Liabilities

Interest rate product

Other Liabilities

Other Contracts

Other Liabilities

Interest rate product $ 209,830 $ 3,653 Other Liabilities $ 319 Other Liabilities

Other Contracts 26,911 118 Other Liabilities 86 Other Liabilities

Mortgage banking derivatives — — Other Liabilities 66 Other Liabilities

$ 236,741 3,771 Other Liabilities 471 Other Liabilities

Net derivatives on the balance sheet 4,287 677

Cash and other collateral (1)

Net derivative Amounts $ 119 $ 171

(1) Collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance.

The other collateral consist of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral.

The application of the collateral cannot reduce the net derivative position below zero.

Therefore, excess other collateral, if any, is not reflected above.

The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the years ended December 31, 2020 and December 31, 2019.

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

Location of Gain or (Loss)

Recognized from

Accumulated Other

Amount of Gain or (Loss)

Amount of Gain or (Loss) Recognized in OCI

Comprehensive Income into

Reclassified from Accumulated OCI

on Derivative

Year Ended December 31,

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

Derivatives in Cash Flow Hedging Relationships

Interest Rate Products

Interest Expense

Location of Gain or (Loss)

Recognized from

Accumulated Other

Amount of Gain or (Loss)

Amount of Gain or (Loss) Recognized in OCI

Comprehensive Income into

Reclassified from Accumulated OCI

on Derivative

Year Ended December 31,

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

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

Amount of Gain or (Loss) Recognized in OCI on Derivative Year Ended December 31, Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Year Ended December 31,

Derivatives in ASC 815-20 Hedging 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 tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operation for the years ended December 31, 2019 and 2018.

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

Interest rate products $ ( 1,510 ) $ ( 1,812 ) Interest expense $ ( 1,146 ) $ 1,165

Interest rate products — — Gain on sale of investment securities — 829

Total $ ( 1,510 ) $ ( 1,812 ) $ ( 1,146 ) $ 1,994

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The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the years ended December 31, 2020 and 2019.

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

Year Ended December 31,

Gain on sale of

2020 2019 2019

Expense Interest

Expense Gain on sale of

investment securities

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

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

Total amounts of income and expense line items presented in the Consolidated Statements of Income in which the effects of fair value or cash flow hedges are recorded $ ( 1,146 ) $ 1,165 $ 829

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

Interest contracts

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Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component $ ( 1,146 ) $ 1,165 $ 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 Operation

Amount of Gain or (Loss)

Recognized in Income on

Derivatives Not Designated as

Location of Gain or

Hedging Instruments under Subtopic

(Loss) Recognized in

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

Derivatives Not Designated as Hedging Instruments under ASC 815-20 Location of Gain or (Loss) Recognized in

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

Year Ended December 31,

Income on Derivative

Interest Rate Products

Other income / (expense)

Other Contracts

Other income / (expense)

Interest rate products Other income / (expense) $ 153 $ ( 8 )

Mortgage banking derivatives Other income 5,213 280

Other contracts Other income / (expense) 32 ( 27 )

Total $ 5,398 $ 245

Balance Sheet Offsetting :

Our designated cash flow hedge interest rate swap derivatives are eligible for offset in the Consolidated Balance Sheet and are subject to master netting arrangements.

Our interest rate swap derivatives are eligible for offset in the Consolidated Balance Sheet and are subject to master netting arrangements.

Our derivative transactions with counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions.

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The Company generally offsets such financial instruments for financial reporting purposes.

The following table presents the liabilities subject to an enforceable master netting arrangement as of December 31, 2019 and December 31, 2018.

As of December 31, 2019

Gross Amounts Not Offset in the

Balance Sheet

Offsetting of Derivative Assets (dollars in thousands)

Gross Amounts Not Offset in the

Balance Sheet

Offsetting of Derivative Liabilities (dollars in thousands)

As of December 31, 2018

Gross Amounts Not Offset in the

Balance Sheet

Offsetting of Derivative Assets (dollars in thousands)

Gross Amounts Not Offset in the

Balance Sheet

Offsetting of Derivative Liabilities (dollars in thousands)

Note 11 – Deposits

The following table provides information regarding the Bank’s deposit composition at December 31, 2019, 2018, and 2017 as well as the average rate being paid on interest bearing deposits at December 31, 2019, 2018, and 2017.

(dollars in thousands)

The following table provides information regarding the Bank’s deposit composition at December 31, 2020 and 2019 as well as the average rate being paid on interest bearing deposits for the month of December 2020 and 2019.

(dollars in thousands) Balance Average

Rate Balance Average

Noninterest bearing demand $ 2,809,334 — $ 2,064,367 —

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Time, $100,000 or more 546,173 1.08 % 663,987 2.55 %

Other time 431,587 1.92 % 619,052 2.21 %

Total $ 9,189,203 $ 7,224,391

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The remaining maturity of time deposits at December 31, 2020 and 2019 are as follows:

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Over twelve months 451,119 484,659

Total $ 977,760 $ 1,283,039

Interest expense on deposits for the years ended December 31, 2020, 2019 and 2018 is as follows:

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Time, $ 100,000 or more

13,464 20,016 17,138

Other time 10,640 14,477 4,190

Total $ 53,566 $ 91,026 $ 60,210

Related Party deposits totaled $ 25.7 million and $ 136.2 million at December 31, 2020 and 2019, respectively.

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Over twelve months 28,280 90,361

Total $ 231,077 $ 350,601

Note 12 – Affordable Housing Projects Tax Credit Partnerships

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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.

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

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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 $ 29.7 million and related unfunded commitments were $ 11.3 million as of December 31, 2019, and are included in Other Assets and Other Liabilities in the Consolidated Statements of Condition.

The Company’s net affordable housing tax credit investment s were $ 26.1 million and related unfunded commitments were $ 8.8 million as of December 31, 2020, and are included in Other Assets and Other Liabilities in the C onsolidated Balance Sheets.

As of December 31, 2020, the expected payments for unfunded affordable housing commitments were as follows:

Years Ending December 31:

(dollars in thousands)

(dollars in thousands) Amount

Thereafter 676

Total unfunded commitments $ 8,762

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Note 13 – Borrowings

Information relating to short-term and long-term borrowings is as follows for the years ended December 31:

(dollars in thousands)

(dollars in thousands) Amount Rate Amount Rate

Customer repurchase agreements and federal funds purchased $ 26,726 0.26 % $ 30,980 1.18 %

Federal Home Loan Bank – current portion 300,000 0.67 % 250,000 0.39 %

Total $ 326,726 $ 280,980

Average Daily Balance:

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Federal Home Loan Bank – current portion 280,126 0.66 % 135,699 1.67 %

Total $ 309,471 $ 165,723

Maximum Month-end Balance:

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Federal Home Loan Bank – current portion 300,000 0.67 % 440,000 0.92 %

Total $ 332,987 $ 474,852

Subordinated Notes $ 220,000 5.42 % $ 220,000 5.42 %

Borrowings 50,000 1.81 % — — %

Average Daily Balance:

Subordinated Notes $ 220,000 5.42 % $ 220,000 5.42 %

Borrowings 50,000 1.81 % — — %

Maximum Month-end Balance:

Subordinated Notes $ 220,000 5.42 % $ 220,000 5.42 %

Borrowings 50,000 1.81 % — — %

The Company offers its business customers a repurchase agreement sweep account in which it collateralizes these funds with U.S.

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By entering into the agreement, the customer agrees to have the Bank repurchase the designated securities on the business day following the initial transaction in consideration of the payment of interest at the rate prevailing on the day of the transaction.

The Bank can purchase up to $ 172.5 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at December 31, 2019 and can borrow unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $ 1.34 billion, against which there was $ 82.4 million outstanding at December 31, 2019.

The Bank also has a commitment at December 31, 2019 from Promontory to place up to $ 700.0 million of brokered deposits from its Insured Network Deposits (“IND”) program in amounts requested by the Bank, as compared to an actual balance of $ 533.1 million at December 31, 2019.

At December 31, 2019, the Bank was also eligible to make advances from the FHLB up to $ 1.54 billion based on collateral at the FHLB, of which there was $ 250 million outstanding at December 31, 2019.

The Bank can purchase up to $ 170 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at December 31, 2020 and can place brokered funds under one-way CDARS and ICS deposits in the amount of $ 1.5 billion, against which there was $ 682 thousand outstanding at December 31, 2020.

The Bank also has a commitment at December 31, 2020 from IntraFi to place up to $ 1.5 billion of brokered deposits from its Insured Network Deposits (“IND”) program in amounts requested by the Bank, as compared to an actual balance of $ 1.3 billion at December 31, 2020.

At December 31, 2020, the Bank was also eligible to take advances from the FHLB up to $ 1.6 billion based on collateral at the FHLB, of which there was $ 350 million outstanding at December 31, 2020.

The Bank may enter into repurchase agreements as well as obtain additional borrowing capabilities from the FHLB provided adequate collateral exists to secure these lending relationships.

The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank of Richmond (“Federal Reserve Bank”).

This facility, which amounts to approximately $ 653.0 million, is collateralized with specific loan assets identified to the Federal Reserve Bank.

This facility, which amounts to approximately $ 644.6 million, is

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collateralized with specific loan assets pledged to the Federal Reserve Bank.

It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only.

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The net proceeds were approximately $ 147.4 million, which includes $ 2.6 million in deferred financing costs which is 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.

Note 14 – Income Taxes

The Tax Cuts and Jobs Act (the “Tax Act”) enacted in December 2017 reduced the federal corporate income tax rate from 35 % to 21 % effective January 1, 2018.

As a result of the Tax Act, we recorded a $ 14.6 million reduction in the value of our net deferred tax asset, which was recorded as additional income tax expense during 2017.

We had net deferred tax assets (deferred tax assets in excess of deferred tax liabilities) of $ 29.8 million and $ 33.3 million at December 31, 2019 and 2018, respectively, which related primarily to our allowance for credit losses, and loan origination fees.

Management believes it is more likely than not that all of the deferred tax assets will be realized.

Federal and state income tax expense consists of the following for the years ended December 31:

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Deferred federal income tax expense (benefit) ( 5,212 ) 78 ( 2,634 )

Deferred state income tax expense (benefit)

Total deferred tax expense (benefit)

Deferred state income tax benefit ( 3,120 ) ( 139 ) ( 863 )

Total deferred tax benefit ( 8,332 ) ( 61 ) ( 3,497 )

Total income tax expense $ 43,928 $ 53,848 $ 51,932

Temporary timing differences between the amounts reported in the financial statements and the tax bases of assets and liabilities result in deferred taxes.

The table below summarizes significant components of our deferred tax assets and liabilities utilizing federal corporate income tax rates of 21% as of December 31, 2019, 2018, and 2017:

We had net deferred tax assets (deferred tax assets in excess of deferred tax liabilities) of $ 38.6 million and $ 29.8 million for the years ended at December 31, 2020 and 2019, respectively, which related primarily to our allowance for credit losses, and loan origination fees.

Management believes it is more likely than not that all of the deferred tax assets will be realized.

Temporary timing differences between the amounts reported in the Consolidated Financial Statements and the tax bases of assets and liabilities result in deferred taxes.

The table below summarizes significant components of our deferred tax assets and liabilities as of December 31, 2020 and 2019:

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(dollars in thousands) 2020 2019

2 unchanged sentences

Deferred loan fees and costs 8,104 6,354

Deferred rent

Leases 7,183 7,790

Stock-based compensation 828 674

Net operating loss 6,896 6,184

Unrealized loss on securities available-for-sale

Unrealized loss on interest rate swap derivatives 132 53

SERP 2,495 1,541

Premises and equipment 879 914

Other assets 1,982 816

Valuation allowances ( 5,845 ) ( 4,899 )

Total deferred tax assets 50,772 38,571

1 unchanged sentence

Unrealized net gain on securities available-for-sale ( 5,519 ) ( 1,081 )

Unrealized gain on interest rate swap derivatives

Excess servicing ( 206 ) ( 51 )

Intangible assets — ( 9 )

Leases ( 6,470 ) ( 7,117 )

Other liabilities ( 6 ) ( 509 )

Total deferred tax liabilities ( 12,201 ) ( 8,767 )

Net deferred income tax amount

A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate for the years ended December 31 follows:

Net deferred income tax assets $ 38,571 $ 29,804

The net operating loss carry forward acquired in conjunction with the Fidelity acquisition is subject to annual limits under Section 382 of the Internal Revenue Code of $ 718 thousand and expires in 2027.

As of December 31, 2020, The Company has concluded, based on the weight of available positive and negative evidence, a portion of it’s state net operating loss deferred tax asset is not more likely than not to be realized and accordingly, a valuation allowance of $ 5.8 million and $ 4.9 million is carried as of December 31, 2020 and 2019, respectively.

A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate for the years ended December 31 2020, 2019, and 2018 follows:

2020 2019 2018

Statutory federal income tax rate 21.00 % 21.00 % 21.00 %

1 unchanged sentence

State income taxes 5.04 % 5.49 % 5.83 %

Deferred tax adjustment

Tax exempt interest and dividend income ( 0.75 ) % ( 0.69 ) % ( 1.13 ) %

Stock-based compensation expense 0.25 % 1.15 % 0.01 %

Other ( 0.63 ) % 0.46 % ( 0.28 ) %

Effective tax rate 24.91 % 27.41 % 25.43 %

The Company remains subject to examination for the years ending after December 31, 2015.

The Company remains subject to examination by taxing authorities for the years ending after December 31, 2016.

Management has identified no uncertain tax positions at December 31, 2020.

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Note 15 – Net Income per Common Share

1 unchanged sentence

(dollars and shares in thousands, except per share data) 2020 2019 2018

Net income $ 132,217 $ 142,943 $ 152,276

Average common shares outstanding 32,334 34,179 34,306

Basic net income per common share $ 4.09 $ 4.18 $ 4.44

Net income $ 132,217 $ 142,943 $ 152,276

Average common shares outstanding 32,334 34,179 34,306

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Note 16 – Related Party Transactions

The Bank leases office space from a limited liability company in which a trust for the benefit of a former executive officer’s children has a 51 % interest.

During the fourth quarter of 2015, the Company entered into an agreement to lease office space for a second location with limited liability companies in which the executive officer indirectly owns a majority interest.

The Company leased additional space at this location starting with the third quarter of 2017.

The executive officer resigned during 2019.

The Company paid $ 2.6 million, $ 2.2 million, and $ 2.1 million with respect to these leases, excluding certain pass-through expenses for the years ended December 31, 2019, 2018 and 2017, respectively.

A director that resigned from Company during 2019 was a shareholder in a law firm which has provided, and continues to provide, legal services to the Company and its subsidiaries.

During 2019, the Company and its subsidiaries paid aggregate fees of $ 929 thousand to that firm.

Under the director’s arrangement with his firm, he did not participate significantly in the profits or revenues resulting from the provision of legal services to the Company and its subsidiaries.

The EagleBank Foundation, a 501(c)(3) non-profit, seeks to improve the well being of our community by providing financial support to local charitable organizations that help foster and strengthen vibrant, healthy, cultural and sustainable communities.

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Such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with outsiders.

Please see further detail regarding Related Party Loans in Note 4 and Related Party Deposits in Note 11 to the Consolidated Financial Statements.

Please see further detail regarding Related Party Loans in Note 4 "Loans and Allowance for Credit Losses" and Related Party Deposits in Note 11 "Deposits" .

Note 17 – Stock-Based Compensation

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The Company adopted the 2016 Plan upon approval by the shareholders at the 2016 Annual Meeting held on May 12, 2016.

The 2016 Plan provides directors and selected employees of the Bank, the Company and their affiliates with the opportunity to acquire

shares of stock, through awards of options, time vested restricted stock, performance-based restricted stock and stock appreciation rights.

The 2016 Plan provides directors and selected employees of the Bank, the Company and their affiliates with the opportunity to acquire shares of stock, through awards of options, time vested restricted stock, performance-based restricted stock and stock appreciation rights.

Under the 2016 Plan, 1,000,000 shares of common stock were initially reserved for issuance.

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For awards that are performance-based, compensation expense is recorded based on the probability of achievement of the goals underlying the grant.

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In February 2020, the Company awarded 152,184 shares of time vested restricted stock to senior officers, directors, and certain employees.

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There are two performance metrics:

1) average annual earnings per share growth;

and 2) average annual net interest margin growth.

Average annual earnings per share growth is measured compared to the Company’s budget.

Average annual net interest margin growth is measured against peer companies in the KBW Regional Banking Index.

1) total shareholder's return;

and 2) return on average assets.

In April 2020, the Company awarded 24,068 shares of time vested restricted stock to the Chairman of the Board of Directors.

The shares vest in three substantially equal installments beginning on the first anniversary of the date of grant.

The Company has unvested restricted stock awards and PRSU grants of 308,673 shares at December 31, 2020.

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Years Ended December 31,

Perfomance Awards

Performance Awards Shares Weighted-

Fair Value Shares Weighted-

Unvested at beginning 58,780 $ 57.74 98,958 $ 54.76

Issued 44,741 40.19 43,145 55.76

Forfeited ( 8,586 ) 54.89 ( 65,589 ) 55.25

Vested ( 4,293 ) 62.70 ( 17,734 ) 45.50

Unvested at end 90,642 $ 49.11 58,780 $ 57.74

Years Ended December 31,

Time Vested Awards

Time Vested Awards Shares Weighted-

Fair Value Shares Weighted-

Unvested at beginning 110,714 $ 57.84 173,721 $ 58.93

Issued 176,252 42.51 112,636 55.76

Forfeited ( 18,385 ) 50.06 ( 44,600 ) 58.73

Vested ( 50,550 ) 58.76 ( 131,043 ) 57.20

Unvested at end 218,031 $ 45.89 110,714 $ 57.84

1 unchanged sentence

The information excludes restricted stock units and awards.

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Years Ended December 31,

2020 2019 2018

Shares Weighted-

Price Shares Weighted-

Beginning balance 6,589 $ 19.99 34,123 $ 14.69 143,224 $ 9.13

Issued 2,500 47.95 — — — —

Exercised ( 3,300 ) 11.40 ( 26,784 ) 12.42 ( 108,201 ) 7.17

Forfeited — — ( 750 ) 49.08 ( 900 ) 34

Ending balance 5,789 $ 36.96 6,589 $ 19.99 34,123 $ 14.69

1 unchanged sentence

The information excludes restricted stock units and awards.

Weighted-Average

Stock Options

Weighted-Average

Range of Exercise Prices

Exercise Price

Outstanding Weighted-Average

Exercise Price Weighted-Average

Contractual Life (Years)

Stock Options

Weighted-Average

Range of Exercise Prices

$ 5.76 - $ 10.72 — — —

$ 10.73 - $ 11.40 1,789 $ 10.73 1.30

$ 11.41 - $ 24.86 — — —

$ 24.87 - $ 49.91 4,000 48.69 7.65

5,789 $ 36.96 5.69

Stock Options

Exercisable Weighted-Average

Exercise Price

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model.

Range of Exercise Prices

$ 5.76 - $ 10.72 — —

$ 10.73 - $ 11.40 1,789 $ 10.73

$ 11.41 - $ 24.86 — —

$ 24.87 - $ 49.91 1,500 49.91

3,289 $ 28.60

There were no grants of stock options during the years ended December 31, 2019 and 2018.

The total intrinsic value of outstanding stock options was $ 192 thousand and $ 1.2 million, respectively, at December 31, 2019 and 2018.

For 2020, there was one grant to an executive officer for 2,500 incentive stock options in January 2020, which has a ten-year term and vests in three equal installments beginning on the first anniversary of the date of grant.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions shown in the table below used for the grants during 2020.

Year Ended December 31, 2020

Expected volatility 42.3 %

Weighted-Average volatility 42.3 %

Expected dividends —

Expected term (in years) 6.5

Risk-free rate 1.67 %

Weighted-average fair value (grant date) $ 21.06

The expected lives were based on the "simplified" method allowed by ASC 718 "Compensation," whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award.

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The total intrinsic value of outstanding stock options was $ 54 thousand and $ 192 thousand, respectively, at December 31, 2020 and 2019.

The total fair value of stock options vested was $ 6 thousand, $ 35 thousand and $ 80 thousand, for 2020, 2019 and 2018, respectively.

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At December 31, 2020, the 2011 ESPP had 346,301 shares reserved for issuance.

Included in salaries and employee benefits in the accompanying Consolidated Statements of Operations, the Company recognized $ 7.7 million, $ 6.6 million and $ 5.6 million in stock-based compensation expense for 2019, 2018 and 2017, respectively.

Included in salaries and employee benefits in the accompanying Consolidated Statements of Income, the Company recognized $ 5.3 million, $ 7.7 million and $ 6.6 million in stock-based compensation expense for 2020, 2019 and 2018, respectively.

In addition, during 2019 the Company accrued $ 4.5 million in stock-based compensation costs associated with the retirement of our former Chairman and Chief Executive Officer.

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The Company makes contributions to the Plan based on a matching formula, which is reviewed annually.

For the years 2019, 2018, and 2017, the Company recognized $ 1.3 million, $ 894 thousand, and $ 1.2 million in expense associated with this benefit, respectively.

These amounts are included in salaries and employee benefits in the accompanying Consolidated Statements of Operations.

For the years 2020, 2019, and 2018, the Company recognized $ 1.5 million, $ 1.3 million, and $ 894 thousand in expense associated with this benefit, respectively.

These amounts are included in salaries and employee benefits in the accompanying Consolidated Statements of Income.

Note 19 – Supplemental Executive Retirement Plan

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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.

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The SERP Agreements are unfunded arrangements maintained primarily to provide supplemental retirement benefits and comply with Section 409A of the Internal Revenue Code.

2 unchanged sentences

The primary impetus for utilizing fixed annuities is a substantial savings in compensation expenses for the Bank as opposed to a traditional SERP Agreement.

The annuity contracts accrued $ 23 thousand and $ 81 thousand of income for the years ended December 31, 2019 and 2018, respectively, which were included in other noninterest income on the Consolidated Statement of Operations.

The cash surrender value of the annuity contracts was $ 14.7 million at December 31, 2019 and was included in other assets on the Consolidated Balance Sheet.

For the years ended December 31, 2019 and 2018, the Company recorded benefit expense accruals of $ 404 thousand and $ 686 thousand, respectively, for this post retirement benefit.

The annuity contracts accrued $ 45 thousand, $ 23 thousand, and $ 81 thousand of income for the years ended December 31, 2020, 2019, and 2018, respectively, which were included in other noninterest income on the Consolidated Statement of Income.

The cash surrender value of the annuity contracts was $ 14.5 million and $ 14.7 million at December 31, 2020 and 2019, respectively, was included in other assets on the Consolidated Balance Sheet.

For the years ended December 31, 2020, 2019, and 2018 the Company recorded benefit expense accruals of $ 428 thousand, $ 404 thousand, and $ 686 thousand, respectively, for this post retirement benefit.

Upon death of a named executive, the annuity contract related to such executive terminates.

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Letters of credit 70,779 69,723

Total $ 2,353,733 $ 2,332,790

Because most of the Company’s business activity is with customers located in the Washington, D.C., metropolitan area, a geographic concentration of credit risk exists within the loan portfolio, the performance of which will be influenced by the economy of the region.

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These amounts are included in other liabilities in the accompanying Consolidated Balance Sheets.

Changes in the balance of the reserve are a component of other expenses in the accompanying Consolidated Statements of Operations.

Additions to the reserve are a component of other expenses in the accompanying Consolidated Statements of Income.

The reserve is available to absorb losses on the repurchase of loans sold related to document and other fraud, early payment default and early payoff.

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Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives.

The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets.

The Company determines the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates while taking into consideration the probability that the rate lock commitments will close or will be funded.

These transactions are further detailed in Note 9 to the Consolidated Financial Statements.

The market value of interest rate lock commitments and best efforts and mandatory contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets.

The Company determines the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest

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rates while taking into consideration the probability that the rate lock commitments will close or will be funded.

These transactions are further detailed in Note 9 "Mortgage Banking Derivatives".

Note 21 – Commitments and Contingent Liabilities

The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments.

Except for its loan commitments, as shown in Note 20 to the Consolidated Financial Statements, the following table shows details on these fixed and determinable obligations as of December 31, 2019 in the time period indicated.

(dollars in thousands)

Except for its loan commitments, as shown in Note 20 "Financial Instruments With Off Balance Sheet Risk" the following table shows details on these fixed and determinable obligations as of December 31, 2020 in the time period indicated.

(dollars in thousands) Within One

Three Years Three to

Five Years Over Five

Deposits without a stated maturity (1)

$ 8,211,443 $ — $ — $ — $ 8,211,443

Time deposits (1)

526,641 376,825 74,294 — 977,760

Borrowed funds (2)

326,726 — 70,000 200,000 596,726

Operating lease obligations 8,342 12,741 9,283 9,500 39,866

Outside data processing (3)

4,592 8,190 1,677 — 14,459

George Mason sponsorship (4)

675 1,350 1,363 6,775 10,163

820 844 — — 1,664

LIHTC investments (6)

5,343 2,070 672 676 8,761

— 2,000 — — 2,000

Total $ 9,084,582 $ 404,020 $ 157,289 $ 216,951 $ 9,862,842

(1) Excludes accrued interest payable at December 31, 2020.

(2) Borrowed funds include customer repurchase agreements, and other short-term and long-term borrowings.

(3) The Bank has outstanding obligations under its current core data processing contract that expire in June 2024 and two other vendor arrangements that relate to network infrastructure and data center services, one expires in December 2021 and the other expires in December 2020.

(3) The Bank has outstanding obligations under its current core data processing contract that expire in June 2024 and one other vendor arrangement that relates to network infrastructure and data center services that expires in December 2021.

(4) The Bank has the option of terminating the George Mason agreement at the end of contract years 10 and 15 (that is, effective June 30, 2025 or June 30, 2030).

Should the Bank elect to exercise its right to terminate the George Mason contract, contractual

obligations would decrease $ 3.5 million and $ 3.6 million for the first option period (years 11 - 15 ) and the second option period ( 16 - 20 ), respectively.

Should the Bank elect to exercise its right to terminate the George Mason contract, contractual obligations would decrease $ 3.5 million and $ 3.6 million for the first option period (years 11 - 15 ) and the second option period ( 16 - 20 ), respectively.

(5) Marketing sponsorship agreement with D.C.

(6) Low Income Housing Tax Credits (“LIHTC”) expected payments for unfunded affordable housing commitments.

(6) LIHTC expected payments for unfunded affordable housing commitments.

(7) As disclosed in the 8-K dated January 25, 2021, pursuant to the executed stipulation of settlement of the demand litigation, the Company has agreed to invest an additional $ 2 million incremental spend above 2020 levels by the end of 2023 to enhance its corporate governance, and risk and compliance controls and infrastructure.

An accrual is recorded when it is both (a) probable that a loss has occurred and (b) the amount of loss can be reasonably estimated.

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Certain legal proceedings involving us are described below.

On July 24, 2019, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York against the Company, its current and former President and Chief Executive Officer and its current and former Chief Financial Officer, on behalf of persons similarly situated, who purchased or otherwise acquired Company securities between March 2, 2015 and July 17, 2019.

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On July 24, 2019, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York (the "SDNY") against the Company, its current and former President and Chief Executive Officer and its current and former Chief Financial Officer, on behalf of persons similarly situated, who purchased or otherwise acquired Company securities between March 2, 2015 and July 17, 2019.

On November 7, 2019, the court appointed a lead plaintiff and lead counsel in that matter, and on January 21, 2020, the lead plaintiff filed an amended complaint on behalf of the same class against the same defendants as well as the Company's former General Counsel.

The plaintiff alleges that certain of the Company's 10-K reports and other public statements and disclosures contained materially false or misleading statements about, among other things, the effectiveness of its internal controls and related party loans, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 20 (a) of that act, resulting in injury to the purported class members as a result of the decline in the value of the Company's common stock following the disclosure of increased legal expenses associated with certain government investigations involving the Company.

The Company intends to defend vigorously against the claims asserted.

On December 23, 2020, the securities class action plaintiffs and defendants filed a stipulation to stay the class action litigation pending a non-binding mediation on April 13, 2021.

The SDNY so-ordered the stipulation on December 24, 2020.

There can be no assurance, however, that the Class Action litigation will be settled.

The Company intends to continue to defend vigorously against the claims asserted.

As previously disclosed in the Company's Quarterly Report for the quarter ended September 30, 2020, the Company engaged with discussions with a shareholder regarding a demand letter previously received by the Board of Directors from such shareholder, largely relating to the subject matters covered by the putative class action lawsuit described above.

On January 25, 2021, the Company announced that it had entered into a settlement agreement with respect to such shareholder demand letter.

As required by DC Superior Court administrative procedures, shareholder’s counsel first filed a derivative action complaint against the individual directors and officers named in the demand letter, and the Company as a nominal Defendant, on February 4, 2021, a nd then filed the executed stipulation of settlement accompanied by the shareholder's brief in support of their unopposed motion to approve the settlement on February 10, 2020.

The settlement is subject to certain conditions and limitations, and is still pending court approval.

Pursuant to the executed stipulation of settlement of the demand litigation, the Company has agreed to implement certain corporate governance enhancements (many of which are already underway) and to invest an additional $ 2 million incremental spend above 2020 levels (over the course of three years ) to enhance its corporate governance, and risk and compliance controls and infrastructure.

As part of the resolution of the matters that were the subject of the demand letter, once court approval is granted, the Company will make a one-time payment to the shareholder’s counsel in the amount of $ 500 thousand for attorneys’ fees and expenses (which one-time amount is expected to be recovered pursuant to the Company’s D&O insurance policy).

The stipulation of settlement further provides for releases by the demanding shareholder on behalf of all Eagle Bancorp shareholders of liability with respect to the subject matters described in the demand letter and any other potential future shareholder derivative claims against all current and former Company and Bank officers and directors, and a release by the Company of certain claims against all current and former officers and directors, subject to court approval.

The stipulation of settlement does not include or constitute an admission, concession, or finding of any fault, liability, or wrongdoing by the Company, the Bank or any defendant.

Although the Company believes the stipulation of settlement is in the best interests of the Company’s shareholders, there can be no assurance that the stipulation of settlement will be approved by the court.

The Company has received various document requests and subpoenas from securities and banking regulators and U.S.

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For these reasons, we are currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses resulting from, the matters described above.

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Note 22 – Regulatory Matters

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The actual capital amounts and ratios for the Company and Bank as of December 31, 2020 and 2019 are presented in the table below:

Minimum Required

Company Bank Minimum Required

Adequacy Purposes To Be Well

Corrective Action

(dollars in thousands)

Adequacy Purposes

Regulations *

(dollars in thousands) Actual

Amount Ratio Actual

As of December 31, 2020

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At December 31, 2020, the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained capital ratios above the required minimums and the capital conservation buffer.

As a result the Company may be restricted in paying dividends.

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Note 23 – Other Comprehensive Income

The following table presents the components of other comprehensive income (loss) for the years ended December 31, 2020, 2019 and 2018.

(dollars in thousands)

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

Year Ended December 31, 2020

Net unrealized gain on securities available-for-sale

Reclassification adjustment for net gains included in net income

Total unrealized gain

Net unrealized loss on derivatives

Reclassification adjustment for gain included in net income

Total unrealized loss

Other Comprehensive Income

Net unrealized gain (loss) on securities available-for-sale $ 19,637 $ ( 5,215 ) $ 14,422

Reclassification adjustment for net gain (loss) included in net income ( 1,815 ) 452 ( 1,363 )

Total unrealized gain (loss) 17,822 ( 4,763 ) 13,059

Net unrealized gain (loss) on derivatives ( 2,049 ) 671 ( 1,378 )

Reclassification adjustment for gain (loss) included in net income 1,145 ( 285 ) 860

Total unrealized gain (loss) ( 904 ) 386 ( 518 )

Other comprehensive income (loss) $ 16,918 $ ( 4,377 ) $ 12,541

Year Ended December 31, 2019

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 gain included in net income

Total unrealized gain

Other Comprehensive Loss

Net unrealized gain (loss) on securities available-for-sale $ 15,183 $ ( 3,929 ) $ 11,254

Reclassification adjustment for net gain (loss) included in net income ( 1,517 ) 416 ( 1,101 )

Total unrealized gain (loss) 13,666 ( 3,513 ) 10,153

Net unrealized gain (loss) on derivatives ( 2,731 ) 682 ( 2,049 )

Reclassification adjustment for gain (loss) included in net income ( 1,198 ) 328 ( 870 )

Total unrealized gain (loss) ( 3,929 ) 1,010 ( 2,919 )

Other comprehensive income (loss) $ 9,737 $ ( 2,503 ) $ 7,234

Year Ended December 31, 2018

Net unrealized loss on securities available-for-sale $ ( 4,279 ) $ ( 438 ) $ ( 3,841 )

Reclassification adjustment for net gains included in net income

Reclassification adjustment for net loss included in net income ( 97 ) ( 25 ) ( 72 )

Total unrealized loss ( 4,376 ) ( 463 ) ( 3,913 )

2 unchanged sentences

Total unrealized gain 1,473 85 1,388

Other Comprehensive Income

Other comprehensive loss $ ( 2,903 ) $ ( 378 ) $ ( 2,525 )

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The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2020, 2019 and 2018.

Accumulated Other

(dollars in thousands) Securities Available

For Sale Derivatives Accumulated Other

Comprehensive Income

(dollars in thousands)

Year Ended December 31, 2020

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The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the years ended December 31, 2020, 2019 and 2018.

Amount Reclassified from

Affected Line Item in

Details about Accumulated Other Amount Reclassified from

Accumulated Other

Comprehensive (Loss) Income Affected Line Item in

the Statement Where

Details about Accumulated Other

Comprehensive (Loss) Income

Net Income is Presented

Comprehensive Income Components

Year Ended December 31,

Comprehensive Income Components Year Ended December 31,

(dollars in thousands) 2020 2019 2018

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

Total Reclassifications for the Period

Realized gain on sale of investment securities $ 1,815 $ 1,517 $ 97 Gain on sale of investment securities

Interest income (expense) derivative deposits ( 1,145 ) 1,198 560 Interest expense on deposits

Income tax (expense) benefit ( 167 ) ( 744 ) ( 167 ) Tax expense

Total Reclassifications for the Period $ 503 $ 1,971 $ 490 Net Income

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Note 24 – Fair Value Measurements

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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 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:

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This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.

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Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019:

Quoted Prices

(dollars in thousands)

(dollars in thousands) Quoted Prices

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant Other

Unobservable Inputs

(Level 3) Total

December 31, 2020

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Corporate bonds — 34,350 1,500 35,850

Other equity investments

Loans held for sale — 88,205 — 88,205

3 unchanged sentences

Interest rate swap derivatives $ — $ 516 $ — $ 516

Derivative liability

Credit risk participation agreements — 118 — 118

Interest rate caps — 3,574 — 3,574

Mortgage banking derivatives

Total liabilities measured at fair value on a recurring basis as of December 31, 2020 $ — $ 4,208 $ — $ 4,208

5 unchanged sentences

Corporate bonds — — 10,733 10,733

Other equity investments

Treasury — 34,855 — 34,855

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 $ 11,013 $ 900,469

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

Credit risk participation agreements — 86 — 86

Interest rate caps — 312 — 312

Mortgage banking derivatives — — 66 66

Total liabilities measured at fair value on a recurring basis as of December 31, 2019 $ — $ 601 $ 66 $ 667

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Investment Securities Available-for-Sale

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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.

1 unchanged sentence

December 31, 2020

(dollars in thousands)

Residential mortgage loans held for sale

FHA mortgage loans held for sale

(dollars in thousands) Fair Value Aggregate

Balance Difference

Loans held for sale $ 88,205 $ 86,551 $ 1,654

December 31, 2019

(dollars in thousands)

Residential mortgage loans held for sale

FHA mortgage loans held for sale

(dollars in thousands) Fair Value Aggregate

Balance Difference

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

No residential mortgage loans held for sale were 90 or more days past due or on nonaccrual status as of December 31, 2020] or December 31, 2019.

Interest rate swap derivatives:

These derivative instruments consist of forward starting interest rate swap agreements, which are accounted for as cash flow hedges under ASC 815.

These derivative instruments consist of interest rate swap agreements, which are accounted for as cash flow hedges under ASC 815.

The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations.

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Accordingly, RPAs fall within Level 2.

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Interest rate caps:

4 unchanged sentences

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

Mortgage Banking

(dollars in thousands)

(dollars in thousands) Investment

Securities Mortgage Banking

Derivatives Total

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

Realized (loss) gain included in earnings — 4,933 4,933

Unrealized gain included in other comprehensive income

Purchases of available -for-sale securities

Principal redemption

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

Reclass fair value asset to cost method ( 198 ) — $ ( 198 )

Ending balance at December 31, 2020 $ 1,500 $ 5,213 $ 6,713

1 unchanged sentence

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

Principal redemption

Ending balance at December 31, 2020 $ — $ — $ —

Mortgage Banking

(dollars in thousands)

(dollars in thousands) Investment

Securities Mortgage Banking

Derivatives Total

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

Realized 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

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

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

The securities consist of $10.9 million in corporate bonds and 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.

Mortgage banking derivatives:

The Company relies on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a Level 3 valuation.

The 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 December 31, 2020 and 2019, the significant unobservable inputs used in the fair value measurements were as follows:

December 31, 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 72 % - 85 %

79.14 % $ 5,213 76.25 % $ 280

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

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.

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 :

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 310, “ Receivables .” The fair value of impaired assessed 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.

Post adoption of CECL (Individually Assessed Loans) :

The Company considers a loan impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest.

Management has determined that nonaccrual loans and loans that have had their terms restructured in a troubled debt restructuring meet this impaired loan definition.

For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company classifies as a Level 3 valuation.

For individually evaluated individually assessed loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company classifies as a Level 3 valuation.

Other real estate owned :

2 unchanged sentences

Assets measured at fair value on a nonrecurring basis are included in the table below:

Quoted Prices

(dollars in thousands)

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(dollars in thousands) Quoted Prices

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant Other

Unobservable Inputs

(Level 3) Total

December 31, 2020

Impaired loans:

Individually assessed loans:

Commercial $ — $ — $ 9,285 $ 9,285

Income producing - commercial real estate — — 21,638 21,638

2 unchanged sentences

Construction - commercial and residential — — 103 103

Home equity — — 416 416

Other real estate owned — — 4,987 4,987

Total assets measured at fair value on a nonrecurring basis as of December 31, 2020 $ — $ — $ 60,961 $ 60,961

Quoted Prices

(dollars in thousands)

(dollars in thousands) Quoted Prices

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant Other

Unobservable Inputs

(Level 3) Total

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

3 unchanged sentences

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired.

Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, “Receivables.” The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows.

Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans.

At December 31, 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.

Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables.” The fair value of individually assessed loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows.

Those individually assessed loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans.

At December 31, 2020, substantially all of the Company’s individually assessed loans were evaluated based upon the fair value of the collateral.

In accordance with ASC 820, individually assessed 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.

3 unchanged sentences

Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists.

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Quoted market prices, if available, are shown as estimates of fair value.

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

Cash due from banks and federal funds sold:

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

Interest bearing deposits with other banks:

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

Investment securities:

For these instruments, fair values are based upon quoted prices, if available.

Federal Reserve and Federal Home Loan Bank stock:

The carrying amounts approximate the fair values at the reporting date.

Loans held for sale:

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

The fair value of multifamily FHA loans held for sale is the carrying value and is based on commitments outstanding from investors as well as what secondary markets are currently offering for portfolios with similar characteristics for multifamily FHA loans held for sale since such loans are typically committed to be securitized and sold (servicing retained) at a profit.

The loan portfolio is valued using an exit price notion.

The present value of cash flows projection is established for each loan in the portfolio projecting contractual payments, default adjusted payments, cash flows in the event of default (including deferred timing of recoveries), and pre-payments.

These expected cash flows are then discounted to present value using the note interest rate and an established market rate which, if different from the note rate, allows the Bank to isolate the amount above or below par a potential acquirer would pay to acquire the Bank’s portfolio.

Bank owned life insurance:

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

Annuity investment:

The fair value of the annuity investments is the carrying amount at the reporting date.

Mortgage banking derivatives:

The Company enters into interest rate lock commitments with prospective residential mortgage borrowers.

These commitments are carried at fair value based on the fair value of the underlying mortgage loans which are based on market data.

These commitments are classified as Level 3 in the fair value disclosures, as the valuations are based on market unobservable inputs.

The Company hedges the risk of the overall change in the fair value of loan commitments to borrowers by selling forward contracts on securities of GSEs.

These forward settling contracts are classified as Level 3, as valuations are based on market unobservable inputs.

See Note 9 to the Consolidated Financial Statements for additional detail.

Credit Risk Participation Agreements :

The Company enters into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts.

The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure.

Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities.

Accordingly, RPAs fall within Level 2.

Interest Rate Caps:

the Company entered into an interest rate cap agreement (“cap”) with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the cap’s strike rate.

The fair value of the cap is calculated by determining the total expected asset or liability exposure of the derivatives.

Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities.

Accordingly, the cap falls within Level 2.

Interest rate swap derivatives:

These derivative instruments consist of forward starting interest rate swap agreements, which are accounted for as cash flow hedges.

The fair value of the derivatives is determined using discounted cash flow models.

These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.

Derivative contracts are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings when the market value exceeds certain threshold limits.

These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration.

Noninterest bearing deposits:

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

Interest bearing deposits:

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

Certificates of deposit:

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

Customer repurchase agreements:

The carrying amount approximate the fair values at the reporting date.

The carrying amount for variable rate borrowings approximate the fair values at the reporting date.

The fair value of fixed rate FHLB advances and the subordinated notes are estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms.

The fair value of variable rate FHLB advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index.

Off-balance sheet items:

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

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

Estimated fair values of the Company’s financial instruments at December 31, 2020 and 2019 are as follows

Table o f Contents

Fair Value Measurements

Quoted Prices

(dollars in thousands)

(dollars in thousands) Carrying

Value Fair Value Quoted Prices

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant Other Unobservable

Inputs (Level 3)

December 31, 2020

5 unchanged sentences

Loans held for sale 88,205 88,205 — 88,205 —

Loans 7,650,633 7,608,687 — — 7,608,687

Bank owned life insurance 76,729 76,729 — 76,729 —

Annuity investment 14,468 14,468 — 14,468 —

Mortgage banking derivatives 5,213 5,213 — — 5,213

Interest rate caps 3,413 3,413 — 3,413 —

1 unchanged sentence

Interest bearing deposits 756,923 756,923 — 756,923 —

Certificates of deposit

Time deposits 977,760 993,500 — 993,500 —

Customer repurchase agreements 26,726 26,726 — 26,726 —

Borrowings 568,077 575,435 — 575,435 —

Interest rate swap derivatives 516 516 — 516 —

Derivative liability

Credit risk participation agreements 118 118 — 118 —

Interest rate caps 3,574 3,574 — 3,574 —

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 —

4 unchanged sentences

Interest bearing deposits 3,876,985 3,876,985 — 3,876,985 —

Certificates of deposit

Time deposits 1,283,039 1,291,688 — 1,291,688 —

Customer repurchase agreements 30,980 30,980 — 30,980 —

Borrowings 467,687 328,330 — 328,330 —

Interest rate swap derivatives 203 203 — 203 —

Credit risk participation agreements, 86 86 — 86 —

Interest rate caps 312 312 — 312 —

Mortgage banking derivatives 66 66 — — 66

Note 25 – Quarterly Results of Operations (unaudited)

The following table reports quarterly results of operations (unaudited) for 2019, 2018 and 2017:

(dollars in thousands except per share data)

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

Total interest income

Total interest expense

Net interest income

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

Noninterest expense

Income before income tax expense

Income tax expense

Net income available to common shareholders

Earnings per common share

(dollars in thousands except per share data)

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

Total interest income

Total interest expense

Net interest income

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

Noninterest expense

Income before income tax expense

Income tax expense

Net income available to common shareholders

Earnings per common share

(dollars in thousands except per share data)

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

Total interest income

Total interest expense

Net interest income

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

Noninterest expense

Income before income tax expense

Income tax expense

Net income available to common shareholders

Earnings per common share

(1) Earnings per common share are calculated on a quarterly basis and may not be additive to the year to date amount.

Table o f Contents

Note 25 – Parent Company Financial Information

1 unchanged sentence

(Parent Company only) is as follows:

(dollars in thousands)

December 31, 2019

December 31, 2018

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

Cash $ 29,275 $ 43,204

Investment securities available-for-sale, at fair value 16,716 7,218

Investment in subsidiaries 1,347,235 1,334,197

Other assets 79,590 30,773

Total Assets $ 1,472,816 $ 1,415,392

Other liabilities $ 13,847 $ 7,024

2 unchanged sentences

Shareholders’ Equity

Common stock 315 331

Additional paid in capital 427,016 482,286

Retained earnings 798,061 705,105

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income 15,500 2,959

Total Shareholders’ Equity 1,240,892 1,190,681

4 unchanged sentences

Gain on sale of investment securities — — —

Total Income $ 141,982 $ 85,851 $ 678

Interest expense 11,915 11,916 11,916

1 unchanged sentence

Directors compensation 500 491 614

Other 1,306 1,294 1,287

Total Expenses $ 16,563 $ 16,480 $ 14,687

3 unchanged sentences

Equity in Undistributed Income of Subsidiaries 6,191 70,396 163,393

Net Income $ 132,217 $ 142,943 $ 152,276

Table o f Contents

Years Ended December 31,

1 unchanged sentence

Cash Flows From Operating Activities

Net Income $ 132,217 $ 142,943 $ 152,276

Adjustments to reconcile net income to net cash used in operating activities:

2 unchanged sentences

Securities premium amortization (discount accretion), net 6 2 —

Depreciation and amortization 390 — —

Increase in other assets ( 48,966 ) ( 21,447 ) ( 2,508 )

3 unchanged sentences

Purchases of available-for-sale investment securities ( 10,000 ) ( 7,030 ) —

Proceeds from maturities of available-for-sale securities 613 — —

Investment in subsidiary (net) — — 6,892

9 unchanged sentences

Cash and Cash Equivalents at End of Year $ 29,275 $ 43,204 $ 72,783

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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

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-K

Item 8. Financial Statements and Supplementary Data