What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-10-23 compared with 2020-07-24 · 374 added, 272 removed, 486 unchanged (57% of the section changed)

33 unchanged sentences

Our products and services include those for business banking, private wealth, and bank consulting.

Within business banking, we offer commercial lending, consumer and other lending, asset-based lending, accounts receivable financing, equipment financing, vendor financing, floorplan financing, SBA lending and servicing, treasury management services, and company retirement plans.

Our private wealth services for executives and individuals include trust and estate administration, financial planning, investment management, and private banking.

Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, vendor financing, floorplan financing, SBA lending and servicing, treasury management services, and company retirement plans.

Our private wealth services for executives and individuals include trust and estate administration, financial planning, investment management, private banking, and consumer and other lending.

For other financial institutions, our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation.

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Operational Summary

Results as of and for the three and six months ended June 30, 2020 include:

Net income totaled $3.3 million , or diluted earnings per share of $0.38 , for the three months ended June 30, 2020 , compared to $6.6 million , or diluted earnings per share of $0.75 , for the same period in 2019 .

Net income totaled $6.6 million , or diluted earnings per share of $0.77 , for the six months ended June 30, 2020 , compared to $12.5 million , or diluted earnings per share of $1.43 , for the same period in 2019 .

During the second quarter of 2020, the Corporation disbursed $327.9 million in Paycheck Protection Program (“PPP”) loans and received processing fee income from the Small Business Administration (“SBA”) of $8.7 million.

Results as of and for the three and nine months ended September 30, 2020 include:

• Net income totaled $4.3 million, or diluted earnings per share of $0.50, for the three months ended September 30, 2020, compared to $5.1 million, or diluted earnings per share of $0.59, for the same period in 2019.

Net income totaled $10.9 million, or diluted earnings per share of $1.27, for the nine months ended September 30, 2020, compared to $17.6 million, or diluted earnings per share of $2.01, for the same period in 2019.

• Annualized return on average assets and annualized return on average equity for the three months ended September 30, 2020 measured 0.68% and 8.58%, respectively, compared to 0.97% and 10.68% for the same period in 2019.

Annualized return on average assets and annualized return on average equity for the nine months ended September 30, 2020 measured 0.62% and 7.49%, respectively, compared to 1.15% and 12.77% for the same period in 2019.

• As of September 30, 2020, the Corporation had $332.3 million in Paycheck Protection Program (“PPP”) loans outstanding and deferred processing fee income from the Small Business Administration (“SBA”) outstanding of $6.9 million.

The processing fee income is deferred and recognized over the contractual life of the loan, or accelerated at forgiveness.

During the second quarter of 2020, $859,000 was recognized in interest income.

Record pre-tax, pre-provision adjusted earnings, which excludes certain one-time and discrete items, totaled $9.8 million for the three months ended June 30, 2020 , up 32.4% for the same period in 2019 .

Pre-tax, pre-provision adjusted return on average assets was 1.61% for the three months ended June 30, 2020 , compared 1.46% for the same period in 2019 .

Pre-tax, pre-provision adjusted earnings totaled $17.3 million for the six months ended June 30, 2020 , up 19.3% for the same period in 2019 .

Pre-tax, pre-provision adjusted return on average assets was 1.53% for the six months ended June 30, 2020 , compared 1.46% for the same period in 2019 .

Period-end gross loans and leases receivable were $2.057 billion as of June 30, 2020 , up $342.2 million from December 31, 2019 .

Line of credit utilization was significantly impacted by PPP loan proceeds and was $212.6 million as of June 30, 2020 , down from $281.4 million at December 31, 2019 .

Gross loans and leases receivable, excluding PPP loans and lines of credit, were $1.516 billion as of June 30, 2020 , up 11.6% annualized, from December 31, 2019 .

The allowance for loan and lease losses increased $7.9 million , or 40.7% , compared to December 31, 2019 primarily due to a $4.3 million and $2.1 million increase in the general and specific reserves, respectively, driven by the COVID-19 pandemic.

For the three and nine months ended September 30, 2020, the Corporation recognized $1.1 million and $2.0 million, respectively, in processing fee income through interest income.

• Pre-tax, pre-provision adjusted earnings, which excludes certain one-time and discrete items, totaled $9.3 million for the three months ended September 30, 2020, up 23.0% from the same period in 2019.

Pre-tax, pre-provision adjusted return on average assets was 1.47% for the three months ended September 30, 2020, compared to 1.45% for the same period in 2019.

Pre-tax, pre-provision adjusted earnings totaled $26.7 million for the nine months ended September 30, 2020, up 20.6% from the same period in 2019.

Pre-tax, pre-provision adjusted return on average assets was 1.51% for the nine months ended September 30, 2020, compared to 1.45% for the same period in 2019.

• Period-end gross loans and leases receivable were $2.170 billion as of September 30, 2020, up $455.7 million from December 31, 2019.

Line of credit utilization was significantly impacted by PPP loan proceeds and was $217.6 million as of September 30, 2020, down from $282.9 million at December 31, 2019.

Gross loans and leases receivable, excluding net PPP loans and lines of credit, were $1.627 billion as of September 30, 2020, up 18.2% annualized, from December 31, 2019.

• The allowance for loan and lease losses increased $11.3 million, or 57.9%, compared to December 31, 2019 due to a $5.8 million increase in the general reserve and a $5.5 million increase in specific reserves, primarily driven by the COVID-19 pandemic.

The allowance for loan and lease losses increased to 1.41% of total loans, compared to 1.14% at December 31, 2019.

Excluding PPP loans, the allowance for loan and lease losses increased to 1.58% of total loans as of June 30, 2020 .

Provision for loan and lease losses totaled $5.5 million for the three months ended June 30, 2020 , compared to a provision benefit of $784,000 for the same period in 2019 .

Provision for loan and lease losses totaled $8.7 million for the six months ended June 30, 2020 , compared to a provision benefit of $736,000 for the same period in 2019 .

Robust liquidity position includes record in-market deposits of $1.621 billion , total deposits of $1.710 billion , and on-balance sheet liquidity of $611.6 million , defined as total short-term investments, unencumbered securities available-for-sale, and unencumbered pledged loans.

In-market deposit balances were inflated due to PPP loan proceeds.

Net interest margin was 3.34% and 3.39% for the three and six months ended June 30, 2020 , respectively, compared to 3.52% and 3.66% for the three and six months ended June 30, 2019 , respectively.

Adjusted net interest margin, which excludes certain one-time and discrete items, was 3.33% for the three and six months ended June 30, 2020 , respectively, compared to 3.31% and 3.33% for the three and six months ended June 30, 2019 , respectively.

Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $2.3 million and $3.1 million for the three and six months ended June 30, 2020 , respectively, compared to $1.2 million and $3.5 million for the three and six months ended June 30, 2019 , respectively.

Top line revenue, defined as net interest income plus non-interest income, totaled $25.2 million for the three months ended June 30, 2020 , up 11.3% from the same period in 2019 .

Top line revenue totaled $48.7 million for the six months ended June 30, 2020 , up 8.0% from the same period in 2019 .

Non-interest income totaled $6.3 million , or 25.1% of total revenue, or the three months ended June 30, 2020 , surpassing the Corporation’s goal of 25% for the fifth consecutive quarter.

Non-interest income totaled $12.7 million , or 26.2% of total revenue, for the six months ended June 30, 2020 .

Non-interest expense was $18.3 million and $34.5 million for the three and six months ended June 30, 2020 , respectively, compared to $17.5 million and $35.2 million for the three and six months ended June 30, 2019 , respectively.

Operating expense, which excludes certain one-time and discrete items, totaled $15.4 million and $31.3 million for the three and six months ended June 30, 2020 , respectively, compared to $15.3 million and $30.5 million for the three and six months ended June 30, 2019 , respectively.

The Corporation incurred a $744,000 loss on the early extinguishment of $59.5 million in Federal Home Loan Bank (“FHLB”) term advances late in the second quarter of 2020, as the Corporation lowered wholesale funding costs and improved the Corporation’s funding position with the expectation of a low interest rate environment for an extended period of time.

The efficiency ratio improved to 61.22% and 64.36% for the three and six months ended June 30, 2020 , respectively, down from 67.41% and 67.72% for the three and six months ended June 30, 2019 , respectively.

Historic tax credit programs contributed $690,000, or $0.08 per share, during the three months ended June 30, 2020 , compared to $446,000, or $0.05 per share for the same period in 2019 .

Excluding net PPP loans, the allowance for loan and lease losses increased to 1.67% of total loans as of September 30, 2020.

• Provision for loan and lease losses totaled $3.8 million for the three months ended September 30, 2020, compared to $1.3 million for the same period in 2019.

Provision for loan and lease losses totaled $12.5 million for the nine months ended September 30, 2020, compared to $613,000 for the same period in 2019.

• Robust liquidity position includes record in-market deposits of $1.667 billion, total deposits of $1.821 billion, and on-balance sheet liquidity of $556.1 million, defined as total short-term investments, unencumbered securities, and unencumbered pledged loans.

In-market deposit balances were positively affected by PPP loan proceeds.

• Net interest margin was 3.14% and 3.30% for the three and nine months ended September 30, 2020, respectively, compared to 3.40% and 3.57% for the three and nine months ended September 30, 2019, respectively.

Adjusted net interest margin, which excludes certain one-time and discrete items, was 3.24% and 3.29% for the three and nine months ended September 30, 2020, respectively, compared to 3.24% and 3.30% for the three and nine months ended September 30, 2019, respectively.

• Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $1.5 million and $4.6 million for the three and nine months ended September 30, 2020, respectively, compared to $1.1 million and $4.6 million for the three and nine months ended September 30, 2019, respectively.

• Top line revenue, defined as net interest income plus non-interest income, totaled $26.0 million for the three months ended September 30, 2020, up 15.3% from the same period in 2019.

Top line revenue totaled $74.7 million for the nine months ended September 30, 2020, up 10.5% from the same period in 2019.

• Non-interest income totaled $7.4 million, or 28.5% of total revenue, for the three months ended September 30, 2020, surpassing the Corporation’s goal of 25% for the sixth consecutive quarter.

Non-interest income totaled $20.1 million, or 27.0% of total revenue, for the nine months ended September 30, 2020.

• Non-interest expense was $16.8 million and $51.2 million for the three and nine months ended September 30, 2020, respectively, compared to $14.7 million and $49.9 million for the three and nine months ended September 30, 2019, respectively.

Operating expense, which excludes certain one-time and discrete items, totaled $16.7 million and $48.0 million for the three and nine months ended September 30, 2020, respectively, compared to $15.0 million and $45.5 million for the three and nine months ended September 30, 2019, respectively.

• The efficiency ratio improved to 64.16% and 64.29% for the three and nine months ended September 30, 2020, respectively, down from 66.41% and 67.29% for the three and nine months ended September 30, 2019, respectively.

COVID-19 Update

Business Continuity

The Corporation continues to strictly adhere to COVID-19 health and safety-related requirements and best practices across all of our locations.

During the second quarter of 2020, employees slowly resumed business travel, as necessary, while business development efforts have continued to be somewhat negatively affected by limitations on in-person appointments.

Portions of the Corporation’s workforce started returning to the office, subject to local mandates and restrictions, on a rotating basis.

Management will monitor the activity closely and adjust accordingly as the health and safety of our employees and clients remain our highest priority.

The Corporation had no furloughs or layoffs related to COVID-19 to date.

Paycheck Protection Program

During the second quarter of 2020, the Corporation processed over 700 applications from existing and new clients, disbursed $327.9 million in funds, and received processing fee income from the SBA of $8.7 million.

The processing fee income is deferred and recognized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method.

During the second quarter of 2020, $859,000 was recognized in interest income.

As of September 30, 2020, the Corporation had $332.3 million in PPP loans outstanding and deferred processing fees outstanding of $6.9 million.

The processing fees are deferred and recognized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method.

For the three and nine months ended September 30, 2020, $1.1 million and $2.0 million, respectively, was recognized in interest income compared to no PPP loan processing fee income for the three and nine months ended September 30, 2019.

The SBA provides a guaranty to the lender of 100% of principal and interest, unless the lender violated an obligation under the agreement.

As loan losses are expected to be immaterial, if any at all, due to the guaranty, management excluded the PPP loans from the allowance for loan and lease losses calculation.

Management funded these short-term loans through a combination of excess cash held at the Federal Reserve and the increase in in-market deposits.

As of October 20, 2020, the Corporation had processed and submitted $97.9 million, or 29% of total gross PPP loans, to the SBA for forgiveness and clients have started to receive reimbursements.

Liquidity Sources

Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized based on available capacity, term flexibility, and cost.

As of June 30, 2020 , the Corporation had the following sources of liquidity, including the Corporation’s ability to participate in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”):

June 30, 2020

(In Thousands)

As of September 30, 2020, the Corporation had the following sources of liquidity, including the Corporation’s ability to participate in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”):

(Unaudited) As of

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

Short-term investments $ 23,500 $ 27,839

PPPLF availability 295,876 298,327

Collateral value of unencumbered pledged loans (FHLB borrowing availability)

Collateral value of unencumbered loans (FHLB borrowing availability) 107,456 178,587

Market value of unencumbered securities (Fed Discount Window and FHLB borrowing availability) 129,246 106,808

Total sources of liquidity $ 556,078 $ 611,561

In addition to the above primary sources of liquidity, as of June 30, 2020 , the Corporation also had access to $53.5 million in federal funds lines with various correspondent banks and significant experience accessing the highly liquid brokered certificate of deposit market.

In addition to the above primary sources of liquidity, as of September 30, 2020, the Corporation also had access to $53.5 million in federal funds lines with various correspondent banks and significant experience accessing the highly liquid brokered certificate of deposit market.

Capital Strength

The Corporation’s capital ratios continued to exceed the highest required regulatory benchmark levels.

Total capital to risk-weighted assets at June 30, 2020 , was 11.97% , tier 1 capital to risk-weighted assets was 9.57% , tier 1 leverage capital to adjusted average assets was 8.29% , and common equity tier 1 capital to risk-weighted assets was 9.08% .

• Total capital to risk-weighted assets at September 30, 2020, was 11.42%, tier 1 capital to risk-weighted assets was 9.09%, tier 1 leverage capital to adjusted average assets was 8.04%, and common equity tier 1 capital to risk-weighted assets was 8.64%.

Tangible common equity to tangible assets was 7.29%.

Excluding PPP loans, tier 1 leverage capital to adjusted average assets and tangible common equity to tangible assets were 9.19% and 8.72% , respectively.

Excluding net PPP loans, tier 1 leverage capital to adjusted average assets and tangible common equity to tangible assets were 9.24% and 8.34%, respectively.

• Management suspended the Corporation’s stock repurchase program in March 2020 due to the uncertainty surrounding the COVID-19 pandemic.

As of March 16, 2020, the Corporation had repurchased 141,137 shares of its common stock at a weighted average price of $24.62 per share, for a total value of $3.5 million.

As of March 16, 2020, the Corporation had repurchased 141,137 shares of its common stock under its current authorization at a weighted average price of $24.62 per share, for a total value of $3.5 million.

The Corporation has $1.5 million of buyback authority remaining.

As previously announced, during the second quarter of 2020 , the Corporation’s Board of Directors declared a regular quarterly dividend of $0.165 per share.

The dividend was paid on May 14, 2020 to stockholders of record at the close of business on May 4, 2020 .

Measured against second quarter 2020 diluted earnings per share of $0.38 , the dividend represents a 43.4% payout ratio.

• As previously announced, during the third quarter of 2020, the Corporation’s Board of Directors declared a regular quarterly dividend of $0.165 per share.

The dividend was paid on August 13, 2020 to stockholders of record at the close of business on August 3, 2020.

Measured against third quarter 2020 diluted earnings per share of $0.50, the dividend represents a 33.0% payout ratio.

The Board of Directors routinely considers dividend declarations as part of its normal course of business.

Deferral Requests

The Corporation provided loan modifications up to six months to certain borrowers impacted by COVID-19 who were current in their payments at the inception of the Corporation’s loan modification program.

As of June 30, 2020 , the Corporation had processed 448 deferral requests on loans totaling $323.2 million, or 18.6% of gross loans and leases.

Loan deferrals of six months accounted for 60.2% of the total $323.2 million in deferral requests and the remaining balance were primarily for three months.

Management anticipates the loan modifications may continue throughout 2020.

The Corporation provided loan modifications deferring payments up to six months to certain borrowers impacted by COVID-19 who were current in their payments at the inception of the Corporation’s loan modification program.

As of September 30, 2020, the Corporation had deferred loans outstanding of $131.5 million, or 7.1% of gross loans and leases, excluding gross PPP loans, compared to $323.2 million, or 18.6% of gross loans and leases, excluding gross PPP loans, as of June 30, 2020.

As of October 20, 2020, 95% of clients whose first deferral concluded during the quarter resumed their scheduled payments.

Management anticipates the loan modifications will continue through 2020 due to the remaining uncertainty surrounding the COVID-19 pandemic.

The following tables represent a breakdown of the deferred loan balances by industry segment and collateral type:

June 30, 2020

(Unaudited) As of

(Dollars in thousands) September 30, 2020 June 30, 2020

Collateral Type

Industries Description

% Deferred of Total Industry

Non Real Estate

(Dollars in Thousands)

Industries Description Balance % of Deferred of Total Industry Real Estate Non Real Estate Balance % of Deferred of Total Industry

Real Estate and Rental and Leasing $ 67,214 7.7 % $ 67,214 $ — $ 147,584 18.8 %

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Transportation and Warehousing 256 1.9 % — 256 19,402 21.3 %

Retail Trade 6,781 14.7 % 6,781 — 14,851 29.7 %

Information — — % — — 11,228 64.1 %

Utilities — — % — — 7,129 96.4 %

Construction 427 0.7 % 427 — 6,448 6.7 %

Wholesale Trade 711 0.3 % 450 261 5,695 5.7 %

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Please refer to Note 6 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses for the risk category definitions.

September 30, 2020

(Dollars in thousands) I II III IV Total

Total deferred loan balances

$ 69,984 $ 40,371 $ 20,045 $ 1,069 $ 131,469

53.2 % 30.7 % 15.2 % 0.8 % 100.0 %

June 30, 2020

(Dollars in Thousands)

(Dollars in thousands) I II III IV Total

Total deferred loan balances

$ 221,414 $ 66,554 $ 35,248 $ — $ 323,216

68.5 % 20.6 % 10.9 % — % 100.0 %

The following table is a further breakdown of the deferred loan balances and collateral type for the Real Estate and Rental and Leasing industry:

June 30, 2020

September 30, 2020 June 30, 2020

Collateral Type

Real Estate and Rental and Leasing Detail:

% Deferred of Sub-Industry

Non Real Estate

Balance % Deferred of Sub-Industry Real Estate Non Real Estate Balance % Deferred of Sub-Industry

(Dollars in Thousands)

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Office - Class B 5,738 10.2 % 5,738 — 17,652 32.1 %

1-4 Family 185 0.7 % 185 — 16,887 64.5 %

Multi-Family - Market Rent 26,888 12.1 % 26,888 — 16,174 8.5 %

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Retail - Non-Credit-Tenant - Big Box 1,755 31.2 % 1,755 — 5,629 100.0 %

Other — — % — — 12,795 5.6 %

Total Real Estate and Rental and Leasing $ 67,214 $ 67,214 $ — $ 147,584

The following table is a further breakdown of the deferred loan balances and collateral type for the Accommodation and Food Services industry:

June 30, 2020

September 30, 2020 June 30, 2020

Collateral Type

Accommodation and Food Services Detail:

% Deferred of Sub-Industry

Non Real Estate

Balance % Deferred of Sub-Industry Real Estate Non Real Estate Balance % Deferred of Sub-Industry

(Dollars in Thousands)

Hotel - Flag $ 25,082 34.1 % $ 25,082 $ — $ 43,011 63.1 %

Hotel - No Flag — — % — — 1,862 46.0 %

Other 1,802 14.5 % 1,802 — 5,594 22.7 %

Retail - Restaurant/Bar — — % — — 2,001 13.0 %

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Certain industries are widely expected to be particularly impacted by social distancing, quarantines, and the economic impact of the COVID-19 pandemic, such as the following:

June 30, 2020

% Gross Loans and Leases (1)

September 30, 2020 June 30, 2020

Balance % Gross Loans and Leases (1)

(Dollars in Thousands)

$ 75,261 4.1 % $ 70,028 4.0 %

78,786 4.3 % 73,502 4.2 %

Entertainment

7,758 0.4 % 16,675 1.0 %

Restaurants & food service

26,728 1.4 % 24,884 1.4 %

Total outstanding exposure

Excluding PPP loans.

Includes $51.7 million in loans secured by commercial real estate.

As of June 30, 2020 , the Corporation had no meaningful direct exposure to the energy sector, airline industry or retail consumer, and does not participate in shared national credits.

$ 188,533 10.2 % $ 185,089 10.6 %

(1) Excluding net PPP loans.

(2) Includes $52.0 million and $51.7 million in loans secured by commercial real estate as of September 30, 2020 and June 30, 2020, respectively.

As of September 30, 2020, the Corporation had no meaningful direct exposure to the energy sector, airline industry or retail consumer, and does not participate in shared national credits.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on our clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Corporation’s loan portfolio.

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Top Line Revenue

Top line revenue, comprised of net interest income and non-interest income, increased 11.3% for the three months ended June 30, 2020 compared to the same period in the prior year primarily due to an increase in fees in lieu of interest and a reduction in interest rate paid on deposits, partially offset by lower loan yields.

Top line revenue increased 8.0% for the six months ended June 30, 2020 compared to the same period in the prior year primarily due to an increase in commercial loan interest rate swap fee income and a reduction in interest rates paid on deposits, partially offset by lower loan yields and a reduction in fees in lieu of interest.

Top line revenue, comprised of net interest income and non-interest income, increased 15.3% for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in average loans and lease, increase in fees in lieu of interest, and increase in commercial loan interest rate swap fee income, partially offset by net interest margin compression.

Top line revenue increased 10.5% for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in average loans and leases, increase in commercial loan interest rate swap fee income, and increase in gains on the sale of SBA loans, partially offset by net interest margin compression.

The components of top line revenue were as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 $ Change % Change 2020 2019 $ Change % Change

(Dollars in Thousands)

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Annualized Return on Average Assets and Annualized Return on Average Equity

ROAA for the three months ended June 30, 2020 decreased to 0.55% compared to 1.30% for the three months ended June 30, 2019 .

ROAA for the six months ended June 30, 2020 decreased to 0.58% compared to 1.25% for the six months ended June 30, 2019 .

The decrease in ROAA was primarily due to an increase in the provision for loan and lease losses related to the COVID-19 pandemic.

This reduction in profitability was partially offset by an increase in commercial loan interest rate swap fee income, a decrease in SBA recourse provision, an overall decrease in operating expenses, and net interest income improvement mainly due to lower rates paid on deposits.

ROAA for the three months ended September 30, 2020 decreased to 0.68% compared to 0.97% for the three months ended September 30, 2019.

ROAA for the nine months ended September 30, 2020 decreased to 0.62% compared to 1.15% for the nine months ended September 30, 2019.

The decrease in ROAA in both periods of comparison was primarily due to an increase in the provision for loan and lease losses related to the COVID-19 pandemic.

This reduction in profitability was partially offset by an increase in commercial loan interest rate swap fee income, increase in gains on the sale of SBA loans, and net interest income improvement mainly due to an increase in average loans and leases.

We consider ROAA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed.

ROAA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage which can ultimately influence return on equity measures.

ROAE for the three months ended June 30, 2020 was 6.70% compared to 14.09% for the three months ended June 30, 2019 .

ROAE for the six months ended June 30, 2020 was 6.92% compared to 13.89% for the six months ended June 30, 2019 .

ROAE for the three months ended September 30, 2020 was 8.58% compared to 10.68% for the three months ended September 30, 2019.

ROAE for the nine months ended September 30, 2020 was 7.49% compared to 12.77% for the nine months ended September 30, 2019.

The reasons for the decrease in ROAE are consistent with the explanations discussed above with respect to ROAA.

We view ROAE as an important measurement for monitoring profitability and continue to focus on improving our return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses, and minimizing our costs of credit.

Efficiency Ratio

Efficiency ratio is a non-GAAP measure representing non-interest expense excluding the effects of the SBA recourse provision, impairment of tax credit investments, losses on foreclosed properties, amortization of other intangible assets, losses on early extinguishment of debt, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized gains or losses on securities, if any.

The efficiency ratio was 61.22% and 64.36% for the three and six months ended June 30, 2020 compared to 67.41% and 67.72% for the three and six months ended June 30, 2019 .

Operating revenue growth outpaced the change in operating expense for the three and six months ended June 30, 2020 , resulting in positive operating leverage.

Results for the three and six months ended June 30, 2020 have benefited from PPP interest income, PPP loan processing fee recognition, and below average business-related expenses due to the COVID-19 pandemic.

For the three months ended June 30, 2020 compared to the three

months ended June 30, 2019 , operating revenue increased 11.2% while operating expense increased 1.0% .

Similarly, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 , operating revenue increased 8.0% while operating expense increased 2.7% .

although this growth may be muted somewhat by the current health crisis and its effect on the economy.

Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings

Efficiency ratio is a non-GAAP measure representing non-interest expense excluding the effects of the SBA recourse provision or benefit, impairment of tax credit investments, net gains or losses on foreclosed properties, amortization of other intangible assets, losses on early extinguishment of debt, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized net gains or losses on securities, if any.

Pre-tax, pre-provision adjusted earnings is defined as operating revenue less operating expense.

In the judgment of the Corporation’s management, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess the Corporation’s operating expenses in relation to its core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items.

The efficiency ratio was 64.16% and 64.29% for the three and nine months ended September 30, 2020 compared to 66.41% and 67.29% for the three and nine months ended September 30, 2019.

Operating revenue growth outpaced the change in operating expense for the three and nine months ended September 30, 2020, resulting in positive operating leverage.

Results for the three and nine months ended September 30, 2020 have benefited from PPP interest income, PPP loan processing fee recognition, and below average business development related expenses due to the COVID-19 pandemic.

For the three months ended September 30, 2020 compared to the three months ended September 30, 2019, operating revenue increased 15.3% while operating expense increased 11.4%.

Similarly, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, operating revenue increased 10.5% while operating expense increased 5.6%.

We believe we will continue to generate modest positive operating leverage and progress towards enhancing our long-term efficiency ratio at a measured pace as we focus on strategic initiatives directed toward revenue growth, although this growth may be muted somewhat by the current health crisis and its effect on the economy.

These initiatives include efforts to expand our specialty finance lines of business, increase our commercial banking market share, and scale our private wealth management business in less mature markets.

We believe the efficiency ratio allows investors and analysts to better assess the Corporation’s operating expenses in relation to its top line revenue by removing the volatility that is associated with certain non-recurring and other discrete items.

We believe the efficiency ratio and pre-tax, pre-provision adjusted earnings allow investors and analysts to better assess the Corporation’s operating expenses in relation to its top line revenue by removing the volatility that is associated with certain non-recurring and other discrete items.

The efficiency ratio also allows management to benchmark performance of our model to our peers without the influence of the loan loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROAA and ROAE.

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Please refer to the Non-Interest Income and Non-Interest Expense sections below for discussion on additional drivers of the year-over-year change in the efficiency ratio.

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 $ Change % Change 2020 2019 $ Change % Change

(Dollars in Thousands)

Total non-interest expense $ 16,758 $ 14,716 $ 2,042 13.9 % $ 51,245 $ 49,922 $ 1,323 2.7 %

Net loss (gain) on foreclosed properties

Net (gain) loss on foreclosed properties (121) 262 (383) NM 329 241 88 36.5

Amortization of other intangible assets

SBA recourse (benefit) provision

Tax credit investment impairment

9 11 (2) (18.2) 27 33 (6) (18.2)

SBA recourse provision (benefit) 57 (427) 484 NM 53 167 (114) (68.3)

Tax credit investment impairment (recovery) 113 (120) 233 NM 2,066 3,982 (1,916) (48.1)

Loss on early extinguishment of debt

— — — NM 744 — 744 NM

Total operating expense $ 16,700 $ 14,990 $ 1,710 11.4 $ 48,026 $ 45,499 $ 2,527 5.6

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Net loss on sale of securities

— (4) 4 NM (4) (5) 1 (20.0)

Total operating revenue $ 26,029 $ 22,572 $ 3,457 15.3 $ 74,703 $ 67,621 $ 7,082 10.5

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Net interest income is sensitive to changes in market rates of interest and the asset/liability management processes to prepare for and respond to such changes.

The following table provides information with respect to (1) the change in net interest income attributable to changes in rate (changes in rate multiplied by prior volume) and (2) the change in net interest income attributable to changes in volume (changes in volume multiplied by prior rate) for the three and six months ended June 30, 2020 compared to the same period in 2019 .

The change in net interest income attributable to changes in rate and volume (changes in rate multiplied by changes in

volume) has been allocated to the rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Increase (Decrease) for the Three Months Ended June 30,

Increase (Decrease) for the Six Months Ended June 30,

2020 Compared to 2019

The following table provides information with respect to (1) the change in net interest income attributable to changes in rate (changes in rate multiplied by prior volume) and (2) the change in net interest income attributable to changes in volume (changes in volume multiplied by prior rate) for the three and nine months ended September 30, 2020 compared to the same period in 2019.

The change in net interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) has been allocated to the rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Increase (Decrease) for the Three Months Ended September 30, Increase (Decrease) for the Nine Months Ended September 30,

2020 Compared to 2019 2020 Compared to 2019

Rate Volume Net Rate Volume Net

(In Thousands)

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Commercial real estate and other mortgage loans (1)

$ (3,728) $ 1,500 $ (2,228) $ (8,438) $ 2,738 $ (5,700)

Commercial and industrial loans (1)

(4,148) 3,584 (564) (9,812) 8,138 (1,674)

Direct financing leases (1)

(23) (35) (58) (86) (120) (206)

Consumer and other loans (1)

(48) 81 33 (132) 181 49

Total loans and leases receivable (7,947) 5,130 (2,817) (18,468) 10,937 (7,531)

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Total net change in income on interest-earning assets

(8,327) 5,165 (3,162) (19,452) 11,433 (8,019)

Interest-bearing liabilities

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Total net change in expense on interest-bearing liabilities

(6,725) 1,718 (5,007) (11,941) 746 (11,195)

Net change in net interest income $ (1,602) $ 3,447 $ 1,845 $ (7,511) $ 10,687 $ 3,176

(1) The average balances of loans and leases include non-accrual loans and leases and loans held for sale.

The table below shows our average balances, interest, average yields/rates, net interest margin, and the spread between the combined average yields earned on interest-earning assets and average rates on interest-bearing liabilities for the three and six months ended June 30, 2020 and 2019 .

The average balances are derived from average daily balances.

For the Three Months Ended June 30,

For the Three Months Ended September 30,

Balance Interest Average

Yield/Rate (4)

Balance Interest Average

Yield/Rate (4)

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Commercial real estate and other mortgage loans (1)

$ 1,282,132 $ 12,340 3.85 % $ 1,153,591 $ 14,568 5.05 %

Commercial and industrial loans (1)

791,909 8,133 4.11 517,043 8,697 6.73

Direct financing leases (1)

26,129 258 3.95 29,600 316 4.27

Consumer and other loans (1)

39,269 374 3.81 31,195 341 4.37

Total loans and leases receivable (1)

2,139,439 21,105 3.95 1,731,429 23,922 5.53

Mortgage-related securities (2)

167,326 833 1.99 167,113 1,060 2.54

Other investment securities (3)

34,004 171 2.01 24,755 134 2.17

FHLB and FRB stock 12,835 161 5.02 7,692 85 4.42

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Non-interest-earning assets 165,844 121,589

Total assets $ 2,540,735 $ 2,093,285

Interest-bearing liabilities

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Non-interest-bearing demand deposit accounts

445,245 283,675

Other non-interest-bearing liabilities 91,810 48,688

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Total liabilities and stockholders’ equity

$ 2,540,735 $ 2,093,285

Net interest income $ 18,621 $ 16,776

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Average interest-earning assets to average interest-bearing liabilities

131.68 % 125.54 %

Return on average assets (4)

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(4) Represents annualized yields/rates.

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Balance Interest Average

Yield/Rate (4)

Balance Interest Average

Yield/Rate (4)

2 unchanged sentences

Commercial real estate and other mortgage loans (1)

$ 1,209,810 $ 38,312 4.22 % $ 1,135,596 $ 44,012 5.17 %

Commercial and industrial loans (1)

678,650 24,338 4.78 492,247 26,012 7.04

Direct financing leases (1)

27,065 761 3.75 31,143 967 4.14

Consumer and other loans (1)

37,260 1,091 3.90 31,391 1,042 4.43

Total loans and leases receivable (1)

1,952,785 64,502 4.40 1,690,377 72,033 5.68

Mortgage-related securities (2)

173,985 2,806 2.15 158,407 3,022 2.54

Other investment securities (3)

29,177 456 2.08 27,849 442 2.12

FHLB and FRB stock 10,558 491 6.20 7,210 261 4.83

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Non-interest-earning assets 151,994 109,395

Total assets $ 2,357,792 $ 2,029,377

Interest-bearing liabilities

10 unchanged sentences

Non-interest-bearing demand deposit accounts

392,455 265,121

Other non-interest-bearing liabilities 80,270 42,276

2 unchanged sentences

Total liabilities and stockholders’ equity

$ 2,357,792 $ 2,029,377

Net interest income $ 54,558 $ 51,382

3 unchanged sentences

Average interest-earning assets to average interest-bearing liabilities

130.44 % 124.78 %

Return on average assets (4)

8 unchanged sentences

(4) Represents annualized yields/rates.

Comparison of Net Interest Income for the Three and Six Months Ended June 30, 2020 and 2019

Net interest income increased $2.0 million , or 12.1% , during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 .

The increase in net interest income reflected a reduction in the rate paid on deposits, interest income received from PPP loans, and an increase in fees collected in lieu of interest, partially offset by a decrease in the yield on loans and leases.

Fees in lieu of interest, which can vary from quarter to quarter, totaled $2.3 million , compared to $1.2 million .

Comparison of Net Interest Income for the Three and Nine Months Ended September 30, 2020 and 2019

Net interest income increased $1.8 million, or 11.0%, during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

The increase in net interest income reflected an increase in average gross loans and leases and an increase in fees collected in lieu of interest, partially offset by adjusted net interest margin compression.

Fees in lieu of interest, which can vary from quarter to quarter, totaled $1.5 million for the three months ended September 30, 2020, compared to $1.1 million for the same period in 2019.

Excluding fees in lieu of interest, interest income from PPP loans, and interest expense from Federal Reserve PPPLF advances, net interest income increased $617,000, or 3.9%.

Average gross loans and leases for the three months ended June 30, 2020 increased $288.8 million , or 17.0% , compared to the three months ended June 30, 2019 .

Excluding PPP loans and lines of credit, average gross loans and leases for the three months ended June 30, 2020 increased $113.0 million , or 8.1% , compared to the three months ended June 30, 2019 .

Net interest income for the six months ended June 30, 2020 increased $1.3 million , or 3.8% , compared to the six months ended June 30, 2019 .

The increase in net interest income reflected a reduction in the rate paid on deposits and interest income received from PPP loans, partially offset by lower loan yields and a decrease in fees collected in lieu of interest.

Fees in lieu of interest totaled $3.1 million for the six months ended June 30, 2020 compared to $3.5 million in the prior year period.

Excluding fees in lieu of interest, interest income from PPP loans, and interest expense from Federal Reserve PPPLF advances, net interest income for the six months ended June 30, 2020 increased $1.2 million , or 3.9% .

Average gross loans and leases for the six months ended June 30, 2020 increased $188.9 million , or 11.3% , compared to the six months ended June 30, 2019 .

Excluding PPP loans and lines of credit, average gross loans and leases for the six months ended June 30, 2020 increased $107.8 million , or 15.6% annualized, compared to the six months ended June 30, 2019 .

The yield on average loans and leases for the three and six months ended June 30, 2020 declined to 4.35% and 4.67% , respectively, compared to 5.64% and 5.76% for the three and six months ended June 30, 2019 , respectively.

Both periods were impacted by fees collected in lieu of interest and the current period was impacted by PPP loan interest income.

Without the impact of these fees and PPP loan interest income, the yield on average loans and leases excluding PPP loans for the three and six months ended June 30, 2020 was 4.33% and 4.59% , respectively, compared to 5.36% and 5.34% for the three and six months ended, June 30, 2019 , respectively.

Similarly, the yield on average interest-earning assets for the three and six months ended June 30, 2020 measured 4.03% and 4.35% , respectively, compared to 5.29% and 5.39% for the three and six months ended June 30, 2019 , respectively.

Excluding fees collected in lieu of interest and PPP loan interest income, the yield on average interest-earning assets excluding PPP loans for the three and six months ended June 30, 2020 was 3.97% and 4.26% , respectively, compared to 5.03% and 5.01% for the three and six months ended June 30, 2019 , reflecting a decrease in LIBOR and Prime.

The average rate paid on total interest-bearing liabilities for the three and six months ended June 30, 2020 decreased to 0.91% and 1.25% , respectively, compared to 2.19% and 2.15% for the three and six months ended June 30, 2019 , respectively.

Average gross loans and leases for the three months ended September 30, 2020 increased $408.0 million, or 23.6%, compared to the three months ended September 30, 2019.

Excluding net PPP loans and lines of credit, average gross loans and leases for the three months ended September 30, 2020 increased $179.2 million, or 12.6%, compared to the three months ended September 30, 2019.

Net interest income for the nine months ended September 30, 2020 increased $3.2 million, or 6.2%, compared to the nine months ended September 30, 2019.

The increase in net interest income for the nine months ended September 30, 2020 was principally due to an increase in average gross loans and leases, including interest income received from PPP loans, partially offset by a reduction in fees collected in lieu of interest and net interest margin compression.

Fees in lieu of interest totaled $4.6 million for both the nine months ended September 30, 2020 and September 30, 2019.

Excluding fees in lieu of interest, interest income from PPP loans and interest expense from Federal Reserve PPPLF advances, net interest income for the nine months ended September 30, 2020 increased $1.8 million, or 3.9%.

Average gross loans and leases for the nine months ended September 30, 2020 increased $262.4 million, or 15.5%, compared to the nine months ended September 30, 2019.

Excluding net PPP loans and lines of credit, average gross loans and leases for the nine months ended September 30, 2020 increased $71.6 million, or 7.0% annualized, compared to the nine months ended September 30, 2019.

The yield on average loans and leases for the three and nine months ended September 30, 2020 declined to 3.95% and 4.40%, respectively, compared to 5.53% and 5.68% for the three and nine months ended September 30, 2019, respectively.

Excluding the impact of fees collected in lieu of interest and PPP loan interest income, the yield on average loans and leases excluding net PPP loans for the three and nine months ended September 30, 2020 was 4.13% and 4.43%, respectively, compared to 5.27% and 5.31% for the three and nine months ended, September 30, 2019, respectively.

Similarly, the yield on average interest-earning assets for the three and nine months ended September 30, 2020 measured 3.75% and 4.13%, respectively, compared to 5.16% and 5.31% for the three and nine months ended September 30, 2019, respectively.

Excluding fees collected in lieu of interest and PPP loan interest income, the yield on average interest-earning assets excluding net PPP loans for the three and nine months ended September 30, 2020 was 3.89% and 4.13%, respectively, compared to 4.94% and 4.98% for the three and nine months ended September 30, 2019.

The decline in yields for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 was primarily due to the decrease in LIBOR and Prime and related impact on variable-rate loans, in addition to the renewal of fixed-rate loans and reinvestment of security cash flows at historically low interest rates.

The average rate paid on total in-market deposits comprised of all transaction accounts, money market accounts, and non-wholesale deposits for the three and nine months ended September 30, 2020 decreased to 0.27% and 0.49%, respectively, down from 1.47% and 1.50%, for the three and nine months ended September 30, 2019, respectively.

The average rate paid on total in-market deposits declined as the Corporation decreased deposit rates in response to the Federal Open Market Committee’s (“FOMC”) decision to decrease the target federal funds rate 200 basis points from September 2019 to September 2020.

For the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019, the average target federal funds rate decreased 205 basis points and 180 basis points, respectively.

Similarly, the average rate paid on total interest-bearing liabilities for the three and nine months ended September 30, 2020 decreased to 0.81% and 1.09%, respectively, compared to 2.21% and 2.17% for the three and nine months ended September 30, 2019, respectively.

Total interest-bearing liabilities include interest-bearing deposits, federal funds purchased, FHLB advances, Federal Reserve PPPLF advances, subordinated and junior subordinated notes payable, and other borrowings.

The average rate paid on total in-market deposits — comprised of all transaction accounts, money market accounts, and non-wholesale deposits — for the three and six months ended June 30, 2020 decreased to 0.33% and 0.62% , respectively, down from 1.56% and 1.51% , for the three and six months ended June 30, 2019 , respectively.

The average target federal funds rate decreased 234 basis points.

Consistent with the Corporation’s longstanding funding strategy to manage interest rate risk and match fund long-term, fixed-rate loans, wholesale funds are used at various maturity terms to meet the Corporation’s funding needs.

Average FHLB advances for the three months ended June 30, 2020 increased $143.1 million to $409.3 million at an average rate paid of 1.25% , compared to $266.1 million at an average rate paid of 2.27% for the three months ended June 30, 2019 .

Average FHLB advances for the six months ended June 30, 2020 increased $100.5 million to $367.6 million at an average rate paid of 1.55% , compared to $267.1 million at an average rate paid of 2.21% for the six months ended June 30, 2019 .

As of June 30, 2020 , the weighted average original maturity of our FHLB term advances was 5.3 years.

Average wholesale deposits, consisting of brokered certificates of deposit and deposits gathered from internet listing services, for the three months ended June 30, 2020 decreased $145.5 million to $105.6 million at an average rate paid of 2.42% , compared to $251.1 million at an average rate paid of 2.22% .

Average wholesale deposits for the six months ended June 30, 2020 decreased $140.3 million to $119.0 million at an average rate paid of 2.50% , compared to $259.4 million at an average rate paid of 2.19% for the six months ended June 30, 2019 .

The existing wholesale deposit portfolio is maturing and being replaced, as needed, by lower cost FHLB advances to match fund long-term, fixed-rate loans.

As of June 30, 2020 , the weighted average original maturity of our wholesale deposits was 4.6 years.

The average rate paid on total bank funding for the three and six months ended June 30, 2020 decreased to 0.61% and 0.91% , respectively, compared to 1.76% and 1.72% for the three and six months ended June 30, 2019 .

Average FHLB advances for the three months ended September 30, 2020 increased $72.9 million to $379.9 million at an average rate paid of 1.43%, compared to $307.1 million at an average rate paid of 2.18% for the three months ended September 30, 2019.

Average FHLB advances for the nine months ended September 30, 2020 increased $91.2 million to $371.7 million at an average rate paid of 1.51%, compared to $280.5 million at an average rate paid of 2.20% for the nine months ended September 30, 2019.

As of September 30, 2020, the weighted average original maturity of our FHLB term advances was 5.1 years, compared to 5.2 years as of September 30, 2019.

Average wholesale deposits, consisting of brokered certificates of deposit and deposits gathered from internet listing services, for the three months ended September 30, 2020 decreased $51.5 million to $160.1 million at an average rate paid of 1.33%, compared to $211.5 million at an average rate paid of 2.36%.

Average wholesale deposits for the nine months ended September 30, 2020 decreased $110.4 million to $132.8 million at an

average rate paid of 2.03%, compared to $243.3 million at an average rate paid of 2.24% for the nine months ended September 30, 2019.

As the existing wholesale deposit portfolio matured lower cost FHLB advances were used, when needed, to fund loan growth and manage interest rate risk by match funding long-term fixed-rate loans.

As of September 30, 2020, the weighted average original maturity of our wholesale deposits was 4.3 years, compared to 5.5 years as of September 30, 2019.

The average rate paid on total bank funding for the three and nine months ended September 30, 2020 decreased to 0.54% and 0.78%, respectively, compared to 1.69% and 1.71% for the three and nine months ended September 30, 2019.

Total bank funding is defined as total deposits plus FHLB advances and Federal Reserve PPPLF advances.

Net interest margin decreased 18 basis points to 3.34% for the three months ended June 30, 2020 compared to 3.52% for the three months ended June 30, 2019 .

Net interest margin decreased 26 basis points to 3.14% for the three months ended September 30, 2020 compared to 3.40% for the three months ended September 30, 2019.

The decrease was primarily due to the decrease in the average yield on loans and leases receivable, partially offset by a decrease in the average rate paid on in-market deposits and wholesale funding and increase in fees collected in lieu of interest.

Excluding fees collected in lieu of interest and PPP loan interest income, net interest margin measured 3.33% for the second quarter of 2020 , compared to 3.31% in the second quarter of 2019 .

Net interest margin decreased 27 basis points to 3.39% for the six months ended June 30, 2020 compared to 3.66% for the six months ended June 30, 2019 .

The decrease was primarily due to the decrease in average yield on loans and leases receivable and a decrease in fees in lieu of interest.

These unfavorable variances were partially offset by a decrease in the average rate paid on in-market deposits and wholesale funding.

Excluding fees collected in lieu of interest and PPP loan interest income, net interest margin measured 3.33% for the six months ended June 30, 2020 and June 30, 2019 .

The Corporation incurred a $744,000 loss, recognized through non-interest expense, on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020, as the Corporation lowered wholesale funding costs and improved the Corporation’s funding position.

Management believes this strategy will help stabilize net interest margin with the expectation of a low interest rate environment for an extended period of time.

Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in our higher-yielding specialty finance lines of business will allow the Corporation to achieve a net interest margin of at least 3.50%, on average.

Excluding fees collected in lieu of interest, PPP loan interest income, Federal Reserve interest income, FHLB dividends, and interest expense from Federal Reserve PPPLF advances, net interest margin measured 3.24% for the third quarter of 2020, compared to 3.24% in the third quarter of 2019.

Net interest margin decreased 27 basis points to 3.30% for the nine months ended September 30, 2020 compared to 3.57% for the nine months ended September 30, 2019.

The decrease was primarily due to the decrease in average yield on loans and leases receivable partially offset by a decrease in the average rate paid on in-market deposits and wholesale funding.

Excluding fees collected in lieu of interest, PPP loan interest income, Federal Reserve interest income, FHLB dividends, and interest expense from Federal Reserve PPPLF advances, net interest margin measured 3.29% and 3.30% for the nine months ended September 30, 2020 and September 30, 2019, respectively.

Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in existing higher-yielding specialty finance lines of business will allow the Corporation to achieve a net interest margin of at least 3.50%, on average, over the long-term.

However, the collection of loan fees in lieu of interest is an expected source of volatility to quarterly net interest income and net interest margin, particularly given the nature of the Corporation’s asset-based lending business and the Corporation’s participation in the PPP.

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Due to COVID-19 and the economic impact it could have on the Corporation’s loan portfolio, additional detail about certain exposure to stressed industries is included in the section titled COVID-19 Update , above.

Based on management’s current assessment of the increased inherent risk in the loan portfolio, the allowance for loan and leases losses increased $7.9 million , or 40.7% , compared to December 31, 2019 .

The provision for loan and lease losses totaled $5.5 million and $8.7 million for the three and six months ended June 30, 2020 , respectively, compared to a provision benefit of $784,000 and $736,000 for the three and six months ended June 30, 2019 , respectively.

For the six months ended June 30, 2020, the increase in the allowance for loan and lease losses was in large part due to an increase in several qualitative factors after careful evaluation by management.

Most notably, a $4.3 million increase was due to the economic conditions caused by the pandemic, including the increase in the unemployment rate, and an additional $953,000 stemmed from the other qualitative factors, such as management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, and the level of loans and leases subject to more frequent review by management.

Additionally, an increase in specific reserves of $2.1 million was driven by deterioration of two existing legacy SBA impaired relationships.

Based on management’s current assessment of the increased inherent risk in the loan portfolio, the allowance for loan and lease losses increased $11.3 million, or 57.9%, compared to December 31, 2019.

The provision for loan and lease losses totaled $3.8 million and $12.5 million for the three and nine months ended September 30, 2020, respectively, compared to $1.3 million and $613,000 for the three and nine months ended September 30, 2019, respectively.

For the nine months ended September 30, 2020, the increase in the allowance for loan and lease losses was in large part due to an increase in specific reserves on impaired loans, in addition to several qualitative factors after careful evaluation by management.

Most notably, an increase in specific reserves of $5.5 million was driven by deterioration of two existing legacy SBA impaired relationships and one relationship in the hospitality industry.

Additionally, a $4.7 million increase was due to the economic conditions caused by the pandemic, including the increase in the unemployment rate, management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, and the level of loans and leases subject to more frequent review by management.

The legacy on-balance sheet SBA portfolio, defined as SBA 7(a) and Express loans originated in 2016 and prior, has been a source of elevated non-performing assets.

Additional information on our legacy SBA portfolio is as follows:

September 30,

2020 June 30,

2020 September 30,

(In Thousands)

1 unchanged sentence

Off-balance sheet loans

$ 26,017 $ 28,843 $ 40,288

On-balance sheet loans

15,175 16,554 21,814

41,192 45,397 62,102

Non-performing loans:

Off-balance sheet loans

2,574 1,640 7,287

On-balance sheet loans

9,561 9,725 14,663

12,135 11,365 21,950

Off-balance sheet loans

28,591 30,483 47,575

On-balance sheet loans

24,736 26,279 36,477

$ 53,327 $ 56,762 $ 84,052

The addition of specific reserves on impaired loans represent new specific reserves established when collateral shortfalls or government guaranty deficiencies are present, while conversely the release of specific reserves represent the reduction of previously established reserves that are no longer required.

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Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Corporation’s loan portfolio.

Comparison of Non-Interest Income for the Three and Six Months Ended June 30, 2020 and 2019

Comparison of Non-Interest Income for the Three and Nine Months Ended September 30, 2020 and 2019

Non-Interest Income

Non-interest income primarily consists of fees earned for private wealth management services, gains on sale of SBA loans, service charges on deposits, loan fee income, and commercial loan interest rate swap fee income.

For the three months ended June 30, 2020 non-interest income increased by $514,000 , or 8.9% , to $6.3 million from $5.8 million for the same period in 2019 .

For the six months ended June 30, 2020 non-interest income increased $2.3 million , or 21.9% , to $12.7 million from $10.4 million for the same period in 2019 .

For the three months ended September 30, 2020 non-interest income increased by $1.6 million, or 27.9%, to $7.4 million from $5.8 million for the same period in 2019.

For the nine months ended September 30, 2020 non-interest income increased $3.9 million, or 24.1%, to $20.1 million from $16.2 million for the same period in 2019.

Management continues to focus on revenue growth from multiple non-interest income sources in order to maintain a diversified revenue stream through greater contribution from fee-based revenues.

Total non-interest income accounted for 25.1% and 26.2% of our total revenues for the three and six months ended June 30, 2020 , respectively, compared to 25.6% and 23.2% for the three and six months ended June 30, 2019 , respectively.

Management believes the expected gradual expansion of our SBA lending program, fees from commercial loan interest rate swap activity with our commercial borrowers, and the geographic expansion of our private wealth management division will allow us to sustain our strategic target of 25% over the long-term.

Total non-interest income accounted for 28.5% and 27.0% of total revenues for the three and nine months ended September 30, 2020, respectively, compared to 25.7% and 24.0% for the three and nine months ended September 30, 2019, respectively.

Management believes the expected gradual expansion of its SBA lending program, fees from commercial loan interest rate swap activity with commercial borrowers, and the geographic expansion of its private wealth management division will allow the Corporation to sustain a strategic target of 25% over the long-term.

The components of non-interest income were as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 $ Change % Change 2020 2019 $ Change % Change

(Dollars in Thousands)

Private wealth management service fees

$ 2,167 $ 2,060 $ 107 5.2 % $ 6,402 $ 6,125 $ 277 4.5 %

Gain on sale of SBA loans 760 454 306 67.4 1,598 993 605 60.9

Service charges on deposits 881 795 86 10.8 2,527 2,314 213 9.2

Loan fees 478 439 39 8.9 1,414 1,316 98 7.4

Increase in cash surrender value of bank-owned life insurance

Net loss on sale of securities

Commercial loan swap fees

365 305 60 19.7 1,037 894 143 16.0

Net loss on sale of securities — (4) 4 NM (4) (5) 1 (20.0)

Commercial loan swap fees 2,446 374 2,072 NM 5,782 1,898 3,884 NM

Other non-interest income 311 1,369 (1,058) (77.3) 1,385 2,699 (1,314) (48.7)

1 unchanged sentence

Fee income ratio (1)

28.5 % 25.7 % 27.0 % 24.0 %

(1) Fee income ratio is total non-interest income, per the above table, divided by top line revenue (defined as net interest income plus non-interest income).

Private wealth management service fees decreased $14,000 , or 0.7% , and increased $170,000 , or 4.2% for the three and six months ended June 30, 2020 , respectively, compared to the three and six months ended June 30, 2019 .

The decrease for the three month comparison period was mainly driven by a decline in equity market values stemming from the COVID-19 pandemic.

The increase in the six month comparison period was driven by growth in assets under management and administration attributable to new client relationships.

As of June 30, 2020 , trust assets under management and administration totaled $1.873 billion , decreasing $18.8 million , or 1.0% , compared to $1.892 billion as of December 31, 2019 and increasing $118.4 million , or 6.7% , compared to $1.755 billion as of June 30, 2019 .

Commercial loan interest rate swap fee income was $1.7 million and $3.3 million for the three and six months ended June 30, 2020 , respectively, compared to $1.1 million and $1.5 million for the three and six months ended June 30, 2019 , respectively.

Private wealth management service fees increased $107,000, or 5.2%, and $277,000, or 4.5% for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019.

The increase for the three and nine month comparison periods was mainly driven by an increase in equity market values and growth in assets under management attributable to new client relationships.

As of September 30, 2020, trust assets under management and administration totaled $2.018 billion, increasing $125.3 million, or 6.6%, compared to $1.892 billion as of December 31, 2019 and $217.0 million, or 12.1%, compared to $1.801 billion as of September 30, 2019.

Commercial loan interest rate swap fee income was $2.4 million and $5.8 million for the three and nine months ended September 30, 2020, respectively, compared to $374,000 and $1.9 million for the three and nine months ended September 30, 2019, respectively.

Interest rate swaps continue to be an attractive product for the Bank’s commercial borrowers, although associated fee income can vary period to period based on client demand and the interest rate environment in any given quarter.

Gains on sale of SBA loans increased $277,000 , or 93.3% , and increased $300,000 , or 55.7% , for the three and six months ended June 30, 2020 , respectively, compared to the three and six months ended June 30, 2019 .

Gains on sale of SBA loans increased $306,000, or 67.4%, and $605,000, or 60.9%, for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019.

The Corporation’s pipeline continues to grow period over period and management believes the gain on sale of traditional SBA loans (i.e., SBA loans unrelated to PPP loans) will increase at a measured pace over time.

Loans held for sale, consisting entirely of SBA loans closed but not fully funded, increased $7.3 million , or 116.0% , to $13.7 million compared to March 31, 2020.

Other non-interest income for the three and six months ended June 30, 2020 totaled $309,000 and $1.1 million , respectively, compared to $816,000 and $1.3 million , respectively, for three and six months ended June 30, 2019 .

Decreases in both periods of comparison were primarily due to gains recognized on end-of-term buyout agreements from the Corporation’s equipment financing business line during the three months ended June 30, 2019.

Comparison of Non-Interest Expense for the Three and Six Months Ended June 30, 2020 and 2019

Loans held for sale, consisting entirely of SBA loans closed but not fully funded, increased $12.0 million, or 390.20%, to $15.0 million compared to September 30, 2019.

Other non-interest income for the three and nine months ended September 30, 2020 totaled $311,000 and $1.4 million, respectively, compared to $1.4 million and $2.7 million, respectively, for three and nine months ended September 30, 2019.

The decrease for both the three and nine month periods of comparison was primarily due to above average returns from the Corporation’s investments in mezzanine funds and a gain on sale of a state tax credit in the prior year periods.

The decrease for the nine months ended was also impacted by gains recognized on end-of-term buyout agreements related to the Company’s equipment finance business line.

Comparison of Non-Interest Expense for the Three and Nine Months Ended September 30, 2020 and 2019

Non-Interest Expense

The components of non-interest expense were as follows :

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 $ Change % Change 2020 2019 $ Change % Change

(Dollars in Thousands)

$ 11,857 $ 10,324 $ 1,533 14.8 % $ 33,705 $ 30,991 $ 2,714 8.8 %

Occupancy 570 580 (10) (1.7) 1,696 1,730 (34) (2.0)

Professional fees

943 751 192 25.6 2,621 2,745 (124) (4.5)

Data processing 679 654 25 3.8 2,066 1,923 143 7.4

Marketing 356 548 (192) (35.0) 1,169 1,611 (442) (27.4)

310 277 33 11.9 905 938 (33) (3.5)

Computer software 1,017 859 158 18.4 2,873 2,485 388 15.6

FDIC insurance

Collateral liquidation costs (recovery)

Net loss (gain) on foreclosed properties

Tax credit investment impairment

SBA recourse (benefit) provision

FDIC insurance 312 1 311 NM 760 595 165 27.7

Collateral liquidation costs 45 110 (65) (59.1) 281 108 173 NM

Net (gain) loss on foreclosed properties (121) 262 (383) NM 329 241 88 36.5

Tax credit investment impairment (recovery) 113 (120) 233 NM 2,066 3,982 (1,916) (48.1)

SBA recourse provision (benefit) 57 (427) 484 NM 53 167 (114) (68.3)

Loss on early extinguishment of debt

— — — NM 744 — 744 NM

Other non-interest expense

620 897 (277) (30.9) 1,977 2,406 (429) (17.8)

Total non-interest expense $ 16,758 $ 14,716 $ 2,042 13.9 $ 51,245 $ 49,922 $ 1,323 2.7

Total operating expense (1)

$ 16,700 $ 14,990 $ 1,710 11.4 $ 48,026 $ 45,499 $ 2,527 5.6

Full-time equivalent employees

300 281 300 281

(1) Total operating expense represents total non-interest expense, adjusted to exclude the impact of discrete items as previously defined in the non-GAAP efficiency ratio calculation, above.

Non-interest expense for the three months ended June 30, 2020 increased by $879,000 , or 5.0% , to $18.3 million compared to $17.5 million for the same period in 2019 .

Non-interest expense for the six months ended June 30, 2020 decreased by $718,000 , or 2.0% , to $34.5 million compared to $35.2 million for the same period in 2019 .

Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $158,000 , or 1.0% , to $15.4 million for the three months ended June 30, 2020 compared to $15.3 million for the same period in 2019 .

Operating expense increased $817,000 , or 2.7% , to $31.3 million compared to $30.5 million for the same period in 2019 .

The increase in operating expense for both periods of comparison was primarily due to an increase in compensation expense and collateral liquidation costs, partially offset by a decrease in general business-related expenses due to the Corporation’s adherence to COVID-19 stay-at-home orders.

Compensation expense for the three months ended June 30, 2020 was $10.8 million , an increase of $293,000 , or 2.8% , compared to the three months ended June 30, 2019 .

Compensation expense for six months ended June 30, 2020 was $21.8 million , an increase of $1.2 million , or 5.7% , compared to the six months ended June 30, 2019 .

Non-interest expense for the three months ended September 30, 2020 increased by $2.0 million, or 13.9%, to $16.8 million compared to $14.7 million for the same period in 2019.

Non-interest expense for the nine months ended September 30, 2020 increased by $1.3 million, or 2.7%, to $51.2 million compared to $49.9 million for the same period in 2019.

Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $1.7 million, or 11.4%, to $16.7 million for the three months ended September 30, 2020 compared to $15.0 million for the same period in 2019.

Operating expense increased $2.5 million, or 5.6%, to $48.0 million compared to $45.5 million for the same period in 2019.

The increase in operating expense for the three month period was primarily due to an increase in compensation, professional fees, computer software, and FDIC insurance, partially offset by a decrease in marketing.

The increase in operating expense for the nine month period was primarily due to an increase in compensation and computer software expense, partially offset by a decrease in general business-related expenses due to the Corporation’s adherence to COVID-19 restrictions.

Compensation expense for the three months ended September 30, 2020 was $11.9 million, an increase of $1.5 million, or 14.8%, compared to the three months ended September 30, 2019.

Compensation expense for the nine months ended September 30, 2020 was $33.7 million, an increase of $2.7 million, or 8.8%, compared to the nine months ended September 30, 2019.

The increase in compensation expense in both periods of comparison reflects an increase in employees and annual merit increases.

Average full-time equivalent employees were 281 for the quarter ended June 30, 2020 compared to 274 for the quarter ended June 30, 2019 .

Collateral liquidation costs increased $26,000 to $115,000 for the three months June 30, 2020 compared to $89,000 for the three months ended June 30, 2019 , and increased $237,000 to $236,000 for the six months ended June 30, 2020 compared to a recovery of $1,000 for the six months ended June 30, 2019 .

The first half of 2019 included the recovery of various workout expenses following the successful resolution of an impaired asset-based loan relationship.

Tax credit investment impairment expense was $1.8 million and $2.0 million for the three and six months ended June 30, 2020 , respectively, compared to $2.1 million and $4.1 million for the three and six months ended June 30, 2019 , respectively.

During the second quarter of 2020, the Corporation recognized a total of $1.7 million in expense due to the impairment of in-market federal historic tax credit investments, which corresponded with the recognition of a $2.5 million in tax credits during the quarter.

During the six months ended June 30, 2019 , the Corporation recognized $3.9 million in expense due to the impairment of in-market federal historic tax credit investments, which corresponded with the recognition of $5.3 million in tax credits.

Average full-time equivalent employees were 295 for the quarter ended September 30, 2020 compared to 274 for the quarter ended September 30, 2019.

Professional fee expense for the three months ended September 30, 2020 increased by $192,000, or 25.6%, to $943,000 compared to $751,000 for the same period in 2019.

Professional fee expense for the nine months ended September 30, 2020 decreased by $124,000, or 4.5%, to $2.6 million compared to $2.7 million for the same period in 2019.

increase in the three months ended was mainly due to additional consulting expense related to annual loan review which had previously been sourced in-house and reported as compensation expense.

The decrease for the nine months ended September 30, 2020 was primarily driven by a reduced need to utilize external recruitment services.

Computer software expense increased $158,000 to $1.0 million for the three months September 30, 2020 compared to $859,000 for the three months ended September 30, 2019, and increased $388,000 to $2.9 million for the nine months ended September 30, 2020 compared to $2.5 million for the nine months ended September 30, 2019.

The increase in computer software expense in both periods of comparison is mainly due to investments made in our small ticket vendor finance and floorplan financing lines of business.

FDIC insurance expense for the three months ended September 30, 2020 was $312,000, an increase of $311,000 compared to the three months ended September 30, 2019.

FDIC insurance expense for the nine months ended September 30, 2020 was $760,000, an increase of $165,000, compared to the nine months ended September 30, 2019.

FDIC insurance expense for the three and nine months ended September 30, 2019 benefited from an assessment credit because as the Deposit Insurance Fund Ratio reached 1.40%, as of June 30, 2019 which exceeded the required minimum ratio of 1.35%, the FDIC was required to distribute assessment credits to small banks for their portion of their assessments that contributed to the growth in the reserve ratio.

The Corporation received a credit of $315,000 in the third quarter of 2019.

Marketing expense for the three months ended September 30, 2020 decreased by $192,000, or 35.0%, to $356,000 compared to $548,000 in the same period in 2019.

Marketing expense for the nine months ended September 30, 2020 decreased by $442,000 to $1.2 million compared to $1.6 million for the same period in 2019.

During 2020, the Corporation’s adherence to COVID-19 restrictions resulted in a reduction in marketing expenses, such as meals and entertainment, and advertisement expense.

No historic tax credits or related impairment were recognized for the three months ended September 30, 2020 and September 30, 2019.

Tax credit investment impairment expense was $2.1 million for the nine months ended September 30, 2020, compared to $4.0 million for the nine months ended September 30, 2019.

During the nine months ended September 30, 2019, the Corporation recognized $3.9 million in expense due to the impairment of in-market federal historic tax credit investments, which corresponded with the recognition of $5.3 million in tax credits.

Management intends to continue actively pursuing in-market tax credit opportunities throughout 2020 and beyond.

SBA recourse benefit was $30,000 and $5,000 for the three and six months ended June 30, 2020 , respectively, compared to recourse provision of $113,000 and $594,000 for the three and six months ended June 30, 2019 , respectively.

The decrease for the three and six months ended June 30, 2020 was primarily due to the declining balance of the outstanding legacy SBA loan sold portfolio and a reduction in the historic loss rate applied to the portfolio.

SBA recourse provision was $57,000 and $53,000 for the three and nine months ended September 30, 2020, respectively, compared to recourse benefit of $427,000 for the three months ended September 30, 2019 and a recourse provision of $167,000 for the nine months ended September 30, 2019.

Changes to SBA recourse reserves may be a source of non-interest expense volatility in future quarters, though the magnitude of this volatility should diminish over time as the outstanding balance of sold legacy SBA loans continues to decline.

The total recourse reserve balance was $1.0 million , or 1.4% of total sold SBA loans outstanding, at June 30, 2020 , compared to $1.3 million , or 1.8% , at December 31, 2019, and $2.1 million , or 2.7% , at June 30, 2019 .

Income tax benefit totaled $1.1 million for the six months ended June 30, 2020 compared to an income tax benefit of $1.9 million for the six months ended June 30, 2019 .

The income tax benefit for the six months ended June 30, 2020 primarily reflects the recognition of $2.5 million in tax credits which correspond with the $1.7 million impairment of relationship-based historic tax credit investments during the same period.

The income tax benefit for the six months ended June 30, 2019 primarily reflects the recognition of $5.3 million in federal historic tax credits, which correspond with the $3.9 million impairment of relationship-based historic tax credit investments during the same period.

The effective tax rate for the six months ended June 30, 2020 , excluding the discrete items, was 18.5%.

The total recourse reserve balance was $1.1 million, or 1.4% of total sold SBA loans outstanding, at September 30, 2020, compared to $1.3 million, or 1.8%, at December 31, 2019, and $1.6 million, or 2.2%, at September 30, 2019.

Income tax expense totaled $73,000 for the nine months ended September 30, 2020 compared to an income tax benefit of $475,000 for the nine months ended September 30, 2019.

The income tax expense for the nine months ended September 30, 2020 reflects a benefit from the recognition of $2.5 million in tax credits which correspond with the $1.7 million impairment of relationship-based historic tax credit investments during the same period.

The income tax benefit for the nine months ended September 30, 2019 primarily reflects the recognition of $5.3 million in federal historic tax credits, which correspond with the $3.9 million impairment of relationship-based historic tax credit investments during the same period.

The effective tax rate for the nine months ended September 30, 2020, excluding the discrete items, was 19.33%.

Generally, the provision for income taxes is determined by applying an estimated annual effective income tax rate to income before taxes and adjusting for discrete items.

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Financial Condition

Total assets increased by $372.0 million , or 17.7% , to $2.469 billion as of June 30, 2020 compared to $2.097 billion at December 31, 2019 .

The increase in total assets was primarily driven by PPP loan growth.

Total assets increased by $505.1 million, or 24.1%, to $2.602 billion as of September 30, 2020 compared to $2.097 billion at December 31, 2019.

The increase in total assets was primarily driven by PPP loan growth and commercial real estate (“CRE”) loan growth, partially offset by a decrease in short-term investments.

Short-Term Investments

Short-term investments decreased by $23.2 million , or 45.4% , to $27.8 million at June 30, 2020 from $51.0 million at December 31, 2019 .

Short-term investments decreased by $27.5 million, or 53.9%, to $23.5 million at September 30, 2020 from $51.0 million at December 31, 2019.

Our short-term investments primarily consist of interest-bearing deposits held at the FRB and commercial paper.

We value the safety and soundness provided by the FRB and therefore incorporate short-term investments in our on-balance sheet liquidity program.

As of June 30, 2020 , we did not hold any commercial paper and as of December 31, 2019 , our total investment in commercial paper was $5.9 million .

As of September 30, 2020, we did not hold any commercial paper and as of December 31, 2019, our total investment in commercial paper was $5.9 million.

Due to current economic conditions, we decided to temporarily exit this short-term investment.

We approach our decisions to purchase commercial paper with similar rigor and underwriting standards as applied to our loan and lease portfolio.

The original maturities of the commercial paper are usually 60 days or less and provide an attractive yield in comparison to other short-term alternatives.

These investments also assist us in maintaining a shorter duration of our overall investment portfolio which we believe is necessary to be in a position to benefit from an anticipated change in the yield curve level and shape.

The original maturities of the commercial paper are usually 60 days or less often provide an attractive yield in comparison to other short-term alternatives.

In general, the level of our short-term investments will be influenced by the timing of deposit gathering, scheduled maturities of wholesale deposits, funding of loan and lease growth when opportunities are presented, and the level of our securities portfolio.

Please refer to the section titled Liquidity and Capital Resources for further discussion.

Total securities, including available-for-sale and held-to-maturity, decreased by $4.3 million , or 2.1% , to $201.5 million at June 30, 2020 compared to $205.8 million at December 31, 2019 .

During the six months ended June 30, 2020 , due to declining interest rates, we recognized unrealized gains of $4.2 million before income taxes through other comprehensive income.

As of June 30, 2020 and December 31, 2019 , our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted-average expected maturity of 3.7 years and 4.4 years, respectively.

Total securities, including available-for-sale and held-to-maturity, increased by $2.3 million, or 1.1%, to $208.2 million at September 30, 2020 compared to $205.8 million at December 31, 2019.

During the nine months ended September 30, 2020, due to declining interest rates, we recognized unrealized gains of $3.9 million before income taxes through other comprehensive income, compared to gains of $3.3 million for the same period in 2019.

As of September 30, 2020 and December 31, 2019, our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted-average expected maturity of 3.8 years and 4.4 years, respectively.

Generally, our investment philosophy remains as stated in our most recent Annual Report on Form 10-K.

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On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification, data integrity validation primarily through comparison of current price to an expectation-based analysis of movement in prices based upon the changes in the related yield curves, and other market factors.

No securities within our portfolio were deemed to be other-than-temporarily impaired as of June 30, 2020 .

No securities within our portfolio were deemed to be other-than-temporarily impaired as of September 30, 2020.

Loans and Leases Receivable

Loans and leases receivable, net of allowance for loan and lease losses, increased by $334.3 million to $2.029 billion at June 30, 2020 from $1.695 billion at December 31, 2019 which was driven by the aforementioned PPP loan growth.

Loans and leases receivable, net of PPP loans and the allowance for loan and lease losses, increased by $6.4 million , or 0.4% , to $1.701 billion at June 30, 2020 from December 31, 2019 .

Total commercial real estate (“CRE”) contributed to growth, increasing $68.1 million to $1.222 billion from $1.154 billion at December 31, 2019 .

Multifamily and construction loans were the largest contributors to CRE loan growth as of June 30, 2020 , increasing $27.2 million and $24.3 million , respectively from December 31, 2019 .

Commercial and industrial (“C&I”) loans increased $277.8 million to $781.2 million from $503.4 million at December 31, 2019 .

Excluding PPP loans, C&I loans decreased $50.1 million to $453.3 million from $503.4 million at December 31, 2019 .

There continues to be a concentration in CRE loans, however, in general our composition of total loans and leases has remained relatively consistent due to balanced growth across our product offerings.

CRE loans represented 70.3% and 67.3% of our total loans, excluding PPP loans, as of June 30, 2020 and December 31, 2019 , respectively.

As of June 30, 2020 , 18.8% of the CRE loans were owner-occupied CRE, compared to 19.6% as of December 31, 2019 .

Loans and leases receivable, net of allowance for loan and lease losses, increased by $444.4 million to $2.139 billion at September 30, 2020 from $1.695 billion at December 31, 2019 which was driven by the aforementioned PPP loan and CRE loan growth, partially offset by a reduction in commercial and industrial (“C&I”) loans.

Loans and leases receivable, net of allowance for loan and lease losses and excluding net PPP loans, increased by $118.9 million, or 7.0%, to $1.814 billion at September 30, 2020 from December 31, 2019.

Total CRE increased $172.4 million to $1.327 billion, up from $1.154 billion at December 31, 2019.

Multifamily, commercial real estate non-owner occupied, and construction loans were the largest contributors to CRE loan growth as of September 30, 2020, increasing $70.3 million, $49.1 million, and $33.7 million, respectively, from December 31, 2019.

Importantly, management has elevated its underwriting standards during the pandemic to ensure business owners and guarantors have robust liquidity, operating performance, and collateral positions.

Despite these higher standards, the Corporation has been able to grow loans and deepen banking relationships.

C&I loans increased $286.9 million to $790.3 million from $503.4 million at December 31, 2019.

Excluding net PPP loans, C&I loans decreased $38.5 million to $464.9 million from $503.4 million at December 31, 2019 primarily due to a $31.2 million decrease in asset-based loans and $4.0 million decrease in accounts receivable financing.

Specialty finance products have historically experienced counter cyclical growth, growing during times of economic stress and uncertainty.

As such, management expects asset-based loans and accounts receivable financing volume to increase during the remainder of 2020 and throughout 2021.

There continues to be a concentration in CRE loans which represented 71.6% and 67.3% of our total loans, excluding net PPP loans, as of September 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020, 18.1% of the CRE loans were owner-occupied CRE, compared to 19.6% as of December 31, 2019.

We consider owner-occupied CRE more characteristic of the Corporation’s C&I portfolio as, in general, the client’s primary source of repayment is the cash flow from the operating entity occupying the commercial real estate property.

As mentioned above, excluding PPP loans, our C&I portfolio decreased $50.1 million , or 10.0% , to $453.3 million at June 30, 2020 from $503.4 million at December 31, 2019 .

Line of credit usage was $212.6 million as of June 30, 2020 , down from $281.4 million at December 31, 2019 , as line of credit usage significantly declined due to PPP loan proceeds.

We will continue to emphasize actively pursuing C&I loans across the Corporation as this segment of our loan and lease portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and private wealth management relationships which generate additional fee revenue.

Management believes our ongoing investment in C&I loan production will allow C&I loan growth to keep pace with CRE growth over the long-term, ultimately stabilizing the concentration in CRE loans.

As mentioned above, excluding net PPP loans, our C&I portfolio decreased $38.5 million, or 7.7%, to $464.9 million at September 30, 2020 from $503.4 million at December 31, 2019.

Line of credit usage was $217.6 million as of September 30, 2020, down from $282.9 million at December 31, 2019, as line of credit usage significantly declined due to PPP loan proceeds.

We will continue to actively pursue C&I loans across the Corporation as this segment of our loan and lease portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and private wealth management relationships which generate additional fee revenue.

While we continue to experience significant competition from banks operating in our primary geographic areas, we remain committed to our underwriting standards and will not deviate from those standards for the sole purpose of growing our loan and lease portfolio.

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The types of loans and leases we originate and the various risks associated with these originations remain consistent with information previously outlined in our most recent Annual Report on Form 10-K.

Non-accrual loans increased $3.5 million , or 16.9% , to $24.1 million at June 30, 2020 , compared to $20.6 million at December 31, 2019 .

The increase in non-accrual loans was principally due to the impairment of one $5.0 million commercial relationship and the repurchase of $3.6 million of impaired legacy SBA loans, partially offset by the $4.0 million payoff of two impaired legacy SBA loan relationships.

The Corporation’s non-accrual loans as a percentage of total gross loans and leases measured 1.17% and 1.20% at June 30, 2020 and December 31, 2019 , respectively.

Non-accrual loans as a percentage of total gross loans and leases, excluding PPP loans, was 1.39% at June 30, 2020 .

Non-accrual loans increased $15.4 million, or 74.9%, to $36.1 million at September 30, 2020, compared to $20.6 million at December 31, 2019.

The increase in non-accrual loans was principally due to the impairment of three previously identified relationships in the hospitality, wholesale food distributor, and commercial industries during the nine months ended September 30, 2020 with balances outstanding of $5.8 million, $4.3 million, and $5.0 million, respectively.

In addition, an impaired legacy SBA loan of $3.6 million was repurchased.

The Corporation’s non-accrual loans as a percentage of total gross loans and leases measured 1.66% and 1.20% at September 30, 2020 and December 31, 2019, respectively.

Non-accrual loans as a percentage of total gross loans and leases, excluding net PPP loans, was 1.95% at September 30, 2020.

Please refer to the sections titled COVID-19 Update and Asset Quality for additional information on credit quality.

As of June 30, 2020 , deposits increased by $180.0 million , or 11.8% to $1.710 billion from $1.530 billion at December 31, 2019 primarily due to a $279.5 million increase in transaction accounts partially offset by decreases of $61.7 million and $17.7 million in wholesale deposits and money market accounts, respectively.

Transaction account balances were inflated as of June 30, 2020 due to PPP loan proceeds.

Management attributes the recent transition from money market accounts to reciprocal transaction accounts with full FDIC insurance to our clients’ preferences for safety and soundness versus interest rate amid the economic uncertainty created by the COVID-19 pandemic.

As of September 30, 2020, deposits increased by $291.0 million, or 19.0%, to $1.821 billion from $1.530 billion at December 31, 2019 primarily due to a $369.5 million increase in transaction accounts, partially offset by a $37.5 million decrease in money market accounts.

Transaction account balances increased primarily due to the influx of PPP loan proceeds.

Management attributes the transition from money market accounts to reciprocal transaction accounts with full FDIC insurance to our clients’ preferences for safety and soundness amid the economic uncertainty created by the COVID-19 pandemic.

Period-end deposit balances associated with in-market relationships will fluctuate based upon maturity of time deposits, client demands for the use of their cash, and our ability to maintain existing and new client relationships.

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We measure the success of in-market deposit gathering efforts based on the number and average balances of our deposit accounts as compared to ending balances due to the volatility of some of our larger relationships.

The Bank’s average in-market deposits, consisting of all transaction accounts, money market accounts, and certificates of deposit, were approximately $1.468 billion , or 74.7% of total bank funding for the six months ended June 30, 2020 , compared to $1.271 billion , or 71.3% of total bank funding for the year ended December 31, 2019 .

The Bank’s average in-market deposits, consisting of all transaction accounts, money market accounts, and certificates of deposit, were approximately $1.528 billion for the nine months ended September 30, 2020, compared to $1.271 billion for the year ended December 31, 2019.

FHLB Advances and Other Borrowings

As of June 30, 2020 , FHLB advances and other borrowings increased by $145.6 million , or 45.6% , to $465.0 million from $319.4 million at December 31, 2019 .

While total wholesale funding as a percentage of total bank funding has decreased meaningfully overall due to significant in-market deposit growth, we continue to replace the majority of our maturing brokered certificates of deposit with FHLB advances at lower rates.

As of September 30, 2020, FHLB advances and other borrowings increased by $164.1 million, or 51.4%, to $483.5 million from $319.4 million at December 31, 2019.

Total bank funding is defined as total deposits plus FHLB advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances.

and improved the Corporation’s funding position.

Management believes this strategy will help stabilize net interest margin with the expectation of a low interest rate environment for an extended period of time.

During the second quarter of 2020, management tested the availability of the Federal Reserve PPPLF due to the uncertainty of when PPP loans would be required to close and fund.

As of June 30, 2020, the Corporation had one $29.6 million PPPLF advance outstanding.

As of September 30, 2020, the Corporation had one $29.6 million PPPLF advance outstanding.

Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds.

We will utilize FHLB advances to the extent we maintain an adequate level of excess borrowing capacity for liquidity and contingency funding purposes and pricing remains favorable in comparison to the wholesale deposit alternative.

At June 30, 2020 , the ratio of wholesale funds to total bank funding was 24.7% .

We will use FHLB advances and/or brokered certificates of deposit in specific maturity periods needed, typically three to five years, to match-fund fixed rate loans and effectively mitigate the interest rate risk measured through our asset/liability management process and to support asset growth initiatives while taking into consideration our operating goals and desired level of usage of wholesale funds.

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Impaired Assets

Total impaired assets consisted of the following at June 30, 2020 and December 31, 2019 , respectively:

Total impaired assets consisted of the following at September 30, 2020 and December 31, 2019, respectively:

September 30,

2020 December 31,

(Dollars in Thousands)

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Land development 890 1,526

Construction — —

Multi-family — —

1-4 family 333 333

Total non-accrual commercial real estate 14,977 5,891

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Allowance for loan and lease losses to non-accrual loans and leases 85.48 94.70

PPP loans outstanding as of June 30, 2020 , were $327.9 million .

Net PPP loans outstanding as of September 30, 2020, were $325.5 million.

There were no PPP loans outstanding as of December 31, 2019.

The asset quality ratios, excluding PPP loans as they are fully guaranteed by the SBA, at June 30, 2020 and December 31, 2019 , were as follows:

The following asset quality ratios exclude net PPP loans as they are fully guaranteed by the SBA:

September 30,

2020 December 31,

Total non-accrual loans and leases to gross loans and leases 1.95 % 1.20 %

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Allowance for loan and lease losses to gross loans and leases 1.67 1.14

As of June 30, 2020 and December 31, 2019 , $16.3 million and $15.6 million of non-accrual loans and leases were considered troubled debt restructurings, respectively.

As of September 30, 2020 and December 31, 2019, $15.4 million and $15.6 million of non-accrual loans and leases were considered troubled debt restructurings, respectively.

This increase is the result of ongoing workout efforts on previously identified impaired loans and does not include any new troubled debt restructurings related to the COVID-19 pandemic.

We use a wide variety of available metrics to assess the overall asset quality of the portfolio and no one metric is used independently to make a final conclusion as to the asset quality of the portfolio.

Non-performing assets increased $2.0 million , or 8.3% , to $25.5 million at June 30, 2020 from $23.5 million at December 31, 2019 .

The increase in non-performing assets was principally due to the impairment of one $5.0 million commercial relationship and the repurchase of $3.6 million of impaired legacy SBA loans, partially offset by $4.0 million in payoffs on legacy SBA loans and a $1.5 million decrease in foreclosed properties, net of impairment, principally due to the sale of one legacy SBA property.

Non-performing assets increased $13.1 million, or 55.8%, to $36.7 million at September 30, 2020 from $23.5 million at December 31, 2019.

In addition, an impaired legacy SBA loan of $3.6 million was repurchased.

We also monitor early stage delinquencies to assist in the identification of potential future problems.

As of June 30, 2020 , 99.64% of the loan and lease portfolio, excluding non-accrual loans and leases, was in a current payment status, compared to 99.76% at December 31, 2019 .

As of September 30, 2020, 99.90% of the loan and lease portfolio, excluding non-accrual loans and leases, was in a current payment status, compared to 99.76% at December 31, 2019.

We also monitor asset quality through our established credit quality indicator categories.

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The following represents additional information regarding our impaired loans and leases:

As of and for the Six Months Ended June 30,

As of and for the

As of and for the Nine Months Ended September 30, As of and for the

Year Ended December 31,

2020 2019 2019

(In Thousands)

Impaired loans and leases with no impairment reserves required

$ 15,557 $ 9,320 $ 7,312

Impaired loans and leases with impairment reserves required

20,540 13,615 13,441

Total impaired loans and leases 36,097 22,935 20,753

Impairment reserve (included in allowance for loan and lease losses)

8,898 4,319 3,365

Net impaired loans and leases $ 27,199 $ 18,616 $ 17,388

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Foregone interest income attributable to impaired loans and leases

$ 2,049 $ 2,113 $ 2,693

Interest income recognized on impaired loans and leases

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A summary of foreclosed properties activity is as follows:

As of and for the Six Months Ended June 30,

As of and for the

As of and for the Nine Months Ended September 30, As of and for the

Year Ended December 31,

2020 2019 2019

(In Thousands)

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Allowance for Loan and Lease Losses

The allowance for loan and lease losses increased $7.9 million , or 40.7% , from $19.5 million as of December 31, 2019 to $27.5 million as of June 30, 2020 .

The allowance for loan and lease losses as a percentage of gross loans and leases also increased from 1.14% as of December 31, 2019 to 1.33% as of June 30, 2020 .

The allowance for loan and lease losses as a percentage of gross loans and leases, excluding PPP loans, was 1.58% as of June 30, 2020 .

The allowance for loan and lease losses increased $11.3 million, or 57.9%, from $19.5 million as of December 31, 2019 to $30.8 million as of September 30, 2020.

The allowance for loan and lease losses as a percentage of gross loans and leases also increased from 1.14% as of December 31, 2019 to 1.41% as of September 30, 2020.

The allowance for loan and lease losses as a percentage of gross loans and leases, excluding net PPP loans, was 1.67% as of September 30, 2020.

The increase in allowance for loan and lease losses as a percent of gross loans and leases was principally driven by COVID-19 and the economic impact it could have on the Corporation’s loan portfolio.

For the six months ended June 30, 2020 , the increase in the allowance for loan and lease losses was in large part due to an increase in several qualitative factors after careful evaluation by management.

Additionally, an increase in specific reserves of $2.1 million was driven by deterioration of two existing legacy SBA impaired relationships.

For the nine months ended September 30, 2020, the increase in the allowance for loan and lease losses was in large part due to an increase in several qualitative factors after careful evaluation by management.

Most notably, a $4.7 million increase was due to the economic conditions caused by the pandemic, including the increase in the unemployment rate, management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, and the level of loans and leases subject to more frequent review by management.

Additionally, an increase in specific reserves of $5.5 million was driven by deterioration of two existing legacy SBA impaired relationships and one relationship in the hospitality industry.

There have been no substantive changes to our methodology for estimating the appropriate level of allowance for loan and lease loss reserves from what was previously outlined in our most recent Annual Report on Form 10-K.

Please refer to the section titled COVID-19 Update for additional information.

During the six months ended June 30, 2020 , we recorded net charge-offs on impaired loans and leases of $707,000 , comprised of $948,000 of charge-offs and $241,000 of recoveries.

During the six months ended June 30, 2019 , we recorded net recoveries on impaired loans and leases of approximately $130,000 , comprised of $63,000 of charge-offs and $193,000 of recoveries.

During the nine months ended September 30, 2020, we recorded net charge-offs on impaired loans and leases of $1.2 million, comprised of $1.5 million of charge-offs and $264,000 of recoveries.

During the nine months ended September 30, 2019, we recorded net charge-offs on impaired loans and leases of approximately $868,000, comprised of $1.2 million of charge-offs and $294,000 of recoveries.

We will continue to experience some level of periodic charge-offs in the future as exit strategies are considered and executed, in particular as it relates to our commercial clients impacted by the COVID-19 pandemic.

Loans and leases with previously established specific reserves may ultimately result in a charge-off under a variety of scenarios.

Based upon the application of our methodology for estimating the appropriate level of allowance for loan and lease loss reserves, which includes actively monitoring the asset quality and inherent risks within the loan and lease portfolio, management concluded that an allowance for loan and lease losses of $27.5 million , or 1.58% of total loans and leases excluding PPP loans, was appropriate as of June 30, 2020 .

Based upon the application of our methodology for estimating the appropriate level of allowance for loan and lease loss reserves, which includes actively monitoring the asset quality and inherent risks within the loan and lease portfolio, management concluded that an allowance for loan and lease losses of $30.8 million, or 1.67% of total loans and leases excluding net PPP loans, was appropriate as of September 30, 2020.

Given ongoing complexities with current workout situations, including those related to the COVID-19 pandemic, further charge-offs and increased provisions for loan and lease losses may be recorded if additional facts and circumstances lead us to a different conclusion.

As of June 30, 2020 and December 31, 2019 , our allowance for loan and lease losses to total non-accrual loans and leases was 113.98% and 94.70% , respectively.

As of September 30, 2020 and December 31, 2019, our allowance for loan and lease losses to total non-accrual loans and leases was 85.48% and 94.70%, respectively.

Impaired loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease.

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Conversely, if we identify further impaired loans or leases, this ratio could fall if the impaired loans are adequately collateralized and therefore require no specific or general reserve.

Given our business practices and evaluation of our existing loan and lease portfolio, we believe this coverage ratio is appropriate for the probable losses inherent in our loan and lease portfolio as of June 30, 2020 .

A summary of the activity in the allowance for loan and lease losses follows:

As of and for the Three Months Ended June 30,

As of and for the Six Months Ended June 30,

As of and for the Three Months Ended September 30, As of and for the Nine Months Ended September 30,

2020 2019 2020 2019

(Dollars in Thousands)

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Construction and land development — — — —

Multi-family — — — —

1-4 family — — — —

Commercial and industrial (505) (1,097) (1,358) (1,158)

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Home equity and second mortgages — (2) — (2)

Other — — (13) (2)

Total charge-offs (505) (1,099) (1,454) (1,162)

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Construction and land development — — — —

Multi-family — — — —

1-4 family — — — —

Commercial and industrial 21 99 259 191

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Home equity and second mortgages — — — 26

Other 2 1 2 3

Total recoveries 23 101 264 294

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Annualized net charge-offs (recoveries) as a percent of average gross loans and leases

Annualized net charge-offs (recoveries) as a percent of average gross loans and leases, excluding average PPP loans

0.09 % 0.23 % 0.08 % 0.07 %

Annualized net charge-offs (recoveries) as a percent of average gross loans and leases, excluding average net PPP loans 0.11 % 0.23 % 0.09 % 0.07 %

Liquidity and Capital Resources

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While the Bank is subject to certain generally applicable regulatory limitations regarding its ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations.

The Corporation’s principal liquidity requirements at June 30, 2020 were the interest payments due on subordinated and junior subordinated notes.

On July 24, 2020 , the Bank’s Board of Directors declared a dividend in the aggregate amount of $2.0 million bringing year-to-date dividend declarations to $10.5 million .

The Corporation’s principal liquidity requirements at September 30, 2020 were the interest payments due on subordinated and junior subordinated notes.

On October 23, 2020, the Bank’s Board of Directors declared a dividend in the aggregate amount of $1.5 million bringing year-to-date dividend declarations to $12.0 million.

The capital ratios of the Corporation and its subsidiary continue to meet all applicable regulatory capital adequacy requirements.

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We define our on-balance sheet liquidity as the total of our short-term investments, our unencumbered securities available-for-sale, and our unencumbered pledged loans.

As of June 30, 2020 and December 31, 2019 , our immediate on-balance sheet liquidity was $611.6 million and $438.2 million , respectively.

At June 30, 2020 and December 31, 2019 , the Bank had $27.3 million and $44.4 million on deposit with the FRB recorded in short-term investments, respectively.

As of September 30, 2020 and December 31, 2019, our immediate on-balance sheet liquidity was $556.1 million and $438.2 million, respectively.

At September 30, 2020 and December 31, 2019, the Bank had $22.8 million and $44.4 million on deposit with the FRB recorded in short-term investments, respectively.

Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our on-balance sheet liquidity in our interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB.

We plan to utilize excess liquidity to fund loan and lease portfolio growth, pay down maturing debt, allow run off of maturing wholesale certificates of deposit, or invest in securities to maintain adequate liquidity at an improved margin.

We had $530.4 million of outstanding wholesale funds at June 30, 2020 , compared to $446.5 million of wholesale funds as of December 31, 2019 , which represented 24.7% and 24.5% , respectively, of ending balance total bank funding.

We had $613.2 million of outstanding wholesale funds at September 30, 2020, compared to $446.5 million of wholesale funds as of December 31, 2019, which represented 26.9% and 24.5%, respectively, of ending balance total bank funding.

Wholesale funds include FHLB advances, Federal Reserve PPPLF advances, brokered certificates of deposit, and deposits gathered from internet listing services.

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The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.

Period-end in-market deposits increased $241.7 million to $1.621 billion at June 30, 2020 from $1.379 billion at December 31, 2019 as in-market deposit balances were primarily inflated due to PPP loan proceeds.

Period-end in-market deposits increased $288.3 million to $1.667 billion at September 30, 2020 from $1.379 billion at December 31, 2019 as in-market deposit balances increased due to PPP loan proceeds.

Our in-market relationships remain stable;

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The Bank limits the percentage of wholesale funds to total bank funds in accordance with liquidity policies approved by its Board.

The Bank was in compliance with its policy limits as of June 30, 2020 and December 31, 2019 .

The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the six month period ended June 30, 2020 .

The Bank was in compliance with its policy limits as of September 30, 2020 and December 31, 2019.

The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the nine month period ended September 30, 2020.

In the event that there is a disruption in the availability of wholesale funds at maturity, the Bank has managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded through on-balance sheet liquidity.

These potential funding sources include deposits maintained at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.

As of June 30, 2020 , the available liquidity was in excess of the stated policy minimum.

As of September 30, 2020, the available liquidity was in excess of the stated policy minimum.

We believe the Bank will also have access to the unused federal funds lines, cash flows from borrower repayments, and cash flows from security maturities.

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We believe that the Bank has sufficient liquidity to match the balance of net withdrawable deposits and short-term borrowings in light of present economic conditions and deposit flows.

During the six months ended June 30, 2020 , operating activities resulted in a net cash inflow of $2.1 million , which included net income and provision for loan and lease losses of $6.6 million and $8.7 million , respectively, partially offset by a net increase in loans originated for sale.

Net cash used in investing activities for the six months ended June 30, 2020 was approximately $347.4 million which consisted of cash outflows to fund net loan growth and the purchase of $8.0 million in additional bank-owned life insurance, partially offset by a net reduction in securities.

Net cash provided by financing activities resulted in a net cash inflow of $320.6 million for the six months ended June 30, 2020 primarily due to a net increase in FHLB advances, an increase in Federal Reserve PPPLF advances, and a net increase in deposits.

During the nine months ended September 30, 2020, operating activities resulted in a net cash inflow of $5.4 million, which included net income and provision for loan and lease losses of $10.9 million and $12.5 million, respectively, partially offset by a net increase in loans originated for sale.

Net cash used in investing activities for the nine months ended September 30, 2020 was approximately $470.1 million which consisted of cash outflows to fund net loan growth and the purchase of $8.0 million in additional bank-owned life insurance and $13.4 million of FHLB stock, partially offset by a net reduction in securities.

Net cash provided by financing activities resulted in a net cash inflow of $449.3 million for the nine months ended September 30, 2020 primarily due to a net increase in FHLB advances, an increase in Federal Reserve PPPLF advances, and a net increase in deposits.

Please refer to the Consolidated Statements of Cash Flows included in PART I., Item 1 for further details regarding significant sources of cash flow for the Corporation.

Contractual Obligations and Off-Balance Sheet Arrangements

As of June 30, 2020 , there were no material changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 .

As of September 30, 2020, there were no material changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

We continue to believe that we have adequate capital and liquidity available from various sources to fund projected contractual obligations and commitments.

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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-Q

Item 2. Management’s Discussion and Analysis