What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-08 · 379 added, 183 removed, 396 unchanged (59% of the section changed)

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This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties, and assumptions.

You should review the “Risk Factors” sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements.

You should review the “Risk Factors” sections of this report, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements.

See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.

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Our residential mortgage products are offered nationwide primarily through an online direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending.

Our consumer lending products are primarily originated on a nationwide basis over the Internet, as well as through relationships with dealerships and financing partners.

Our commercial banking products and services are delivered through a relationship banking model and include commercial real estate (“CRE”) banking, commercial and industrial (“C&I”) banking, public finance, healthcare finance, small business lending

and commercial deposits and treasury management.

lending products are primarily originated on a nationwide basis over the Internet, as well as through relationships with dealerships and financing partners.

Through our CRE team, we offer single tenant lease financing on a nationwide basis in addition to traditional investor CRE and construction loans primarily within Central Indiana and adjacent markets.

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Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis.

Our healthcare finance team was established in conjunction with our strategic partnership with Lendeavor, Inc., a San Francisco-based technology-enabled lender to healthcare practices, and provides lending for healthcare practice finance or acquisition, acquisition or refinancing owner-occupied CRE and equipment purchases.

This portfolio segment is generally concentrated in the Western and Southwestern regions of the United States with plans to continue expanding nationwide.

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We believe that we can differentiate ourselves from larger financial institutions through providing a full suite of services to emerging small businesses and entrepreneurs.

We have begun adding experienced personnel to build out our capabilities in small business lending and U.S.

We have been focused on adding experienced personnel to build out our capabilities in small business lending and U.S.

government guaranteed lending programs, including loans originated under the Small Business Administration (“SBA”) guidelines.

To accelerate our efforts in this area, on November 1, 2019 we acquired a loan portfolio, a servicing portfolio and a team of experienced SBA professionals from First Colorado National Bank.

As of March 31, 2020, the principal balance of loans acquired was approximately $31.3 million and was comprised primarily of SBA 7(a) loans while the principal balance of the servicing portfolio acquired was approximately $89.2 million and consisted of guaranteed SBA 7(a) loans sold in the secondary market.

We expect to continue adding personnel to build out a nationwide small business platform.

During 2020, we have continued to hire additional small business sales, credit and operations personnel and plan to continue our efforts in onboarding talent as we build out our nationwide small business platform.

COVID-19 Pandemic

The coronavirus pandemic (“COVID-19”) has caused health and economic concerns across the world and continues to have negative effects on global, national and local economies.

In response, federal, state and local governments have recently passed laws intended to provide relief to affected businesses and individuals and to stimulate national and local economies.

While the ongoing spread of COVID-19 did not have a material impact on our operating results as of March 31, 2020, a sustained outbreak could have an adverse affect on our financial condition and results of operations in future periods.

The ultimate impact of COVID-19 on our business is highly uncertain as the extent of the pandemic is unknown, and we cannot predict with confidence when restrictions on businesses and individuals will be lifted and the economies in which we operate return to conditions existing prior to COVID-19.

As a result of actions taken to either contain or reduce the impact of COVID-19, we may experience issues that negatively impact our business, such as a decline in the liquidity of our borrowers or volatility in interest rates affecting our rate-sensitive assets and liabilities.

To date, our response to COVID-19 has centered around supporting our employees, caring for our communities and serving our clients.

We fully implemented our Company-wide business continuity plan in order to continue conducting business while focusing on the health and safety of our employees, clients and community.

The majority of our workforce is working remotely and for those that continue to come into the office we have implemented social distancing policies and increased cleaning protocols and frequency at all Company locations.

With regard to our community, among other things, we have announced a $250,000 grant in April 2020 to provide financial stimulus to small businesses and not-for-profits in Marion and Hamilton counties in Indiana.

As a digitally-focused institution without branch locations, we believe we have been able to continue serving clients while minimizing operational disruptions caused by COVID-19.

For clients affected by COVID-19, we have offered loan payment deferral programs and, as a preferred SBA lender, we have assisted clients in participating in the Paycheck Protection Program (“PPP”).

The coronavirus pandemic (“COVID-19”) continues to pose health and economic challenges globally.

In response, federal, state and local governments have passed laws and enacted policy changes intended to provide relief to affected businesses and individuals and to stimulate national and local economies.

While the effect of COVID-19, including the responses from governmental agencies, did have an impact on our operating results as of June 30, 2020, we believe the impact was consistent with the effect of COVID-19 on the overall banking industry and was minimal on our operations.

However, a prolonged outbreak could have an adverse effect on our financial condition and results of operations in future periods.

The ultimate impact of COVID-19 on our business remains uncertain as we cannot predict with confidence when the economies in which we operate will return to conditions existing prior to COVID-19.

As a result of continued measures to either contain or reduce the impact of COVID-19, we may experience issues that negatively impact our business, such as a decline in the liquidity of our borrowers or volatility in interest rates.

Throughout the COVID-19 pandemic, our top priority has been the health of our team and clients.

A significant number of our employees are still working remotely, and for those that continue to come into the office we have implemented social distancing policies and increased cleaning frequency and protocols at all Company locations.

As a digitally-focused institution without branch locations, we were able to continue serving clients when they needed us most, while minimizing operational disruptions caused by COVID-19.

Beginning in the first quarter 2020, we offered loan payment deferral programs for clients affected by COVID-19.

Loan balances on payment deferral programs peaked in late May 2020.

As certain parts of the economy re-opened during the second quarter 2020, loan balances under deferral agreements have been reduced significantly from the peak and all borrowers coming off deferrals have resumed normal payment schedules.

As a preferred SBA lender, we also assisted clients by participating in the Paycheck Protection Program (“PPP”).

Despite the challenging environment, we have continued to prudently extend credit to both commercial and consumer clients.

Small Business Administration Paycheck Protection Program

Section 1102 of the CARES Act created the PPP, which is administered by the SBA.

Loans originated under the PPP have a two-year term, bear an interest rate of 1.00% and are designed to provide a direct incentive to small businesses to retain employees on their payroll during COVID-19.

These loans will be forgiven if the funds were used for payroll costs and other qualifying business expenses as long as 75% of the forgiven amount was used to maintain payroll costs.

Section 1102 of the CARES Act created the PPP, which is jointly administered by the SBA and the Department of the Treasury.

The PPP is designed to provide a direct incentive to small businesses to retain employees on their payroll during COVID-19 as well as to help cover certain utility costs and rent payments.

Loans originated under the PPP bear an interest rate of 1.00% and do not require payments for the first six months.

Originally, all PPP Loans carried a two-year term, however Congressional amendments to the CARES Act changed the maturity of loans approved after June 5, 2020 to a five-year term.

These loans may be forgiven if the loan proceeds were used for payroll costs and other qualifying business expenses as long as a minimum of 60% of the forgiven amount was used to maintain payroll costs.

The federal government approved an initial appropriation of $349.0 billion for PPP loans and when that was depleted, approved an additional $310.0 billion.

As a preferred SBA lender, we assisted our clients in participating in both rounds of the PPP.

Through May 1, 2020, we provided

437 PPP loans totaling $59.6 million, with an average loan size of $136,000, to help small businesses maintain their workforces in an uncertain and challenging environment.

Through June 30, 2020, we approved and funded 449 PPP loans totaling $58.9 million to help small businesses maintain their workforces in an uncertain and challenging environment.

All of the loans the Company originated have two-year maturities as they were originated prior to June 5, 2020.

Results of Operations

The following table presents a summary of the Company’s financial performance for the last five completed fiscal quarters.

(dollars in thousands except for per share data)

Three Months Ended

The following table presents a summary of the Company’s financial performance for the last five completed fiscal quarters and the six months ended June 30, 2020 and 2019.

(dollars in thousands except for per share data) Three Months Ended Six Months Ended

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

2020 June 30,

Income Statement Summary:

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Noninterest expense 13,244 13,486 12,613 11,203 11,709 26,730 22,818

Income tax provision

Income tax (benefit) provision (268) 263 602 449 340 (5) 866

Net income $ 3,932 $ 6,019 $ 7,096 $ 6,326 $ 6,121 $ 9,951 $ 11,817

Per Share Data:

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Tangible book value per common share 1

$ 30.92 $ 30.65 $ 30.82 $ 29.82 $ 29.10 $ 30.92 $ 29.10

Common shares outstanding 9,799,047 9,801,825 9,741,800 9,741,800 10,016,458 9,799,047 10,016,458

Average common shares outstanding:

Basic 9,768,227 9,721,485 9,825,784 9,979,603 10,148,285 9,798,528 10,182,770

Diluted 9,768,227 9,750,528 9,843,829 9,980,612 10,148,285 9,802,427 10,186,833

Dividend payout ratio 2

15.00 % 9.68 % 8.33 % 9.52 % 10.00 % 11.76 % 10.34 %

Performance Ratios:

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Return on average tangible common equity 1

5.23 % 7.90 % 9.61 % 8.53 % 8.39 % 6.58 % 8.22 %

Net interest margin 1.37 % 1.50 % 1.51 % 1.54 % 1.73 % 1.43 % 1.79 %

Net interest margin - FTE 1,3

1.50 % 1.65 % 1.67 % 1.70 % 1.91 % 1.58 % 1.97 %

Noninterest expense to average assets 1.22 % 1.32 % 1.22 % 1.11 % 1.23 % 0.94 % 1.55 %

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Tangible common equity to tangible assets ratio 1

7.01 % 7.22 % 7.33 % 7.10 % 7.37 % 7.01 % 7.37 %

Tier 1 leverage ratio 7.49 % 7.82 % 7.64 % 7.66 % 8.06 % 7.49 % 8.06 %

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1 This information represents a non-GAAP financial measure.

See the “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of these measures to their most directly comparable GAAP measures.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.

2 Dividends per share divided by diluted earnings per share.

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The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons.

During the first quarter 2020 , net income was $6.0 million , or $0.62 per diluted share, compared to the first quarter 2019 net income of $5.7 million , or $0.56 per diluted share, representing an increase in net income of $0.3 million, or 5.7% .

The $0.3 million increase in net income in the first quarter 2020 compared to the first quarter 2019 was due primarily to an increase of $3.8 million , or 161.8% , in noninterest income and a decrease of $0.3 million , or 50.0% , in income tax expense , partially offset by a $0.2 million , or 13.7% , increase in provision for loan losses , a $2.4 million , or 21.4% , increase in noninterest expense and a decrease of $1.2 million , or 7.5% , in net interest income .

During the first quarter 2020 , return on average assets (“ROAA”) and return on average shareholders’ equity (“ROAE”) were 0.59% and 7.78% , respectively, compared to 0.64% and 7.91% , respectively, for the first quarter 2019 .

The decrease in ROAA for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was due primarily to the Company’s growth in average assets.

The decrease in ROAE during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 resulted primarily from the Company’s growth in average shareholders’ equity.

The increase in average shareholder’s equity was due mainly to an increase in retained earnings.

During the second quarter 2020, net income was $3.9 million, or $0.40 per diluted share, compared to the second quarter 2019 net income of $6.1 million, or $0.60 per diluted share, representing a decrease in net income of $2.2 million, or 35.8%.

During the six months ended June 30, 2020, net income was $10.0 million, or $1.02 per diluted share, compared to the six months ended June 30, 2019 net income of $11.8 million, or $1.16 per diluted share, resulting in a decrease in net income of $1.9 million, or 15.8%.

The $2.2 million decrease in net income in the second quarter 2020 compared to the second quarter 2019 was due primarily to a decrease of $1.7 million, or 10.4%, in net interest income, a $1.5 million, or 13.1%, increase in noninterest expense and a $1.1 million, or 79.3%, increase in provision for loan losses, partially offset by a $1.5 million, or 44.0%, increase in noninterest income and a decrease of $0.6 million, or 178.8%, in income tax expense.

The $1.9 million decrease in net income in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was due primarily to a $3.9 million, or 17.1%, increase in noninterest expense, a $2.9 million, or 9.0%, decrease in net interest income and a $1.3 million, or 47.8% increase in provision for loan losses, partially offset by a $5.4 million, or 92.0%, increase in noninterest income and a $0.9 million, or 100.6%, decrease in income tax expense.

During the second quarter 2020, return on average assets (“ROAA”) and return on average shareholders’ equity (“ROAE”) were 0.37% and 5.15%, respectively, compared to 0.65% and 8.26%, respectively, for the second quarter 2019.

During the six months ended June 30, 2020, ROAA and ROAE were 0.47% and 6.48%, respectively, compared to 0.64% and 8.09%, respectively, for the six months ended June 30, 2019.

The decrease in ROAA for both the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 was due primarily to the combination of lower net income and the Company’s growth in average assets.

The decrease in ROAE during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 was mainly the result of the combination of lower net income and the Company’s growth in average shareholders’ equity.

The increase in average shareholder’s equity was due mainly to an increase in the average balance of retained earnings, but partially offset by an increase in the average balance of accumulated other comprehensive loss.

Consolidated Average Balance Sheets and Net Interest Income Analyses

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Nonaccrual loans are included in average loan balances.

(dollars in thousands)

Three Months Ended

March 31, 2020

December 31, 2019

March 31, 2019

Average Balance

Interest /Dividends

Average Balance

Interest /Dividends

Average Balance

Interest /Dividends

(dollars in thousands) Three Months Ended

June 30, 2020 March 31, 2020 June 30, 2019

Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost

Interest-earning assets

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Noninterest-earning assets 111,872 97,191 100,872

Total assets $ 4,330,174 $ 4,099,932 $ 3,805,021

Interest-bearing liabilities

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Interest rate spread 1

1.17% 1.30% 1.54 %

Net interest margin 2

1.37% 1.50% 1.73 %

Net interest margin - FTE 3

1.50% 1.65% 1.91 %

1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities.

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Net interest margin - FTE represents a non-GAAP financial measure.

See the “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of these measures to their most directly comparable GAAP measures.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.

(dollars in thousands) Six Months Ended

June 30, 2020 June 30, 2019

Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost

Interest-earning assets

Loans, including loans held-for-sale $ 2,983,883 $ 60,138 4.05 % $ 2,845,854 $ 60,060 4.26 %

Securities - taxable 545,997 6,895 2.54 % 445,006 6,864 3.11 %

Securities - non-taxable 98,254 1,029 2.11 % 95,899 1,352 2.84 %

Other earning assets 505,111 2,404 0.96 % 247,871 3,567 2.90 %

Total interest-earning assets 4,133,245 70,466 3.43 % 3,634,630 71,843 3.99 %

Allowance for loan losses (22,724) (18,755)

Noninterest-earning assets 104,532 100,880

Total assets $ 4,215,053 $ 3,716,755

Interest-bearing liabilities

Interest-bearing demand deposits $ 130,206 $ 456 0.70 % $ 113,582 $ 427 0.76 %

Regular savings accounts 33,774 170 1.01 % 38,177 213 1.13 %

Money market accounts 977,834 7,284 1.50 % 577,686 5,747 2.01 %

Certificates and brokered deposits 2,038,068 25,061 2.47 % 2,074,812 26,146 2.54 %

Total interest-bearing deposits 3,179,882 32,971 2.09 % 2,804,257 32,533 2.34 %

Other borrowed funds 584,504 8,051 2.77 % 544,841 6,961 2.58 %

Total interest-bearing liabilities 3,764,386 41,022 2.19 % 3,349,098 39,494 2.38 %

Noninterest-bearing deposits 67,107 42,558

Other noninterest-bearing liabilities 74,623 30,569

Total liabilities 3,906,116 3,422,225

Shareholders’ equity 308,937 294,530

Total liabilities and shareholders’ equity $ 4,215,053 $ 3,716,755

Net interest income $ 29,444 $ 32,349

Interest rate spread 1

1.24 % 1.61 %

Net interest margin 2

1.43 % 1.79 %

Net interest margin - FTE 3

1.58 % 1.97 %

1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities.

2 Net interest income divided by total average interest-earning assets (annualized).

3 On an FTE basis assuming a 21% tax rate.

Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes.

This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets.

Net interest margin - FTE represents a non-GAAP financial measure.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.

Rate/Volume Analysis

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The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.

(dollars in thousands)

Three Months Ended March 31, 2020 vs.

December 31, 2019 Due to Changes in

Three Months Ended March 31, 2020 vs.

March 31, 2019 Due to Changes in

(dollars in thousands) Three Months Ended June 30, 2020 vs.

March 31, 2020 Due to Changes in Three Months Ended June 30, 2020 vs.

June 30, 2019 Due to Changes in Six Months Ended June 30, 2020 vs.

June 30, 2019 Due to Changes in

Volume Rate Net Volume Rate Net Volume Rate Net

Interest income

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Other earning assets 3,134 (4,020) (886) 6,787 (7,822) (1,035) 5,141 (6,304) (1,163)

Total 4,949 (6,971) (2,022) 13,851 (16,473) (2,622) 14,025 (15,402) (1,377)

Interest expense

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Other borrowed funds — 14 14 234 207 441 542 548 1,090

Total 5,215 (6,646) (1,431) 10,523 (11,466) (943) 8,586 (7,058) 1,528

Increase (decrease) in net interest income $ (266) $ (325) $ (591) $ 3,328 $ (5,007) $ (1,679) $ 5,439 $ (8,344) $ (2,905)

Net interest income for the first quarter 2020 was $15.0 million , a decrease of $1.2 million , or 7.5% , compared to $16.2 million for the first quarter 2019 .

The decrease in net interest income was primarily the result of a $2.5 million , or 13.2% , increase in total interest expense to $21.2 million for the first quarter 2020 from $18.8 million for the first quarter 2019 .

The increase in total interest expense was partially offset by a $1.2 million , or 3.6% , increase in total interest income to $36.2 million for the first quarter 2020 from $35.0 million for the first quarter 2019 .

The increase in total interest income for the first quarter 2020 compared to the first quarter 2019 was due primarily to an increase in interest earned on loans resulting from an increase of $203.1 million , or 7.3% , in the average balance of loans, including loans held-for-sale, partially offset by a decline of 16 basis point (“bp”) in the yield earned on these balances.

Interest income earned on securities increased as well, due to an increase in the average balance of securities of $107.6 million , or 20.6% , offset by a decline of 44 bps in the yield earned on these assets for the first quarter 2020 compared to the first quarter 2019 .

The overall yield on interest-earning assets for the first quarter of 2020 declined to 3.62% from 4.00% in the prior year quarter due primarily to the continued decline in market interest rates from the year-ago period.

The decline in interest rates negatively impacted the yields earned on variable rate loans, including fixed rate loans that have been effectively converted to variable rate loans through the use of interest rate swap agreements, and new loan originations as well as variable rate securities and cash balances, which remained elevated throughout the first quarter 2020.

The increase in total interest expense for the first quarter 2020 compared to the first quarter 2019 was driven primarily by an increase of $360.4 million , or 13.2% , in the average balance of interest-bearing deposits, partially offset by a 5 bp decline in the cost of funds related to these deposits.

The increase in interest expense associated with interest-bearing deposits was due primarily to a $303.5 million, or 53.9%, increase in average money market balances as well as a $51.9 million, or 2.6%, increase in average certificates and brokered deposits balances.

The decrease in the cost of funds primarily reflects a decline in the rate paid on money market accounts as well as a shift in the deposit mix due to the growth in money market balances.

Compared to the first quarter 2019, the cost of money market deposits decreased 24 bps and the average balance of money market accounts comprised 28.1% of total interest-bearing deposits in the first quarter 2020 versus 20.6% in the first quarter 2019.

Interest expense related to other borrowed funds also contributed to the increase in total interest expense due to a $43.8 million , or 8.1% , increase in the average balance of other borrowed funds as well as a 23 bp increase in the cost of these funds for the first quarter 2020 compared to the first quarter 2019 .

The increase in both the average balance and cost of other borrowed funds was due to the Company issuing $37.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes in June 2019.

Net interest margin (“NIM”) was 1.50% for the first quarter 2020 compared to 1.86% for the first quarter 2019 .

The decrease in NIM for the first quarter 2020 compared to the first quarter 2019 was driven primarily by the decline in the yield earned on interest-earning assets as discussed above.

On a fully-taxable equivalent basis, NIM was 1.65% for the first quarter 2020 compared to 2.04% for the first quarter 2019 .

As a result of COVID-19, economic uncertainties, including potential volatility in interest rates affecting our rate-sensitive assets and liabilities, may put downward pressure on net interest margin.

Net interest income for the second quarter 2020 was $14.4 million, a decrease of $1.7 million, or 10.4%, compared to $16.1 million for the second quarter 2019.

The decrease in net interest income was primarily the result of a $2.6 million, or 7.1%, decrease in total interest income to $34.2 million for the second quarter 2020 from $36.8 million for the second quarter 2019.

The decrease in total interest income was partially offset by a $0.9 million, or 4.5%, decrease in total interest expense to$19.8 million for the second quarter 2020 from $20.7 million for the second quarter 2019.

Net interest income for the six months ended June 30, 2020 was $29.4 million, a decrease of $2.9 million, or 9.0%, compared to $32.3 million for the six months ended June 30, 2019.

The decrease in net interest income was the result of a $1.5 million, or 3.9%, increase in total interest expense to $41.0 million for the six months ended June 30, 2020 from $39.5 million for the six months ended June 30, 2019 and a $1.4 million, or 1.9%, decrease in total interest income to $70.5 million for the six months ended June 30, 2020 from $71.8 million for the six months ended June 30, 2019.

The decrease in total interest income for the second quarter 2020 compared to the second quarter 2019 was due to decreases in interest earned on loans, including loans held-for-sale, other earning assets and securities.

Interest income earned on loans decreased $1.1 million, or 3.6%, due primarily to a decline of 24 basis points (“bps”) in the yield earned on average loan balances, partially offset by an increase of $73.7 million, or 2.5%, in average loan balances.

Interest income earned on other earning assets declined $1.0 million, or 57.7%, due mainly to a 238 bp decline in the yield earned on these assets, partially offset by an increase of $345.3 million, or 138.7%, in the average balance of other earning assets.

The increase in other earning assets was due to higher cash balances driven by growth in the average balance of deposits.

Additionally, interest income earned on securities decreased $0.5 million, or 11.3%, due to a decline of 74 bps in the yield earned on securities, partially offset by an increase of $99.3 million, or 17.8%, in the average balance of securities.

The decrease in total interest income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was due to decreases in interest income earned on other earning assets and securities.

Interest income earned on other earning assets decreased $1.2 million, or 32.6%, due to a decline of 194 bps in the yield earned on these assets, partially offset by an increase of $257.2 million, or 103.8%, in the average balance of other earning assets.

The increase in other earning assets was due to higher cash balances driven by growth in the average balance of deposits.

Interest income earned on securities decreased $0.3 million, or 3.6%, due to a decline of 59 bps in the yield earned on securities, partially offset by an increase of $103.3 million, or 19.1%, in the average balance of securities.

Interest income earned on loans, including loans held-for-sale, increased slightly as an increase of $138.0 million, or 4.9%, in the average balance of loans was partially offset by a decline of 21 bps in the yield earned on loans.

Overall, the yield on interest-earning assets for the second quarter 2020 declined 73 bps to 3.24% from 3.97% for the second quarter 2019.

Additionally, the yield on interest-earning assets for the six months ended June 30, 2020 declined 56 bps

to 3.43% from 3.99% for the six months ended June 30, 2019.

The declines in the yields earned on interest-earning assets were due to the continued decrease in market interest rates from the year-ago periods.

Interest rates began declining during 2019 and have declined significantly in 2020 following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19.

The decline in interest rates negatively impacted the yields earned on variable rate loans, including fixed rate loans that have been effectively converted to variable rate loans through the use of interest rate swap agreements, and new loan originations as well as variable rate securities and cash balances, which were elevated throughout both the second quarter 2020 and the six months ended June 30, 2020 as discussed above.

The decrease in total interest expense for the second quarter 2020 compared to the second quarter 2019 was due to a decrease in interest expense related to certificates and brokered deposits, partially offset by increases in expense related to money market accounts and other borrowed funds.

Interest expense on certificates and brokered deposits decreased $1.9 million, or 14.2%, due to a decline of 22 bps in the cost of these deposits as well as a $124.8 million, or 5.9%, decrease in the average balance of these deposits.

The decrease in certificates and brokered deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits.

The increase in expense related to money market accounts of $0.5 million, or 18.2%, was driven by an increase of $497.0 million, or 83.9%, in the average balance of these deposits, partially offset by a decline of 72 bps in the cost of these deposits.

Money market balances have increased throughout 2020 as consumers, small businesses and commercial clients have increased cash balances due to the economic uncertainty resulting from COVID-19.

The increase in expense related to other borrowed funds of $0.4 million, or 12.3%, was due to the impact of the 2029 Notes (subordinated debt) issued in June 2019 with an aggregate principal amount of $37.0 million and an initial fixed interest rate of 6.00%.

The increase in total interest expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was due to increases in interest expense on money market accounts and other borrowed funds, partially offset by a decrease in interest expense related to certificates and brokered deposits.

Interest expense on money market accounts increased $1.5 million, or 26.7%, driven by an increase of $400.1 million, or 69.3%, in the average balance of these deposits, partially offset by a decline of 51 bps in the cost of these deposits.

Money market balances have increased throughout 2020 as consumers, small businesses and commercial clients have increased cash balances due to the economic uncertainty resulting from COVID-19.

The increase in expense related to other borrowed funds of $1.1 million, or 15.7%, was due to the impact of the issuance of the 2029 Notes discussed above.

The decrease in expense related to certificates and brokered deposits of $1.1 million, or 4.2%, was due to a decline of 7 bps in the cost of these deposits as well as a $36.7 million, or 1.8%, decrease in the average balance of these deposits.

Overall, the cost of total interest-bearing liabilities for the second quarter 2020 declined 36 bps to 2.07% from 2.43% for the second quarter 2019.

Additionally, the cost of total interest-bearing liabilities for the six months ended June 30, 2020 declined 19 bps to 2.19% from 2.38% for the six months ended June 30, 2019.

Similar to asset yields, the declines in the cost of funds were due to the continued decrease in market interest rates from the year-ago periods.

The sharp declines in both short- and long-term interest rates due to COVID-19 have allowed the Company to reprice all of its deposit products at lower rates.

Furthermore, a shift in the deposit composition from higher cost certificates and brokered deposits to lower cost money market accounts also contributed to the decline in the cost of deposit funding.

Net interest margin (“NIM”) was 1.37% for the second quarter 2020 compared to 1.73% for the second quarter 2019.

On a fully-taxable equivalent basis, NIM was 1.50% for the second quarter 2020 compared to 1.91% for the second quarter 2019.

NIM was 1.43% for the six months ended June 30, 2020 compared to 1.79% for the six months ended June 30, 2019.

On a fully-taxable equivalent basis, NIM was 1.58% for the six months ended June 30, 2020 compared to 1.97% for the six months ended June 30, 2019.

The decrease in NIM reflects the greater decline in asset yields compared to the decline in the cost of funds during the applicable periods.

Following the Federal Reserve’s interest rate cuts in March 2020 in response to COVID-19, variable rate assets tied to market rates repriced faster than deposits.

However, as the pace of short-term market interest rate declines has slowed over the course of the second quarter 2020, the Company believes that yields on interest-earning assets have largely stabilized.

Furthermore, the Company has approximately $1.0 billion of certificates and brokered deposits with a weighted average cost of 2.18% that mature over the next twelve months.

As the weighted average cost of these deposits is significantly higher than current new production costs, the Company expects the cost of deposit funding to continue to decline.

Noninterest Income

The following table presents noninterest income for the last five completed fiscal quarters.

(in thousands)

Three Months Ended

The following table presents noninterest income for the last five completed fiscal quarters and the six months ended June 30, 2020 and 2019.

(in thousands) Three Months Ended Six Months Ended

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

2020 June 30,

Service charges and fees $ 182 $ 212 $ 213 $ 211 $ 225 $ 394 $ 461

4 unchanged sentences

Gain (loss) on sale of securities — 41 — — (458) 41 (458)

Other 456 417 352 517 1,089 873 1,712

Total noninterest income $ 4,973 $ 6,211 $ 5,405 $ 5,558 $ 3,454 $ 11,184 $ 5,826

During the first quarter 2020 , noninterest income was $6.2 million , representing an increase of $3.8 million , or 161.8% , compared to $2.4 million for the first quarter 2019 .

The increase was due primarily to increases in revenue from mortgage banking activities and gain on sale of loans.

The increase in mortgage banking revenue was due mainly to an increase in mandatory pipeline volumes as the year-over-year decline in market interest rates drove increased interest rate lock commitment and origination activity.

The increase in gain on sale of loans was due to the Company selling single tenant lease financing, public finance, portfolio residential mortgages and SBA 7(a) loans with book values totaling $190.7 million during the first quarter 2020, recognizing a net gain of $1.8 million, as compared to a $0.1 million loss on sale of loans in the first quarter 2019, when the Company sold $31.5 million of seasoned lower-yielding public finance and portfolio residential mortgage loans.

Compared to the first quarter 2019, the Company also recognized loan servicing revenue, net of the loan servicing asset revaluation, in connection with the SBA 7(a) servicing portfolio acquired in the fourth quarter 2019.

During the second quarter 2020, noninterest income was $5.0 million, representing an increase of $1.5 million, or 44.0%, compared to $3.5 million for the second quarter 2019.

The increase in noninterest income was due primarily to increases in revenue from mortgage banking activities, gain on sale of loans, gain on sale of securities and loan servicing revenue, which were partially offset by lower other income.

The increase in mortgage banking revenue was due mainly to an increase in mandatory pipeline and best efforts sales volumes as the year-over-year decline in market interest rates drove increased origination activity.

The increase in gain on sale of loans was due to the Company selling $11.5 million of SBA 7(a) guaranteed loans during the second quarter 2020, recognizing a net gain of $0.8 million, as compared to a $0.1 million net loss on the sale of loans in the second quarter 2019.

The increase in gain on sale of securities was due to the sale of lower-yielding mortgage-backed and U.S.

Government Agency securities in the second quarter 2019 that resulted in a loss of $0.5 million, compared to no sales of securities in the second quarter 2020.

Additionally, compared to the second quarter 2019, the Company recognized $0.2 million of loan servicing revenue, net of the loan servicing asset revaluation, in the second quarter 2020, in connection with the SBA 7(a) servicing portfolio acquired in the fourth quarter 2019.

The decrease in other noninterest income was due primarily to the Company recognizing a $0.5 million gain on the sale of its ownership of Visa Class B shares in the second quarter 2019.

During the six months ended June 30, 2020, noninterest income was $11.2 million, an increase of $5.4 million, or 92.0%, from the six months ended June 30, 2019.

The increase in noninterest income was due primarily to increases in revenue from mortgage banking activities, gain on sale of loans, loan servicing revenue and gain on sale of securities, which were partially offset by a decrease in other income.

The increase in gain on sale of loans was due to sales of portfolio loans with book values totaling $185.1 million that resulted in a gain of $1.3 million, as well as a gain of $1.2 million on the sale of SBA 7(a) guaranteed loans during the six months ended June 30, 2020 compared to the Company selling portfolio loans with book values of $148.4 million that resulted in a net loss of $0.2 million during the six months ended June 30, 2019.

The increase in gain on sale of securities was due to a gain of less than $0.1 million being recorded during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 when the Company sold lower-yielding mortgage-backed and U.S.

Government Agency securities that resulted in a loss of $0.5 million.

The Company also recognized loan servicing revenue, net of servicing asset revaluation, of $0.2 million, during the six months ended June 30, 2020, in connection with the SBA 7(a) servicing portfolio acquired in the fourth quarter 2019.

The decrease in other noninterest income was mainly the result of income recognized in the prior year associated with the sale of the Company’s Visa Class B shares and income associated with the Company’s temporary ownership of the land associated with the Company’s new headquarters.

Refer to Note 11 to the condensed consolidated financial statements for additional information about the Company’s new headquarters.

Noninterest Expense

The following table presents noninterest expense for the last five completed fiscal quarters.

(in thousands)

Three Months Ended

The following table presents noninterest expense for the last five completed fiscal quarters and the six months ended June 30, 2020 and 2019.

(in thousands) Three Months Ended Six Months Ended

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

2020 June 30,

Salaries and employee benefits $ 7,789 $ 7,774 $ 7,168 $ 6,883 $ 6,642 $ 15,563 $ 12,963

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Deposit insurance premium 435 485 601 — 747 920 1,302

Other 1,337 1,076 1,036 952 902 2,413 1,721

Total noninterest expense $ 13,244 $ 13,486 $ 12,613 $ 11,203 $ 11,709 $ 26,730 $ 22,818

Noninterest expense for the first quarter 2020 was $13.5 million , compared to $11.1 million for the first quarter 2019 .

The increase of $2.4 million , or 21.4% , compared to the first quarter 2019 was due primarily to increases of $1.5 million in salaries and employee benefits , $0.4 million in consulting and professional services, $0.3 million in loan expenses, $0.3 million in other and $0.1 million in premises and equipment .

The increase in salaries and employee benefits was due mainly to an increase in headcount which includes the impact of personnel growth associated with the Company’s small business lending platform as well as increased mortgage incentive compensation.

The increase in consulting and professional services was due primarily to an increase in recruiting fees and director compensation.

Noninterest expense for the second quarter 2020 was $13.2 million, compared to $11.7 million for the second quarter 2019.

The increase of $1.5 million, or 13.1%, compared to the second quarter 2019 was due primarily to increases of $1.1 million in salaries and employee benefits and $0.4 million in other expenses.

The increase in salaries and employee benefits was due mainly to an increase in headcount, which includes the impact of personnel growth associated with the Company’s small business lending platform, as well as increased mortgage and small business lending incentive compensation.

The increase in other expenses was due primarily to a $0.3 million charitable contribution the Company made to assist small businesses and nonprofits address the economic challenges of the COVID-19 pandemic.

Noninterest expense for the six months ended June 30, 2020 was $26.7 million, compared to $22.8 million for the six months ended June 30, 2019.

The increase of $3.9 million, or 17.1%, compared to the six months ended June 30, 2019 was due primarily to increases of $2.6 million in salaries and employee benefits, $0.7 million in other expenses, $0.5 million in consulting and professional services, $0.4 million in loan expenses, and $0.2 million in premises and equipment, partially offset by a decrease of $0.4 million in deposit insurance premium.

The increase in salaries and employee benefits was primarily the result of personnel growth, mostly associated with the Company’s small business lending platform, as well as increased mortgage and small business lending incentive compensation.

The increase in other expenses was due primarily to the $0.3 million charitable contribution mentioned above.

The increase in consulting and professional services was due primarily to increased recruitment costs and directors’ fees.

The increase in loan expenses was driven primarily by costs associated with nonperforming loans.

The increase in other expenses was due to various items, none of which were deemed significant individually.

The increase in premises and equipment was due primarily to higher software expense.

Income tax provision was $0.3 million for the first quarter 2020, resulting in an effective tax rate of 4.2%, compared to $0.5 million and an effective tax rate of 8.5% for the first quarter 2019.

The decrease in both income tax provision and the effective tax rate was due primarily to the impact of the CARES Act, which was signed into law on March 27, 2020.

The decrease in deposit insurance premium was due primarily to declines in the balance of brokered deposits and year-over-year asset growth, both of which positively impact the formula used to calculate deposit insurance expense.

The Company recorded an income tax benefit of $0.3 million for the second quarter 2020, compared to a $0.3 million income tax provision and an effective tax rate of 5.3% for the second quarter 2019.

The Company’s income tax benefit was less than $0.1 million for the six months ended June 30, 2020, compared to a $0.9 million income tax provision and an effective tax rate of 6.8% for the six months ended June 30, 2019.

The decrease in income tax provision for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was due primarily to lower income before income taxes in the 2020 period.

The decrease in the income tax provision for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was due to lower income before income taxes, as well as the impact of the CARES Act, which was signed into law on March 27, 2020.

The CARES Act provided the opportunity to carryback certain federal net operating losses based on the difference between the current statutory rate and the statutory rate in effect during the period to which the net operating loss will be carried back.

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Balance Sheet Data:

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

Total assets $ 4,324,600 $ 4,168,146 $ 4,100,083 $ 4,095,491 $ 3,958,829

Loans 2,973,674 2,892,093 2,963,547 2,881,272 2,861,156

Total securities 657,312 675,013 602,730 591,549 558,160

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Total shareholders’ equity 307,711 305,127 304,913 295,140 296,120

Total assets increased $68.1 million, or 1.7%, to $4.2 billion at March 31, 2020 compared to $4.1 billion at December 31, 2019.

Deposit growth of $24.5 million, or 0.8%, and the decline in the total loan balances of $71.5 million, or 2.4%, driven by loan sales during the first quarter 2020, led to an increase in liquid assets as securities balances increased $72.3 million, or 12.0%, and cash balances increased $23.9 million, or 7.3%.

The increase in balance sheet liquidity was reflected in the percentage of loans to deposits, which declined to 91.0% as of March 31, 2020, compared to 94.0% as of December 31, 2019.

Total assets increased $224.5 million, or 5.5%, to $4.3 billion at June 30, 2020 compared to $4.1 billion at December 31, 2019.

Balance sheet growth was driven by an increase in deposits of $226.8 million, or 7.2%.

As loan balances remained relatively consistent since December 31, 2019, the deposit growth resulted in an increase in liquid assets as cash balances increased $171.3 million, or 52.3%, and securities balances increased $54.6 million, or 9.1%.

The increase in balance sheet liquidity was reflected in the percentage of loans to deposits, which declined to 88.0% as of June 30, 2020, compared to 94.0% as of December 31, 2019.

Loan Portfolio Analysis

The following table presents a summary of the Company’s loan portfolio for the last five completed fiscal quarters.

(dollars in thousands)

(dollars in thousands) June 30,

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

Commercial loans

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Owner-occupied commercial real estate (1)

86,897 2.9 % 87,957 3.0 % 86,726 2.9 % 86,357 3.0 % 83,979 2.9 %

Investor commercial real estate 13,286 0.4 % 13,421 0.5 % 12,567 0.4 % 11,852 0.4 % 21,179 0.7 %

Construction 77,591 2.6 % 64,581 2.2 % 60,274 2.0 % 54,131 1.9 % 47,849 1.7 %

Single tenant lease financing 980,292 33.0 % 972,275 33.6 % 995,879 33.6 % 1,008,247 35.0 % 1,001,196 35.1 %

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Small business lending (1)

118,526 4.0 % 54,055 1.9 % 46,945 1.6 % 11,597 0.4 % 8,925 0.3 %

Total commercial loans 2,386,342 80.2 % 2,287,460 79.1 % 2,286,517 77.1 % 2,193,817 76.0 % 2,182,858 76.3 %

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Residential mortgage 208,728 7.0 % 218,730 7.6 % 313,849 10.6 % 320,451 11.1 % 318,678 11.1 %

Home equity 22,640 0.8 % 23,855 0.8 % 24,306 0.8 % 25,042 0.9 % 26,825 0.9 %

Other consumer 291,632 9.8 % 296,605 10.2 % 295,309 10.0 % 296,573 10.4 % 294,251 10.4 %

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Net deferred loan origination costs, premiums and discounts on purchased loans and other (2)

64,332 2.2 % 65,443 2.3 % 43,566 1.5 % 45,389 1.6 % 38,544 1.3 %

Total loans 2,973,674 100.0 % 2,892,093 100.0 % 2,963,547 100.0 % 2,881,272 100.0 % 2,861,156 100.0 %

Allowance for loan losses (24,465) (22,857) (21,840) (21,683) (19,976)

(1) Includes carrying value adjustments of $44.6 million, $21.4 million, $11.5 million, $5.0 million and ($5.2) million as of March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, respectively, related to interest rate swaps associated with public finance loans.

Total loans were $2.9 billion as of March 31, 2020 , a decrease of $71.5 million , or 2.4% , compared to December 31, 2019 .

Total commercial balances were $2.3 billion as of March 31, 2020, consistent with December 31, 2019.

Compared to December 31, 2019, production in healthcare finance, small business lending and construction was offset by lower balances in the single tenant lease financing and public finance loan portfolios due primarily to sales of $94.4 million of loans in these categories during the first quarter 2020.

Total consumer loan balances were $539.2 million as of March 31, 2020, a decrease of $94.3 million, or 14.9%, compared to December 31, 2019.

Net loans $ 2,949,209 $ 2,869,236 $ 2,941,707 $ 2,859,589 $ 2,841,180

(1) As of December 31, 2019, the Company held $13.3 million of SBA 7(a) 504 loans which were classified within the small business lending category.

In the second quarter 2020, those balances were reclassified into the owner-occupied commercial real estate category.

(2) Includes carrying value adjustments of $46.0 million related to terminated interest rate swaps associated with public finance loans as of June 30, 2020 and $44.6 million, $21.4 million, $27.6 million and $22.2 million as of March 31, 2020, December 31, 2019, September 30, 2019 and June 30, 2019, respectively, related to interest rate swaps associated with public finance loans.

Total loans were $3.0 billion as of June 30, 2020, an increase of $10.1 million, or 0.3%, compared to December 31, 2019.

Total commercial balances were $2.4 billion as of June 30, 2020, up slightly from $2.3 billion in December 31, 2019.

Compared to December 31, 2019, production in healthcare finance, small business lending and construction was partially offset by lower balances in the public finance and single tenant lease financing loan portfolios due primarily to sales of $94.4 million of loans in these categories during the first quarter 2020.

The growth in small business lending was driven by $58.9 million of PPP loan balances originated during the second quarter 2020, partially offset by sales of SBA 7(a) guaranteed loans.

The Company did not execute any portfolio loan sales during the second quarter 2020 due to market conditions resulting from COVID-19;

however, it expects to resume portfolio loan sales in the future to help further its objectives of managing balance sheet growth and capital, providing liquidity and improving NIM and profitability.

Total consumer loan balances were $523.0 million as of June 30, 2020, a decrease of $110.5 million, or 17.4%, compared to December 31, 2019.

The decline in consumer loan balances from December 31, 2019 was due primarily to the sale of $90.8 million of portfolio residential mortgage loans, which included seasoned lower-yielding loans.

The Company has identified loan exposures to certain industries that may be impacted by COVID-19.

Our healthcare finance portfolio, which represents 12.9% of our total loan portfolio, is comprised primarily of loans to dentists and other specialists that have been impacted by government actions to contain COVID-19.

Within the rest of the portfolio, as of March 31, 2020, additional exposures represent approximately 17.6% of our total loan portfolio and include full-service restaurants of $221.2 million, quick-service restaurants of $218.6 million, consumer services of $35.1 million, healthcare and social assistance of $21.1 million and hotels and accommodations of $12.6 million.

Our healthcare finance portfolio, which represents 12.8% of our total loan portfolio, is comprised primarily of loans to dentists and other specialists that have been impacted by government actions to contain COVID-19 occurring late in the first quarter 2020 and into the second quarter 2020.

As certain states reopened their economies later in the second quarter 2020, we experienced a

decline in healthcare finance loan balances under deferral agreements.

See “Non-TDR Loan Modifications due to COVID-19” below for additional information on this portfolio.

Within the rest of the portfolio, as of June 30, 2020, additional exposures represent approximately 17.7% of our total loan portfolio and include full-service restaurants of $221.1 million, quick -service restaurants of $229.8 million , consumer services of $35.7 million, healthcare and social assistance of $21.2 million and hotels and accommodations of $16.8 million.

Given the economic uncertainty related to COVID-19, the ultimate impact of the pandemic on these exposures is unknown at this time.

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The following table provides a summary of the Company’s nonperforming assets for the last five completed fiscal quarters.

(dollars in thousands)

(dollars in thousands) June 30,

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

Nonaccrual loans

3 unchanged sentences

Single tenant lease financing 4,680 4,680 4,680 4,691 —

Small business lending

Total commercial loans 7,045 6,288 5,370 5,741 2,082

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Allowance for loan losses to total loans 0.82 % 0.79 % 0.74 % 0.75 % 0.70 %

Allowance for loan losses to total loans, excluding PPP loans (1)

0.84 % 0.79 % 0.74 % 0.75 % 0.70 %

Allowance for loan losses to nonperforming loans 298.5 % 307.1 % 324.4 % 374.9 % 370.9 %

1 This information represents a non-GAAP financial measure.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.

Troubled Debt Restructurings

The following table provides a summary of troubled debt restructurings for the last five completed fiscal quarters.

(in thousands)

(in thousands) June 30,

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

Troubled debt restructurings – nonaccrual $ 854 $ 94 $ 94 $ 171 $ 174

1 unchanged sentence

Total troubled debt restructurings $ 1,226 $ 472 $ 521 $ 641 $ 2,159

The increase in nonperforming loans of $0.7 million , or 10.6% , to $7.4 million as of March 31, 2020 compared to $6.7 million as of December 31, 2019 was due primarily to a small business lending loan with an unpaid principal balance of $0.9 million that was placed on nonaccrual status in the quarter, partially offset by a decrease in accruing residential mortgage loans that were 90 days past due.

Total nonperforming assets increased $0.8 million , or 8.5% , as of March 31, 2020 compared to December 31, 2019 .

The ratio of nonperforming loans to total loans increased to 0.26% as of March 31, 2020 compared to 0.23% as of December 31, 2019 and the ratio of nonperforming assets to total assets increased to 0.23% as of March 31, 2020 compared to 0.22% as of December 31, 2019 , due primarily to the loan mentioned above.

Total TDRs as of March 31, 2020 remained consistent with December 31, 2019 at $0.5 million.

As of March 31, 2020 and December 31, 2019 , the Company had one commercial property in OREO with a carrying value of $2.1 million.

The increase in nonperforming loans of $1.5 million, or 21.7%, to $8.2 million as of June 30, 2020 compared to $6.7 million as of December 31, 2019 was due primarily to an increase in nonperforming owner-occupied commercial real estate loans with unpaid principal balanced of $1.6 million that were placed on nonaccrual status during 2020, partially offset by a decrease in accruing residential mortgage loans that were 90 days past due.

Total nonperforming assets increased $1.4 million, or 16.1%, as of June 30, 2020 compared to December 31, 2019.

The ratio of nonperforming loans to total loans increased to 0.28% as of June 30, 2020 compared to 0.23% as of December 31, 2019 and the ratio of nonperforming assets to total assets increased to 0.24% as of June 30, 2020 compared to 0.22% as of December 31, 2019, due primarily to the loans mentioned above.

Total TDRs as of June, 2020 were $1.2 million, up $0.7 million from December 31, 2019.

The increase was driven by one residential mortgage loan that became a TDR during the second quarter 2020.

As of June 30, 2020 and December 31, 2019, the Company had one commercial property in OREO with a carrying value of $2.1 million.

This property consists of two buildings that are residential units adjacent to a university campus.

As of March 31, 2020, we have experienced little impact on our asset quality as a result of COVID-19.

As of June 30, 2020, our financial results have reflected little impact on asset quality as a result of COVID-19.

Actions taken to either contain or reduce the impact of the pandemic have had a detrimental effect on the national and our local economies.

The ultimate impact it may have on our business and asset quality is highly uncertain, as the extent of the crisis is unknown.

We remain optimistic that the combination of government stimulus programs and relief programs we have provided to our clients will lessen the economic stress on our borrowers.

The ultimate impact it may have on our business and asset quality is still uncertain;

however, we remain optimistic that the combination of government stimulus programs and relief programs we have provided to our clients will lessen the economic stress on our borrowers.

However, if the pandemic extends for a prolonged period of time, we may experience negative trends in nonperforming loans and assets.

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Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of December 31, 2020 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates.

In accordance with this guidance, the Company offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments.

The following table shows the Company’s deferrals by loan portfolio type that have been granted through May 1, 2020.

The balances shown are as of March 31, 2020.

(dollars in thousands)

Total Loan Balance

% Of Balances With Deferrals

In accordance with this guidance, the Company has offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments.

The following table shows the Company’s deferrals by loan portfolio type that have been granted through July 31, 2020.

The balances shown are as of June 30, 2020.

(dollars in thousands) Deferrals Total Loan Balance % Of Balances With Deferrals

Commercial loans

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Investor commercial real estate 411 13,286 3.1 %

Construction — 77,591 0.0 %

Single tenant lease financing 276,716 980,292 28.2 %

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Residential mortgage 6,393 208,728 3.1 %

Home equity 229 22,640 1.0 %

Other consumer 1,692 291,632 0.6 %

1 unchanged sentence

Total commercial and consumer loans $ 323,341 $ 2,909,342 11.1 %

The single tenant lease financing and healthcare finance portfolios comprise approximately 88% of the total loan deferrals granted.

The single tenant lease financing and healthcare finance portfolios comprise approximately 92% of the total loan deferrals granted as of July 31, 2020.

Borrowers in these portfolios have experienced short-term cash flow challenges due to broad-based federal and state government actions to contain COVID-19.

Within the single tenant lease financing portfolio, the portfolio average loan-to-value ratio is 50% and all borrowers, except for the single relationship on nonaccrual status, made their April 2020 loan payments in a timely manner.

Related to the healthcare finance portfolio, over 90% of the loans are made to dental practices who generally are open only for emergency procedures at the current time.

It is expected that dental practices will be among the first to reopen when restrictions are lifted for non-essential businesses.

Additionally, we have experienced no delinquencies or losses in this portfolio since inception.

Within the single tenant lease financing portfolio, the portfolio average loan-to-value ratio is 54% and all borrowers, except for the single relationship on nonaccrual status, made their April 2020 loan payments in a timely manner, prior to entering a deferral program.

Furthermore, a significant majority of these loans are scheduled to resume making payments in August 2020 and there are no delinquencies for nonperforming loans not on deferral status.

Related to the healthcare finance portfolio, over 90% of the loans are made to dental practices, many of which have been allowed to resume seeing patients as certain states across the country have reopened their economies.

The amount of healthcare finance loans on deferral status peaked in late May when approximately 80% of this portfolio balance was under deferral.

As of July 31, 2020, this percentage had dropped to 5.4%.

The majority of healthcare finance loans under deferral listed above are scheduled to resume making payments within the next 30 days.

Furthermore, all borrowers who have come off a deferral program have resumed making scheduled loan payments in a timely manner.

Small Business Administration Paycheck Protection Program

Section 1102 of the CARES Act created the PPP, which is administered by the SBA.

These loans will be forgiven if the funds were used for payroll costs and other qualifying business expenses as long as 75% of the forgiven amount was used to maintain payroll costs.

Section 1102 of the CARES Act created the PPP, which is jointly administered by the U.S.

Small Business Administration (“SBA”) and the Department of the Treasury.

Loans originated under the PPP bear an interest rate of 1.00% and do not require payments for the first six months.

Originally, all PPP Loans carried a two-year term;

however, Congressional amendments to the CARES Act changed the maturity of loans approved after June 5, 2020 to a five-year term.

The PPP is designed to provide a direct incentive to small businesses to retain employees on their payroll during COVID-19 as well as to help cover certain utility costs and rent payments.

These loans may be forgiven if the funds were used for payroll costs and other qualifying business expenses as long as a minimum of 60% of the forgiven amount was used to maintain payroll costs.

The federal government approved an initial appropriation of $349.0 billion for PPP loans and when that was depleted approved an additional $310.0 billion.

As a preferred SBA lender, we assisted our clients in participating in both rounds of the PPP.

Through May 1, 2020, we provided 437 PPP loans totaling $59.6 million, with an average loan size of $136,000, to help small businesses maintain their workforces in an uncertain and challenging environment.

We expect to receive fee revenue from the federal government based on the PPP funding we provided for our clients.

The estimated weighted average fee was 3.86% of the amount funded, or approximately $2.3 million in total.

This fee revenue will be deferred over the life of the PPP loans and recognized as interest income.

Through June 30, 2020, we provided 449 PPP loans totaling $58.9 million, to help small businesses maintain their workforces in an uncertain and challenging environment.

The weighted average fee was 3.86% of the amount funded, or approximately $2.3 million in total.

The Company received this fee revenue from the SBA in late June and it will be deferred over the life of the PPP loans and recognized as interest income.

Allowance for Loan Losses

The following table provides a rollforward of the allowance for loan losses for the last five completed fiscal quarters.

(dollars in thousands)

Three Months Ended

(dollars in thousands) Three Months Ended

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

Balance, beginning of period $ 22,857 $ 21,840 $ 21,683 $ 19,976 $ 18,841

1 unchanged sentence

Losses charged off (1,016) (498) (409) (1,182) (337)

Recoveries 133 54 98 65 83

Balance, end of period $ 24,465 $ 22,857 $ 21,840 $ 21,683 $ 19,976

Net charge-offs to average loans 0.12 % 0.06 % 0.04 % 0.15 % 0.05 %

The allowance for loan losses was $22.9 million as of March 31, 2020 , compared to $21.8 million as of December 31, 2019 .

While total loan balances declined $71.5 million, or 2.4%, compared to December 31, 2019, the Company made adjustments to qualitative factors related to economic conditions in its allowance model to reflect the economic uncertainty resulting from COVID-19.

The allowance for loan losses was $24.5 million as of June 30, 2020, compared to $21.8 million as of December 31, 2019.

While total loan balances experienced a slight increase of $10.2 million, or 0.3%, compared to December 31, 2019, the Company made additional adjustments to qualitative factors in its allowance model to reflect the continued economic uncertainty resulting from COVID-19.

As a result, both the allowance for loan losses and the allowance as a percentage of total loans increased compared to December 31, 2019.

During the first quarter 2020 , the Company recorded net charge-offs of $0.4 million, compared to net charge-offs of $0.3 million for the first quarter 2019 .

The allowance for loan losses as a percentage of total loans was 0.79% at March 31, 2020 and 0.74% at December 31, 2019 .

The allowance for loan losses as a percentage of nonperforming loans decreased to 307.1% as of March 31, 2020 , compared to 324.4% as of December 31, 2019 .

The provision for loan losses in the first quarter 2020 was $1.5 million, compared to $0.5 million for the fourth quarter 2019.

The increase of $1.0 million, or 212.2%, compared to the fourth quarter 2019 was due primarily to the adjustments to the economic qualitative factors in the allowance model discussed above.

During the second quarter 2020, the Company recorded net charge-offs of $0.9 million, compared to net charge-offs of $0.3 million for the second quarter 2019.

The increase in net charge-offs was due primarily to a $0.7 million charge-off in the healthcare finance portfolio.

The allowance for loan losses as a percentage of total loans was 0.82% at June 30, 2020, or 0.84% when excluding PPP Loans, and 0.74% at December 31, 2019.

The allowance for loan losses as a percentage of nonperforming loans decreased to 298.5% as of June 30, 2020, compared to 324.4% as of December 31, 2019.

The provision for loan losses in the second quarter 2020 was $2.5 million, compared to $1.4 million for the second quarter 2019.

The increase of 1.1 million, or 79.3%, compared to the second quarter 2019 was due primarily to the healthcare finance charge-off discussed above and adjustments to the economic qualitative factors in the allowance model discussed above.

Investment Securities Portfolio

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(in thousands)

Amortized Cost

Amortized Cost June 30,

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

Securities available-for-sale

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(in thousands)

Approximate Fair Value

Approximate Fair Value June 30,

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

Securities available-for-sale

11 unchanged sentences

Total securities $ 658,169 $ 678,150 $ 603,412 $ 592,297 $ 558,622

The approximate fair value of available-for-sale investment securities increased $67.8 million , or 12.5% , to $608.7 million as of March 31, 2020 , compared to $540.9 million as of December 31, 2019 .

The approximate fair value of available-for-sale investment securities increased $48.1 million, or 8.9%, to $589.0 million as of June 30, 2020, compared to $540.9 million as of December 31, 2019.

The increase was due primarily to increases of $38.3 million in private label mortgage-backed securities and $17.1 million in agency mortgage-backed securities.

These increases were driven primarily by purchases as liquidity from deposit growth and loan sales was deployed and, to a lesser extent, increases in market value due to changes in interest rates.

As of March 31, 2020 , the Company had securities with an amortized cost basis of $66.3 million designated as held-to-maturity compared to $61.9 million as of December 31, 2019 .

These increases were driven primarily by purchases as liquidity from deposit growth was deployed and, to a lesser extent, increases in market value due to changes in interest rates.

As of June 30, 2020, the Company had securities with an amortized cost basis of $68.3 million designated as held-to-maturity compared to $61.9 million as of December 31, 2019.

Accrued Income and Other Assets

Accrued income and other assets were $112.3 million at March 31, 2020 compared to $67.1 million at December 31, 2019.

The increase of $45.3 million, or 67.5%, was due primarily to cash collateral pledged for interest rate swap agreements.

The Company pledged $81.3 million and $42.3 million of cash collateral to counterparties as security for its obligations related to these agreements at March 31, 2020 and December 31, 2019, respectively.

Accrued income and other assets were $63.2 million at June 30, 2020 compared to $67.1 million at December 31, 2019.

The decrease of $3.8 million, or 5.74%, was due primarily to cash collateral pledged for interest rate swap agreements.

The Company pledged $34.6 million and $42.3 million of cash collateral to counterparties as security for its obligations related to these agreements at June 30, 2020 and December 31, 2019, respectively.

Collateral posted and received is dependent on the fair value of the underlying agreements as of the respective date.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities were $96.7 million at March 31, 2020 compared to $53.0 million at December 31, 2019.

The increase of $43.7 million, or 82.5%, was due primarily to a $40.8 million decrease in the fair value of interest rate swap agreements.

Accrued expenses and other liabilities were $50.4 million at June 30, 2020 compared to $53.0 million at December 31, 2019.

The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters.

(dollars in thousands)

(dollars in thousands) June 30,

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

Noninterest-bearing deposits $ 82,864 2.5 % $ 70,562 2.2 % $ 57,115 1.8 % $ 50,560 1.6 % $ 44,040 1.5 %

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Total deposits $ 3,380,789 100.0 % $ 3,178,506 100.0 % $ 3,153,963 100.0 % $ 3,148,242 100.0 % $ 3,006,263 100.0 %

Total deposits increased $24.5 million , or 0.8% , to $3.2 billion as of March 31, 2020 , compared to approximately $3.2 billion as of December 31, 2019 .

This increase was due primarily to an increase of $144.3 million, or 18.4%, in money market deposits, largely offset by declines of $119.8 million, or 7.4%, in certificates of deposits and $10.5 million, or 2.0%, in brokered deposits.

The Company experienced strong growth in money market balances from commercial, small business and consumer depositors.

Total deposits increased $226.8 million, or 7.2%, to $3.4 billion as of June 30, 2020, compared to $3.2 billion as of December 31, 2019.

This increase was due primarily to an increase of $455.5 million, or 57.9%, in money market accounts, largely offset by declines of $142.5 million, or 8.8%, in certificates of deposits and $149.0 million, or 2.8%, in brokered deposits.

The Company experienced strong growth in money market balances from consumers, small businesses and commercial clients as our customers have increased their cash balances due to the economic uncertainty resulting from the COVID-19 pandemic.

The declines in certificates of deposits and brokered deposits were due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production.

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Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees.

The following tables present actual and required capital ratios as of March 31, 2020 and December 31, 2019 for the Company and the Bank under the Basel III Capital Rules.

The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2020 and December 31, 2019 based on the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019.

The following tables present actual and required capital ratios as of June 30, 2020 and December 31, 2019 for the Company and the Bank under the Basel III Capital Rules.

The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2020 and December 31, 2019 based on the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019.

Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

Minimum Capital Required - Basel III

Minimum Required to be Considered Well Capitalized

(dollars in thousands)

Capital Amount

As of March 31, 2020:

Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized

(dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio

As of June 30, 2020:

Common equity tier 1 capital to risk-weighted assets

Consolidated $ 323,415 10.94 % $ 206,854 7.00 % N/A N/A

Bank 354,978 12.02 % 206,662 7.00 % $ 191,900 6.50 %

Tier 1 capital to risk-weighted assets

Consolidated 323,415 10.94 % 177,303 8.50 % N/A N/A

Bank 354,978 12.02 % 177,139 8.50 % 236,185 8.00 %

Total capital to risk-weighted assets

Consolidated 417,561 14.13 % 236,404 10.50 % N/A N/A

Bank 379,443 12.85 % 236,185 10.50 % 295,231 10.00 %

Leverage ratio

Minimum Capital Required - Basel III

Minimum Required to be Considered Well Capitalized

(dollars in thousands)

Capital Amount

Consolidated 323,415 7.49 % 172,813 4.00 % N/A N/A

Bank 354,978 8.22 % 172,708 4.00 % 215,885 5.00 %

Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized

(dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio

As of December 31, 2019:

Common equity tier 1 capital to risk-weighted assets

Consolidated $ 313,803 10.84 % $ 202,661 7.00 % N/A N/A

Bank 341,242 11.80 % 202,480 7.00 % $ 188,017 6.50 %

Tier 1 capital to risk-weighted assets

Consolidated 313,803 10.84 % 246,088 8.50 % N/A N/A

Bank 341,242 11.80 % 245,869 8.50 % 231,406 8.00 %

Total capital to risk-weighted assets

Consolidated 405,171 13.99 % 303,991 10.50 % N/A N/A

Bank 363,082 12.55 % 303,720 10.50 % 289,257 10.00 %

Leverage ratio

Consolidated 313,803 7.64 % 164,219 4.00 % N/A N/A

Bank 341,242 8.32 % 164,121 4.00 % 205,151 5.00 %

Shareholders’ Dividends

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable April 15, 2020 to shareholders of record as of March 31, 2020 .

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable July 15, 2020 to shareholders of record as of June 30, 2020.

The Company expects to continue to pay cash dividends on a quarterly basis;

however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including its results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company’s outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors, including any potential impact resulting from COVID-19.

As of March 31, 2020 , the Company had $72.0 million principal amount of subordinated debt outstanding pursuant its term loan evidenced by a term note due 2025, its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 and the 2029 Notes.

As of June 30, 2020, the Company had $72.0 million principal amount of subordinated debt outstanding pursuant its term loan evidenced by a term note due 2025, its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 and the 2029 Notes.

The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement.

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Additionally, the Company has enhanced its liquidity management process during 2019 and 2020 through increased loan sale activity.

During the first quarter 2020, the Company sold $99.9 million of public finance, single tenant lease financing and SBA 7(a) guaranteed loans at premiums to book value, as well as a $90.8 million pool of residential mortgage loans.

During the first six months of 2020, the Company sold $111.4 million of public finance, single tenant lease financing and SBA 7(a) guaranteed loans at premiums to book value, as well as a $90.8 million pool of residential mortgage loans.

During 2019, the Company sold $237.5 million of portfolio residential mortgage, single tenant lease financing and public finance loans.

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The Company holds cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments.

Given the uncertainty regarding the length and ultimate economic effect of COVID-19, we believe it may be prudent to maintain higher levels of cash on the balance sheet until the crisis passes.

Furthermore, we believe we have more than sufficient on-balance sheet liquidity, supplemented by access to additional funding sources, to manage the potential economic impact of COVID-19.

At March 31, 2020 , on a consolidated basis, the Company had $960.0 million in cash and cash equivalents and investment securities available-for-sale and $52.4 million in loans held-for-sale that were generally available for its cash needs.

We intend to reduce the size of our balance sheet during the second half of 2020 through continued deposit repricing in order to manage capital levels.

A component of this balance sheet management strategy is expected to include reducing our cash balances from those as of June 30, 2020.

However, given the uncertainty regarding the length and ultimate economic effect of COVID-19, we believe it will be prudent to maintain higher levels of cash on the balance sheet than we have historically until the crisis passes.

We believe we have sufficient on-balance sheet liquidity, supplemented by access to additional funding sources, to manage the potential economic impact of COVID-19.

At June 30, 2020, on a consolidated basis, the Company had $1.1 billion in cash and cash equivalents and investment securities available-for-sale and $38.8 million in loans held-for-sale that were generally available for its cash needs.

The Company can also generate funds from wholesale funding sources and collateralized borrowings.

At March 31, 2020 , the Bank had the ability to borrow an additional $602.2 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.

At June 30, 2020, the Bank had the ability to borrow an additional $558.4 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.

The Company is a separate legal entity from the Bank and must provide for its own liquidity.

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The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits.

At March 31, 2020 , the Company, on an unconsolidated basis, had $36.0 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

At June 30, 2020, the Company, on an unconsolidated basis, had $36.0 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures.

At March 31, 2020 , approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $295.9 million .

Certificates of deposits and brokered deposits scheduled to mature in one year or less at March 31, 2020 totaled $1.18 billion .

At June 30, 2020, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $267.4 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at June 30, 2020 totaled $1.04 billion.

Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on either the Company’s or the Bank’s liquidity.

1 unchanged sentence

This Management’s Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP.

Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, average tangible common equity, return on average tangible common equity, tangible common equity to tangible assets ratio, total interest income - FTE, net interest income - FTE and net interest margin - FTE are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders.

Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, average tangible common equity, return on average tangible common equity, tangible common equity to tangible assets ratio, total interest income - FTE, net interest income - FTE, net interest margin - FTE and allowance for loan losses to loans, excluding PPP loans are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders.

The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons.

Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters.

(dollars in thousands, except share and per share data)

Three Months Ended

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters and the six months ended June 30, 2020 and 2019.

(dollars in thousands, except share and per share data) Three Months Ended Six Months Ended

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

2020 June 30,

Total equity - GAAP $ 307,711 $ 305,127 $ 304,913 $ 295,140 $ 296,120 $ 307,711 $ 296,120

Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687)

Tangible common equity $ 303,024 $ 300,440 $ 300,226 $ 290,453 $ 291,433 $ 303,024 $ 291,433

Total assets - GAAP $ 4,324,600 $ 4,168,146 $ 4,100,083 $ 4,095,491 $ 3,958,829 $ 4,324,600 $ 3,958,829

Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687)

Tangible assets $ 4,319,913 $ 4,163,459 $ 4,095,396 $ 4,090,804 $ 3,954,142 $ 4,319,913 $ 3,954,142

12 unchanged sentences

Return on average tangible common equity 5.23 % 7.90 % 9.61 % 8.53 % 8.39 % 6.58 % 8.22 %

(dollars in thousands, except share and per share data)

Three Months Ended

(dollars in thousands, except share and per share data) Three Months Ended Six Months Ended

2020 March 31,

2020 December 31,

2019 September 30,

2019 June 30,

2020 June 30,

Total interest income $ 34,222 $ 36,244 $ 37,877 $ 37,964 $ 36,844 $ 70,466 $ 71,843

Fully-taxable equivalent adjustments 1

1,437 1,535 1,570 1,595 1,612 2,972 3,169

Total interest income - FTE $ 35,659 $ 37,779 $ 39,447 $ 33,326 $ 38,456 $ 73,438 $ 75,012

1 unchanged sentence

Fully-taxable equivalent adjustments 1

1,437 1,535 1,570 1,595 1,612 2,972 3,169

Net interest income - FTE $ 15,863 $ 16,553 $ 16,944 $ 16,839 $ 17,717 $ 32,416 $ 35,518

1 unchanged sentence

Effect of fully-taxable equivalent adjustments 1

0.13 % 0.15 % 0.16 % 0.16 % 0.18 % 0.15 % 0.18 %

Net interest margin - FTE 1.50 % 1.65 % 1.67 % 1.70 % 1.91 % 1.58 % 1.97 %

Allowance for loan losses $ 24,465 $ 22,857 $ 21,840 $ 21,683 $ 19,976 $ 24,465 $ 19,976

Loans $ 2,973,674 $ 2,892,093 $ 2,963,547 $ 2,881,272 $ 2,861,156 $ 2,973,674 $ 2,861,156

PPP loans (58,948) — — — — (58,948) —

Loans, excluding PPP loans $ 2,914,726 $ 2,892,093 $ 2,963,547 $ 2,881,272 $ 2,861,156 $ 2,914,726 $ 2,861,156

Allowance for loan losses to loans 0.82 % 0.79 % 0.74 % 0.75 % 0.70 % 0.82 % 0.70 %

Effect of PPP loans 0.02 % 0.00 % 0.00 % 0.00 % 0.00 % 0.02 % 0.00 %

Allowance for loan losses to loans, excluding PPP loans 0.84 % 0.79 % 0.74 % 0.75 % 0.70 % 0.84 % 0.70 %

1 Assuming a 21% tax rate

8 unchanged sentences

Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities.

At March 31, 2020 and December 31, 2019, the Company had interest rate swaps with notional amounts of $723.0 million and $725.6 million, respectively.

In June 2020, the Company terminated all fair value hedging instruments associated with loans.

At June 30, 2020 and December 31, 2019, the Company had interest rate swaps with notional amounts of $298.2 million and $725.6 million, respectively.

Additionally, we enter into forward contracts relating to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale.

At March 31, 2020 and December 31, 2019 , the Company had commitments to sell residential real estate loans of $106.8 million and $115.0 million , respectively.

At June 30, 2020 and December 31, 2019, the Company had commitments to sell residential real estate loans of $11.7 million and $115.0 million, respectively.

These contracts mature in less than one year.

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis