What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-10 · 392 added, 253 removed, 547 unchanged (54% of the section changed)

19 unchanged sentences

The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion.

The Bank currently has a total of twenty branch offices, including nine in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C.

The Bank currently has a total of nineteen branch offices, including eight in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C.

The Bank offers a broad range of commercial banking services to its business and professional clients, as well as full service consumer banking services to individuals living and/or working primarily in the Bank’s market area.

3 unchanged sentences

The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under best efforts and/or mandatory delivery commitments with the investors to purchase the loans subject to compliance with pre-established criteria.

The decision whether to sell residential mortgage loans on a mandatory or best efforts lock basis is a function of multiple factors, including but not limited to overall market volumes of mortgage loan originations, forecasted “pull-through” rates of origination, loan closing operational considerations, pricing differentials between the two methods, and availability and pricing of various interest rate hedging strategies associated with the mortgage origination pipeline.

The Company continually monitors these factors to maximize profitability and minimize operational and interest rate risks.

7 unchanged sentences

Impact of COVID-19

In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization.

The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve.

Governmental responses to the pandemic have included orders closing nonessential businesses, directing individuals to restrict their movements, observe social distancing, and shelter in place.

These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to COVID-19 pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.

Since the inception of the pandemic in March of 2020, much progress has been made in reopening economies back up domestically and abroad.

In the United States and in other nations around the world, the availability of vaccination to immunize the masses ramped up significantly in the first quarter of 2021.

While there is a hopeful reason to be optimistic, we remain cautious given the potential for lingering effects of the pandemic.

Since the inception of the COVID-19 pandemic in March of 2020, much progress has been made in reopening economies back up domestically and abroad.

In the United States and in other nations around the world, the availability of vaccines ramped up significantly in the first half of 2021.

Although management feels we're generally trending in a positive direction and strides have been made in the fight against COVID-19, we remain cautious given the potential for lingering effects of the pandemic, and the uncertainty of vaccination availability and distribution, as well as vaccination efficacy against variants, which could continue to impair some customers' ability to fulfill their financial obligations to the Company.

Certain of our business and consumer customers have experienced and continue to experience varying degrees of financial distress.

In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including directing employees to work from home insofar as is possible, implementing our business continuity plans and protocols to the extent necessary, and our branches have modified hours and advanced safety measures.

We have established general guidelines for returning 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.

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

As concerns over the most severe impacts of the pandemic have abated, the Company expects that a partial return to the workplace may be appropriate starting in the Fall.

The return to the workplace will seek to have at least half of the Company's employees in the office each day.

We are monitoring jurisdictional guidelines and will respond as appropriate.

On March 27, 2020, the CARES Act was signed into law.

2 unchanged sentences

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

As an SBA preferred lender, the Bank is participating in the PPP program, and at March 31, 2021, had an outstanding balance of PPP loans of $565.0 million to just over 1,800 business' loans.

The statutory interest rate on these loans is 1.00% and the average yield, which includes fee and cost amortization, was 3.50% for the first quarter of 2021.

As an SBA preferred lender, the Bank is participating in the PPP program, and at June 30, 2021, had an outstanding balance of PPP loans of $238.0 million through 537 business loans.

The statutory interest rate on these loans is 1.00% and the average yield, which includes fee and cost amortization, was 6.13% for the first six months of 2021.

On May 3, 2021, we transacted to sell 849 PPP loans for a total purchase price of $169.0 million.

Immediately following this sale, the principal outstanding on PPP loans totaled approximately $378.4 million across 789 notes.

There have also been various governmental actions taken or proposed to provide forms of relief, such as streamlining the application process for forgiveness of all PPP loans under $50,000, limiting debt collections efforts, including foreclosures, and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees.

We sold another 16 PPP loans on June 28, 2021 for a total purchase price of $816 thousand, amounting to a total of $169.8 million of sales of PPP loans for the quarter.

During the second quarter of 2021, we recognized $4.7 million in accelerated interest income from the sale of PPP loans.

Origination of new loans through the PPP has ceased, and the focus going forward will be on forgiveness.

Following the CARES Act, the Consolidated Appropriations Act was signed in to law on December 27, 2020 which expanded and modified the PPP as well as provided additional COVID-19 support.

2 unchanged sentences

The efficacy and ultimate effect of these actions is not known.

In response to the COVID-19 pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications.

In response to the COVID-19 pandemic, we had previously implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications.

Initial modifications under the program have predominantly been for 90 days, with a second 90 day modification if warran ted.

These types of loan modifications are no longer being granted at this time.

The de ferred payments along with interest accrued during the deferral period are due and payable on the existing maturity date of the existing loan.

As of March 31, 2021, we had ongoing temporary modifications on approximately 58 loans representing $143.4 million (approximately 1.9% of total loans) in outstanding balances.

Overall, through the twelve months of the pandemic ending March 31, 2021, the Bank's COVID-19 modification program has granted temporary modifications on approximately 787 loans representing approximately $1.6 billion in outstanding balances.

At March 31, 2021, the level of loans currently in COVID-19 related modification is $143 million.

Some of these deferrals may have met the criteria for treatment under U.S.

generally accepted accounting principles ("GAAP") as troubled debt restructurings ("TDRs").

As of June 30, 2021, we had ongoing temporary

modifications on approximately 31 loans representing approximately $77 million (approximately 1.1% of total loans) in outstanding balances, as compared to 36 loans representing approximately $72 million (approximately 0.9% of total loans) at December 31, 2020.

Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e.

1 unchanged sentence

financial institutions to temporarily suspend the U.S.

GAAP requirements to treat such short-term loan modifications as TDR.

GAAP requirements to treat such short-term loan modifications as troubled debt restructurings ("TDRs").

Some of these deferrals may have met the criteria for treatment under U.S.

generally accepted accounting principles ("GAAP") 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.

Steadily improving economic forecasts, improved unemployment numbers, improvement of credits in the portfolio along with a reduction in total loans, higher provisioning in 2020 associated with the implementation of the expected loss methodology for determining our provision for credit losses as required by the Current Expected Credit Loss ("CECL") standard described below, resulted in a negative provision for credit losses for the first three months of 2021.

We continue to monitor the impact of COVID-19 closely even as economic forecasts improve.

In addition, we continue to monitor the effects that have resulted from the CARES Act and other legislative and regulatory developments related to COVID-19;

however, the extent to which the COVID-19 pandemic could impact our operations and financial results during the remainder of 2021 is highly uncertain.

however, the extent to which the COVID-19 pandemic could impact our operations and financial results during the remainder of 2021 is uncertain.

CRITICAL ACCOUNTING POLICIES

16 unchanged sentences

Our determination of these amounts requires significant reliance on estimates and significant judgment as to the amount and timing of expected future cash flows on loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts.

The Provision for Credit Losses ("PCL") represents the expected credit losses arising from the Company's loan and

AFS securities portfolios.

The Provision for Credit Losses ("PCL") represents the periodic expense for expected credit losses arising from the Company's loan and AFS securities portfolios.

The Company uses a loan-level probability of default ("PD")/ loss given default ("LGD") cash flow method with an exposure at default ("EAD") model to estimate expected credit losses for the commercial, income producing – commercial real estate, owner occupied – commercial real estate, real estate mortgage - residential, construction – commercial and residential, construction – C&I (owner occupied), home equity, and other consumer loan pools.

5 unchanged sentences

This analysis also determines how expected probability of default will react to forecasted levels of the loss drivers.

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 a loss driver over our reasonable and supportable period of two years, and reverts back to a historical loss rate over the following twelve months on a straight-line basis.

Improved unemployment projections, which inform our CECL economic forecast reduced our loss reserve during the three months ended March 31, 2021.

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 a loss driver over our reasonable and supportable period of 18 months, and reverts back to a historical loss rate over the following twelve months on a straight-line basis.

Improved unemployment projections, which materially inform our CECL economic forecast reduced our loss reserve during the three months ended June 30, 2021.

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

4 unchanged sentences

Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.

For example, the COVID-19 pandemic has negatively impacted the performance outlook in the Accommodation & Food Service segment of our loan portfolio, which informs our CECL economic forecast and increased our loss reserve for the three months ended March 31, 2021.

See Notes 1 and 5 to the Consolidated Financial Statements for more information on the provision for credit losses.

2 unchanged sentences

The Company performs impairment testing during the fourth quarter of each year or when events or changes in circumstances indicate the assets might be impaired.

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

Determining the fair value of a reporting unit under the goodwill impairment test involves judgment 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.

5 unchanged sentences

Earnings Summary

Net income for the three months ended March 31, 2021 was $43.5 million compared to $23.1 million for the three months ended March 31, 2020, a 88% increase.

Net income per basic and diluted common share for the three months ended March 31, 2021 was $1.36 compared to $0.70 per basic and diluted common share for the same period in 2020, a 94% increase.

Net income increased for the three months ended March 31, 2021 relative to the same period in 2020 due primarily to a reversal of the provision for credit losses and significant gain on sale of residential mortgages, whereas the first quarter of 2020 included provisions for credit losses at the beginning of the COVID-19 pandemic, as well as, mark-to-market losses related to a hedge position on mortgage operations.

In particular, the provision for credit losses decreased to a net credit of $2.4 million for the three months ended March 31, 2021 compared to $14.3 million for the same period in 2020, a 116% decrease (see "Provision for Credit Losses" section below for further details on drivers of the change).

Three Months Ended June 30, 2021 vs.

Three Months Ended June 30, 2020

Net income for the three months ended June 30, 2021 was $48.0 million compared to $28.9 million for the three months ended June 30, 2020, a 66% increase.

Net income per basic and diluted common share for the three months ended June 30, 2021 was $1.50 compared to $0.90 per basic and diluted common share for the same period in 2020, a 67% increase.

Net income increased for the three months ended June 30, 2021 relative to the same period in 2020 due primarily to a $4.6 million reversal of the provision for credit losses and reserve for unfunded commitments, as well as interest income of $4.7 million due to accelerated interest income from the sale of PPP loans.

By comparison, the second quarter of 2020 included provisions for credit losses and unfunded commitments of $20.7 million as the Company increased reserves during the COVID-19 pandemic (see "Provision for Credit Losses" section below for further details on drivers of the change).

Total revenue (i.e.

net interest income plus noninterest income) was $93.2 million for the first quarter of 2021 as compared to $85.2 million in the same period of 2020.

The most significant portion of revenue is net interest income, which increased to $82.7 million for the three months ended March 31, 2021 compared to $79.7 million for the same period in 2020.

The increase in net interest income was primarily due to an increase in assets, which more than offset the decline in net interest margin.

net interest income plus noninterest income) was $95.6 million for the second quarter of 2021 as compared to $93.9 million in the same period of 2020.

The most significant portion of revenue is net interest income, which increased to $84.6 million for the three months ended June 30, 2021 compared to $81.4 million for the same period in 2020.

The increase in net interest income was primarily due to the $4.7 million acceleration of net deferred fees and costs associated with the sale of PPP loans, which more than offset the decline in net interest margin.

The net interest margin, which measures the difference between interest income and interest expense (i.e.

net interest income) as a percentage of earning assets, was 2.98% for the three months ended March 31, 2021 and 3.49% for the same period in 2020.

net interest income) as a percentage of earning assets, was 3.04% for the three months ended June 30, 2021 and 3.26% for the same period in 2020.

The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below.

The benefit of noninterest sources funding earning assets decreased by 34 basis points to 24 basis points for the three months ended March 31, 2021 as compared to 58 basis points for the same period in 2020, due to significantly lower market interest rates.

The combination of a 17 basis point decrease in the net interest spread and a 34 basis point decrease in the value of noninterest sources resulted in a 51 basis point decrease in the net interest margin for the three months ended March 31, 2021 as compared to the same period in 2020.

Total noninterest income for the three months ended March 31, 2021 increased to $10.6 million from $5.5 million for the three months ended March 31, 2020, a 94% increase.

The largest factor behind the increase was the gain on sale of loans which increased from $944 thousand to $5.2 million between the three months ended March 31, 2021 and March 31, 2020 due to higher gains on the sale of residential mortgage loans ($4.2 million).

The benefit of noninterest sources funding earning assets decreased by 13 basis points to 23 basis points for the three months ended June 30, 2021 as compared to 36 basis points for the same period in 2020, due to significantly lower market interest rates.

The combination of a 9 basis point decrease in the net interest spread and a 13 basis point decrease in the value of noninterest sources resulted in a 22 basis point decrease in the net interest margin for the three months ended June 30, 2021 as compared to the same period in 2020.

Total noninterest income for the three months ended June 30, 2021 decreased to $10.9 million from $12.5 million for the three months ended June 30, 2020, a 13% decrease.

The decrease was primarily due to a decline in loan fees and other fees, which was partially offset by FHA multifamily trade premiums of $2.6 million and $3.5 million in gain on sale from residential mortgage loans.

F or further information on the components and drivers of these changes see "Noninterest Income" section below.

Gain on sale of loans for the three months ended March 31, 2021 was $5.2 million compared to $944 thousand for the three months ended March 31, 2020, an increase of 449%.

The change was primarily due to a loss on a negative mark-to-market hedge position in the residential mortgage operation in the first quarter of 2020 as contrasted to low interest rates driving more residential mortgage activity in the first quarter of 2021.

Other income for the three months ended March 31, 2021 increased to $3.8 million from $1.9 million for the three months ended March 31, 2020, a 105% increase, due substantially to $911 thousand gain from the cancellation of an FHLB borrowing, swap fee income of $695 thousand and $576 thousand higher gains associated with the origination, securitization, sale and servicing of FHA loans.

Noninterest expenses totaled $38.0 million for the three months ended March 31, 2020, as compared to $37.3 million for the three months ended March 31, 2020, a 2% increase.

Gain on sale of loans for the three months ended June 30, 2021 was $3.5 million compared to $3.1 million for the three months ended June 30, 2020, an increase of 13%.

Residential lending gains for the second quarter of 2020 include $1.3 million in hedge and mark to market losses incurred during the second quarter of 2020 that were not repeated in 2021.

The 2020 losses were attributable to the Federal Reserve’s market actions negatively impacting mortgage backed securities pricing combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19 at the end of March 2020.

Other income for the three months ended June 30, 2021 decreased to $5.6 million from $6.9 million for the three months ended June 30, 2020, a 19% decrease.

Noninterest expenses totaled $35.5 million for the three months ended June 30, 2021, as compared to $34.9 million for the three months ended June 30, 2020, a 2% increase.

See the "Noninterest Expense" section for further detail on the components and drivers of the change.

Income tax expenses were $14.6 million for the three months ended March 31, 2021 an increase of 75.1%, compared to the same period in 2020.

Income tax expenses were $16.7 million for the three months ended June 30, 2021 an increase of 76.9%, compared to the same period in 2020.

The components and drivers of the change are discussed in the "Income Tax Expense" section below.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 40.74% for the first quarter of 2021, as compared to 43.83% for the first quarter of 2020.

The Company believes it has effectively managed its net interest income over the past twelve months by growing its balance sheet over the past twelve months.

At March 31, 2021, total loans (including PPP loans) were 3.0% lower than they were at December 31, 2020, and average loans were 0.99% higher in the first three months of 2021 as compared to the first three months of 2020 (which did not include any PPP loans as the program had not yet started).

PPP loans represented $565 million of total loans at the end of the first quarter 2021.

Excluding PPP loans, the decrease in loan balance is mostly attributable to elevated payoffs and prepays due in part to successful completion of construction projects and low nominal interest rates.

From a liquidity and funding perspective, the Company continues to benefit from funding from the build in both interest bearing and noninterest bearing accounts.

At March 31, 2021, total deposits were 0.1% higher than deposits at December 31, 2020, while average deposits were 24.7% higher for the first three months of 2021 compared with the first three months of 2020.

This has allowed the Company to sustain strong primary and secondary sources of liquidity.

On May 3, 2021, we transacted to sell 849 PPP loans for a total purchase price of $169.0 million.

Immediately following this sale, the principal outstanding on PPP loans totaled approximately $378.4 million across 789 notes .

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 68.8% and 83.4% of average earning assets for the first three months of 2021 and 2020, respectively.

The decline was primarily a result of strong deposit inflows in the second and third quarters of 2020, which significantly increased cash and securities.

The ratio of common equity to total assets decreased to 11.33% at March 31, 2021 from 11.64% at March 31, 2020, as strong deposit inflows significantly increased assets held in cash and securities;

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 37.14% for the second quarter of 2021, as compared to 37.18% for the second quarter of 2020.

The Company believes it has effectively managed the Company over the past twelve months as deposits flowed into the Bank, increasing the balance sheet by maintaining a focus on disciplined pricing of both loans and sources of funding.

At June 30, 2021, total loans (including PPP loans) were 6.5% lower than they were at December 31, 2020, and average loans were 7.9% lower in the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

PPP loans represented $238.0 million of total loans at the end of the second quarter 2021.

Notwithstanding the impact of PPP loans to total loans at June 20, 2021, the decrease in loan balance is mostly attributable to elevated payoffs and prepays due in part to successful completion of construction projects and low nominal interest rates.

From a liquidity and funding perspective, the Company continues to benefit from a higher level of both interest bearing and noninterest bearing accounts relative to the second quarter of 2020.

At June 30, 2021, total deposits were 1.9% lower than deposits at December 31, 2020, while average deposits were 12.4% higher for the three months ended June 30, 2021 compared with the three months ended June 30, 2020.

While deposits declined slightly since December 31.

2020, the large increase from June 30, 2020 has allowed the Company to sustain strong primary and secondary sources of liquidity.

On May 3, 2021, the Company sold 849 PPP loans for a total purchase price of $169.0 million.

We sold another 16 PPP loans on June 28, 2021 for a total purchase price of $816 thousand, amounting to a total of $169.8 million of sales of PPP loans.

After accounting for the forgiveness process and loans granted forgiveness during the quarter, the Company had $238.0 million in PPP loans at June 30, 2021.

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 66% and 80% of average earning assets for the three months ended June 30, of 2021 and 2020, respectively.

The decline was primarily a result of strong deposit inflows in the second half of 2020, which resulted in a significant increase in cash and securities.

The ratio of common equity to total assets decreased to 11.92% at June 30, 2021 from 12.12% at June 30, 2020, as strong deposit inflows significantly increased assets held in cash and securities;

average assets increased by 10.9%.

As discussed later in “Capital Resources and Adequacy,” the regulatory capital ratios of the Bank and Company remain above well capitalized levels.

For the three months ended March 31, 2021, the Company reported an annualized return on average assets (“ROAA”) of 1.53%, as compared to 0.98% for the three months ended March 31, 2020.

Total shareholders’ equity was $1.26 billion and $1.24 billion at March 31, 2021 and December 31, 2020, respectively, an increase of 1.6%.

The annualized return on average common equity (“ROACE”) for the three months ended March 31, 2020 was 14.05% as compared to 7.81% for the three months ended March 31, 2020.

The annualized return on average tangible common equity (“ROATCE”) for the three months ended March 31, 2021 was 15.33% as compared to 8.56% for the three months ended March 31, 2020.

The increase in these ratios was primarily due to substantially lower provision of credit losses.

For the three months ended June 30, 2021, the Company reported an annualized return on average assets (“ROAA”) of 1.68%, as compared to 1.12% for the three months ended June 30, 2020.

Total shareholders’ equity was $1.31 billion and $1.24 billion at June 30, 2021 and December 31, 2020, respectively, an increase of 5.3%.

The annualized return on average common equity (“ROACE”) for the three months ended June 30, 2021 was 14.92% as compared to 9.84% for the three months ended June 30, 2020.

The annualized return on average tangible common equity (“ROATCE”) for the three months ended June 30, 2021 was 16.25% as compared to 10.80% for the three months ended June 30, 2020.

The increase in these ratios was primarily due to reversals from the allowance for credit losses on loans and the reserve for unfunded commitments in the three months ended June 30, 2021, versus increases to both of these accounts in the three months ended June 30, 2020.

Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.

Six Months Ended June 30, 2021 vs.

Six Months Ended June 30, 2020

Net interest income increased by 4% for the six months ended June 30, 2021 over the same period in 2020 ($167.3 million as compared to $161.1 million).

This was largely attributable to the acceleration of $4.7 million in net deferred fees and costs associated with the sale of $169.8 million in PPP loans as well as growth in average earning assets mostly offset by a decline in the net interest margin.

For the six months ended June 30, 2021, the Company reported an annualized ROAA of 1.61% as compared to 1.06% for the six months ended June 30, 2020.

The annualized ROACE for the six months ended June 30, 2021 was 14.49% as compared to 8.82% for the six months ended June 30, 2020.

The annualized ROATCE for the six months ended June 30, 2021 was 15.80% as compared to 9.67% for the six months ended June 30, 2020.

The increase in these ratios was primarily due to reversals from the allowance for credit losses on loans and the reserve for unfunded commitments in the first half of 2021, versus increases to both of these accounts in the first half of 2020.

Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.

The net interest margin was 3.02% for the six months ended June 30, 2021 and 3.36% for the same period in 2020.

Average earning asset yields decreased 80 basis points to 3.41% for the six months ended June 30, 2021, as compared to 4.21% for the same period in 2020.

The average cost of interest bearing liabilities decreased by 68 basis points (to 0.63% from 1.31%) for the six months ended June 30, 2021 as compared to the same period in 2020.

Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 12 basis points for the six months ended June 30, 2021 as compared to 2020 (2.78% as compared to 2.90%).

The benefit of noninterest sources funding earning assets decreased by 22 basis points to 24 basis points from 46 basis points for the six months ended June 30, 2021 as compared to the same period in 2020 due to rates continuing to move lower.

The combination of a 12 basis point decrease in the net interest

spread and a 22 basis point decrease in the value of noninterest sources resulted in a 34 basis point decrease in the net interest margin for the six months ended June 30, 2021 as compared to the same period in 2020.

The Company believes it has effectively managed its pricing and interest rate risk over the past twelve months as market interest rates moved lower and have stayed low.

This factor has been significant to overall earnings performance over the past twelve months as net interest income represents 89% of the Company's total revenue for the six months ended June 30, 2021.

For the six months ended June 30, 2021, total loans decreased 6.5% from December 31, 2020 (from $7.8 billion to $7.3 billion), and average loans were 3.6% lower in the first six months of 2021 as compared to the first six months of 2020.

At June 30, 2021, total deposits were 1.9% lower than deposits at December 31, 2020, while average deposits were 18.2% higher for the first six months of 2021 compared with the first six months of 2020.

There was decline in average loans from $7.8 billion to $7.6 billion over the six months ended June 30, 2021 as compared to the same period in 2020 but still sustained significant liquidity, the Company has relied on funding from interest bearing accounts primarily as a result of inflows from certain financial intermediary relationships that are also experiencing increased liquidity.

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 67% and 81% of average earning assets for the first six months of 2021 and 2020, respectively.

For the first six months of 2021, as compared to the same period in 2020, average loans, excluding loans held for sale, decreased $280 million, or 4%, due to the sale of PPP loans, and payoffs/paydowns outpaced loan originations/fundings.

Average investment securiti es for the six months ended June 30, 2021 and 2020 amounted to 13% and 9% of average earning assets, respectively.

The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 20% and 10% of average earning assets for the first six months of 2021 and 2020, respectively.

The provision for credit losses decreased with a reversal of $6.2 million for the six months ended June 30, 2021 as compared to a provision of $34.0 million for the six months ended June 30, 2020.

The reversal of provisioning for the six months ended June 30, 2021, as compared to the provisioning for the same period in 2020, is primarily due to by the improved macroeconomic outlook and more significant impacts of COVID-19 during the six months ended June 30, 2020.

Net charge-offs of $10.8 million for the six months ended June 30, 2021 represented an annualized 0.29% of average loans, excluding loans held for sale, as compared to $9.4 million, or an annualized 0.24% of average loans, excluding loans held for sale, in the first six months of 2020.

Net charge-offs in the first six months of 2021 were attributable to commercial loans ($5.4 million) and commercial real estate loans ($5.4 million).

Total noninterest income for the six months ended June 30, 2021 increased to $21.5 million from $18.0 million for the six months ended June 30, 2020, a 20% increase.

Service charges on deposits for the six months ended June 30, 2021 decreased to $2.1 million from $2.4 million for the six months ended June 30, 2020, a $0.3 million decrease, due to a decrease in insufficient funds fees.

Gain on sale of loans for the six months ended June 30, 2021 increased to $8.7 million from $4.0 million for the six months ended June 30, 2020, a 115% increase, due to higher gains on the sale of residential mortgage loans .

Residential mortgage loans locked were $551.6 million for the first six months of 2021 as compared to $840.3 million for the first six months of 2020.

Residential lending gains for the first six months of 2020 include $3.9 million in hedge and mark to market losses incurred during the first half of 2020 that were not repeated in 2021.

Other income for the six months ended June 30, 2021 increased to $9.4 million from $8.8 million for the six months ended June 30, 2020, a 7% increase due substantially to a $911 thousand gain associated with the extinguishment of an FHLB borrowing and higher gains associated with the securitization, sale an d servicing of FHA loans ($499 thousand more in 2021) .

Gains on sale of investments were $539 thousand and $1.5 million for the six months ended June 30, 2021 and 2020, respectively.

For the first six months of 2021, the efficiency ratio was 38.92% as compared to 40.34% for the same period in 2020.

Noninterest expenses totaled $73.5 million for the six months ended June 30, 2021, as compared to $72.2 million for the six months ended June 30, 2020, a 1% increase.

Noninterest expenses in 2021 period increased slightly from the 2020 amount primarily because of increased salaries and employee benefits, partially offset by a reduction in legal costs.

Salaries and employee benefits were $41.6 million for the six months ended June 30, 2021, as compared to $34.9 million for the same period in 2020, an increase of $6.7 million or 19% due to payroll taxes associated with annual vesting, additional restricted stock awards granted and amortization, and higher annual incentive accruals based on performance expectations.

Legal, accounting and professional fees decreased $4.5 million for the six months ended June 30, 2021 compared to the six months

ended June 30, 2020.

The reason for the increase in salaries and employee benefits and decrease in legal, accounting and professional fees for the periods noted above are further discussed in the “Noninterest Expense” section.

Data processing expenses were $5.6 million for the six months ended June 30, 2021 compared to $5.3 million for the same period in 2020, a 6% increase.

FDIC expenses were $4.0 million for the six months ended June 30, 2021 compared to $3.4 million for the same period in 2020, a 19% increase, due to a larger deposit base and a higher assessment.

Other expenses were $6.6 million for the six months ended June 30, 2021 compared to $8.2 million over the same period ended June 30, 2020, a 20% decrease, due primarily to lower broker fees and lower other real estate owned (“OREO”) expense, partially offset by higher real estate taxes-utilities.

The ratio of common equity to total assets increased to 11.92% at June 30, 2021 from 11.16% at December 31, 2020.

The increase is primarily due to the increase in common equity from earnings of $91.5 million (reduced by dividends of $19.1 million) in the first half of 2021 while assets declined slightly.

This is discussed in the “Earnings Summary” above.

As discussed later in “Capital Resources and Adequacy,” the regulatory capital ratios of the Bank and Company remain above well capitalized levels.

Net Interest Income and Net Interest Margin

4 unchanged sentences

Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.

Net interest income was $82.7 million for the three months ended March 31, 2021 and $79.7 million for the same period in 2020, which reflects the strong growth in average earning assets from deposit inflows increasing cash and securities, partially offset by a decline in the net interest margin, as explained below.

The net interest margin was 2.98% for the three months ended March 31, 2021 and 3.49% for the same period in 2020.

The decline reflects the impact of lower rates on increased cash and securities balances, partially offset by improved funding mix and lower funding costs.

In the first quarter of 2021 as compared to the first quarter of 2020, average U.S.

Treasury rates in the two to five year range decreased by approximately 78 basis points and the average yield curve flattened.

The Company experienced 51 basis points of net interest margin compression between the first quarter of 2020 as compared to the first quarter of 2021 (from 3.49% to 2.98%).

Net interest income was $84.6 million for the three months ended June 30, 2021 and $81.4 million for the same period in 2020, which reflects the acceleration of $4.7 million in net deferred fees and costs into interest income as a result of the sale of $169.8 million in PPP loans in the second quarter of 2021, partially offset by a decline in the net interest margin, as explained below.

The addition of the PPP loans at an average yield of 9.35% for the three months ended June 30, 2021, positively impacted the overall yield of the total loan portfolio by approximately 27 basis points.

For the six months ended June 30, 2021, net interest income increased by $6.2 million, which reflects earnings on a higher level of average earnings assets and the accelerated interest income from the PPP sale.

The addition of the PPP loans at an average yield of 6.13% for the six months ended June 30, 2021, positively impacted the overall yield of the total loan portfolio by approximately 10 basis points.

The net interest margin was 3.02% for the six months ended June 30, 2021 and 3.36% for the same period in 2020.

The decline reflects the impact of lower rates on increased cash and securities balances and loans balances representing a lower percentage of earning assets, partially offset by the accelerated interest income from the PPP sale.

In the first half of 2021 as compared to the first half of 2020, average U.S.

Treasury rates in the two to five year range decreased by approximately 29 basis points and the average yield curve steepened as the average two to ten year spread went from 40 basis points in the first half of 2020 to 131 basis points in the first half of 2021.

The Company experienced 34 basis points of net interest margin compression between the first half of 2020 as compared to the first half of 2021 (from 3.36% to 3.02% ).

In addition, our cost of funds declined 46 basis points (from 0.85% to 0.39%), while the yield on earning assets declined by 80 basis points (from 4.21% to 3.41%).

Average liquidity for the first quarter 2021 was $2.1 billion versus $619 million for the first quarter of 2020.

The yield on our loan assets was negatively impacted by the low interest rate environment in the first quarter of 2021 as legacy fixed rate loans originated in higher rate eras matured and paid off.

Average liquidity was $2.1 billion for the second quarter of 2021 and $1.1 billion for the second quarter of 2020.

The yield on our loan assets was negatively impacted by the low interest rate environment in the first half of 2021 as legacy fixed rate loans originated in higher rate eras matured and paid off or were prepaid off.

A substantial portion of the variable rate loan portfolio has interest rate floors that cushioned the decline in loan yields.

Average earning asset yields decreased 115 basis points to 3.40% for the three months ended March 31, 2021, as compared to 4.55% for the same period in 2020.

The average cost of interest bearing liabilities decreased by 98 basis points (to 0.66% from 1.64%) for the three months ended March 31, 2021 as compared to the same period in 2020.

Combining the change

in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased b y 17 basis points for the three months ended March 31, 2021 as compared to 2020 (2.74% as compared to 2.91%).

The table below presents the average balances and rates of the major categories of the Company’s assets and liabilities for the three months ended March 31, 2021 and 2020.

Included in the table are measurements of interest rate spread and margin.

Average earning asset yields decreased 80 basis points to 3.41% for the six months ended June 30, 2021, as compared to 4.21% for the same period in 2020.

The average cost of interest bearing liabilities decreased by 68 basis points (to 0.63% from 1.31%) for the six months ended June 30, 2021 as compared to the same period in 2020.

Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased b y 12 basis points for the six months ended June 30, 2021 as compared to 2020 (2.90% as compared to 2.78%).

The tables below presents the average balances and rates of the major categories of the Company’s assets and liabilities for the three months ended June 30, 2021 and 2020 and also the six months ended June 30, 2021 and 2020.

Included in the tables are measurements of interest rate spread and margin.

Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities.

5 unchanged sentences

(dollars in thousands)

Three Months Ended March 31,

Three Months Ended June 30,

Balance Interest Average

36 unchanged sentences

(1) Loans placed on nonaccrual status are included in average balances.

Net loan fees and late charges included in interest income on loans totaled $7.8 million and $4.3 million for the three months ended March 31, 2021 and 2020, respectively.

Net loan fees and late charges included in interest income on loans totaled $13.4 million and $6.3 million for the three months ended June 30, 2021 and 2020, respectively.

(2) Interest and fees on loans and investments exclude tax equivalent adjustments.

Six Months Ended June 30,

Balance Interest Average

Yield/Rate Average

Balance Interest Average

Interest earning assets:

Interest bearing deposits with other banks and other short-term investments $ 2,095,711 $ 1,156 0.11 % $ 845,540 $ 1,720 0.41 %

Loans held for sale (1)

90,648 1,294 2.84 % 59,488 1,040 3.50 %

Loans (1) (2)

7,553,525 176,648 4.72 % 7,833,372 188,643 4.84 %

Investment securities available for sale (2)

1,423,898 10,001 1.42 % 844,503 9,998 2.38 %

Federal funds sold 30,795 15 0.10 % 33,434 72 0.43 %

Total interest earning assets 11,194,577 189,114 3.41 % 9,616,337 201,473 4.21 %

Total noninterest earning assets 395,823 365,080

allowance for credit losses 105,120 94,231

Total noninterest earning assets 290,703 270,849

TOTAL ASSETS $ 11,485,280 $ 9,887,186

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest bearing liabilities:

Interest bearing transaction $ 807,315 $ 815 0.20 % $ 803,321 $ 2,196 0.55 %

Savings and money market 4,776,928 7,668 0.32 % 3,626,437 16,690 0.93 %

Time deposits 858,954 6,215 1.46 % 1,243,628 14,174 2.29 %

Total interest bearing deposits 6,443,197 14,698 0.46 % 5,673,386 33,060 1.17 %

Customer repurchase agreements 19,644 20 0.21 % 30,310 173 1.15 %

Other short-term borrowings 300,003 997 0.66 % 260,030 858 0.65 %

Long-term borrowings 235,590 6,116 5.16 % 251,866 6,275 4.93 %

Total interest bearing liabilities 6,998,434 21,831 0.63 % 6,215,592 40,366 1.31 %

Noninterest bearing liabilities:

Noninterest bearing demand 3,122,688 2,416,355

Other liabilities 91,656 69,923

Total noninterest bearing liabilities 3,214,344 2,486,278

Shareholders’ Equity 1,272,502 1,185,316

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 11,485,280 $ 9,887,186

Net interest income $ 167,283 $ 161,107

Net interest spread 2.78 % 2.90 %

Net interest margin 3.02 % 3.36 %

Cost of funds 0.39 % 0.85 %

(1) Loans placed on nonaccrual status are included in average balances.

Net loan fees and late charges included in interest income on loans totaled $21.2 million and $10.7 million for the six months ended June 30, 2021 and 2020, respectively.

(2) Interest and fees on loans and investments exclude tax equivalent adjustments.

Provision for Credit Losses

3 unchanged sentences

The provision for unfunded commitments is presented separately on the Statement of Income.

This provision considers the probability that unfunded commitments will fund.

This provision considers the probability that unfunded commitments will fund among other factors.

Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses.

6 unchanged sentences

Also, refer to the table on the next page which reflects activity in the allowance for credit losses.

During the three months ended March 31, 2021, the ACL on loans reflected a reversal of $2.4 million in provision for credit losses attributable to the ACL for loans and $5.2 million in net charge-offs, which were attributable primarily a variety of commercial C&I credits, which included two restaurants, one commercial real estate credit for a hotel and two Small Business Administration ("SBA") credits.

During the three months ended June 30, 2021, the ACL on loans reflected a reversal of $3.9 million in the provision and $5.6 million in net charge-offs, which were attributable primarily to one CRE loan on an office building for $3.5 million with the remaining balance being smaller CRE and C&I loans .

The provision for credit losses on loans for the same period in 2020 was $19.7 million.

The higher provisioning in the first quarter of 2020, as compared to the first quarter of 2021, was primarily due to the impact of COVID-19 on our actual and expected future credit losses.

The reversal was also fueled by improved macroeconomic outlook, better unemployment rate, improvement of credits in the loan portfolio, and a reduction in total loans.

Net charge-offs of $5.2 million in the first quarter of 2021 represented an annualized 0.27% of average loans, excluding loans held for sale, as compared to $2.2 million, or an annualized 0.12% of average loans, excluding loans held for sale, in the first quarter of 2020.

The high level of provisioning in the second quarter of 2020 was primarily due to the impact of COVID-19 on our actual and expected future credit losses.

The reversal in the second quarter of 2021 was driven by the improved macroeconomic outlook, better unemployment rate, improvement of credits in the loan portfolio, and a reduction in total loans.

Net charge-offs of $5.6 million in the second quarter of 2021 represented an annualized 0.30% of average loans, excluding loans held for sale, as compared to $7.1 million, or an annualized 0.36% of average loans, excluding loans held for sale, in the second quarter of 2020.

During the six months ended June 30, 2021, the ACL on loans reflected a reversal of $6.2 million in the provision, and $10.8 million in net charge-offs during the period.

The provision for credit losses on loans was $34.0 million for the six months ended June 30, 2020.

Net charge-offs in the first six months of 2021 represented an annualized 0.29% of average loans, excluding loans held for sale, as compared to $9.4 million, or an annualized 0.24% of average loans, excluding loans held for sale, in the first six months of 2020.

As part of its comprehensive loan review process, internal loan and credit committees carefully evaluate loans that are past-due 30 days or more.

The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan.

The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection.

The Bank’s loan policy requires that loans be placed on nonaccrual if they are 90 days past-due, unless they are well secured and in the process of collection.

Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves.

2 unchanged sentences

Plans for mitigating inherent risks in managing loan assets include carefully enforcing loan policies and procedures, evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation.

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

Three Months Ended

The following table sets forth activity in the allowance for credit losses for the periods indicated.

Six Months Ended

(dollars in thousands) 2021 2020

25 unchanged sentences

The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category.

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(dollars in thousands) Amount % (1)

11 unchanged sentences

Nonperforming Assets

As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, and nonaccrual loans, which includes the nonperforming portion of TDRs and OREO, totaled $57.3 million at March 31, 2021 representing 0.51% of total assets, as compared to $65.9 million of nonperforming assets, or 0.59% of total assets, at December 31, 2020.

At March 31, 2021, the Company had no accruing loans 90 days or more past due.

As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, and nonaccrual loans, which includes the nonperforming portion of TDRs and OREO, totaled $54.5 million at June 30, 2021 representing 0.50% of total assets, as compared to $65.9 million of nonperforming assets, or 0.59% of total assets, at December 31, 2020.

At June 30, 2021, the Company had no accruing loans 90 days or more past due.

Management remains attentive to early signs of deterioration in borrowers’ financial conditions and to taking the appropriate action to mitigate risk.

Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.36% of total loans at March 31, 2021, is adequate to absorb expected credit losses within the loan portfolio at that date.

Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.28% of total loans at June 30, 2021, is adequate to absorb expected credit losses within the loan portfolio at that date.

CECL allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation.

This can occur due to credit deterioration, increased collateral dependency or other factors leading to impairment.

In particular, the Company individually evaluates loans on non-accrual and those identified as TDRs, though it may individually evaluate other loans or groups of loans as well if it determines they no longer share similar risk with their assigned segment.

In particular, the Company individually evaluates loans on nonaccrual status and those identified as TDRs, though it may individually evaluate other loans or groups of loans as well if it determines they no longer share similar risk with their assigned segment.

Reserves on individually assessed loans are determined by one of two methods:

10 unchanged sentences

The determination of whether a restructured loan is a TDR requires c onsideration of all of the facts and circumstances surrounding the change in terms, and the exercise of prudent business judgment.

The Company had eight TDRs at March 31, 2021 totaling approximately $16.8 million.

The Company had seven TDRs at June 30, 2021 totaling approximately $16.6 million.

Five of these loans totaling approximately $10.2 million are performing under their modified terms.

A default is considered to have occurred once the TDR

is past due 90 days or more or it has been placed on nonaccrual.

In the first six months of 2020, one performing TDR loan, with a balance of $5.5 million, defaulted on its modified terms and was placed on nonaccrual status.

A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.

If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment.

The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.

For both the three months ended March 31, 2021 and 2020, there were no loans modified in a TDR.

The allowance

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

For both the six months ended June 30, 2021 and 2020, there were no loans modified in a TDR.

There is uncertainty regarding the region’s overall economic outlook given lack of clarity over how long COVID-19 will continue to impact our region.

Management has been working with customers on payment deferrals to assist companies in managing through this crisis.

Through March 31, 2021, we granted approximately 787 temporary modifications representing approximately $1.6 billion in outstanding balances (approximately 21% of total loans), including 729 temporary modifications representing $1.5 billion the majority of which have returned to pre-modification terms.

Current deferrals total $143 million on 58 notes as of March 31, 2021.

Some of these deferrals may have met the criteria for treatment under GAAP as TDRs.

As of June 30, 2021, we had ongoing temporary modifications on approximately 31 loans representing approximately $77 million (approximately 1.1% of total loans) in outstanding balances, as compared to 36 loans representing approximately $72 million (approximately 0.9% of total loans) at December 31, 2020.

Additionally, none of the deferrals are reflected in the Company’s asset quality measures (i.e.

2 unchanged sentences

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.

Total nonperforming loans amounted to $52.3 million at March 31, 2021 (0.69% of total loans) compared to $60.9 million at December 31, 2020 (0.79% of total loans).

Included in nonperforming assets at March 31, 2021 and December 31, 2020 was $4.9 million of OREO consisting of 4 foreclosed properties.

While the Company has seen some s oftness in the market for ultra high-end residential properties in recent history, there is still an underpinning of demand for residential properties across lower price points.

This is particularly true in light of COVID-19 and a general desire for increased space as some figure working from home may be part of future working arrangements.

Total nonperforming loans amounted to $49.5 million at June 30, 2021 (0.68% of total loans) compared to $60.9 million at December 31, 2020 (0.79% of total loans).

Included in nonperforming assets at June 30, 2021 and December 31, 2020 was $5.0 million of OREO consisting of four foreclosed properties.

OREO properties are carried at fair value less estimated costs to sell.

1 unchanged sentence

Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value.

There were no sales of an OREO property during the first three months of 2021 or 2020.

The following table shows the amounts of nonperforming assets at the dates indicated (unaudited for March 31, 2021).

(dollars in thousands) March 31, 2021 December 31, 2020

There were no sales of an OREO property during the first six months of 2021 or 2020.

The following table shows the amounts of nonperforming assets at the dates indicated for June 30, 2021).

(dollars in thousands) June 30, 2021 December 31, 2020

Nonaccrual Loans:

15 unchanged sentences

________________________________________________________

(1) Nonaccrual loans reported in the table above include one loan totaling $101 thousand that migrated from a performing TDR during the three months ended March 31, 2021, as compared to the three months ended March 31, 2020 when there were four loans totaling $1.3 million that migrated from a performing TDR.

(1) Nonaccrual loans reported in the table above do not include loans that migrated from a performing TDR status during the period.

During the six months ended June 30, 2021, there were no loans that migrated from a performing TDR status.

During the six months ended June 30, 2020 there was one loan totaling $5.5 million that migrated from a performing TDR.

Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio.

At March 31, 2021, there were $95.5 million of performing loans considered to be potential problem loans, defined as loans that are not included in the 90 days past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories.

Potential problem loans increased to $95.5 million at March 31, 2021 f rom $91.2 million at December 31, 2020.

The Company has taken a conservative posture with respect to risk rating its loan portfolio.

At June 30, 2021, there were $95.5 million of performing loans considered to be potential problem loans, defined as loans that are not included in the 90 days past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories.

Potential problem loans were $91.2 million at December 31, 2020.

The Company has taken a conservative yet proactive approach with respect to risk rating its loan portfolio.

Based upon their status as potential problem loans, these loans receive heightened scrutiny and ongoing intensive risk management.

1 unchanged sentence

Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from bank owned life insurance (“BOLI”) and other income.

Total noninterest income for the three months ended March 31, 2021 increased to $10.6 million from $5.5 million for the three months ended March 31, 2020, a 94% increase.

Gain on sale of loans for the three months ended March 31, 2021 increased to $5.2 million from $944 thousand for the three months ended March 31, 2020, a 449% increase, due to higher gains on the sale of residential mortgage loans in 2021 ($5.0 million) and the gain for the three months ended March 31, 2020 was net of a $2.6 million mark-to-market loss on a hedge position.

Residential mortgage loan locked commitments were $422.2 million for the first quarter of 2020 as compared to $303.3 million for the first quarter 2021.

Service charges on deposits for the three months ended March 31, 2021 decreased to $1.0 million from $1.4 million for the three months ended March 31, 2020, a 31% decreas e, due to to a decrease in insufficient funds fees.

Total noninterest income for the three months ended June 30, 2021 decreased to $10.9 million from $12.5 million for the three months ended June 30, 2020, a 13% decrease.

Gain on sale of loans for the three months ended June 30, 2021 increased to $3.5 million from $3.1 million for the three months ended June 30, 2020, a 13% increase, due to $399 thousand higher gains on the sale of residential mortgage loans in 2021.

Residential mortgage loan locked commitments were $248 million for the second quarter of 2021 as compared to $418 million for the second quarter 2020.

Residential lending gains for the second quarter of 2020 include $1.3 million in hedge and mark to market losses incurred during the second quarter of 2020 that were not repeated in 2021.

Other income for the three months ended June 30, 2021 decreased to $5.6 million from $6.9 million for the three months ended June 30, 2020, a 19% decrease.

Service charges on deposits for the three months ended June 30, 2021 increased to $1.1 million from $942 thousand for the three months ended June 30, 2020, a 19% increase , due to an increase in insufficient funds fees.

The decision whether to sell residential mortgage loans on a mandatory or best efforts lock basis is a function of multiple factors, including but not limited to overall market volumes of mortgage loan originations, forecasted “pull-through” rates of origination, loan underwriting and closing operational considerations, pricing differentials between the two methods, and availability and pricing of various interest rate hedging strategies associated with the mortgage origination pipeline.

The Company continually monitors these factors to maximize profitability and minimize operational and interest rate risks.

Other income for the three months ended March 31, 2021 increased to $3.8 million from $1.9 million for the three months ended March 31, 2020, an 105% increase, primarily due to a $911 thousand gain on FHLB debt extinguishment, $695 thousand gain on swap fees, a nd a $576 thousand gain on FHA servicing fees.

Ga in on sale of investment securities were $221 thousand for the three months ended March 31, 2021 compared to $822 thousand for the same period in 2020.

Ga in on sale of investment securities were $318 thousand for the three months ended June 30, 2021 compared to $713 thousand for the same period in 2020.

Total noninterest income for the six months ended June 30, 2021 increased to $21.5 million from $18.0 million for the six months ended June 30, 2020, a 20% increase.

Service charges on deposits for the six months ended June 30, 2021 decreased to $2.1 million from $2.4 million for the six months ended June 30, 2020, a 11% decrease, due to a decrease in insufficient funds fees.

Residential mortgage loans locked commitments wer e $551.6 million for the first six months of 2021 as compared to $840.3 milli on for the first six months of 2020.

Residential lending gains for the first six months of 2020 include $3.9 million in hedge and mark to market losses incurred during the first half of 2020 that were not repeated in 2021.

Other income for the six months ended June 30, 2021 increased to $9.4 million from $8.8 million for the six months ended June 30, 2020, a 7% increase substantially due to higher gains associated with a $1.0 million increase in FHA trade premiums ($3.2 million), offset by a $764 thousand decrease on FHA servicing fees and other noninterest loan fees.

Gain on sale of investment securities were $539 thousand and for the six months ended June 30, 2021 and $1.5 million for the six months ended June 30, 2020.

Servicing agreements relating to the Ginnie Mae mortgage-backed securities program require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers.

3 unchanged sentences

In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan.

At March 31, 2021, the Company had one loan outstanding under FHA mortgage loan servicing agreements for $3.1 million.

T o the extent the mortgage loans underlying the Company’s servicing portfolio experience delinquencies, the Company would be required to dedicate cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

At June 30, 2021, the Company had eight loans outstanding under FHA mortgage loan servicing agreements for a total of $150.5 million.

To the extent the mortgage loans underlying the Company’s servicing portfolio experience delinquencies, the Company would be requir ed to dedicate cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

The Company originates residential mortgage loans and, pending market conditions and other factors outlined above, may utilize either or both "mandatory delivery" and “best efforts” forward loan sale commitments to sell those loans, servicing released.

2 unchanged sentences

The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under GAAP for possible repurchases.

There were no repurchases due to fraud by the borrower during the three months ended March 31, 2021.

The reserve amounted to $193 thousand at March 31, 2021 and is included in other liabilities on the Consolidated Balance Sheets.

There were no repurchases due to fraud by the borrower during the six months ended June 30, 2021.

The reserve amounted to $158 thousand at June 30, 2021 and is included in other liabilities on the Consolidated Balance Sheets.

Beyond the participation in the PPP program, the Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium.

There was $223 thousand of income from this source for the three months ended March 31, 2021 compared to $119 thousand for the same period in 2020.

There was $223 thou sand of income from this source for the six months ended June 30, 2021 compared to $119 thousa nd for the same period in 2020.

Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter.

2 unchanged sentences

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

Total noninterest expenses totaled $38.0 million for the three months ended March 31, 2021, as compared to $37.3 million for the three months ended March 31, 2020, a 2% increase due substantially to the followin g:

Salaries and employee benefits were $21.8 million for the three months ended March 31, 2021, as compared to $17.8 million for the same period in 2020, an increase of $4.0 million or 22%.

The increase was due to increased headcount, increased incentive bo nus accruals based on economic outlook in the first quarter of 2021 (gradual reopening of economy) compared to accruals in the first quarter of 2020 (on-set of COVID-19 pandemic), and an increase in the number of shares granted and vested in 2021.

At March 31, 2021, the Company’s full time equivalent staff numbered 508 as compared to 494 at March 31, 2020.

Premises and equipment expenses amounted to $3.6 million and $3.8 million for the three months ended March 31, 2021 and 2020, respectively, a 5% decrease.

Marketing and advertising expenses totaled $886 thousand for the three months ended March 31, 2021 and $1.1 million for the same period in 2020.

Total noninterest expenses totaled $35.5 million for the three months ended June 30, 2021, as compared to $34.9 million for the three months ended June 30, 2020, a 1.7% increase.

Total noninterest expenses totaled $73.5 million for the six months ended June 30, 2021, as compared to $72.2 million for the six months ended June 30, 2020, a 1.7% increase due substantially to the followin g:

Salaries and employee benefits were $19.9 million for the three months ended June 30, 2021, as compared to $17.1 million for the same period in 2020, an increase of $2.8 million or 16%.

Salaries and employee benefits were $41.6 million for the six months ended June 30, 2021, as compared to $34.9 million for the same period in 2020, an increase of $6.7 million or 19%.

For both the three month and six month periods, the increase was due to increased incentive bo nus accruals based on economic outlook in the second quarter of 2021 (continued reopening of economy) compared to accruals in the second quarter of 2020 (COVID-19 pandemic continues), and an increase in share based compensation.

At June 30, 2021, the Company’s full time equivalent staff numbered 497 as compared to 519 at December 31, 2020 and 506 at June 30, 2020.

Premises and equipment expenses were $7.3 million for the six months ended June 30, 2021, of which $6.1 million were premises expenses.

For the six months ended June 30, 2020 premises and equipment expenses were $7.3 million, of which $5.8 million were premises expenses.

Premises and equipment for the three months ended June 30, 2021 and 2020 were $3.6 million, of which $3.0 million were premise expenses, and $3.5 million, of which $2.8 million were premises expenses.

For the six months ended June 30, 2021, the Company recognized $189 thousand of sublease revenue as compared to $224 thousand for the same period in 2020.

Sublease revenue is accounted for as a reduction to premises and equipment expenses.

Marketing and advertising expenses totaled $ 980 thousand for the three months ended June 30, 2021 and $1.1 million for the same period in 2020.

Marketing and advertising expenses totaled $1.9 million for the six months ended June 30, 2021 and $2.2 million for the same period in 2020.

The decrease was due to repurposing of marketing initiatives due to COVID-19, which resulted in a cutback of print, digital and radio advertising as well as a reduction in event-related sponsorships due to cancellations and virtual modifications to event structures.

Data processing expense increased to $2.8 million for the three months ended March 31, 2021 from $2.5 million for the same period in 2020, a 13% increase related to an increase in licensing fees.

Legal, accounting and professional fees decreased by $4.0 million from $7.0 million to $3.0 million, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 from , as the Bank recognized an increase in receivables on legal expenditures associated with insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies.

The Bank does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time.

Legal fees and expenditures were $964 thousand and $5.0 million for the three months ended March 31, 2021 and 2020, respectively, and were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests, as well as, our defense of the previously disclosed class action lawsuit.

In connection with which we, each of the other defendants and the lead plaintiff, on behalf of the class, reached an agreement to settle in the days following the non-binding mediation on April 13, 2021.

The amount of legal fees and expenditures for the year is net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies but does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time.

Data processing expenses were $2.8 million for the three months ended June 30, 2021 compared to $2.8 million for the same period in 2020.

Data processing expense increased to $5.6 million for the six months ended June 30, 2021 from $5.3 million for the same period in 2020, a 6% increase.

The increase, which took place in the first quarter of 2021 was related to an increase in licensing fees.

Legal, accounting and professional fees were $3.5 million for the three months ended June 30, 2021, compared to $4.0 million for the three months ended June 30, 2020, a decrease of $0.5 million.

Legal fees and expenditures were $1.8 million and $2.6 million for the three months ended June 30, 2021 and 2020, respectively, and were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests, as well as our defense of the previously disclosed class action lawsuit.

Legal, accounting and professional fees for the six months ended June 30, 2021 were $6.5 million compared to $11.0 million for the six months ended June 30, 2020, a decrease of $4.5 million, primarily due to higher legal fees in 2020 versus the same period in 2021.

The amount of legal fees and expenditures are net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies but does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time.

See Part II, Item 1- "Legal Proceedings" for more information.

FDIC expenses were $2.4 million for the three months ended March 31, 2021 compared to $1.4 million for the same period in 2020, a 71% increase.

The increases for the first three months of 2021 compared to the same period in 2020 were due to a higher deposit base.

FDIC expenses were $1.6 million for the three months ended June 30, 2021 compared to $2.0 million for the same period in 2020, a 19% decrease.

FDIC expenses were $4.0 million for the six months ended June 30, 2021 compared to $3.4 million for the same period in 2020, a 19% increase.

The increases for the first six months of 2021 compared to the same period in 2020 were due to a higher deposit base.

The major components of other expenses include broker fees, franchise taxes, director compensation and insurance expense.

Other expenses decreased to $3.5 million for the three months ended March 31, 2021 from $3.7 million for the same period in 2020, a 7% decrease.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 40.74% for the first quarter of 2021, as compared to 43.83% for the first quarter of 2020.

The improvement in the first quarter of 2021 over the first quarter of 2020 was due to increases in noninterest income and net interest income, while non-interest expenses remained relatively flat.

As a percentage of average assets, total noninterest expense (annualized) was 1.32% for the three months ended March 31, 2021 as compared to 1.58% for the same period in 2020.

Other expenses decreased to $3.1 million for the three months ended June 30, 2021 from $4.5 million for the same period in 2020, a 30% decrease.

Other expenses decreased to $6.6 million for the six months ended June 30, 2021 from $8.2 million for the same period June 30, 2020, a 20% decrease, due to an increase in broker fees and OREO expenses in getting a property ready to sell.

The efficiency ratio, which measures the ratio of n oninterest expense to total revenue, was 37.14% for the second quarter of 2021, as compared to 37.18% for the second quarter of 2020.

For the first six months of 2021, the efficiency ratio was 38.92% as compared to 40.34% for the same period in 2020.

The improvement in the second quarter of 2021 over the second quarter of 2020 was due to an increase in net interest income, offset by a decrease in noninterest income and an increase in noninterest expenses.

As a percentage of average assets, total noninterest expense (annualized) was 1.24% for the three months ended June 30, 2021 as compared to 1.35% for the same period in 2020.

As a percentage of average assets, total noninterest expense (annualized) was 1.28% for the six months ended June 30, 2021 as compared to 1.46% for the same period in 2020.

Income Tax Expense

The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) for the first quarter of 2021 was 25.1% as compared to 26.5% for the first quarter of 2020.

The decrease was due to an increase in Low Income Housing Tax Credits in the first quarter 2021.

The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) for the second quarter of 2021 was 25.8% as compared to 24.6% for the second quarter of 2020.

The effective income tax rate for the six months ended June 30, 2021 and 2020 was 25.5%.

For the second quarter taxes, earnings significantly increased minimizing the impact of favorable permanent differences which increased the effective tax rate.

FINANCIAL CONDITION

Total assets at both March 31, 2021 and December 31, 2020 were $11.1 billion.

Total loans (excluding loans held for sale) were $7.5 billion at March 31, 2021, a 3.0% decrease, as compared to $7.8 billion at December 31, 2020, as we have continued to focus on serving our current loan clients and maintaining credit quality, over expanding the loan portfolio at lower rates and less favorable terms.

Loans held for sale amounted to $142.2 million at March 31, 2021 and $88.2 million at December 31, 2020, a 61.2% increase.

The investment portfolio totaled $1.4 billion at March 31, 2021.

As compared to December 31, 2020, the investment portfolio at March 31, 2021 increased by $212 million, or 18.9%, primarily due to the deployment of deposit inflows into higher yielding assets.

Total deposits at both March 31, 2021 and December 31, 2020 were $9.2 billion.

Total assets at both June 30, 2021 and December 31, 2020 were $11.0 billion.

Total loans (excluding loans held for sale) were $7.3 billion at June 30, 2021, as compared to $7.8 billion at December 31, 2020, a 6.5% decrease.

The decrease in loans in the first quarter of 2021 was due to our focus on serving our current loan clients and maintaining credit quality, over expanding the loan portfolio at lower rates and less favorable terms, and in the second quarter of 2021, the decrease was largely attributable to the sale of $169.8 million in PPP loans.

Loans held for sale amounted to $55.9 million at June 30, 2021 compared to $88.2 million at December 31, 2020, a 36.6% decrease.

The investment portfolio totaled $1.7 billion at June 30, 2021 as compared to $1.2 billion at December 31, 2020, an increase of 46.0%, primarily due to the deployment of cash from deposit inflows into investments.

Total deposits at June 30, 2021 were $9.0 billion and at December 31, 2020 were $9.2 billion.

We continue to work on expanding the breadth and depth of our existing relationships while we pursue building new relationships.

Total borrowed funds (excluding customer repurchase agreements) were $518.2 million at March 31, 2021, as compared to $568.1 million at December 31, 2020.

Total shareholders’ equity was $1.26 billion and $1.24 billion as of March 31, 2021 and December 31, 2020, respectively, an increase of $20 million.

This increase was primarily from earnings of $43.5 million less $17.5 million in unrealized losses on AFS securities (net of taxes) and $7.9 million in dividends declared.

The Company’s capital ratios remain substantially in excess of regulatory minimum and buffer requirements, with a total risk based capital ratio of 17.86% at March 31, 2021, as compared to 17.04% at December 31, 2020, common equity tier 1 (“CET1”) risk based capital was 14.42% at March 31, 2021 compared to 13.49% at December 31, 2020, tier 1 risk based capital ratios of 14.42% at March 31, 2021, as compared to 13.49% at December 31, 2020, and a tier 1 leverage ratio of 10.28% at March 31, 2021, as compared to 10.31% at December 31, 2020.

The ratio of common equity to total assets was 11.33% at March 31, 2021, as compared to 11.16% at December 31, 2020.

Book value per share was $39.45 at March 31, 2021, a 1% increase over $39.05 at December 31, 2020.

In addition, the tangible common equity ratio was 10.48% at March 31, 2021, as compared to 10.31% at December 31, 2020.

Tangible book value per share was $36.16 at March 31, 2021, a 1% increase over $35.74 at December 31, 2020.

Total borrowed funds (excluding customer repurchase agreements) were $518.3 million at June 30, 2021, as compared to $568.1 million at December 31, 2020.

Total shareholders’ equity was $1.31 billion as of June 30, 2021 compared to $1.24 billion as of December 31, 2020, an increase of $65.4 million.

This increase was primarily from earnings of $91.5 million and $3.8 million in additional paid-in capital associated with share-based compensation, offset by $19.1 million in dividends declared and $11.0 million in unrealized losses on AFS securities (net of taxes).

The Company’s capital ratios remain substantially in excess of regulatory minimum and buffer requirements, with a total risk based capital ratio of 17.98% at June 30, 2021, as compared to 17.04% at December 31, 2020, common equity tier 1 (“CET1”) risk based capital was 14.67% at June 30, 2021 compared to 13.49% at December 31, 2020, tier 1 risk based capital ratios of 14.67% at June 30, 2021, as compared to 13.49% at December 31, 2020, and a tier 1 leverage ratio of 10.65% at June 30, 2021, as compared to 10.31% at December 31, 2020.

The ratio of common equity to total assets was 11.92% at June 30, 2021, as compared to 11.16% at December 31, 2020.

Book value per share was $40.87 at June 30, 2021, a 4.7% increase over $39.05 at December 31, 2020.

In addition, the tangible common equity ratio was 11.07% at June 30, 2021, as compared to 10.31% at December 31, 2020.

Tangible book value per share was $37.58 at June 30, 2021, a 5.1% increase over $35.74 at December 31, 2020.

Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.

2 unchanged sentences

Failure to maintain the required capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.

Loans, net of amortized deferred fees and costs, at March 31, 2021 (unaudited) and December 31, 2020 by major category are summarized below.

March 31, 2021 December 31, 2020

Loans, net of amortized deferred fees and costs, at June 30, 2021 and December 31, 2020 by major category are summarized below.

June 30, 2021 December 31, 2020

(dollars in thousands) Amount % Amount %

12 unchanged sentences

$ 7,166,998 $ 7,650,633

(1) Excludes accrued interest receivable of $46.4 million and $30.8 million at March 31, 2021 and December 31, 2020, respectively, which is recorded in other assets.

(1) Excludes accrued interest receivable of $43.5 million and $30.8 million at June 30, 2021 and December 31, 2020, respectively, which is recorded in other assets.

In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank.

Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality.

Loans outstanding were $7.5 billion at March 31, 2021, a decrease of $233.5 million, or 3%, as compared to $7.8 billion at December 31, 2020.

If PPP loans are excluded, the balance was $7.0 billion at March 31, 2021, a decrease of 4.7% from December 31, 2020.

Loans outstanding were $7.3 billion at June 30, 2021, a decrease of $500.7 million, or 6.5%, as compared to $7.8 billion at December 31, 2020.

If PPP loans are excluded, the balance was $7.0 billion at June 30, 2021, a decrease of 3.9% from December 31, 2020.

PPP loans accounted for approximately one-third of the 6% total decrease in loans outstanding at June 30, 2021 as compared to at December 31, 2020.

Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.

On May 3, 2021, we transacted to sell 849 PPP loans for a total purchase price of $169.0 million.

Immediately following this sale, the principal outstanding on PPP loans totaled approximately $378.4 million across 789 notes.

This past quarter, we faced headwinds in the form of low loan demand and a competitive, low interest rate environment.

We also experienced elevated payoffs and prepayments due in part to successful project completions and low nominal interest rates.

Notwithstanding an increased supply of residential units, multi-family commercial real estate leasing and collections in the Bank’s market area have held up well, particularly for well-located close-in projects.

As a general matter, there has been some softening and slow decision making relative to renewals in the office leasing market.

Immediately following this sale, the principal outstanding on PPP loans totaled approximately $378.4 million across 789 loans.

We sold another 16 PPP loans on June 28, 2021 for a total purchase price of $816 thousand, amounting to a total of $169.8 million of sales of PPP loans for the quarter.

This past quarter, we saw a modest increase in loans relative to the prior quarter reversing the negative loan growth trend of the past several quarters.

The low interest rate environment and extremely competitive landscape remain factors impacting growth in our lending footprint, while the rate of payoff’s has somewhat ameliorated in the second quarter.

Notwithstanding an increased supply of residential (rental) units, for sale single family residential properties and multi-family commercial real estate leasing in the Bank’s market area have held up well, particularly for well-located close-in projects.

As a general matter, there has been some softening and slow decision making relative to renewals in the office leasing market as tenants evaluate the “new normal” with respect to office.

Overall, commercial real estate values have generally held up well, but we continue to be cautious of the capitalization rates at which some assets are trading and as a result we are being cautious with our valuations.

1 unchanged sentence

Valuations associated with the moderately priced housing market have generally been increasing, with well-located, Metro-accessible properties garnering a premium.

We believe we are well positioned to originate loans for large commercial projects, and also see a path to growing the loan portfolio as economic conditions improve and more opportunities arise.

The potential impact from the COVID-19 pandemic has not yet been fully reflected in the market across all asset types.

We believe we are well positioned to continue to originate loans for large commercial projects, and also see a path to growing the loan portfolio as economic conditions improve and more opportunities arise.

The potential impact from the COVID-19 pandemic may not yet have been fully reflected in the market across all asset types.

Please refer to the COVID-19 risk factor in Item 1A below.

Loan Portfolio Exposures- COVID-19:

Industry segments within the Loan Portfolio as of March 31, 2021 that we believe may have heightened risk from the COVID-19 pandemic include:

Industry segments within the Loan Portfolio as of June 30, 2021 that we believe may have heightened risk from the COVID-19 pandemic include:

Industry Principal Balance

10 unchanged sentences

Concerns over exposures to the Accommodation and Food Service industry and Retail Trade are the most immediate at this time.

Accommodation and Food Service exposure represents 10.7% of the Bank’s loan portfolio as of March 31, 2021 among 297 customers.

Accommodation and Food Service exposure represents 9% of the Bank’s loan portfolio as of June 30, 2021 among 423 customers.

Retail Trade exposure represents 1% of the Bank’s loan portfolio and represented 134 c ustomers.

The Bank has ongoing extensive outreach to these customers and is assisting where necessary with PPP loans and payment deferrals or interest-only periods in the short term while customers work to adopt to the evolving landscape of the COVID-19 pandemic.

The Bank has ongoing extensive outreach to these customers and has assisted where necessary with PPP loans and payment deferrals or interest-only periods in the short term while customers work to adopt to the evolving landscape of the COVID-19 pandemic.

The uncertain duration and severity of the pandemic and the timing of recovery may impact future credit challenges in these areas.

Although not evidenced at March 31, 2021, it is anticipated that some portion of the CRE loans secured by the above property types could be impacted by the tenancies associated with impacted industries.

Although not evidenced at June 30, 2021, it is anticipated that some portion of the CRE loans secured by the above property types could be impacted by the tenancies associated with impacted industries.

The Bank is working with CRE investor borrowers and monitoring rent collections as part of our portfolio management oversight.

3 unchanged sentences

To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the Federal Home Loan Banks (the “FHLB”), federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and IntraFi Network, LLC (“IntraFi”).

For the three months ended March 31, 2021, noninterest bearing deposits decreased $215.0 million as compared to December 31, 2020, while interest bearing deposits increased by $224.6 million during the same period.

For the six months ended June 30, 2021, noninterest bearing deposits decreased $167.7 million as compared to December 31, 2020, while interest bearing deposits increased by $2.5 million during the same period.

From time to time, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from national brokerage networks, including IntraFi.

1 unchanged sentence

The Bank also is able to obtain one-way CDARS deposits and participates in IntraFi’s Insured Network Deposit (“IND”).

At March 31, 2021, total deposits included $2.7 billion of brokered deposits (excluding the CDARS and ICS two-way) which represented 29.6% of total deposits.

At June 30, 2021, total deposits included $2.5 billion of brokered deposits (excluding the CDARS and ICS two-way) which represented 27.9% of total deposits.

At December 31, 2020, total brokered deposits (excluding the CDARS and ICS two-way) were $2.4 billion, or 26.2% of total deposits.

The CDARS and ICS two-way component represented $760.2 million, or 8%, of total deposits and $790.0 million, or 9%, of total deposits at March 31, 2021 and December 31, 2020, respectively.

The CDARS and ICS two-way component represented $881.7 million, or 9.8%, of total deposits and $790.0 million, or 8.6%, of total deposits at June 30, 2021 and December 31, 2020, respectively.

These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank.

However, to the extent that the condition, regulatory position or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in

market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits.

However, to the extent that the condition, regulatory position or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits.

In that event, we would be required to obtain alternate sources for funding.

At March 31, 2021, the Company had $2.6 billion in noninterest bearing demand deposits, representing 28% of total deposits, compared to $2.8 billion of noninterest bearing demand deposits at December 31, 2020, or 31% of total deposits.

Average noninterest bearing deposits of total deposits for the first three months of 2021 and 2020 were 32% and 30%.

At June 30, 2021, the Company had $2.6 billion in noninterest bearing demand deposits, representing 29% of total deposits, compared to $2.8 billion of noninterest bearing demand deposits at December 31, 2020, or 31% of total deposits.

Average noninterest bearing deposits of total deposits for the first half of 2021 and 2020 were 33% and 30%.

The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets.

As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds that are not suited for either a certificate of deposit or a money market account.

The balances in these accounts were $20.1 million at March 31, 2021 compared to $26.7 million at December 31, 2020.

The balances in these accounts were $19.7 million at June 30, 2021 compared to $26.7 million at December 31, 2020.

Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S.

4 unchanged sentences

This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.

At March 31, 2021 the Company had $866.0 million in time deposits.

At June 30, 2021 the Company had $778.0 million in time deposits.

Time deposits decreased by $199.7 million from year end December 31, 2020.

The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered certificates of deposits ("CDs") to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning.

The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at March 31, 2021 and December 31, 2020.

At March 31, 2021 and December 31, 2020, the Company had $300 million of FHLB short-term advances borrowed as part of the overall asset liability strategy and to support loan growth.

The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at June 30, 2021 and December 31, 2020.

At June 30, 2021 and December 31, 2020, the Company had $300 million of FHLB short-term advances borrowed as part of the overall asset liability strategy and to support loan growth.

Outstanding FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank’s commercial mortgage, residential mortgage and home equity loan portfolios.

Long-term borrowings outstanding at March 31, 2021 included the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024, and the Company’s July 26, 2016 issuance of $150.0 million of subordinated notes, due August 1, 2026.

For additional information on the subordinated notes, please refer to Note 8 to the Consolidated Financial Statements included in this report.

Long-term borrowings outstanding at June 30, 2021 included the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024, and the Company’s July 26, 2016 issuance of $150.0 million of subordinated notes, due August 1, 2026 (the "2026 Notes").

The Company paid the 2026 Notes in full on August 2, 2021 and accelerated

deferred financing costs of $1.3 million on that date.

For additional information on the subordinated notes, please refer to Notes 8 and 13 to the Consolidated Financial Statements included in this report.

Liquidity Management

3 unchanged sentences

These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial.

Additionally, the Bank can purchase up to $155 mil lion in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at March 31, 2021, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.7 billion, against which there was $685 million outstanding at March 31, 2021.

The Bank also has a commitment from IntraFi to place up to $1.8 billion of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of $1.7 billion at March 31, 2021.

At March 31, 2021, the Bank was also eligible to make advances from the FHLB up to $1.6 billion based on loans pledged as collateral to the FHLB, of which there was $300 m illion outstanding at March 31, 2021.

Additionally, the Bank can purchase up to $155 mil lion in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at June 30, 2021, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.6 billion, against which there wa s $438 thousand o utstanding at June 30, 2021.

At June 30, 2021, the Bank was also eligible to make advances from the FHLB up to $1.5 billion based on loans pledged as collateral to the FHLB, of which there was $300 millio n outstanding at June 30, 2021.

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 $611 million, is collateralized with specific loan assets

identified to the Federal Reserve Bank.

This facility, which amounts to approximately $588 million, is collateralized with specific loan assets identified to the Federal Reserve Bank.

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

11 unchanged sentences

Our primary and secondary sources of liquidity remain strong.

Average deposits increased 13% for the first quarter of 2021 as compared to the fourth quarter of 2020.

We maintain a very liquid investment portfolio, including significant overnight liquidity.

Average short term liquidity was $2.1 billion in first quarter of 2021, which is above EagleBank’s average needs.

Average deposits decreased 18.2% for the first half of 2021 as compared to the first half of 2020.

However, we still maintain a very liquid investment portfolio, including significant overnight liquidity.

Average short term liquidity was $2.1 billio n in first half of 2021, which is above EagleBank’s average needs.

Secondary sources of liquidity amount to $4.1 billion.

At March 31, 2021, under the Bank’s liquidity formula, it had $6.2 billio n of primary and secondary liquidity sources.

At June 30, 2021, under the Bank’s liquidity formula, it had $6.8 billion of primary and secondary liquidity sources.

The amount is deemed adequate to meet current and projected funding needs.

Commitments and Contractual Obligations

Loan commitments outstanding and lines and letters of credit at March 31, 2021 are as follows:

Loan commitments outstanding and lines and letters of credit at June 30, 2021 are as follows:

(dollars in thousands)

7 unchanged sentences

Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.

As of March 31, 2021, unfunded loan commitments included $191.9 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature slightly.

As of June 30, 2021, unfunded loan commitments included $109.1 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature.

Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract.

6 unchanged sentences

Standby letters of credit are generally not drawn.

Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the

customer and a third party.

Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party.

The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank.

5 unchanged sentences

Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives.

During the three months ended March 31, 2021, the Company was able to produce a net interest margin of 2.98% as compared to 3.49% during the same period in 2020, and continue to manage its overall interest rate risk position .

The Company, along with many other banks, continues to be challenged in 2021 during a period of extremely low interest rates together with relatively low loan demand.

During the six months ended June 30, 2021, the Company was able to produce a net interest margin of 3.02% as compared to 3.36% during the same period in 2020, and continue to manage its overall interest rate risk position .

The Company, along with many other banks, continues to be challenged in 2021 during a period of extremely low interest rates.

The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits.

3 unchanged sentences

agency investment portfolio.

During the three months ended March 31, 2021, the average investment portfolio balance increased by $401.3 million, or 46%, as compared to average balance for the three months ended March 31, 2020.

During the three months ended June 30, 2021, the average investment portfolio balance increased by $755.6 million, or 92%, as compared to average balance for the three months ended June 30, 2020.

The cash received from deposit growth along with cash flows from the investment portfolio were deployed into loans, the purchase of replacement investments and held in cash.

The percentage mix of municipal securities was 8% of total investments at March 31, 2021 and 9% at December 31, 2020.

The portion of the portfolio invested in mortgage backed securities was 69% and 72% at March 31, 2021 and December 31, 2020, respectively.

The percentage mix of municipal securities was 6% of total investments at June 30, 2021 and 9% at December 31, 2020.

The portion of the portfolio invested in mortgage backed securities was 68% and 72% at June 30, 2021 and December 31,

2020, respectively.

The portion of the portfolio invested in U.S.

agency investments was 16% at March 31, 2021 and 10% at December 31, 2020.

Shorter duration floating rate corporate bonds were 4% and 3% of total investments at March 31, 2021 and December 31, 2020, respectively, and SBA bonds, which are included in mortgage backed securities, were 4% and 6% of total investments at March 31, 2021 and December 31, 2020, respectively.

The duration of the investment portfolio increased to 4.7 years at March 31, 2021 from 3.2 years at December 31, 2020.

The re-pricing duration of the loan portfolio was 19 mo nths at March 31, 2021 as compared to 21 mon ths at December 31, 2020 with fixed rate loans amounting to 46% and 45% of total loans at March 31, 2021 and December 31, 2020, respectively.

Variable and adjustable rate loans comprised 54% (offset by 7.5% from the dilution impact of PPP loans) and 55% of total loans at March 31, 2021 and December 31, 2020, respectively.

agency investments was 17% at June 30, 2021 and 10% at December 31, 2020.

Shorter duration floating rate corporate bonds were 5% and 3% of total investments at June 30, 2021 and December 31, 2020, respectively, and SBA bonds, which are included in mortgage backed securities, were 4% and 6% of total investments at June 30, 2021 and December 31, 2020, respectively.

The duration of the investment portfolio increased to 4.3 years at June 30, 2021 from 3.2 years at December 31, 2020.

The re-pricing duration of the loan portfolio wa s 18 mo nths at June 30, 2021 as compared to 21 mon ths at December 31, 2020 with fixed rate loans amounting to 43 % and 45% of total loans at June 30, 2021 and December 31, 2020, respectively.

Variable and adjustable rate loans comprised 57% (offset by 2 % from the dilution impact of PPP loans) and 55% of total loans at June 30, 2021 and December 31, 2020, respectively.

Variable rate loans are generally indexed to either the one month LIBOR interest rate, or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S.

Treasury interest rate.

The duration of the deposit portfolio decreased to 40 mo nths at March 31, 2021 from 42 months at December 31, 2020.

The decrease since December 31, 2020 was due substantially to maturity and aging in of the CD portfolio.

The net unrealized loss before income tax on the investment portfolio was $1.9 mill ion at March 31, 2021 as compared to a net unrealized gain before tax of $20.1 million at March 31, 2020.

The move to a net unrealized loss from a net unrealized gain on the investment portfolio was due primarily to higher interest rates at March 31, 2021 along with a changing portfolio mix.

At March 31, 2021, the net unrealized loss position represented 0.14% of the investment portfolio’s book value.

The duration of the deposit portfolio held steady in this low rate environment, measuring 4 3 mo nths at June 30, 2021 from 42 months at December 31, 2020.

The net unrealized gain before income tax on the investment portfolio was $6.7 mill ion at June 30, 2021 as compared to a net unrealized gain before tax of $21.8 million at June 30, 2020.

The lower unrealized gain on the investment portfolio was due primarily to higher interest rates at June 30, 2021 along with a changing portfolio mix from mortgage prepayments and calls on agency bonds.

At June 30, 2021, the net unrealized gain posit ion represented 0.4% of the investment portfolio’s book value.

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

3 unchanged sentences

The data is then subjected to a “shock test” which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield curve, but not below zero.

The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from March 31, 2021.

The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from June 30, 2021.

In addition to analysis of simultaneous changes in interest rates along the yield curve, changes based on interest rate “ramps” is also performed.

This analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes.

For the analysis presented below, at March 31, 2021, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor 10 basis points in the same analysis as of March 31, 2020), and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.

For the analysis presented below, at June 30, 2021, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor 10 basis points in the same analysis as of June 30, 2020), and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.

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

The Company’s analysis at March 31, 2021 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points.

The Company’s analysis at June 30, 2021 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points.

This moderate impact is due substantially to the significant level of variable rate and repriceable assets and liabilities and related shorter relative durations.

The repricing duration of the investment portfolio at March 31, 2021 is 5 years, the loan portfolio 1.8 years, the interest bearing deposit portfolio 3.3 years, and the borrowed funds portfolio 5 years.

The following table reflects the result of simulation analysis on the March 31, 2021 asset and liabilities balances:

The repricing duration of the investment portfolio at June 30, 2021 is 4.8 years, the loan portfolio 1.5 years, the interest bearing deposit portfolio 3.6 years, and the borrowed funds portfolio 4.9 years.

The following table reflects the result of simulation analysis on the June 30, 2021 asset and liabilities balances:

Change in interest

12 unchanged sentences

For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change.

The amounts in the first quarter exceeded these limits due to the already low level of rates on non-maturing deposit instruments.

Management has determined that due to the level of market rates at March 31, 2021, interest rate shocks of -100, -200, -300 and -400 basis points leave the Bank with near zero down to negative rate instruments and are not considered practical or informative.

The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at March 31, 2021 are not considered to be excessive.

The amounts in the first half of 2021 exceeded these limits due to the already low level of rates on non-maturing deposit instruments.

Management has determined that due to the level of market rates at June 30, 2021, interest rate shocks of -100, -200, -300 and -400 basis points leave the Bank with near zero down to negative rate instruments and are not considered practical or informative.

The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at June 30, 2021 are not considered to be excessive.

The impact of 1.4% in net interest income and 2.5% in net income given a 100 basis point decrease in market interest rates reflects in large measure the impact of variable rate loans and fed funds sold repricing downward while deposits remain at expected floor rates and are not expected to have lower interest rates.

In the first quarter of 2021, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above.

The interest rate risk position at March 31, 2021, was relatively similar to the December 31, 2020 position for both the up and down rate scenarios.

In the first half of 2021, t he Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above.

The interest rate risk position at June 30, 2021, was relatively similar to the December 31, 2020 position for both the up and down rate scenarios.

Although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates.

3 unchanged sentences

Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.

During the first quarter of 2021, average market interest rates increased across the yield curve.

Overall, there was a steepening of the yield curve as compared to the fourth quarter of 2020 with rate increases being more significant at the longer end of the yield curve.

As compared to the first quarter of 2020, the average two-year U.S.

Treasury rate decreased by 95 basis points from 1.08% to 0.13%, the average five year U.S.

Treasury rate decreased by 53 basis points from 1.14% to 0.61% and the average ten year U.S.

Treasury rate decreased by 5 basis points from 1.37% to 1.32%.

The Company’s net interest margin was 2.98% for the first quarter of 2021 and 3.49% in the first quarter of 2020.

During the first half of 2021, average market interest rates increased across the yield curve as compared to the 2020 year end.

In the most recent quarter, however, there was a flattening of the yield curve as compared to the market rates at the end of the first quarter of 2021, with rate decreases being more significant at the longer end of the yield curve.

As compared to the first quarter of 2021 the second quarter average two-year U.S.

Treasury rate increased by 4 basis points from 0.13% to 0.17%, the average five year U.S.

Treasury rate increased by 11 basis points from 0.62% to 0.84% and the average ten year U.S.

Treasury rate increased by 25 basis points from 1.34% to 1.47%.

The Company’s net interest margin was 3.04% for the second quarter of 2021 and 3.26% in the second quarter of 2020.

The Company believes that the net interest margin in the most recent quarter as compared to 2020’s first quarter has been consistent with its interest rate risk analysis.

Banks a nd other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities.

Net interest income represented 89% and 94% of the Company’s revenue for the first quarter of 2021 and 2020, respectively.

Banks a nd other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on rate sensitive assets and interest expense on rate sensitive liabilities.

Net interest income represented 89% and 90% of the Company’s revenue for the first half of 2021 and 2020, respectively.

In falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by lower yielding short-term funds, or what is referred to as a negative mismatch or gap.

1 unchanged sentence

The gap position, which is a measure of the difference in maturity and repricing volume between assets and liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates.

The chart below provides an indication of the sensitivity of the Company to changes in interest rates.

A negative gap indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods.

At March 31, 2021, the Company had a negative gap position of approximately $107 million or 0.96% of total assets, out to three months, and a positive cumulative gap position of $167 million, or 1.5% of total assets out to twelve months;

as compared to a negative gap position of approximately $376 million or 3.76% of total assets out to three months and a positive cumulative gap position of $472 million of 4.72% of total assets out to 12 months at March 31, 2020.

T he change in the gap position at March 31, 2021 as compared to December 31, 2020 was due to term deposits moving into overnight deposits in the low and flat interest rate environment, and the maturity of a $100 million pay fixed balance sheet swap in April 2021.

The table below provides an indication of the sensitivity of the Company to changes in interest rates.

A negative gap ind icates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods.

While a positive gap indicates the degree to which the volume of repriceable assets exceeds repriceable liabilities in given time periods.

At June 30, 2021, the Company had a positive gap position of approximately $38 million or 0.35% of total assets, out to three months, and a positive cumulative gap position of $357 million, or 3.3% of total assets out to twelve months;

as compared to a positive gap position of approximately $476 million or 4.86% of total assets out to three months and a positive cumulative gap position of $624 million of 6.37% of total assets out to 12 months at June 30, 2020.

T he change in the gap position at June 30, 2021 as compared to June 30, 2020 was due to reduction in time deposits relative to money market demand amount, and the maturity of a $100 million pay fixed balance sheet swap in April 2021.

Such a change in the gap position is not deemed material to the Company's overall interest rate risk position, which relies more heavily on simulation analysis that captures the full opportunity within the balance sheet.

7 unchanged sentences

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

March 31, 2021

June 30, 2021

(dollars in thousands)

Repricible in:

Repriceable in:

months Over 60

35 unchanged sentences

The Company, like many community banks, has focused on commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years.

At March 31, 2021, we did not exceed these regulatory concentration thresholds, we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators.

Construction, land and land development loans represent 92% of total risk based capital.

At June 30, 2021, we did not exceed these regulatory concentration thresholds, we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators.

Construction, land and land development loans represen t 96% o f total risk based capital.

Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio.

1 unchanged sentence

Nevertheless, as our commercial real estate concentration fluctuates each quarter, we may be required to maintain higher levels of capital, which could require us to obtain additional capital, and may adversely affect shareholder returns.

The Company has an extensive Capital Plan and Policy, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.

The Company has an extensive Capital Plan and Capital Policy, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.

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

8 unchanged sentences

Under the Basel III Rules, the Company and Bank are required to maintain, inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of 7.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%, a minimum total capital to risk-weighted assets ratio of 10.5%, and a minimum leverage ratio of 4.0%.

At March 31, 2021, the Company and the Bank meet all these requirements, and satisfy the requirement to maintain a capital conservation buffer of 2.5% of CET1 capital for capital adequacy purposes.

At June 30, 2021, the Company and the Bank meet all these requirements, and satisfy the requirement to maintain a capital conservation buffer of 2.5% of CET1 capital for capital adequacy purposes.

During the fourth quarter of 2020, the Company started a new Repurch ase Program.

Under the Board approval in December, the Company may repurchase up to an aggregate of 1,588,848 shares of its common stock (inclusive of shares remaining under the initial authorization), through December 31, 2021, subject to earlier termination by the Board of Directors (the “Repurchase Program Extension”).

The Company announced a regular quarterly cash dividend on March 31, 2021 of $0.25 per share to shareholders of record on April 21, 2021 and payable on May 3, 2021.

The actual capital amounts and ratios for the Company and Bank as of March 31, 2021 (unaudited) and December 31, 2020 are presented in the table below.

In the second quarter of 2021 there were no repurchases of shares under the Repurchase Program.

In the first quarter of 2021, the Company completed repurchases of 1,466 shares for a total of $62,000 at an average cost of $42.46 per share u nder the Repurchase Program.

The Company announced a regular quarterly cash dividend on June 30, 2021 of $0.35 per share to shareholders of record on July 22, 2021 and payable on August 2, 2021.

The actual capital amounts and ratios for the Company and Bank as of June 30, 2021 and December 31, 2020 are presented in the table below.

Company Bank Minimum

2 unchanged sentences

(dollars in thousands) Amount Ratio Amount Ratio Purposes Regulations*

As of March 31, 2021

As of June 30, 2021

CET1 capital (to risk weighted assets) $ 1,209,889 14.67 % $ 1,322,338 16.09 % 7.00 % 6.50 %

9 unchanged sentences

Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company.

At March 31, 2021 the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above.

At June 30, 2021 the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above.

In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020.

2 unchanged sentences

We have elected to adopt the March 2020 interim final rule.

On August 2, 2021, the Company paid in full $150.0 million of subordinated debt due 2026 and accelerated deferred financing costs of $1.3 million on that date.

Refer to Note 8 for additional detail.

Use of Non-GAAP Financial Measures

7 unchanged sentences

The efficiency ratio measures a bank’s overhead as a percentage of its revenue.

The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions.

GAAP Reconciliation (Unaudited)

The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes,

which excludes intangible assets from the calculation of risk based ratios and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions.

GAAP Reconciliation

(dollars in thousands except per share data)

Three Months Ended

March 31, 2021 March 31, 2020

Three Months Ended Six Months Ended Year Ended Three Months Ended Six Months Ended

June 30, 2021 June 30, 2021 December 31, 2020 June 30, 2020 June 30, 2020

Common shareholders’ equity $ 1,306,336 $ 1,240,892 $ 1,187,895

15 unchanged sentences

16.25 % 15.80 % 12.03 % 10.80 % 9.67 %

Total loans, excluding loans held for sale and PPP loans is a non-GAAP financial measures derived from GAAP-based amounts.

The Company calculates total loans, excluding loans held for sale and PPP loans by excluding the balance of the PPP loans from the total loans, excluding loans held for sale.

The Company considers this information important to shareholders as total loans, excluding loans held for sale and PPP loans is a measure that removes fluctuations associated with the activity related to the non-core business and management of the PPP portfolio.

($ in thousands) June 30, 2021 December 31, 2020 June 30, 2020

Total loans, excluding loans held for sale (GAAP) $ 7,259,558 $ 7,760,212 $ 8,021,761

PPP loans (238,041) (454,771) (456,476)

Total loans, excluding loans held for sale and PPP loans (Non-GAAP) $ 7,021,517 $ 7,305,441 $ 7,565,285

Quantitative and Qualitative Disclosures about Market Risk

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis