What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-01 · 339 added, 463 removed, 641 unchanged (56% of the section changed)

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• Changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;

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• The impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;

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We will not update the forward looking statements to reflect actual results or changes in the factors affecting the forward looking statements.

The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebratin g twenty-two years of successful operations.

The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebratin g twenty-three years of successful operations.

The Company provides general commercial and consumer banking services through the Bank, its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System.

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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 seventeen branch offices (six in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C.), a principal corporate office, five lending centers (two are co-located with branches and one co-located in the principal corporate office) and one operations center.

Refer to the Business Section above, which describes in detail the various banking services offered.

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As 2020 began, expectations were high that the Federal Reserve Open Market Committee, or FOMC, would continue generally accommodative monetary policy, in support of strong GDP, low levels of unemployment and lower than expected inflation.

The Federal Reserve had purchases of securities expanding their balance sheet as late as year-end 2019.

Actual GDP growth for 2020 in the U.S.

was expected to be slightly below 2019 and before a global pandemic occurred in the first quarter of 2020 (termed COVID-19), which severely impacted business activity and person to person interactions.

The 2020 U.S.

official unemployment rate increased to 6.7% by year-end 2020 from a record low level of 3.6% pre-pandemic.

and world economies were turned upside down with the health care community placed on high alert in March and April 2020, which continued throughout the remainder of the year.

In 2020 there was volatile job markets across the country and Washington D.C.

metropolitan region with transitions to work from home and different degrees of economic lockdowns at different times as State Governors adopted different responses.

These fundamentals were factored into the Federal Reserve Board's monetary policy, as the situation led to 200 basis points of rate cuts in the overnight federal fund rate back to near 0% and massive expansion in liquidity support in the form of U.S.

Treasury and mortgage backed security ("MBS") bond purchases.

Additionally, fiscal policy accommodation was provided with the U.S.

Congress passing three stimulus measures approaching $2.6 trillion in 2020, adding to an already high level of total National Debt.

The Federal Reserve Board is currently indicating that a continued high level of monetary policy support is appropriate and that extraordinary support will continue through 2021, including continued very low interest rates.

In general, the economy began to recover in 2021 as COVID-19 vaccines and treatments became more readily available in communities in the US and around the world.

The improvement in the overall economy in 2021 led to supply chain issues, low unemployment rates and inflation.

This led to expectations that the Federal Reserve Open Market Committee ("FOMC"), would discontinue the generally accommodative monetary policy it had pursued when the COVID-19 pandemic begin in early 2020.

In late 2021, the Federal Reserve begun tapering purchases of securities and is no longer expanding its balance sheet as aggressively.

Actual real U.S.

GDP growth for 2021 was 5.7%, in contrast to a 3.4% decrease in 2020, which was adversely impacted by the onset of COVID-19.

Employment climbed throughout 2021 as the U.S.

unemployment rate ended the year at 3.9%, down from 6.7% at the end of 2020.

Longer-term U.S.

interest rates were much lower in 2020 than expected, with the ten year U.S.

interest rates increased in 2021, with the ten year U.S.

Treasury rate averaging 1.45% in 2021 as compared to 0.88% in 2020.

The yield curve in 2020 was steeper than in 2019 (two year as compared to ten year U.S.

Treasury rates) as the short end of the yield curve fell more sharply than the long end although the long end also fell dramatically.

The yield curve in 2021 was steeper than in 2020, but narrowed toward the end of 2021 (two year as compared to ten year U.S.

Treasury rates).

As the ten year U.S.

Treasury rate dropped back to 2016 levels in the summer of 2020, the volume of residential mortgage lending began to increase.

Overall, real estate values in most of the Company's markets were stable to increasing in 2020 as interest rates remained historically low.

Treasury rate increased in late 2021, the volume of residential mortgage lending began to decrease.

Overall, real estate values in most of the Company's markets were stable-to-increasing in 2021 as interest rates, although up versus the prior year, remained historically low.

Political gridlock continued in Washington, D.C.

over concerns of pandemic policy, public debt and deficits, as well as tax policy and spending levels, and the November elections.

over concerns of pandemic policy, public debt and deficits, as well as tax policy and spending levels.

The Company’s primary market, the Washington, D.C.

metropolitan area, has continued to perform well relative to other parts of the country notwithstanding the impact of the COVID-19 pandemic, due to a stable public sector along with increased government spending.

The private sector lost jobs which was attributable in large part to the difficulties in the Leisure and Hospitality sector brought on by challenges associated with the pandemic.

The private sector, in particular, the Leisure and Hospitality sector still faces challenges associated with the pandemic.

In spite of these challenges, the Washington, D.C.

metropolitan area maintains a diverse economy including a large healthcare component, substantial business services, and a highly educated work force.

The Company has had the financial resources to meet, and has remained committed to meeting, the credit needs of its community, which resulted in modest growth in the Bank’s loan portfolio during 2020, as COVID-19 related factors slowed new lending opportunities while loan payoffs continued on schedule demonstrating successful projects and financings.

Liquidity levels grew ever higher as we moved through 2020, which negatively impacted net interest margins and resulted in a much lower loan to deposit ratio.

Furthermore, the Company’s capital position remained strong in 2020 as a result of good earnings despite higher legal expenses.

Additionally, with longer term interest rates very low, residential lending and refinance activity was very strong which resulted in favorable noninterest income growth, largely from gain on sale of residential loans.

As a result of the Company’s strong capital position and earnings, it was able to sustain a quarterly dividend in 2020 and to execute a share repurchase program amounting to about 5% of shares outstanding.

The Company has the financial resources to meet, and has remained committed to meeting, the credit needs of its community.

The decline in the Company's loan balances in 2021 was a result of successful projects paying off, the competition to refinance at lower rates with longer amortization periods, and excess liquidity at competing banks as well as many companies and construction project sponsors.

While our loan balances declined in 2021, deposit inflows increased our liquidity levels, which increased earning assets, but negatively impacted net interest margins and resulted in a much lower loan to deposit ratio.

The Company’s capital position remained strong in 2021 as a result of good earnings that were enhanced by reversal of provisions to the ACL, improved economic conditions and improved asset quality.

Additionally, while mortgage rates increased in 2021 over 2020, the Company's residential lending group continues to contribute to earnings through the origination and sale of residential mortgages.

As a result of the Company’s strong capital position and earnings, we were able to increase our quarterly dividend several times in 2021 and continue our share repurchase program.

Although the number of shares

repurchased by the Company was much smaller in 2021, this was due to the increase in the price of the Company common stock, making repurchases less accretive to earnings per share.

The Company believes its strategy of remaining growth-oriented, retaining talented staff and maintaining focus on seeking quality lending and deposit relationships has proven successful and is evidenced in its financial and performance ratios.

Additionally, the Company believes such focus and strategy of relationship building has fostered future growth opportunities, as the Company’s reputation in the marketplace has continued to grow.

At December 31, 2020, the Company had total assets of approximately $11.1 billion, total loans of $7.8 billion, total deposits of $9.2 billion and twenty branches in the Washington, D.C.

Additionally, the Company believes such focus and strategy of relationship building has fostered future growth opportunities, as the Company’s reputation in the marketplace remains strong.

At December 31, 2021, the Company had total assets of approximately $11.8 billion, total loans of $7.1 billion, total deposits of $10.0 billion and seventeen branches in the Washington, D.C.

metropolitan area.

Operating in the weaker economic environment of 2020, the Bank was able to produce growth in average loans of 3.1%, excluding PPP loans.

Additionally, the Bank was able to grow its net interest spread earnings, as a result of very strong average deposit growth, retain a solid position regarding asset quality, and generate continued favorable operating leverage due to its seasoned and professional staff.

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Impact of COVID-19

During 2020 and to a lesser extent in 2021, our business has been, and continues to be, impacted by the ongoing outbreak 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 U.S.

The spread of COVID-19 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 U.S.

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.

Our business and consumer customers are experiencing varying degrees of financial distress.

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

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

It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic.

The CARES Act created the PPP, a program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks.

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

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

As an SBA preferred lender, the Bank is participating in the PPP, and at December 31, 2020, had an outstanding balance of PPP loans of $454.8 million to just over 1,400 businesses.

The statutory interest rate on these loans is 1.00% and the average yield, which includes fee amortization, was 2.55% for 2020.

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 $150,000, limiting debt collections efforts, including foreclosures, and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees.

Governmental actions taken in response to the COVID-19 pandemic have not always been coordinated or consistent across jurisdictions but, in general, have been expanding in scope and intensity.

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

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.

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

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

As of December 31, 2020, we had ongoing temporary modifications on approximately 36 loans representing $72 million (approximately 1% of total loans) in outstanding balances.

Overall, throughout 2020, the Bank's COVID-19 modification program granted temporary modifications on approximately 750 loans representing approximately $1.6 billion in outstanding balances, including 714 temporary modifications representing $1.5 billion that have or are expected to return to pre-modification terms.

None of the deferrals are reflected in the Company's asset quality measures (i.e., non-performing loans) due to the provision of the CARES Act that permits U.S.

financial institutions to temporarily suspend the U.S.

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

Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.

Significant uncertainties as to future economic conditions exist, and we have taken deliberate actions in response, including maintaining record levels of on and off-balance sheet liquidity and have maintained regulatory capital ratios significantly above the well capitalized.

Furthermore, we suspended our share repurchase program during the first quarter of 2020.

Accordingly, we made no share repurchases in the second quarter of 2020.

The Company’s Board of Directors approved lifting the suspension of the Company’s share repurchase program in the third quarter of 2020 and commenced repurchasing the balance of the 458,069 shares available for repurchase under that program.

Subsequently on December 16, 2020, the Board of Directors authorized the repurchase of 1,588,848 shares of common stock, or approximately 5% of the Company’s outstanding

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shares of common stock, under a new repurchase program (effective January 1, 2021), which will expire on December 31, 2021, subject to earlier termination of the program by the Board of Directors.

Additionally, the economic pressures, coupled with the implementation of the expected loss methodology for determining our provision for credit losses as required by the CECL standard described below, have contributed to an increased provision for credit losses for the full year 2020.

We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act and other legislative and regulatory developments related to COVID-19;

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

Efforts to limit the spread of COVID-19 have included quarantines, shelter-in-place orders, the closure or limiting capacity of businesses, travel restrictions, supply chain limitations and prohibitions on public gatherings, among other things, throughout many parts of the United States, including the Washington D.C.

As the COVID-19 pandemic is ongoing and dynamic in nature, there are many uncertainties, including its severity, duration, impact to our customers, employees and vendors, impact to the financial services and banking industry, impact to the economy as a whole and the level of governmental intervention (both economic and health-related).

COVID-19 has negatively affected, and is expected to continue to negatively affect the Company.

Furthermore, the sustainability of the economic recovery remains unclear and significant volatility could continue for a prolonged period as the potential exists for additional variants of COVID-19, including the recent Omicron variant, to impede the economic recovery.

CRITICAL ACCOUNTING POLICIES

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Carrying assets and liabilities at fair value inherently results in more financial statement volatility.

Investment Securities

The fair values and the information used to record valuation adjustments for investment securities available-for-sale are based either on quoted market prices or are provided by other third-party sources, when available.

The Company’s investment portfolio is categorized as available-for-sale with unrealized gains and losses net of income tax being a component of shareholders’ equity and accumulated other comprehensive income (loss) unless required to be accounted for as an impairment loss.

Provision for Credit Losses and Provision for Unfunded Commitments

A consequence of lending activities is that we may incur credit losses, so we record an allowance for credit losses ("ACL") with respect to loan receivables and a reserve for unfunded commitments (“RUC”) as estimates of those losses.

A consequence of lending activities is that we may incur credit losses, so we record an ACL with respect to loan receivables and a reserve for unfunded commitments (“RUC”) as estimates of those losses.

The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as changes in interest rates, the financial performance of borrowers and regional unemployment rates, which management estimates by using a national forecast and estimating a regional adjustment based on historical differences between the two.

As a result of our January 1, 2020 adoption of FASB's Accounting Standard Codification ("ASC") 326, Measurement of Credit Losses on Financial Instruments , and its related amendments, our methodology for estimating these credit losses changed significantly from prior years.

The new standard replaced the “incurred loss” approach with a “current expected credit loss” approach known as CECL, which requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures).

The standard replaced the “incurred loss” approach with a “current expected credit loss” approach known as CECL, which requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures).

CECL removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.”

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The PCL is determined by following:

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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.

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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.

COVID-19 has negatively impacted unemployment projections, which inform our CECL economic forecast and increased our loss reserve during 2020.

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.

While the COVID-19 pandemic negatively impacted unemployment projections for 2020, which informed our CECL economic forecast and increased our loss reserve for that year, there were positive signs in 2021 as the unemployment rate and economic forecast suggested the impact of the COVID-19 pandemic on credit would not be as significant as previously considered in 2020.

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

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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 as of December 31, 2020.

See Notes 1 and 4 to the Consolidated Financial Statements, the “Provision for Credit Losses” section in Management’s Discussion and Analysis, and the COVID-19 risk factors in Item 1A for more information on the provision for credit losses.

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 continues to adversely impact our loss reserve as of December 31, 2021.

See Notes 1, 3 and 4 to the Consolidated Financial Statements, the “Provision for Credit Losses” section in Management’s Discussion and Analysis, and the COVID-19 risk factor in Item 1A for more information on the provision for credit losses.

Goodwill and Other Intangibles

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

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

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

Similarly, estimates and assumptions are used in determining the fair value of other intangible assets.

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These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables.

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As of June 30, 2020, COVID-19 caused the occurrence of what management deemed to be a triggering event that caused us to perform a goodwill impairment test to determine if an impairment charge was required for that period.

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

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

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

Management did not consider a triggering event to have occurred during the fourth quarter of 2020.

Management did, however, perform its annual assessment of goodwill as of December 31, 2020.

Based on the results of qualitative assessments of the reporting unit as part of its annual goodwill impairment testing, the Company concluded that no impairment existed at December 31, 2020.

Management performed its annual assessment of goodwill as of December 31, 2021.

Based on the results of qualitative assessments of the reporting unit, the Company concluded that no impairment existed at December 31, 2021.

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

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See “Item 1A Risk Factors—Changes in the value of goodwill and intangible assets could reduce our earnings” for more information.

Accounting for Income Taxes

The Company accounts for income taxes by recording deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as, certain tax attributes, such as net operating losses.

Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities.

The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws.

If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there might be additional expenses required in future periods.

The Company’s accounting policy follows the prescribed authoritative guidance that a minimal probability threshold of a tax position must be met before a financial statement benefit is recognized.

The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in other noninterest expenses in the Consolidated Statements of Income.

Assessment of uncertain tax positions requires careful consideration of the technical merits of a position based on management’s analysis of tax laws, regulations and other procedural guidance.

Significant judgment may be involved in applying the applicable reporting and accounting requirements.

Management expects that the Company’s adherence to the required accounting guidance may result in volatility in quarterly and annual effective income tax rates due to the requirement that any change in judgment or measurement of a tax position taken in a prior period be recognized as a discrete event in the period in which it occurs.

Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.

See “Item 1A Risk Factors—Changes in tax laws could have an adverse effect on us, the banking industry, our customers, the value of collateral securing our loans and demand for loans” for more information.

Stock Based Compensation

The Company follows the provisions of ASC Topic 718, “Compensation,” which requires the expense recognition for the fair value of share based compensation awards, such as stock options, restricted stock awards, and performance based shares.

This standard allows management to establish modeling assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates which directly impact estimated fair value.

The accounting standard also allows for the use of alternative option pricing models which may impact fair value as determined.

The Company’s practice is to utilize reasonable and supportable assumptions.

FASB ASC Topic 815, Derivatives and Hedging , provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of:

(a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.

Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments.

SELECTED FINANCIAL DATA

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the year ended December 31, 2021.

The information contained in this section should be read together with the December 31, 2021 audited Consolidated Financial Statements and the accompanying Notes included in Item 8.

Financial Statements And Supplementary Data of this Form 10-K.

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Form 10-K for the fiscal year ended December 31, 2020.

Use of Non-GAAP Financial Measures

The information set forth below contains certain financial information determined by methods other than in accordance with GAAP.

These non-GAAP financial measures are “tangible common equity,” “tangible book value per common share,” “efficiency ratio,” and “return on average common equity.” Management uses these non-GAAP measures in its analysis of our performance because it believes these measures are used as a measure of our performance by investors.

These disclosures should not be considered in isolation or as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures which may be presented by other bank holding companies.

Management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measures.

A reconciliation table is set forth below following the selected historical consolidated financial data.

Years Ended December 31,

2021 2020 2019

Balance Sheets - Period End

Securities $ 2,623,408 $ 1,151,083 $ 843,363

Loans held for sale 47,218 88,205 56,707

Loans 7,065,598 7,760,212 7,545,748

Allowance for credit losses (74,965) (109,579) (73,658)

Intangible assets, net 105,793 105,114 104,739

Total assets 11,847,310 11,117,802 8,988,719

Deposits 9,981,540 9,189,203 7,224,391

Borrowings 369,670 568,077 498,667

Total liabilities 10,496,535 9,876,910 7,798,038

Total shareholders’ equity 1,350,775 1,240,892 1,190,681

Tangible common equity (1)

1,244,982 1,135,778 1,085,942

Statements of Income

Interest income $ 364,496 $ 389,986 $ 429,630

Interest expense 39,982 68,424 105,585

Provision (reversal) for credit losses (20,821) 45,571 13,091

Noninterest income 40,385 45,696 25,699

Noninterest expense 149,165 144,162 139,862

Income before taxes 237,674 176,145 196,791

Income tax expense 60,983 43,928 53,848

176,691 132,217 142,943

Cash dividends declared 44,691 28,330 22,332

Total revenue (2)

364,899 367,258 349,744

Years Ended December 31,

(dollars in thousands except per share data) 2021 2020 2019

Per Common Share Data

Net income, basic $ 5.53 $ 4.09 $ 4.18

Net income, diluted 5.52 $ 4.09 4.18

Dividends declared 1.40 0.88 0.66

Book value 42.28 39.05 35.82

Tangible book value (3)

38.97 35.74 32.67

Common shares outstanding 31,950,092 31,779,663 33,241,496

Weighted average common shares outstanding, basic 31,935,824 32,334,201 34,178,804

Weighted average common shares outstanding, diluted 32,003,090 32,362,556 34,210,646

Net interest margin 2.81 % 3.19 % 3.77 %

Efficiency ratio (4)

40.88 % 39.25 % 39.99 %

Return on average assets 1.49 % 1.28 % 1.61 %

Return on average common equity 13.54 % 10.98 % 12.20 %

Return on average tangible common equity (1)

14.73 % 12.03 % 13.40 %

CET1 capital (to risk weighted assets) 15.02 % 13.49 % 12.87 %

Total capital (to risk weighted assets) 16.15 % 17.04 % 16.20 %

Tier 1 capital (to risk weighted assets) 15.02 % 13.49 % 12.87 %

Tier 1 capital (to average assets) 10.19 % 10.31 % 11.62 %

Tangible common equity ratio 10.60 % 10.31 % 12.22 %

Dividend payout ratio 25.29 % 21.59 % 15.79 %

Asset Quality

Nonperforming assets and loans 90+ past due $ 30,843 $ 65,930 $ 50,216

Nonperforming assets and loans 90+ past due to total assets 0.26 % 0.59 % 0.56 %

Nonperforming loans to total loans 0.41 % 0.79 % 0.65 %

Allowance for credit losses to loans 1.06 % 1.41 % 0.98 %

Allowance for credit losses to nonperforming loans 256.66 % 179.80 % 151.16 %

Net charge-offs $ 13,339 $ 20,097 $ 9,377

Net charge-offs to average loans 0.18 % 0.26 % 0.13 %

(1) Tangible common equity and return on average tangible common equity are non-GAAP financial measures.

Tangible common equity is defined as total common shareholders’ equity reduced by goodwill and other intangible assets.

(2) Total revenue calculated as net interest income plus noninterest income.

(3) Tangible book value per common share, a non-GAAP financial measure, is defined as tangible common shareholders’ equity divided by total common shares outstanding.

(4) Computed by dividing noninterest expense by the sum of net interest income and noninterest income.

The following table details our Non-GAAP to GAAP reconciliation for the years 2019 through 2021.

Non-GAAP Reconciliation Years Ended December 31,

(dollars in thousands except per share data) 2021 2020 2019

Common shareholders’ equity $ 1,350,775 $ 1,240,891 $ 1,190,681

Intangible assets (105,793) (105,114) (104,739)

Tangible common equity $ 1,244,982 $ 1,135,777 $ 1,085,942

Book value per common share $ 42.28 $ 39.05 $ 35.82

Intangible book value per common share (3.31) (3.31) (3.15)

Tangible book value per common share $ 38.97 $ 35.74 $ 32.67

Total assets $ 11,847,310 $ 11,117,802 $ 8,988,719

Intangible assets (105,793) (105,114) (104,739)

Tangible assets $ 11,741,517 $ 11,012,688 $ 8,883,980

Tangible common equity ratio 10.60 % 10.31 % 12.22 %

Average common shareholders’ equity $ 1,304,902 $ 1,204,341 $ 1,172,051

Average intangible assets (105,256) (104,903) (105,167)

Average tangible common equity $ 1,199,646 $ 1,099,438 $ 1,066,884

Net Income $ 176,691 $ 132,217 $ 142,943

Average tangible common equity $ 1,199,646 $ 1,099,438 $ 1,066,884

Return on average tangible common equity 14.73 % 12.03 % 13.40 %

Total noninterest expense $ 149,165 $ 144,162 $ 139,862

Net interest income $ 324,514 $ 321,562 $ 324,045

Total noninterest income 40,385 45,696 25,699

Total of net interest and noninterest income $ 364,899 $ 367,258 $ 349,744

Efficiency ratio 40.88 % 39.25 % 39.99 %

RESULTS OF OPERATIONS

Net income for the years ending December 31, 2020, 2019, and 2018 was $132.2 million, $142.9 million, and $152.3 million, respectively.

Net income per basic and diluted common share for 2020 was $4.09 compared to $4.18 per basic and diluted common share for 2019, a 2% decrease.

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Net income decreased for 2020 relative to 2019 primarily due to a decline in the net interest margin, and increased provisioning for credit losses (see "Provision for Credit Losses" section below, and Notes 1 - " Summary of Significant Accounting Policies " and Note 4 - " Loans and Allowance for Credit Losses " to the consolidated financials statements for further detail on CECL ), partially off set by higher noninterest income (as discussed in the "Noninterest Income" section below).

The most significant portion of revenue (i.e., net interest income plus noninterest income) is net interest income, which decreased to $321.6 million for 2020 compared to $324.0 million for 2019.

The decrease resulted from a decline in the net interest margin substantially offset by growth in average earning assets of 17%.

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 3.19% for 2020 and 3.77% for 2019.

Net income for the years ending December 31, 2021 and 2020 were $176.7 million and $132.2 million, respectively.

Net income per basic and diluted common share for 2021 was $5.53 and $5.52, respectively, compared to $4.09 per basic and diluted common share for 2020, a 35% increase.

Net income increased in 2021 relative to 2020 primarily due to reversals from the allowance for credit losses and, to a lesser extent, net interest income on a higher asset base, partially off set by lower noninterest income and higher noninterest expense.

The most significant portion of revenue (i.e., net interest income plus noninterest income) is net interest income, which increased to $324.5 million in 2021 compared to $321.6 million for 2020.

The increase resulted from an increase in average earning assets of 14%, which offset a decline of 38 basis points 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 2.81% for 2021 and 3.19% for 2020, a decline of 38 basis points.

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 38 basis points for 2020 as compared to 72 basis points for 2019, due to significantly lower market interest rates.

The combination of a 58 basis point decrease in the net interest spread and a 34 basis point decrease in the value of noninterest sources resulted in a 92 basis point decrease in the net interest margin for 2020 as compared to 2019.

Despite currently having lesser value resulting from lower interest rates, the Company continues to consider the value of its noninterest sources of funds as very significant to its business model and its overall profitability over the longer term.

The provision for credit losses in 2020 was $45.6 million as compared to $13.1 million for the year ended December 31, 2019.

The higher provisioning for 2020, as compared 2019, is primarily due to the implementation of the CECL accounting standard and the impact of COVID-19 on our actual and expected future credit losses.

The provision for credit losses in 2021 was a reversal of $20.8 million as compared to a provision of $45.6 million in 2020.

The reversal of the provision was primarily driven by the improved economic environment, adjustments to the quantitative components of the CECL model and improvements in asset quality.

F or information on the components and drivers of these changes see "Provision for Credit Losses" section below.

Total noninterest income for 2020 increased to $45.7 million from $25.7 million for 2019, a 78% increase.

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

Noninterest expenses totaled $144.2 million for 2020, as compared to $139.9 million for 2019, a 3% increase.

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

Total noninterest income in 2021 was $40.4 million, as compared to $45.7 million in 2020, a 12% decrease.

Noninterest expenses in 2021 totaled $149.2 million, as compared to $144.2 million in 2020, a 3% increase.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 40.88% for 2021 as compared to 39.25% for 2020.

Income tax expense was $43.9 million for 2020, a decrease of $9.9 million or 18% compared to the same period in 2019.

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

At December 31, 2020, total loan balances (including PPP loans) were 3% higher than they were at December 31, 2019, and average loans were 7% higher in 2020 as compared to 2019.

PPP loans represented $454.8 million of total loans at the end of 2020.

Excluding PPP loans, average loans increased 3% in 2020.

The slower loan growth in 2020 (excluding PPP loans) is mostly attributable to the successful completion of construction projects and the related construction loan payoff, coupled with the Company’s de-emphasizing new construction lending.

Average deposit growth was strong throughout 2020, and resulted in well above average overnight liquidity.

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

Income tax expense in 2021 was $61.0 million, as compared to $43.9 million in 2020, a 39% increase.

At December 31, 2021, total loan balances (including PPP loans) were 9% lower than they were at December 31, 2020, and average loans were 8% lower in 2021 as compared to 2020.

PPP loans represented $51.1 million of total loans at the end of 2021, as compared to $454.8 million at the end of 2020.

Excluding PPP loans, loans decreased 4% in 2021, driven by higher payoffs and paydowns, which outpaced originations and advances.

The decline in PPP loans was the result of the forgiveness process and, in the second quarter of 2021, the Company's sale of a portion of the PPP loan portfolio.

Deposit growth was strong throughout 2021, and resulted in well above historical average overnight liquidity for the Company.

Deposit funding during 2021 was primarily from noninterest bearing and money market accounts.

In order to fund such loan increases and sustain significant liquidity, the Company has relied on funding from interest bearing accounts primarily as a result of inflows from certain financial intermediary relationships.

In large part due to those inflows, total deposits at December 31, 2021 were 9% higher than deposits at December 31, 2020, while average deposits were 17% higher for 2021 compared with 2020.

This increase in deposits allowed the Company to sustain strong primary and secondary sources of liquidity in the fourth quarter of 2020.

This increase in deposits allowed the Company to sustain strong primary and secondary sources of liquidity and increase the size of the investment securities portfolio.

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 63% and 76% of average earning assets for 2021 and 2020, respectively.

For 2020, as compared to 2019, average loans, excluding loans held for sale, increased $535.6 million, or 7%, due primarily to growth in PPP, income producing commercial real estate, and commercial loans.

Average investment securities for 2020 and 2019 both amounted to 9% average earning assets.

For 2021, as compared to 2020, average loans, excluding loans held for sale, decreased $607.6 million, or 8%, driven by higher payoffs and paydowns, which outpaced originations and advances, and PPP loan forgiveness and sale.

Average investment securities for 2021 were 14% of average earning assets compared to 9% for 2020.

The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 23% and 12% of average earning assets for 2021 and 2020, respectively, as much higher levels of on-balance sheet liquidity existed throughout 2021.

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The ratio of common equity to total assets decreased to 11.16% at December 31, 2020 from 13.25% at December 31, 2019, due to total assets growing faster than common equity, including common equity reductions due to $61 million in share repurchase activity, the approximate $10.9 million charge to common equity due to implementation of CECL on January 1, 2020, and $28.3 million of cash dividends declared.

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

For 2020, the Company reported an annualized return on average assets (“ROAA”) of 1.28%, as compared to 1.61% for 2019.

These increases were driven by the decline in loans coupled with the inflow of deposits.

The ratio of common equity to total assets increased to 11.40% at December 31, 2021 from 11.16% at December 31, 2020, due to common equity growing faster rate than total assets, even with common equity reductions due to $682 thousand in share repurchase activity and $44.7 million of cash dividends declared.

For 2021, the return on average assets (“ROAA”) was 1.49%, as compared to 1.28% for 2020.

Total shareholders’ equity was $1.35 billion at December 31, 2021 and $1.24 billion and 2020, an increase of 9%.

The annualized return on average common equity (“ROACE”) for 2020 was 10.98% as compared to 12.20% for 2019.

The annualized return on average tangible common equity (“ROATCE”) for 2020 was 12.03% as compared to 13.40% for 2019.

The return on average common equity (“ROACE”) for 2021 was 13.54% as compared to 10.98% for 2020.

The return on average tangible common equity (“ROATCE”) for 2021 was 14.73% as compared to 12.03% for 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 decline in these ratios was primarily due to the implementation of CECL and COVID-19 impacts on loan loss provisioning, as well as a lower net interest margin.

The increase in these returns was primarily due to reversals from the allowance for credit losses and to a lesser extent net interest income on a higher asset base, partially off set by lower noninterest income and higher noninterest expense.

Net Interest Income and Net Interest Margin

Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets.

Earning assets are composed primarily of loans, loans held for sale, investment securities, and interest bearing deposits with banks.

Earning assets are composed primarily of loans, loans held for sale, investment securities, and interest bearing deposits with other banks.

The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings, which consist of federal funds purchased, advances from the FHLB and subordinated notes.

For additional information on the Company’s subordinated notes, please refer to Note 13 to the Consolidated Financial Statements, as well as the “Capital Resources and Adequacy” section below.

Noninterest bearing deposits and capital are other components representing funding sources.

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 in 2020 was $321.6 million compared to $324.0 million in 2019 and $317.0 million in 2018.

For the year ended December 31, 2020, net interest income decreased 0.8% over the same period for 2019.

Average loans increased $535.6 million (7%) and average deposits increased by $1.3 billion (18%).

The net interest margin was 3.19% for the year ended December 31, 2020, as compared to 3.77% for the same period in 2019.

Excluding PPP loans, average loans increased 3% in 2020.

The yield on PPP loans was lower than other loans, which depressed loan yields and the net interest margin for 2020.

Excluding PPP loans, the yield on loans for 2020 was 4.87%, and the net interest margin was 3.28%.

The Company has maintained its disciplined loan pricing practices in 2020, and the Company has also managed its funding costs lower in 2020 while maintaining a favorable deposit mix, wherein noninterest deposits averaged 31% of average total deposits.

Higher levels of on-balance sheet liquidity contributed to margin compression in 2020.

Net interest income in 2021 was $324.5 million compared to $321.6 million in 2020.

For 2021, net interest income increased 1% over the same period for 2020.

The increase resulted from an increase in average earning assets of 14%, which offset a decline of 38 basis points in net interest margin.

The net interest margin was 2.81% for 2021, as compared to 3.19% for 2020, a decline of 38 basis points.

This decline was led by a lower rate environment and the decline in loans, which generally have higher yields than securities.

Additionally, the increase in deposits, led to an increase in low yielding assets such as securities or interest bearing deposits at other banks, which contributed to net income and liquidity, but lowered net interest margin.

In 2021, average loans decreased $607.6 million or 8% and average deposits increased by $1.4 billion or 17%.

Loans, the largest component of interest income on earnings assets, had a yield of 4.62% in 2021, compared to 4.66% in 2020, a decline of 4 basis points (includes PPP loans).

The decline in yield was minimized due to disciplined loan pricing practices and the sale or forgiveness of PPP loans, which accelerated net deferred fees and cost into interest income.

Additionally, the deposit mix remained favorable, with average noninterest deposits being 34% of average total deposits, up from 31% in 2020.

In 2021, total net loans, the primary source of the Bank’s revenue, declined, although total assets increased over the same period.

Further, loan pricing pressures in the highly competitive market for high-quality commercial loans, and the cost sand implementation risks associated with pursuing loan growth, has put pressure on loan portfolio yields and consequently the Bank’s net interest margin and net income.

The table below presents the average balances and rates of the major categories of the Company’s assets and liabilities for the years ended December 31, 2021, 2020 and 2019.

Included in the table is a measurement of interest rate spread and margin.

Included in the table are two measurements, interest rate spread and net interest margin.

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

While the interest rate spread provides a quick comparison of earnings rates as compared to cost of funds, management believes that the net interest margin provides a better measurement of performance.

While the interest rate spread provides a quick comparison of earnings rates as compared to cost of funds, management believes that the net interest margin typically provides a better measurement of performance.

However, given the increase in assets and liquidity from deposits, the usefulness of net interest margin comparisons are diluted.

To illustrate, in 2021 net interest margins declined 38 basis points, which would normally be expected to lead to a decrease in net interest income;

however, since average earning assets were up 14%, net interest income increased by 0.9%.

The net interest margin (as compared to the net interest spread) includes the effect of noninterest bearing sources in its calculation and is net interest income expressed as a percentage of average earning assets.

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Eagle Bancorp, Inc.

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Loans (1) (2) 7,260,886 335,471 4.62 % 7,868,523 366,729 4.66 % 7,332,886 399,358 5.45 %

7,868,523 366,729 4.66 % 7,332,886 399,358 5.45 % 6,638,136 367,511 5.54 %

Investment securities available-for-sale (2) 1,653,522 23,205 1.40 % 929,983 18,440 1.98 % 796,608 21,037 2.64 %

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Cost of funds 0.35 % 0.68 % 1.23 %

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

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

Net loan fees and late charges included in interest income on loans totaled $30.6 million, $22.3 million, and $17.8 million, for the years ended December 31, 2021, 2020 and 2019, respectively.

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

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Rate/Volume Analysis of Net Interest Income

The rate/volume table below presents the composition of the change in net interest income for the periods indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest bearing liabilities, and the changes in net interest income due to changes in interest rates.

As the table shows, the decrease in net interest income in 2020, as compared to 2019 was a function of an increase in the volume of earning assets more than offset by a decline in the net interest margin.

The increase in net interest income in 2019 as compared to 2018 was a function of an increase in the volume of earning assets more than offsetting a decline in the net interest margin.

As the table shows, the increase in net interest income in 2021, as compared to 2020 was due to a decrease in the volume of earning assets more than offset by lower deposit rates.

The decrease in net interest income in 2020 as compared to 2019 was a function of an increase in the volume of earning assets more than offset by a decline in the net interest margin.

2021 compared with 2020 2020 compared with 2019

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The ACL under CECL (adopted January 1, 2020) utilizes an economic forecast that is updated quarterly with the significant measure being the expected regional unemployment rate, which management estimates by using a national forecast and estimating a regional adjustment based on historical differences between the two.

The provision for credit losses was $45.6 million in 2020, as compared to $13.1 million in 2019.

The increase was due substantially to the implementation of the CECL methodology and the related impact of the COVID-19 pandemic.

The provision for credit losses was a reversal of $20.8 million in 2021, as compared to a provision of $45.6 million in 2020.

The reversal in 2021 was largely due to the improvement of the economy as the COVID-19 vaccines and treatments became widely available and the improvement in credit quality, whereas the provision in 2020 was due to a reserve build associated with the onset of the COVID-19 pandemic.

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

This provision considers the probability that unfunded commitments will fund.

The provision was $1.4 million in 2020, as compared to no provision expense in 2019 (prior to CECL).

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The provision was a reversal of $1.1 million in 2021, as compared to a provision of $1.4 million in 2020.

Management has developed a comprehensive analytical process to monitor the adequacy of the ACL.

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Also, refer to the table in the "Allowance for Credit Losses" section which reflects activity in the ACL.

The ACL increased $35.9 million at December 31, 2020 as compared to December 31, 2019, reflecting $45.6 million in provision for credit losses, day one CECL impact of $10.6 million charged to retained earnings, and $20.1 million in net charge-offs during 2020.

For 2021, the ACL decreased by $34.6 million, reflecting a reversal of $20.8 million to provision for credit losses and $13.3 million in net charge-offs.

Net charge-offs of $13.3 million during 2021 represented 0.18% of average loans, excluding loans held for sale, as compared to $20.1 million or 0.26% of average loans, excluding loans held for sale, in 2020.

Net charge-offs during 2020 were attributable primarily to commercial real estate ($7.2 million), commercial loans ($12 million), and residential mortgages ($815 thousand).

At December 31, 2020 the ACL represented 1.41% of loans outstanding (1.50% excluding PPP loans), as compared to 0.98% at December 31, 2019.

Net charge-offs during 2021 were attributable primarily to commercial real estate ($5.1 million) and commercial loans ($8.3 million).

At December 31, 2021 the ACL represented 1.06% of loans outstanding, as compared to 1.41% at December 31, 2020.

The ACL represented 257% of nonperforming loans at December 31, 2021, as compared to 180% at December 31, 2020.

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Noninterest Income

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 year ended December 31, 2020 was $45.7 million as compared to $25.7 million for the year ended December 31, 2019, a 78% increase due substantially to $13.7 million higher gains on sale of residential mortgage loans, $2.9 million higher gains associated with the origination, securitization, sale and servicing of FHA loans, $1.2 million gain on the sale of OREO, and $1.1 million on swap fee income, partially offset by $1.8 million lower service charges on deposits.

For the year ended December 31, 2020, service charges on deposit accounts decreased $1.8 million to $4.4 million from $6.2 million for the same period in 2019, a decrease of 29%, due primarily to waived fees due to the pandemic.

Gain on sale of loans consists of gains on the sale of SBA and residential mortgage loans.

For the year ended December 31, 2020, gain on sale of loans increased from $8.5 million to $22.1 million, an increase of 161%, compared to the same period in 2019.

The Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium.

Income from this source was $269 thousand for the year ended December 31, 2020 compared to $309 thousand for the same period in 2019.

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

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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 year ended December 31, 2021 was $40.4 million as compared to $45.7 million for the year ended December 31, 2020.

The 12% decrease was due substantially to $8.0 million lower gains on sa le of residential mortgage loans which was partially offset by $1.1 million higher gains on sales of securities and $1.6 million higher fees associated with the origination, securitization, sale and servicing of FHA loans.

For the year ended December 31, 2021, service charges on deposit accounts slightly increased $146 thousand to $4.6 million from $4.4 million for the same period in 2020, an increase of 3%.

While deposits increased significantly in 2021, deposit fees continue to be waived due to the pandemic.

Gain on sale of loans consists of gains on the sale of residential mortgage and SBA loans.

For the year ended December 31, 2021, gain on sale of loans was $14.0 million, compared to $22.1 million in 2020, a decrease of 36%.

The decrease was driven by higher residential mortgage rates in the latter part of the year, which reduced mortgage origination volume.

The Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to sell those loans with servicing released.

Sales of residential mortgage loans yielded gains of $21.8 million for the year ended December 31, 2020 compared to $8.2 million in the same period in 2019, due to higher loan locked volume ($367.7 million for 2020 as compared to $49.9 million for 2019).

Loans sold are subject to repurchase in circumstances where documentation is deficient or the underlying loan becomes delinquent or pays off within a specified period following loan funding and sale.

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There were no repurchases due to fraud by the borrower during the year ended December 31, 2021.

The reserve amounted to $205 thousand at December 31, 2020 and is included in other liabilities on the Consolidated Balance Sheets.

The reserve is included in other liabilities on the Consolidated Balance Sheets.

The Bank does not originate “sub-prime” loans and has no exposure to this market segment.

As a result of elevated origination volumes and market dislocations associated with the current COVID-19 pandemic, beginning in the second quarter of 2020, and continuing through the fourth quarter of 2020, the Company began to shift its pipeline strategy towards a best efforts lock basis.

Residential mortgage Years Ended December 31,

(dollars in thousands) 2021 2020 % Change

Gain on sale $ 13,585 $ 22,368 (39.3) %

Closed loans 1,140,408 1,260,615 (9.5) %

Locked loans 994,452 1,860,813 (46.6) %

Reserve 125 205 (39.2) %

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.

Gain on the sale of investments amounted to $1.8 million for the year ended December 31, 2020 compared to $1.5 million for the year ended December 31, 2019.

Other income totaled $15.3 million for the year ended December 31, 2020 as compared to $7.8 million for 2019, a increase of 97%.

The FHA business unit generated income of $3.4 million on the origination, securitization, servicing and sale of FHA Multifamily-Backed GNMA securities for the full year 2020 compared to $501 thousand for the same period in 2019.

There was also a $1.2 million gain on OREO and $1.1 million gain on swaps.

The Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium.

Income from this source was $460 thousand for the year ended December 31, 2021 compared to $269 thousand for the same period in 2020.

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

Gain on the sale of investments were $3.0 million for the year ended December 31, 2021 compared to $1.8 million for the year ended December 31, 2020.

Other income totaled $16.8 million for the year ended December 31, 2021 as compared to $15.3 million for 2020, an increase of 9%.

The FHA business unit generated income on the sale of FHA multifamily-backed GNMA securities of $5.0 million for 2021 compared to $3.4 million for 2020.

Servicing agreements relating to the Ginnie Mae ("GNMA") 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.

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At December 31, 2021, the Company did not have any funds advanced outstanding under FHA mortgage loan servicing agreements.

The funds advanced were in conjunction with a single loan of $90 thousand that suffered financial hardship due to COVID-19 and was granted forbearance by the Company on November 25th, 2020 for the period from December 1, 2020 to December 31, 2021.

Under the Forbearance Agreement, the borrower has the option to extend the Forbearance Period through February 28, 2021.

During this time, the Company will advance principal and interest on the borrower’s behalf and will be repaid in 12 monthly installments beginning on March 1, 2021 and ending on February 1, 2022.

To the extent the loan currently in forbearance or other 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.

Noninterest Expense

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

Total noninterest expenses totaled $144.2 million for the year ended December 31, 2020, as compared to $139.9 million for the year ended December 31, 2018, a 3% increase.

For the year 2020, the efficiency ratio (ratio of noninterest expenses to total revenue) was 39.25% as compared to 39.99% for the same period in 2019.

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Salaries and employee benefits were $74.4 million for the year ended December 31, 2020, as compared to $79.8 million for the same period in 2018, a decrease of 7%.

Cost decreased as result of 2019 having $8.2 million of nonrecurring charges related to acceleration of share based compensation expenses associated with the retirement of our former Chairman and Chief Executive Officer and the resignation of certain directors.

The decrease was partially offset by higher salaries attributable to merit increases and increased headcount in 2020.

Total noninterest expenses totaled $149.2 million for 2021, as compared to $144.2 million for 2020, a 3% increase.

For 2021, the efficiency ratio (ratio of noninterest expenses to total revenue) was 40.88% as compared to 39.25% for 2020.

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

Salaries and employee benefits were $88.4 million for 2021, as compared to $74.4 million for 2020, an increase of 19%.

The increase was a result of higher incentive bonus accruals based on Company performance and increased share based compensation.

At December 31, 2021, the Company’s full time equivalent staff numbered 507, as compared to 519 at December 31, 2020.

Premises and equipment expenses amounted to $15.7 million for the year ended December 31, 2020 as compared to $14.4 million for the same period in 2019, an increase of 9%.

The largest increase related to adjustments for lease extensions not previously recorded.

For the year ended December 31, 2020, the Company recognized $469 thousand of sublease revenue as compared to $527 thousand for the same period in 2019.

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

Marketing and advertising expenses decreased to $4.3 million for the year ended December 31, 2020 from $4.8 million for 2019, a decrease of 11%, due primarily to a reduction in sponsorship fees as several expected conferences did not happen as result of COVID-19 in 2020.

Data processing expenses increased from $9.4 million for the year ended December 31, 2019 to $10.7 million for 2020, an increase of 14%, primarily due to yearly increases in license fee renewals and additional networking capacity needed related to COVID-19.

Legal, accounting and professional fees and expenses for the year ended December 31, 2020 increased to $16.4 million from $12.2 million in 2019, a 35% increase.

The increased expenses were primarily associated with legal fees and expenditures related to ongoing governmental investigations and subpoenas and document requests.

The Company expects to continue to incur elevated levels of legal and professional fees and expenses in 2021 as it continues to cooperate with these investigations.

Refer to "Item 3- Legal Proceedings" for additional information on the Company’s recent proceedings.

FDIC insurance increased $4.7 million to $7.9 million for the year ended December 31, 2020, an increase of 148% compared to 2019, primarily due to a nonrecurring $1.8 million credit in 2019 and a higher assessment base in 2020 resulting from growth in total assets.

Other expenses decreased to $14.7 million for the year ended December 31, 2020 from $16.0 million for the same period in 2019, a decrease of 8%.

The major components of cost in this category include broker fees, franchise tax, core deposit intangible amortization, insurance expenses, and director compensation.

Premises and equipment expenses were $14.9 million for 2021 as compared to $15.7 million for 2020, a decrease of 5%.

The reduction in rent expense from the closure of several locations and was partially offset by normal lease increases and acceleration of leasehold amortization;

and the third quarter of 2020 included a $1.7 million adjustment which increased rent expense in accordance with ASC 842 on leases.

Marketing and advertising expenses were $4.2 million for 2021 as compared to $4.3 million for 2020, a decrease of 3%.

Marketing and advertising expenses remained low in 2021 as events and conferences remained on hold as a result of COVID-19.

Data processing expenses were $11.7 million for 2021 as compared to $10.7 million in 2020, an increase of 9%, primarily due to increased customer activity and annual increases in license fee renewals.

Legal, accounting and professional fees and expenses were $11.5 million for 2021 as compared to $16.4 million in 2020, a 30% decrease.

The decrease was primarily associated with reduced legal fees as the Company incurred significant legal expenses in 2020 due to ongoing governmental investigations and subpoenas and document requests.

Refer to Note 21 – Commitments and Contingent Liabilities to the Consolidated Financial Statements for additional information on the Company’s recent proceedings.

FDIC insurance expense was $5.9 million for 2021 as compared to $7.9 million in 2020, a decrease of 26%.

The decrease was primarily due to adoption of the large bank assessment methodology.

Other expenses were $12.6 million for 2021 as compared to $14.7 million for 2020, a decrease of 14%.

The decrease was associated with reductions in OREO expense, franchise tax, other loan expenses, telephone and travel expense.

The major components of cost in this category include broker fees, franchise tax, insurance expenses, and director compensation.

Cost control remains a significant operating objective of the Company.

Income Tax Expense

The Company recorded income tax expense of $43.9 million in 2020 compared to $53.8 million in 2019, resulting in an effective tax rate of 24.9% and 27.4%, respectively.

The decrease was due primarily to a decrease in nondeductible expenses related to executive compensation, state taxes and adjustments related to the completion of the 2019 tax returns.

Income tax expense was $61.0 million for 2021 as compared to $43.9 million in 2020, resulting in an effective tax rate of 25.7% and 24.9%, respectively.

The increase in rates was due to an increase in state income taxes and nondeductible stock-based compensation awarded to execu tiv e officers.

BALANCE SHEET ANALYSIS

Total assets at December 31, 2020 were $11.1 billion, a 24% increase as compared to $9.0 billion at December 31, 2019.

Total loans (excluding loans held for sale) were $7.8 billion at December 31, 2020, an 3% increase as compared to $7.5 billion at December 31, 2019.

Loans held for sale amounted to $88.2 million at December 31, 2020 as compared to $56.7 million at December 31, 2019, a 56% increase.

The investment portfolio totaled $1.2 billion at December 31, 2020, a 36% increase from $843.4 million at December 31, 2019.

Total borrowed funds (excluding customer repurchase agreements) were $568.1 million at December 31, 2020 and $467.7 million at December 31, 2019, a 21% increase.

Total shareholders’ equity at December 31, 2020 increased 4%, remaining at a rounded $1.24 billion from $1.19 billion at December 31, 2019.

The relatively modest increase in shareholders’ equity from December 31, 2019 was due to favorable net income being largely offset by share repurchases, cash dividends and a Day 1 adjustment to the Allowance for Credit Losses for adoption of the CECL accounting methodology.

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In 2021, asset growth was driven by deposits inflows.

The cash from deposit inflows, along with cash from the decline in loans (from payoffs and paydowns) was invested in investment securities.

Total assets at December 31, 2021 were $11.8 billion as compared to $11.1 billion at December 31, 2020, a 7% increase.

Total loans (excluding loans held for sale) were $7.1 billion at December 31, 2021, as compared to $7.8 billion at December 31, 2020 a 9% decrease.

The investment securities portfolio totaled $2.6 billion at December 31, 2021 as compared to $1.2 billion at December 31, 2020, a 128% increase.

For the year ended December 31, 2021, total deposits were $10.0 billion as compared to $9.2 billion at December 31, 2020 , an increase of 9%.

Total shareholders’ equity at December 31, 2021 was $1.35 billion as compared to $1.24 billion at December 31, 2020, a 9% increase.

The increase in shareholders’ equity in 2021 was from net income offset primarily by cash dividends and unrealized losses on the AFS investments included in other comprehensive income (loss).

The total risk based capital ratio was 16.15% at December 31, 2021, as compared to 17.04% at December 31, 2020.

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The Company’s capital position remains well in excess of regulatory requirements for well capitalized status.

Total risk based capital decreased by 89 basis points as the large increase in the investment portfolio, offset the decline in loans, and increased risk weighted assets.

Investment Securities Available-for-Sale and Short-Term Investments

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This classification requires that investment securities be recorded at their fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any discount accretion or premium amortization) reported as a component of shareholders’ equity (accumulated other comprehensive income), net of deferred income taxes.

At December 31, 2020, the Company had a net unrealized gain in AFS securities of $22.0 million with a deferred tax liability of $5.5 million as compared to a net unrealized loss in AFS securities of $4.2 million at December 31, 2019, with a deferred tax asset of $757 thousand.

At December 31, 2021, the Company had a net unrealized loss in AFS securities of $18.6 million with a deferred tax asset of $5.0 million as compared to a net unrealized gain in AFS securities of $22.0 million at December 31, 2020, with a deferred tax liability of $5.5 million.

The AFS portfolio is comprised of U.S.

agency securities (16% of AFS securities) with an average duration of 1.9 years, seasoned mortgage backed securities that are 100% agency issued (72% of AFS securities) which have an average expected life of 3.2 years with contractual maturities of the underlying mortgages of up to thirty years, municipal bonds (9% of AFS securities) which have an average duration of seven years, corporate bonds (3% of AFS securities) which have an average duration of four years, and equity investments which comprise less than 1% of AFS securities.

The equity investment consists of common stock of two community banking companies with an estimated fair value of $198 thousand.

agency securities (24% of AFS securities) with an average duration of 3.0 years, seasoned mortgage backed securities that are 100% agency issued (64% of AFS securities) which have an average expected life of 4.26 years with contractual maturities of the underlying mortgages of up to thirty years, municipal bonds (6% of AFS securities) which have an average duration of 6.5 years, and corporate bonds (5% of AFS securities) which have an average duration of 6.3 years.

95 percent of the investment securities which are debt instruments are rated AAA or AA or have the implicit guarantee of the U.S.

At December 31, 2020, the investment portfolio amounted to $1.2 billion as compared to $843.4 million at December 31, 2019, an increase of 36%.

At December 31, 2021, the investment portfolio was $2.6 billion as compared to $1.2 billion at December 31, 2020, an increase of 128%.

The investment portfolio is managed to achieve goals related to liquidity, income, interest rate risk management and to provide collateral for customer repurchase agreements and other borrowing relationships.

The following table provides information regarding the composition of the Company’s investment securities portfolio at the dates indicated.

The increase in the investment portfolio in 2021 was driven by deposit inflows, of which a portion were invested in securities to generate income.

The following table provides information regarding the composition of the investment securities portfolio at the dates indicated.

Amounts are reported at estimated fair value.

The change in composition of the portfolio at December 31, 2020 as compared to 2019 was due principally to ALCO decisions to buy longer-term municipal investments and increase holdings of mortgage backed securities to better position the Company for the current interest rate environment while maintaining portfolio cash flow and liquidity.

During the year ended December 31, 2020, the investment portfolio balances at fair value increased as compared to balances at December 31, 2019, as the Bank’s deposit growth outpaced loan growth.

At December 31, 2021, the investment portfolio balances at fair value increased as compared to December 31, 2020, and the composition of portfolio changed.

The increase in fair value and the change in composition of the portfolio in 2021 was driven by the decision to put more of the cash balances generated by deposit inflows into higher yielding investments, which were primarily residential mortgage backed securities and U.S.

agency securities.

Years Ended December 31,

(dollars in thousands) Balance Percent of Total Balance Percent of Total Balance Percent of Total

(dollars in thousands) Balance Percent of Total Balance Percent of Total

Treasury $ 49,458,000 1.9 % $ — — %

agency securities $ 622,387,000 23.7 % 181,921 15.8 %

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Corporate bonds 128,459,000 4.9 % 35,850 3.1 %

treasury — — % 34,855 4.1 % — —

$ 2,623,407,000 100 % $ 1,150,885 100 %

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Yields on tax exempt securities have not been calculated on a tax equivalent basis.

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One Year or Less After One Year

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Cost Weighted

Treasury $ — — % $ 49,693 0.83 % $ — — % $ — — $ 49,693 0.83 %

Government agency securities 425,597 1.23 % 127,641 1.41 % 76,035 0.89 % $ — — 629,273 1.23 %

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$ 458,728 1.29 % $ 1,459,712 1.48 % $ 692,701 1.60 % $ 31,526 2.12 % $ 2,642,667 1.48 %

Federal funds sold amounted to $28.2 million at December 31, 2020 as compared to $39.0 million at December 31, 2019.

Federal funds sold were $20.4 million at December 31, 2021 as compared to $28.2 million at December 31, 2020.

These funds represent excess daily liquidity which is invested on an unsecured basis with well capitalized banks, in amounts generally limited both in the aggregate and to any one bank.

Interest bearing deposits with banks and other short-term investments amounted to $1.8 billion at December 31, 2020 as compared to $195.4 million at December 31, 2019.

Interest bearing deposits with banks and other short-term investments were $1.68 billion at December 31, 2021 as compared to $1.75 billion at December 31, 2020.

These short term investments represent liquid funds held at the Federal Reserve to meet future loan demand, to fund future increases in investment securities and to meet other general liquidity needs of the Company.

The Bank no longer holds any time deposits at December 31, 2020 and held $1.6 million at December 31, 2019.

The Bank no longer holds any time deposits at December 31, 2021 or December 31, 2020.

Loan Portfolio

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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.

Loan growth over the past year has been favorable, with loans outstanding reaching $7.8 billion at December 31, 2020, an increase of $214.5 million or 3% as compared to $7.5 billion at December 31, 2019.

Loans declined over the past year as loans outstanding were $7.1 billion at December 31, 2021, as compared to $7.8 billion at December 31, 2020, a decrease of $695 million or 9% .

Loan production in 2021 was predominantly in the income producing - commercial real estate and owner occupied – commercial real estate loan categories, while construction loans have been de-emphasized.

That said, the Company continues to be active as a construction lender and we expect to continue to see construction commitments funded up over time.

Despite an increased level of in-market competition for business, the Bank continued to experience organic loan production, having originated more than $1 billion in new CRE loan commitments during 2020.

Despite an increased level of in-market competition for business and a decline in net loan growth for the period ended 2021 over 2020, the Bank continued to experience organic gross loan production, having originated more than $1 billion in new CRE loan commitments during 2021.

This production was offset by the continued successful completion of projects and subsequent paydowns.

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

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The following table shows the trends in the composition of the loan portfolio over the past five years.

The following table shows the trends in the composition of the loan portfolio over the past three years.

Years Ended December 31,

2021 2020 2019

(dollars in thousands) Amount % Amount % Amount % Amount % Amount %

(dollars in thousands) Amount % Amount % Amount %

Commercial $ 1,354,317 19 % $ 1,437,433 19 % $ 1,545,906 20 %

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While our basic market area is the Washington, D.C.

metropolitan area, the Bank has made loans outside that market area where the applicant is an existing customer and the nature and quality of such loans was consistent with the Bank’s lending policies.

metropolitan area, the

Bank has made loans outside that market area where the applicant is an existing customer and the nature and quality of such loans was consistent with the Bank’s lending policies.

At present, the Company believes that commercial real estate values are stable to improving in those sub-markets of the Washington, D.C.

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As of December 31, 2021, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represent 320% of consolidated risk based capital;

however, growth in that segment over the past 36 months a t 18% do es not exceed the 50% threshold laid out in the regulatory guidance.

however, growth in that segment over the past 36 months at 4% does not exceed the 50% threshold laid out in the regulatory guidance.

Construction, land and land development loans represent 110% of consolidated risk based capital.

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The Company has an extensive Capital Policy and Capital Plan, 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.

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As of December 31, 2021, loans to the Accommodation and Food Service industry represent 8.3% of the loan portfolio compared to 9.9% as of December 31, 2020.

At December 31, 2020, the Company had no other concentrations of loans in any one industry exceeding 10% of its total loan portfolio.

At December 31, 2021, the Company had no concentrations of loans in any one industry exceeding 10% of its total loan portfolio.

An industry for this purpose is defined as a group of businesses that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.

Certain directors and executive officers have had loan transactions with the Company.

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

Such loans were made in the ordinary course of the Company’s lending business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with third parties;

and, in the opinion of management, did not involve more than the normal risk of collectability or present other unfavorable features.

Refer to Note 4 to the Consolidated Financial Statements for further detail regarding related party loans.

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Industry areas of potential concern within the Loan Portfolio are presented below as of December 31, 2021.

The Commercial Real Estate exposure is collateral-based and shows exposures on loans secured by tenant type

Industry Principal Balance

(in 000's) % of Loan Portfolio

(in millions) % of Loan Portfolio

Accommodation & Food Services (1) $ 584 (1 )

Retail Trade (2) 75 (2 )

(1) Includes $81,832 of PPP loans.

(2) Includes $13,512 of PPP loans.

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% of the Bank’s loan portfolio as of December 31, 2020 among 311 customers.

Retail Trade exposure represents 1% of the Bank’s loan portfolio and represented 111 customers.

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 with the Bank to develop longer term stabilization strategies as the landscape of the COVID-19 pandemic evolves.

The uncertain duration and severity of the pandemic will likely impact future credit challenges in these areas.

The table below is collateral-based and shows exposures on loans secured by CRE by tenant type as of December 31, 2020.

This table excludes loans disclosed in the industry table above.

Property Type Principal Balance (in 000’s) % of Loan

Commercial Real Estate exposure (not included above):

Restaurant 32 0.5 %

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Retail 359 5.1 %

Although not evidenced at December 31, 2020, 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.

Total $ 1,135 16.2 %

(1) Includes $22.2 million of PPP loans.

(2) Includes $36 thousand of PPP loans.

The Bank continues to be proactive in regard to exposures to the Accommodation and Food Service industry and Retail Trade.

Accommodation and Food Service exposure represents 8.3% of the Bank’s loan portfolio as of December 31, 2021 and Retail Trade exposure represents 1.1% of the Bank’s loan portfolio.

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

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The following table sets forth the time to contractual maturity of the loan portfolio as of December 31, 2021.

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(dollars in thousands) Total One Year or Less Over One to Five Years Over Five to Ten Years Over Ten Years

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This process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies.

The results of this process, in combination with conclusions of the Bank’s outside consultants’ review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at December 31, 2020.

During 2020, a provision for credit losses was made in the amount of $45.6 million and net charge-offs amounted to $20.1 million.

During 2021, a reversal of $20.8 million was made to the provision for credit losses and net charge-offs were $13.3 million.

A full discussion of the accounting for ACL is contained in Note 1 to the Consolidated Financial Statements and activity in the ACL is contained in Note 4 to the Consolidated Financial Statements.

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At December 31, 2021, the allowance represented 257% of nonperforming loans as compared to 180% at December 31, 2020 .

The increase in the ratio of the allowance for loan losses to total loans was partially due to the adoption of CECL, as well as changes in the economic conditions and forecasts due to COVID-19 in 2020.

The increase in the allowance coverage ratio was also due to the same factors.

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The decrease in the ratio of the allowance for loan losses to total loans was due to the provision reversal of $20.8 million and net charge offs of $13.3 million, which had a greater impact on the ratio than the decline in loans.The increase in the coverage ratio is due to the improvement in asset quality, which also contributed to the decision to reverse provisions to the ACL.

As part of its comprehensive lo an review process, the Bank’s Board of Directors, Directors’ Loan Committee and Credit Review Committee carefully evaluate loans which are past due 30 days or more.

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The Credit Administration department specifically analyzes the status of development and construction projects, including sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk which may require additional reserves.

Additionally, for COVID-19 impacted relationships, a Task Force comprised of senior executives has been formed to evaluate each request for deferral or modification, along with a remediation plan, before any modification to any loan is made.

At December 31, 2020, the Company had $60.9 million of loans classified as nonperforming, and $91.2 million of additional loans considered potential problem loans, as compared to $48.7 million of nonperforming loans and $20.0 million of potential problem loans at December 31, 2019.

The $91.2 million in potential problem loans at December 31, 2020, increased from $20.0 million at Decembe r 31, 2019 due primarily to one commercial real estate loan and one assisted living property.

At December 31, 2021, the Company had $29.2 million of loans classified as nonperforming, and $88.6 million of additional loans rated substandard or worse, as compared to $60.9 million of nonperforming loans and $91.2 million of additional loans rated substandard or worse at December 31, 2020.

Please refer to Note 1 to the Consolidated Financial Statements under the caption “Loans” for a discussion of the Company’s policy regarding impairment of loans.

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Historically, the Bank has enjoyed a high quality loan portfolio with relatively low levels of net charge-offs and low delinquency rates.

In 2020, the Company experienced an increased level of net charge-offs as a percentage of average loans compared to 2019 (0.26% as compared to 0.13%).

In 2021, the Company experienced a reduced level of net charge-offs as a percentage of average loans compared to 2020 (0.18% as compared to 0.26%).

The maintenance of a high quality portfolio will continue to be a high priority for both management and the Board of Directors.

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The loan portfolio analysis process is ongoing and proactive in order to maintain a portfolio of quality credits and to quickly identify any weaknesses before they become more severe.

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The following table sets forth activity in the allowance for credit losses for the past five years.

The following table sets forth activity in the allowance for credit losses - for the past three years.

Years Ended December 31,

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Ratio of net charge-offs during the year to average loans outstanding during the year 0.18 % 0.26 % 0.13 %

The following table presents the allocation of the ACL by loan category and the percent of loans each category bears to total loans.

The allocation of the allowance at December 31, 2020 includes specific reserves of $15.4 million against individually assessed loans of $71.2 million as compared to specific reserves of $10.0 million against impaired loans of $54.9 million at December 31, 2019.

The following table presents the allocation of the ACL by loan category and the percent of allowance in each category.

The allocation of the allowance at December 31, 2021 includes specific reserves of $7.0 million against individually assessed loans of $39.1 million as compared to specific reserves of $15.4 million against individually assessed of $71.2 million at December 31, 2020.

The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the usage of the allowance for any specific loan or category.

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Years Ended December 31,

2020 2019 2018 2017 2016

(dollars in thousands) Amount % (1)

(dollars in thousands) Amount ACL % Total Loans % Total Amount ACL % Total Loans % Total

Commercial $ 14,475 19 % 20 % $ 26,569 24 % 24 %

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Construction - Commercial and Residential 9,099 12 % 15 % 11,529 11 % 13 %

Construction - C&I (owner occupied) 2,437 2 % 1,113 1 % 691 1 % 687 1 % 1,485 2 %

Home Equity 474 1 % 1 % 1,039 1 % 1 %

Other Consumer 35 — % — % 37 — % — %

Total allowance for credit losses $ 109,579 100 % $ 73,658 100 % $ 69,944 100 % $ 64,758 100 % $ 59,074 100 %

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

Total $ 74,965 100 % 100 % $ 109,579 100 % 100 %

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, nonaccrual loans, which includes the nonperforming portion of troubled debt restructurings, or TDR, and other real estate owned ("OREO"), totaled $65.9 million at December 31, 2020, representing 0.59% of total assets, as compared to $50.2 million of nonperforming assets at December 31, 2019, representing 0.56% of total assets.

As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, nonaccrual loans, which includes the nonperforming portion of troubled debt restructurings ("TDR"), and other real estate owned ("OREO"), totaled $30.8 million at December 31, 2021, representing 0.26% of total assets, as compared to $65.9 million at December 31, 2020, representing 0.59% of total assets.

The Company had no accruing loans 90 days or more past due at December 31, 2021 or December 31, 2020.

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

Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its ACL at 1.41% of total loans at December 31, 2020, is adequate to absorb potential 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 ACL at 1.06% of total loans at December 31, 2021, is adequate to absorb expected credit losses.

Total nonperforming loans amounted to $29.2 million at December 31, 2021, representing 0.41% of total loans, compared to $60.9 million at December 31, 2020, representing 0.79% of total loans.

The decline in nonperforming loans was due to payoffs, note sales, charge offs and loans returning to accrual status after a period of sustained performance which offset new nonperforming loans.

The majority of nonperforming loans are believed to be adequately secured by real estate.

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The continuing payments are discounted over the expected life at the loan’s original contract rate and include adjustments for risk of default.

Under the incurred loss methodology that the Company applied as of December 31, 2020, nonperforming assets included loans that the Company considered to be individually assessed.

Individually assessed loans were defined as those as to which we believed it was probable that we would not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms had been modified in a TDR that had not shown a period of performance as required under applicable accounting standards.

For collateral dependent individually assessed loans, the carrying amount of the loan was determined by current appraised value less estimated costs to sell the underlying collateral, which may have been adjusted downward under certain circumstances for actual events and/or changes in market conditions.

For example, current average actual selling prices less average actual closing costs on an impaired multi-unit real estate project may have indicated the need for an adjustment in the appraised valuation of the project, which in turn could increase the associated ASC Topic 310 specific reserve for the loan.

Generally, all appraisals associated with individually assessed loans were updated on a not less than annual basis.

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Nonperforming assets include loans that the Company considers to be individually assessed.

Individually assessed loans are defined as those as to which we believe it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a TDR that has not shown a period of performance as required under applicable accounting standards.

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

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

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

When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell.

The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

Generally, all appraisals associated with individually assessed loans are updated on a not less than annual basis.

Loans are considered to have been modified in a TDR when, due to a borrower's financial difficulties, the Company makes unilateral concessions to the borrower that it would not otherwise consider.

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

The Company had 10 TDRs at December 31, 2020, totaling approximately $19.2 million, as compared to nine TDRs totaling approximately $19.1 million at December 31, 2019.

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

During 2020, there were two performing TDRs totaling $6.3 million that defaulted on their modified terms which were reclassified to nonperforming loans, as compared to the same period in 2019, there were three performing TDR loans totaling approximately $9.5 million that defaulted on their modified terms and were reclassified to nonperforming loans.

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

During 2020, there were two restructured loans totaling approximately $572 thousand, and one TDR loan totaling $138 thousand defaulted on its modified terms and was charged off.

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

During 2020 there were no TDR loans that were re-underwritten, and there were two restructured loans totaling approximately $870 thousand that were paid off from the sale proceeds of the collateral property.

During 2019 there was one TDR totaling $10.4 million that was re-underwritten into two new loans which provided better collateral for the Bank.

During 2019 there was also one restructured loan totaling approximately $309 thousand that was paid off from the sale proceeds of the collateral property.

The Company had 7 TDRs at December 31, 2021, totaling

approximately $16.5 million, as compared to 10 TDRs totaling approximately $19.2 million at December 31, 2020.

Refer to Note 4 – Loan Modifications for more detail on TDRs.

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

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

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

Refer to Note 4 - " Loans and Allowance for Credit Losses" to the Consolidated Financial Statements for additional detail.

During 2021, there were no loans modified in a TDR as compared to two loans totaling approximately $572 thousand modified in a TDR during 2020.

Included in nonperforming assets at December 31, 2021 is OREO of $1.6 million, consisting of three foreclosed properties .

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

The increase was due to a foreclosure involving an ultra high-end residential property located in Washington, D.C.

The Company is continuing to see softness in the market for ultra high-end residential properties.

This is particularly true in light of COVID-19 and the related limitations in marketing residential properties.

It is the Company's policy to generally obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties generally not less frequently than annually.

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

During 2020, there was one OREO sale compared to no sales in 2019.

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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 December 31, 2020, we granted approximately 750 temporary modifications representing approximately $1.6 billion in outstanding balances, including 714 temporary modifications representing $1.5 billion that have or are expected to return to pre-modification terms.

We have also granted second deferrals totaling $67 million on 33 notes as of December 31, 2020.

Of all the deferrals granted only 36 notes amounting to $72 million were outstanding as of December 31, 2020 (approximately 1% of total loans).

All loans that received a second deferral were automatically downgraded and added to our watch list to raise visibility within the loan portfolio.

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

non-performing loans) due to the provision of the CARES Act that permits U.S.

financial institutions to temporarily suspend the GAAP requirements to treat such short-term loan modifications as TDRs.

Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.

Other loan portfolio areas of concern and additional COVID-19 loan related matters are discussed below.

The following table details the deferrals discussed above as of December 31, 2020:

Industry/Collateral Type Number of Notes Total Outstanding (in millions) Deferred Note Count Total Deferred Outstanding (in millions) Percentage Outstanding Deferred Weighted Avg LTV of RE Collateral Average Loan Size (in millions)

Hotels 43 $ 529 — $ — — % N/A N/A

Transportation & Warehousing 60 171 29 38 22 % 70 % $ 1.3

Restaurants 393 238 2 5 2 % 75 % 2.5

Retail 139 276 1 4 1 % 75 % 4

Other Real Estate 911 3,688 2 6 >0.5% 44 % 3

Healthcare 197 274 1 19 7 % 87 % 19

Art/Entertainment/Recreation 66 139 0 — — % N/A N/A

Other 3,138 2,445 1 0.4 >0.5% 68 % 0.5

Total 4,947 $ 7,760 36 $ 72.4 1 % N/A N/A

There was one OREO sale in each of 2021 and 2020.

Beginning in the third quarter of 2020, all loans that received a second COVID-19 deferral or payment modification were downgraded to a watch-rating if not already rated as such.

This was done to raise the visibility of these loans within the loan portfolio.

After these COVID-19 deferred or modified loans demonstrate six months of payments and sustained performance, they may be considered for removal of the classification of a watch-rated loan.

Watch-rated loans at December 31, 2021 were $351 million, of which $261 million were loans that received a COVID-19 deferral or payment modification (includes loans that were upgraded to watch-rated).

As of December 31, 2021, there were three loans with COVID-19 deferrals or payment modifications.

Two of the loans were hotels and one was an assisted living facility.

The aggregate note balance was $67 million.

As of December 31, 2020, the aggregate note balance was $72 million.

The following table shows the amounts and relevant ratios of nonperforming assets at the dates indicated:

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Commercial $ 8,876 $ 15,352 $ 14,928

PPP 1,365 — —

Income producing - commercial real estate 13,456 18,879 9,711

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Ratio of nonperforming assets to total assets 0.26 % 0.59 % 0.56 %

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(1) At December 31, 2020, nonaccrual loans reported in the table above included two loans totaling approximately $6.3 million which migrated from performing troubled debt restructuring.

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

(1) At December 31, 2021, nonaccrual loans reported in the table above included one loan totaling $101 thousand and as of December 31, 2020 there were two loans totaling approximately $6.3 million which migrated from performing troubled debt restructuring.

(2) Gross interest income of $1.6 million, $3.7 million and $3.0 million would have been recorded for 2021, 2020 and 2019, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans were $101 thousand $679 thousand and $630 thousand at December 31, 2021, 2020 and 2019, respectively.

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

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See the “Business” section for a description of the Bank’s residential mortgage lending and sales activities.

BOLI is utilized by the Company in accordance with income tax regulations as part of the Company’s financing of its benefit programs.

At December 31, 2020, this asset amounted to $76.7 million as compared to $75.7 million at December 31, 2019, which reflected the increase in cash surrender value of the policies during 2020.

Bank owned life insurance at December 31, 2021 amounted to $108.8 million as compared to $76.7 million at December 31, 2020, which reflected the $30.0 million in additional policies added during 2021.

Refer to Note 19 to Consolidated Financial Statements for further detail.

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For 2021, excess servicing fees of $909 thousand were recorded and $132 thousand was amortized as a reduction of actual service fees collected, which is a component of other income.

At December 31, 2020, the balance of excess servicing fees was $946 thousand.

At December 31, 2021, the balance of excess servicing fees was $1.6 million.

For 2020, excess servicing fees of $667 thousand were recorded and $228 thousand was amortized as a reduction of actual service fees collected, which is a component of other income.

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In 2014, the Company recorded an initial amount of unidentified intangible (goodwill) incident to the acquisition of Virginia Heritage of approximately $102 million.

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

As of June 30, 2020, a triggering event was deemed to have occurred as a result of COVID-19 and, accordingly, a step one assessment was performed by comparing the fair value of the reporting unit with its carrying amount (including goodwill).

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

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

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

An impairment analysis was performed during the fourth quarter as part of our regularly scheduled annual impairment testing and again found no impairment existed.

Impairment analyses were performed as of December 31, 2021 and December 31, 2020 as part of our regularly scheduled annual impairment testing and found no impairment existed.

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

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

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Refer to Note 7 to the Consolidated Financial Statements for information on the initial and current carrying values as well as additions and amortization.

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To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the FHLB, federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms.

For the year ended December 31, 2020, total deposits increased by $2.0 billion or 27% compared to the same period in 2019.

Noninterest bearing deposits increased $745.0 million or 36% to $2.8 billion at December 31, 2020 as compared to $2.1 billion at December 31, 2019, while interest bearing deposits increased by $1.4 billion, or 31%.

Within interest bearing deposits, money market and savings accounts collectively amounted to $4.6 billion at December 31, 2020, or 51% of total deposits, as compared to $3.0 billion, or 42% of total deposits, at December 31, 2019, an increase of $1.6 billion, or 54%.

For the year ended December 31, 2021, deposits were $10.0 billion as compared to $9.2 billion at December 31, 2020 , an increase of 9%.

Noninterest bearing deposits increased $468.6 million or 17% to $3.3 billion at December 31, 2021 as compared to $2.8 billion at December 31, 2020, while interest bearing deposits increased by $323.7 million, or 5%.

Within interest bearing deposits, money market and savings accounts collectively amounted to $5.2 billion at December 31, 2021, or 52% of total deposits, as compared to $4.6 billion, or 51% of total deposits, at December 31, 2020, an increase of $552.1 million, or 12%.

Average total deposits for the year ended December 31, 2021 were $9.9 billion, as compared to $8.5 billion for the same period in 2020, an 17% increase.

Approximately 11% of the Bank’s deposits at December 31, 2020 ($977.8 million) were time deposits, whi ch are generally the most expensive form of deposit because of their fixed rate and term, as compared to 18% at December 31, 2019 ($1.3 billion).

The following table sets forth the maturities of time deposits with balances of $250 thousand or more, which represents 11% and 5% of total deposits as of December 31, 2020 and 2019, respectively.

See Note 11 to the Consolidated Financial Statements for additional information regarding the maturities of time deposits and the Average Balances Table in the “Net Interest Income and Net Interest Margin” section for the average rates paid on interest-bearing deposits.

Time deposits of $250 thousand or more can be more volatile and more expensive than time deposits of less than $250 thousand.

However, because the Bank focuses on relationship banking, and its marketplace demographics are favorable, its historical experience has been that large time deposits have not been more volatile or significantly more expensive than smaller denomination certificates.

Time deposits were $729.1 million at December 31, 2021, which was 7% of deposits.

This is down from $977.8 million at December 31, 2020, which was 11% of deposits.

The decline in time deposits is due to the low rate environment which has reduced depositor interest in time deposits.

Time deposits $250,000 or more

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Three months or less $ 16,663 $ 32,967

More than three months through six months 56,619 122,192

More than three months through twelve months 48,271 47,638

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Total $ 152,460 $ 231,077

Maturities of time deposits with balances of $250 thousand or more, which represents 7% and 11% of total deposits as of December 31, 2021 and 2020, respectively.

Time deposits of $250 thousand or more can be more volatile and more expensive than time deposits of less than $250 thousand.

From time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from a regional brokerage firm, and other national brokerage networks, including IntraFi.

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

The Bank had $1.3 billion and $533.1 million of “IND” brokered deposits as of December 31, 2020 and 2019, respectively.

The Bank had $1.7 billion and $1.3 billion of “IND” brokered deposits as of December 31, 2021 and 2020, respectively.

However, to the extent that the condition 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.

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At December 31, 2020, total brokered deposits (excluding the CDARS and ICS two-way) were $2.4 billion, or 26% of total deposits.

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At December 31, 2021, the Company had $3.3 billion in noninterest bearing demand deposits, representing 33% of total deposits.

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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 December 31, 2020 and December 31, 2019 consisted of 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.

Long-term borrowings outstanding at December 31, 2021 consisted of the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024.

Long term borrowings at December 31, 2020 included the 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 Company’s subordinated notes, please refer to Note 13 to the Consolidated Financial Statements, as well as the “Capital Resources and Adequacy” section below.

Additionally, long-term borrowings consisted of FHLB advances with maturities over one year, which amounted to $50 million at December 31, 2020 and $0 at December 31, 2019.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2019 AND 2018

For the year ended December 31, 2019, the Company’s net income was $142.9 million, a 6% decrease as compared to $152.3 million.

For the year ended December 31, 2019, net income was $4.18 per basic and diluted common share as compared to $4.44 per basic common share and $4.42 per diluted common share for 2018, a 6% decrease in basic and 5% decrease in diluted earnings per share for the full year of 2019 as compared to 2018.

For the year ended December 31, 2019, the Company reported a return on average assets, or ROAA, of 1.61% as compared to 1.91% for the year ended December 31, 2018.

The return on average common equity, or ROACE, for the year ended December 31, 2019 was 12.20%, as compared to 14.89% for the year ended December 31, 2018.

The return on average tangible common equity, or ROATCE, for the year ended December 31, 2019 was 13.40%, as compared to 16.63% for the year ended December 31, 2018.

The Company’s earnings were largely dependent on net interest income, the difference between interest income and interest expense, which represented 93%% of total revenue (defined as net interest income plus noninterest income) for both the full year of 2019 and 2018, respectively.

The net interest margin, which measures the difference between interest income and interest expense (i.e., net interest income) as a percentage of average earning assets, decreased 33 basis points from 4.10% for the year ended December 31, 2018 to 3.77% for the year ended December 31, 2019.

Average earning asset yields decreased by 9 basis points (5.09% to 5.00%) for the year ended December 31, 2019 compared to the same period in 2018, while the cost of interest bearing liabilities increased by 34 basis points (to 1.95% from 1.61%).

For 2019, in spite of competitive factors, the Company was able to maintain its loan portfolio yields relatively close to 2018 levels (5.45% as compared to 5.54%) due to disciplined loan pricing practices.

For the year ended December 31, 2019, the net interest spread decreased by 43 basis points (to 3.05% from 3.48%) as compared to 2018, due primarily to an increase in the average cost of interest bearing liabilities.

The cost of interest bearing liabilities increased in 2019 largely as a result of interest rate increases by the FOMC in mid to late 2018 and increased competition for deposits within our market area,

though funding costs started to moderate in the second half of 2019, as the market rate cuts passed through to the liability base.

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Overall, the Company believed its deposit mix and cost of funds remained favorable across 2018 and 2019.

The benefit of noninterest sources funding earning assets increased by 10 basis points to 72 basis points for the year ended December 31, 2019 as compared to 62 basis points for the year ended December 31, 2018 as a result of a favorable mix of noninterest bearing deposits.

The percentage of average noninterest deposits relative to average total deposits was 31% for the full year 2019 compared to 33% for the same period in 2018.

The combination of a 43 basis point decrease in the net interest spread and a 10 basis point increase in the value of noninterest sources resulted in the 33 basis point decrease in the net interest margin for the year ended December 31, 2019 as compared to the same period in 2018.

Net interest income in 2019 was $324.0 million compared to $317.0 million in 2018.

For the year ended December 31, 2019, net interest income increased 2% over the same period for 2018.

Average loans increased $694.8 million (10%) and average deposits increased by $787.1 million (12%).

The net interest margin was 3.77% for the year ended December 31, 2019, as compared to 4.10% for the same period in 2018.

The Company was able to maintain its loan yields in 2019 relatively close to 2018 levels due to disciplined loan pricing practices, and was able to manage its funding costs while maintaining a favorable deposit mix;

much of which has occurred from sales efforts to increase and deepen client relationships.

In spite of margin compression, the Company believed its net interest margin remains were favorable as compared to its peer banking companies across 2018 and 2019.

The provision for credit losses was $13.1 million for the year ended December 31, 2019 as compared to $8.7 million for the year ended December 31, 2018.

Net charge-offs of $9.4 million during 2019 represented 0.13% of average loans, excluding loans held for sale, as compared to $3.5 million or 0.05% of average loans, excluding loans held for sale, in 2018.

Net charge-offs during 2019 were attributable primarily to commercial real estate ($5.0 million) and commercial loans ($4.5 million).

At December 31, 2019, the ACL represented 0.98% of loans outstanding, as compared to 1.00% at December 31, 2018.

The ACL represented 151% of nonperforming loans at December 31, 2019, as compared to 430% at December 31, 2018.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, remained favorable at 39.99% for the year ended December 31, 2019 as compared to 37.31% for the same period in 2018.

Total noninterest expenses totaled $139.9 million for the year ended December 31, 2019, as compared to $126.7 million for the year ended December 31, 2018, a 10% increase.

As a percentage of average assets, total noninterest expense was 1.58% for the year of 2019 as compared to 1.59% for the same period in 2018.

Total noninterest income for the year ended December 31, 2019 was $25.7 million as compared to $22.6 million for the year ended December 31, 2019, a 14% increase due to $2.7 million higher gains on sale of residential mortgage loans, $1.4 million higher gain on sale of investment securities, partially offset by $767 thousand lower service charges on deposits.

For the year ended December 31, 2019, service charges on deposit accounts decreased $767 thousand to $6.2 million from $7.0 million for the same period in 2018, a decrease of 11%, due primarily to a lower volume of insufficient funds charges.

Gain on sale of loans consisted of gains on the sale of SBA and residential mortgage loans.

For the year ended December 31, 2019, gain on sale of loans increased from $6.0 million to $8.5 million, an increase of 42%, compared to the same period in 2018.

The Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium.

Income from this source was $309 thousand for the year ended December 31, 2019 compared to $540 thousand for the same period in 2018.

Activity in SBA loan sales to secondary markets can vary widely from year to year as seen in 2019 and 2018.

Other income totaled $7.8 million for the year ended December 31, 2019 as compared to $8.0 million for the same period in 2018, a decrease of 3%.

Gain on sale of investments amounted to $1.5 million for the year ended December 31, 2019 compared to $97 thousand for the year ended December 31, 2018.

The FHA business unit generated income of $501 thousand on the origination, securitization, servicing and sale of FHA Multifamily-Backed GNMA securities for the full year 2019 compared to $357 thousand for the same period in 2018.

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Total noninterest expenses totaled $139.9 million for the year ended December 31, 2019, as compared to $126.7 million for the year ended December 31, 2018, a 10% increase.

For 2019, the efficiency ratio was 39.99% as compared to 37.31% for the same period in 2018.

Salaries and employee benefits were $79.8 million for the year ended December 31, 2019, as compared to $67.7 million for the same period in 2018, an increase of 18%.

Cost increases for salaries and benefits were due primarily to $8.2 million of nonrecurring charges related to acceleration of share based compensation expenses associated with the retirement of our former Chairman and Chief Executive Officer and the resignation of certain directors.

In addition, $4.0 million of the increase resulted from additional staffing, merit increases, and incentives.

At December 31, 2019, the Company’s full time equivalent staff numbered 492, as compared to 470 at December 31, 2018.

Premises and equipment expenses amounted to $14.4 million for the year ended December 31, 2019 as compared to $15.7 million for the same period in 2018, a decrease of 8%.

For the year ended December 31, 2019, the Company recognized $527 thousand of sublease revenue as compared to $501 thousand for the same period in 2018.

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

Marketing and advertising expenses increased to $4.8 million for the year ended December 31, 2019 from $4.6 million for the same period in 2018, an increase of 6%, due primarily to increased digital and print advertising spend.

Data processing expenses decreased from $9.7 million for the year ended December 31, 2018 to $9.4 million for 2019, a decrease of 3%, primarily due to ongoing contract renegotiations.

Legal, accounting and professional fees and expenses for the year ended December 31, 2019 increased to $12.2 million from $9.7 million in 2018, a 25% increase.

The increased expenses were primarily associated with legal fees and expenditures associated with governmental investigations and related subpoenas and document requests.

FDIC insurance decreased $306 thousand to $3.2 million for the year ended December 31, 2019, a decrease of 9% compared to 2018, due to one time premium credits in the second and third quarters of 2019 due to the deposit insurance fund exceeding regulatory levels partially offset by premiums on a larger deposit base.

Other expenses increased to $16.0 million for the year ended December 31, 2019 from $15.8 million for the same period in 2018, an increase of 1%.

The major components of cost in this category included broker fees, franchise tax, core deposit intangible amortization, insurance expenses, and director compensation.

Cost control was and remains a significant operating objective of the Company, which helped to contribute to the minimal increase year-over-year between 2019 and 2018.

The Company recorded income tax expense of $53.8 million in 2019 compared to $51.9 million in 2018, resulting in an effective tax rate of 27.4% and 25.4%, respectively.

The higher effective tax rate for 2019 was due primarily to a decrease in federal tax credits, an increase in nondeductible expenses, and adjustments related to the completion of the 2018 tax returns.

Total assets at December 31, 2019 were $9.0 billion a 7% increase as compared to $8.39 billion at December 31, 2018.

Total loans (excluding loans held for sale) were $7.5 billion at December 31, 2019, an 8% increase as compared to $6.99 billion at December 31, 2018.

Loans held for sale amounted to $56.7 million at December 31, 2019 as compared to $19.3 million at December 31, 2018, a 195% increase.

The investment portfolio totaled $843.4 million at December 31, 2019, an 8% increase from $784.1 million at December 31, 2018.

Total borrowed funds (excluding customer repurchase agreements) were $467.7 million at December 31, 2019 and $217.3 million at December 31, 2018, a 115% increase due to the $250.0 million in FHLB advances that had been outstanding as of December 31, 2019.

Total shareholders’ equity at December 31, 2019 increased 7%, to $1.2 billion from $1.1 billion at December 31, 2018.

The increase in shareholders’ equity from December 31, 2018 was primarily due to increased retained earnings.

During 2019 and 2018, growth in retained earnings has enhanced the Company’s capital position well in excess of regulatory requirements.

The total risk based capital ratio was 16.20% at December 31, 2019, as compared to 16.08% at December 31, 2018.

In addition, the tangible common equity ratio was 12.22% at December 31, 2019, compared to 12.11% at December 31, 2018.

The ratio of common equity to total assets was 13.25% at December 31, 2019 as compared to 13.22% at December 31, 2018.

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Interest bearing deposits with banks and other short-term investments amounted to $195.4 million at December 31, 2019 as compared to $303.2 million at December 31, 2018.

These short term investments represented liquid funds that were held at the Federal Reserve to meet future loan demand, to fund future increases in investment securities and to meet other general liquidity needs of the Company.

The Bank also holds a time deposit amounting to $1.6 million at both December 31, 2019 and 2018.

Loan growth over the past year has been favorable, with loans outstanding reaching $7.5 billion at December 31, 2019, an increase of $554 million or 8% as compared to $6.99 billion at December 31, 2018.

The bank's continued strong financial performance over the last twelve months has remained relatively flat due to the Bank's dedication to our relationship-first strategy of supporting the needs of the markets we serve and working with our existing clients.

The ACL represented 0.98% of total loans at December 31, 2019 as compared to 1.00% at December 31, 2018.

At December 31, 2019, the allowance represented 151% of nonperforming loans as compared to 430% at December 31, 2018.

The decline in the ratio of the allowance for loan losses to total loans was due to a higher percentage increase in loans outstanding as compared to the allowance growth.

The decrease in the allowance coverage ratio was due to a higher percentage increase in nonperforming loans as compared to the allowance growth.

The majority of nonperforming loans are believed to be adequately secured by real estate.

At December 31, 2019, the Company had $48.7 million of loans classified as nonperforming, and $20.0 million of additional loans considered potential problem loans, as compared to $16.3 million of nonperforming loans and $102.7 million of potential problem loans at December 31, 2018.

The $20.0 million in potential problem loans at December 31, 2019, decreased from $102.7 million at December 31, 2018 due primarily to two commercial real estate secured relationships.

The Company had no accruing loans 90 days or more past due at December 31, 2019 or December 31, 2018.

During both 2019 and 2018, management was 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 believed, based on its loan portfolio risk analysis, that its ACL at 0.98% of total loans at December 31, 2019, was adequate to absorb potential credit losses within the loan portfolio at that date.

Total nonperforming loans amounted to $48.7 million at December 31, 2019, representing 0.65% of total loans, compared to $16.3 million at December 31, 2018, representing 0.23% of total loans.

The majority of nonperforming loans were believed to be adequately secured by real estate.

At December 31, 2019, there were $20.0 million of performing loans considered 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.

The $20.0 million in potential problem loans at December 31, 2019, decreased from $102.7 million at December 31, 2018 due primarily to two commercial real estate secured relationships.

The balance of potential problem loans at December 31, 2019 included $11.9 million of loans that were considered potential problem loans at December 31, 2018.

BOLI is utilized by the Company in accordance with income tax regulations as part of the Company’s financing of its benefit programs.

At December 31, 2019, this asset amounted to $75.7 million as compared to $73.4 million at December 31, 2018, which reflected the purchase of $580 thousand in additional policies during 2019 and an increase in cash surrender values.

For 2019, excess servicing fees of $175 thousand were recorded and $246 thousand was amortized as a reduction of actual service fees collected, which is a component of other income.

At December 31, 2019, the balance of excess servicing fees was $507 thousand.

For 2018, excess servicing fees of $1.8 million were recorded, $672 thousand of the FHA mortgage servicing was sold, and $1.1 million was amortized as a reduction of actual service fees collected, which is a component of other income.

For the year ended December 31, 2019, total deposits increased by $250.1 million or 4% compared to the same period in 2018.

Noninterest bearing deposits decreased $39.9 million or 2% to $2.06 billion at December 31, 2019 as compared to $2.10 billion at December 31, 2018, while interest bearing deposits increased by $290.0 million, or 6%.

Within interest bearing deposits, money market and savings accounts collectively amounted to $3.0 billion at December 31, 2019, or 42% of total deposits, as compared to $2.95 billion, or 42% of total deposits, at December 31, 2018, an increase of $63.6 million, or 2%.

Approximately 18% of the Bank’s deposits at December 31, 2019 ($3.0 billion) were time deposits, which are generally the most expensive form of deposit because of their fixed rate and term, as compared to 19% at December 31, 2018 ($1.33 billion).

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At December 31, 2019, total deposits included $1.80 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 25% of total deposits.

At December 31, 2018, total brokered deposits (excluding the CDARS and ICS two-way) were $1.36 billion, or 19% of total deposits.

The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at December 31, 2019 and 2018.

At December 31, 2019, the Company had $350.0 million of FHLB advances borrowed as part of the overall asset liability strategy and to support loan growth.

The Company did not have FHLB advances outstanding as of December 31, 2018.

Long-term borrowings outstanding at December 31, 2019 and December 31, 2018 include 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.

Additionally, long-term borrowings consisted of FHLB advances with maturities over one year, with balances of $0 at December 31, 2021 and $50 million at December 31, 2020.

CONTRACTUAL OBLIGATIONS

The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments.

Except for its loan commitments, as shown in Note 21 to the Consolidated Financial Statements, the following table shows details on these fixed and determinable obligations as of December 31, 2020 in the time period indicated.

Except for its loan commitments, as shown in Note 21 to the Consolidated Financial Statements.

The following table shows details on these fixed and determinable obligations as of December 31, 2021 in the time period indicated.

(dollars in thousands) Within One

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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Commitments generally have fixed expiration dates or other termination clauses and may require

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payment of a fee.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

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Total $ 2,040,296 $ 2,353,733

Additionally, unfunded loan commitments of $367.7 million as of December 31, 2020 and $49.9 million as of December 31, 2019 were related to interest rate lock commitments on residential mortgage loans and were of a short-term nature.

Included in the unfunded loan commitments are interest rate lock commitments on residential mortgage loans which are short-term in nature.

These interest rate lock commitments were $53.3 million as of December 31, 2021 and $367.7 million as of December 31, 2020.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.

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LIQUIDITY MANAGEMENT

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Liquidity is a measure of the Company’s and Bank’s ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner.

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Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional

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capital, and may adversely affect shareholder returns.

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Refer to Note 1 to the Consolidated Financial Statements for New Authoritative Accounting Guidance and their expected impact on the Company’s Financial Statements.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis