What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 263 added, 223 removed, 552 unchanged (47% 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, 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.

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.

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.

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

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.

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.

To meet the needs of commercial borrowers and depositors located primarily in Central Indiana, Phoenix, Arizona and adjacent markets, our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards.

To meet the needs of commercial borrowers located primarily in Central Indiana, Phoenix, Arizona and adjacent markets, our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards.

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

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COVID-19 Pandemic

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.

The third quarter 2020 was characterized by continued uncertainty as the coronavirus pandemic (“COVID-19”) persisted globally, resulting in high unemployment and market volatility.

However, Federal, state and local governments have taken steps to reopen and stimulate economies, evidenced by improving economic indicators as the quarter progressed.

While the effects of COVID-19 did have an impact on our operating results as of September 30, 2020, we believe the impact was consistent with the effects of COVID-19 on the overall banking industry.

The low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 had a negative impact on our variable rate assets in the second and third quarters of 2020.

However, the low interest rate environment has also allowed us to reprice our interest-bearing deposits at lower rates, which provided a benefit to net interest income in the third quarter 2020.

The benefit from lower deposit pricing is expected to continue in the fourth quarter 2020 and into 2021.

Additionally, the low interest rate environment has driven residential mortgage rates to historically low levels, which has resulted in increased mortgage originations and has benefited our residential mortgage business.

At this time, the ultimate impact of COVID-19 on our business continues to remain uncertain as we cannot predict the duration of the pandemic or 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, or an increase in the number of reported cases or mortality rates, 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.

Most of our employees who worked remotely during the earlier stages of the pandemic have returned to the office.

We have implemented social distancing policies, require our employees to wear masks while at work and increased cleaning frequency and protocols at all Company locations.

Management will continue to assess the evolving health and safety situations at local and regional levels.

Our plans remain flexible to adapt as these situations evolve.

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”).

Loan balances on payment deferral programs peaked in late May 2020 but as of October 30, 2020, less than 1% of loan balances were in deferral status and all borrowers coming off deferrals have resumed normal payment schedules.

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 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 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 and the six months ended June 30, 2020 and 2019.

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

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

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

September 30,

2020 June 30,

2020 March 31,

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2019 September 30,

2019 June 30,

2020 June 30,

2019 September 30,

2020 September 30,

Income Statement Summary:

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Noninterest expense 16,412 13,244 13,486 12,613 11,203 43,142 34,021

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

Income tax provision (benefit) 1,395 (268) 263 602 449 1,390 1,315

Net income $ 8,411 $ 3,932 $ 6,019 $ 7,096 $ 6,326 $ 18,362 $ 18,143

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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 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.

During the third quarter 2020, net income was $8.4 million, or $0.86 per diluted share, compared to the third quarter 2019 net income of $6.3 million, or $0.63 per diluted share, representing an increase in net income of $2.1 million, or 33.0%.

During the nine months ended September 30, 2020, net income was $18.4 million, or $1.87 per diluted share, compared to the nine months ended September 30, 2019 net income of $18.1 million, or $1.79 per diluted share, representing an increase in net income of $0.2 million, or 1.2%.

The $2.1 million increase in net income in the third quarter 2020 compared to the third quarter 2019 was due primarily to an increase of $6.9 million, or 124.8%, in noninterest income, an increase of $1.0 million, or 6.5%, in net interest income and a $0.3 million, or 11.2%, decrease in provision for loan losses, partially offset by a $5.2 million, or 46.5%, increase in noninterest expense and an increase of $0.9 million, or 210.7%, in income tax expense.

The $0.2 million increase in net income in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due primarily to a $12.3 million, or 108.0%, increase in noninterest income, partially offset by a $9.1 million, or 26.8%, increase in noninterest expense, a $1.9 million, or 4.0%, decrease in net interest income, a $1.0 million, or 17.5%, increase in provision for loan losses and a $0.1 million, or 5.7%, increase in income tax expense.

During the third quarter 2020, return on average assets (“ROAA”) and return on average shareholders’ equity (“ROAE”) were 0.78% and 10.67%, respectively, compared to 0.63% and 8.40%, respectively, for the third quarter 2019.

During the nine months ended September 30, 2020, ROAA and ROAE were 0.58% and 7.90%, respectively, compared to 0.64% and 8.20%, respectively, for the nine months ended September 30, 2019.

The increase in ROAA for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due primarily to the increase in net income.

The decrease in ROAA for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due primarily to the Company’s growth in average assets.

The increase in ROAE during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due mainly to the increase in net income.

The decrease in ROAE during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to the Company’s growth in average equity.

Consolidated Average Balance Sheets and Net Interest Income Analyses

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(dollars in thousands) Three Months Ended

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

September 30, 2020 June 30, 2020 September 30, 2019

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

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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

(dollars in thousands) Nine Months Ended

September 30, 2020 September 30, 2019

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

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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 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

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

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

September 30, 2019 Due to Changes in Nine Months Ended September 30, 2020 vs.

September 30, 2019 Due to Changes in

Volume Rate Net Volume Rate Net Volume Rate Net

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Increase (decrease) in net interest income $ 1,724 $ 82 $ 1,806 $ 3,552 $ (2,564) $ 988 $ 4,186 $ (5,510) $ (1,324)

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.

Net interest income for the third quarter 2020 was $16.2 million, an increase of $1.0 million, or 6.5%, compared to $15.2 million for the third quarter 2019.

The increase in net interest income was primarily the result of a $5.9 million, or 26.4%, decrease in total interest expense to $16.5 million for the third quarter 2020 from $22.5 million for the third quarter 2019.

The decrease in total interest expense was partially offset by a $4.9 million, or 13.1%, decrease in total interest income to $32.8 million for the third quarter 2020 from $37.7 million for the third quarter 2019.

Net interest income for the nine months ended September 30, 2020 was $45.7 million, a decrease of $1.9 million, or 4.0%, compared to $47.6 million for the nine months ended September 30, 2019.

The decrease in net interest income was the result of a decrease in total interest income of $6.3 million, or 5.8%, from $109.5 million for the nine months ended September 30, 2019 to $103.2 million for the nine months ended September 30, 2020.

This decrease was partially offset by a $4.4 million, or 7.1%, decrease in total interest expense to $57.5 million for the nine months ended September 30, 2020 from $61.9 million the nine months ended September 30, 2019.

The decrease in total interest income for the third quarter 2020 compared to the third 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 other earning assets declined $2.4 million, or 81.0%, due mainly to a 212 basis point (“bp”) decline in the yield earned on these assets, partially offset by an increase of $82.6 million, or 17.6%, 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 $1.5 million, or 36.2%, due to a decline of 118 bps in the yield earned on securities, partially offset by an increase of $71.8 million, or 12.8%, 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.

The increase in average securities balances was due to the deployment of liquidity driven by deposit growth.

Interest income earned on loans decreased $1.0 million, or 3.4%, due primarily to a decline of 30 bps in the yield earned on average loan balances, partially offset by an increase of $128.9 million, or 4.4%, in average loan balances.

The increase in average loan balances was due to growth in the healthcare finance portfolio and the small business lending portfolio, which included loans acquired from First Colorado National Bank, as well as loans originated through PPP.

The decrease in total interest income for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to decreases in interest income earned on loans, including loans held-for-sale, other earning assets and securities.

Interest income earned on other earning assets decreased $3.6 million, or 54.7%, due to a decline of 196 bps in the yield earned on these assets, partially offset by an increase of $198.3 million, or 61.5%, in the average balance of other earning assets.

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Interest income earned on securities decreased $1.8 million, or 14.4%, due to a decline of 81 bps in the yield earned on securities, partially offset by an increase of $92.7 million, or 16.9%, 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 increase in average securities balances was due to deployment of liquidity driven by deposit growth.

Interest income earned on

loans, including loans held-for-sale, decreased by $1.0 million as an increase of $134.9 million, or 4.7%, in the average balance of loans was partially offset by a decline of 24 bps in the yield earned on loans.

Overall, the yield on interest-earning assets for the third quarter 2020 declined 71 bps to 3.09% from 3.80% for the third quarter 2019.

Additionally, the yield on interest-earning assets for the nine months ended September 30, 2020 declined 61 bps to 3.31% from 3.92% for the nine months ended September 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.

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 third quarter 2020 and the nine months ended September 30, 2020 due to growth in average deposit balances.

The decrease in total interest expense for the third quarter 2020 compared to the third quarter 2019 was due primarily to a decrease in interest expense related to certificates and brokered deposits and money market accounts.

Interest expense on certificates and brokered deposits decreased $5.1 million, or 34.5%, due to a decline of 47 bps in the cost of these deposits as well as a $448.7 million, or 20.1%, 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 interest expense related to money market accounts of $0.8 million, or 25.1%, was driven by a decline of 127 bps in the cost of these deposits, partially offset by an increase of $656.1 million, or 102.6%, in the average balance of these deposits.

Money market balances have increased throughout 2020 due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19.

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

The decrease in expense related to certificates and brokered deposits of $6.2 million, or 15.1%, was due to a decline of 19 bps in the cost of these deposits as well as a $175.3 million, or 8.2%, 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.

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.

Interest expense on money market accounts increased $0.7 million, or 8.0%, driven by an increase of $486.0 million, or 81.2%, in the average balance of these deposits, partially offset by a decline of 81 bps in the cost of these deposits.

Money market balances have increased throughout 2020 due to targeted digital marketing efforts to grow small business accounts as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19.

The increase in expense related to other borrowed funds of $1.1 million, or 9.8%, was due primarily to the impact of the issuance 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%.

Overall, the cost of total interest-bearing liabilities for the third quarter 2020 declined 76 bps to 1.70% from 2.46% for the third quarter 2019.

Additionally, the cost of total interest-bearing liabilities for the nine months ended September 30, 2020 declined 39 bps to 2.02% from 2.41% for the nine months ended September 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.

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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.

Net interest margin (“NIM”) was 1.53% for the third quarter 2020 compared to 1.54% for the third quarter 2019.

On a fully-taxable equivalent basis, NIM was 1.67% for the third quarter 2020 compared to 1.70% for the third quarter 2019.

NIM was 1.47% for the nine months ended September 30, 2020 compared to 1.70% for the nine months ended September 30, 2019.

On a fully-taxable equivalent basis, NIM was 1.61% for the nine months ended September 30, 2020 compared to 1.87% for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, 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.

However, as the pace of short-term market interest rate declines has slowed over the course of the year, the Company believes that yields on

interest-earning assets have largely stabilized.

Furthermore, the Company has approximately $931.0 million of certificates and brokered deposits with a weighted average cost of 2.02% 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 and the six months ended June 30, 2020 and 2019.

(in thousands) Three Months Ended Six Months Ended

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

(in thousands) Three Months Ended Nine Months Ended

September 30,

2020 June 30,

2020 March 31,

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2019 September 30,

2019 June 30,

2020 June 30,

2019 September 30,

2020 September 30,

Service charges and fees $ 224 $ 182 $ 212 $ 213 $ 211 $ 618 $ 672

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Mortgage banking activities 9,630 3,408 3,668 2,953 4,307 16,706 8,588

Gain (loss) on sale of loans 762 1,801 1,721 523 (66) 2,563 (170)

Gain on sale of loans 2,033 762 1,801 1,721 523 4,596 353

Gain (loss) on sale of securities 98 — 41 — — 139 (458)

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Total noninterest income $ 12,495 $ 4,973 $ 6,211 $ 5,405 $ 5,558 $ 23,679 $ 11,384

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.

During the third quarter 2020, noninterest income was $12.5 million, representing an increase of $6.9 million, or 124.8%, compared to $5.6 million for the third quarter 2019.

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

The increase in mortgage banking revenue was due mainly to an increase in loan origination volume, driven by historically low mortgage interest rates, and higher gain-on-sale margins.

The increase in gain on sale of loans was due to the Company selling $12.9 million of SBA 7(a) guaranteed loans and $12.2 million of single tenant lease financing loans during the third quarter 2020, recognizing a net gain of $2.0 million, as compared to a $0.5 million net gain on the sale of loans in the third quarter 2019 from sales totaling $53.4 million of single tenant lease financing and public finance loans.

The Company recognized $0.2 million of loan servicing revenue, net of the loan servicing asset revaluation, in the third quarter 2020, in connection with its SBA 7(a) servicing portfolio, which includes the portfolio acquired in the fourth quarter 2019 as well as loans originated by the Company in 2020.

The decrease in other noninterest income was mainly the result of income recognized in the prior year related to the Company’s temporary ownership of the land associated with the Company’s future corporate headquarters.

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

During the nine months ended September 30, 2020, noninterest income was $23.7 million, representing an increase of $12.3 million, or 108.0%, compared to $11.4 million for the nine months ended September 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 (loss) on sale of securities, which were partially offset by a decrease in other income.

The increase in mortgage banking revenue was due mainly to an increase in loan origination volume, driven by historically low mortgage interest rates, and higher gain-on-sale margins.

The increase in gain on sale of loans was due to sales of portfolio loans with book values totaling $216.7 million that resulted in a gain of $1.3 million, as well as a gain of $3.3 million on the sale of SBA 7(a) guaranteed loans during the nine months ended September 30, 2020, compared to the Company selling portfolio loans with book values of $201.8 million that resulted in a net gain of $0.4 million during the nine months ended September 30, 2019.

The increase in gain (loss) on sale of securities was due to a gain of $0.1 million being recorded during the nine months ended September 30, 2020 compared to the nine months ended September 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.

The Company also recognized loan servicing revenue, net of the loan servicing asset revaluation, of $0.4 million, during the nine months ended September 30, 2020, in connection with its SBA 7(a) servicing portfolio, which includes the portfolio acquired in the fourth quarter 2019, as well as loans originated by the Company in 2020.

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 at a gain of $0.5 million and $0.4 million of income related to the Company’s temporary ownership of the land associated with its future corporate 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 and the six months ended June 30, 2020 and 2019.

(in thousands) Three Months Ended Six Months Ended

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

(in thousands) Three Months Ended Nine Months Ended

September 30,

2020 June 30,

2020 March 31,

1 unchanged sentence

2019 September 30,

2019 June 30,

2020 June 30,

2019 September 30,

2020 September 30,

Salaries and employee benefits $ 9,533 $ 7,789 $ 7,774 $ 7,168 $ 6,883 $ 25,096 $ 19,846

5 unchanged sentences

Deposit insurance premium 440 435 485 601 — 1,360 1,302

Write-down of other real estate owned 2,065 — — — — 2,065 —

Other 970 1,337 1,076 1,036 952 3,383 2,673

Total noninterest expense $ 16,412 $ 13,244 $ 13,486 $ 12,613 $ 11,203 $ 43,142 $ 34,021

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.

Noninterest expense for the third quarter 2020 was $16.4 million, compared to $11.2 million for the third quarter 2019.

The increase of $5.2 million, or 46.5%, compared to the third quarter 2019 was due primarily to increases of $2.7 million in salaries and employee benefits and $0.4 million in deposit insurance premium, as well as a $2.1 million write-down of a legacy commercial other real estate owned (“OREO”) property.

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.

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 deposit insurance premium was due primarily to the Company not incurring deposit insurance premium expense during the third quarter 2019 as a result of the small bank assessment credit applied by the FDIC.

Noninterest expense for the nine months ended September 30, 2020 was $43.1 million, compared to $34.0 million for the nine months ended September 30, 2019.

The increase of $9.1 million, or 26.8%, compared to the nine months ended September 30, 2019 was due primarily to increases of $5.3 million in salaries and employee benefits, $0.7 million in other expenses, $0.6 million in loan expenses, $0.3 million in consulting and professional services and $0.3 million in premises and equipment, as well as a $2.1 million write-down of a legacy commercial OREO property.

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 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, as well as various other miscellaneous expenses, none of which were individually significant.

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

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

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

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.

Income tax provision was $1.4 million for the third quarter 2020, resulting in an effective tax rate of 14.2%, compared to $0.5 million and an effective tax rate of 6.6% for the third quarter 2019.

Income tax provision was $1.4 million for the nine months ended September 30, 2020, resulting in an effective tax rate of 7.0%, compared to $1.3 million and an effective tax rate of 6.8% for the nine months ended September 30, 2019.

The increase in income tax provision for the third quarter 2020 compared to the third quarter 2019 was due primarily to the increase in pre-tax earnings driven by a higher proportion of taxable revenue from mortgage banking and gain on sale of loans.

Financial Condition

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Balance Sheet Data:

September 30,

2020 June 30,

2020 March 31,

1 unchanged sentence

2019 September 30,

2019 June 30,

Total assets $ 4,333,624 $ 4,324,600 $ 4,168,146 $ 4,100,083 $ 4,095,491

7 unchanged sentences

Total shareholders’ equity 318,102 307,711 307,711 304,913 295,140

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.

Total assets increased $233.5 million, or 5.7%, to $4.3 billion at September 30, 2020 compared to $4.1 billion at December 31, 2019.

Balance sheet growth was driven by an increase in deposits of $218.4 million, or 6.9%.

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.

The deposit growth drove an increase in liquid assets as cash balances increased $161.1 million, or 49.2%.

Additionally, loan balances increased $49.4 million, or 1.7%, and loans held-for-sale increased $20.1 million, or 35.9%.

As deposit growth outpaced loan growth, balance sheet liquidity increased as reflected in the percentage of loans to deposits, which declined to 89.3% as of September 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) June 30,

(dollars in thousands) September 30,

2020 June 30,

2020 March 31,

1 unchanged sentence

2019 September 30,

2019 June 30,

Commercial loans

20 unchanged sentences

Net loans $ 2,985,997 $ 2,949,209 $ 2,869,236 $ 2,941,707 $ 2,859,589

(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 12.8% 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.

We currently have no exposure to other highly impacted industries such as airlines, cruise ships, oil & gas or multifamily lending.

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

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

(2) Includes carrying value adjustments of $44.3 and $46.0 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2020 and June 30, 2020, respectively, and $44.6 million, $21.4 million and $27.6 million, as of March 31, 2020, December 31, 2019 and September 30, 2019, respectively, related to interest rate swaps associated with public finance loans.

Total loans were $3.0 billion as of September 30, 2020, an increase of $49.4 million, or 1.7%, compared to December 31, 2019.

Total commercial balances were $2.4 billion as of September 30, 2020, up $156.0 million, or 6.8%, from 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 $106.6 million of loans in these categories during 2020, as well as a decline in commercial and industrial balances.

The growth in healthcare finance balances was due primarily to a combination of strong borrower demand following the re-opening of state and local economies across the U.S.

subsequent to shelter-in-place orders in response to COVID-19 and growth in loan originations by the sales team at Lendeavor, the Company’s origination partner in this loan category.

The growth in small business lending was driven by $58.3 million of PPP loan balances originated during the second quarter 2020, as well as an increase in originated SBA 7(a) loans during 2020.

Total consumer loan balances were $507.7 million as of September 30, 2020, a decrease of $125.8 million, or 19.9%, 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 in the first quarter 2020, which included seasoned lower-yielding loans.

Additionally, the balances of residential mortgage loans and other consumer loans have been impacted by elevated prepayment activity, which more than offset new origination activity.

Asset Quality

2 unchanged sentences

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

(dollars in thousands) June 30,

(dollars in thousands) September 30,

2020 June 30,

2020 March 31,

1 unchanged sentence

2019 September 30,

2019 June 30,

Nonaccrual loans

35 unchanged sentences

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

(in thousands) June 30,

(in thousands) September 30,

2020 June 30,

2020 March 31,

1 unchanged sentence

2019 September 30,

2019 June 30,

Troubled debt restructurings – nonaccrual $ 811 $ 854 $ 94 $ 94 $ 171

1 unchanged sentence

Total troubled debt restructurings $ 1,176 $ 1,226 $ 472 $ 521 $ 641

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 in nonperforming loans of 3.0 million, or 45.2%, to $9.8 million as of September 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 balances of $1.6 million and an increase in nonperforming single tenant lease financing loans with unpaid principal balances of $2.5 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 and one nonaccrual owner-occupied commercial real estate loan that paid off during the third quarter 2020.

Total nonperforming assets increased $0.9 million, or 10.3%, as of September 30, 2020 compared to December 31, 2019, due primarily to the increase in nonperforming loans discussed above, partially offset by a $2.1 million write-down of a legacy commercial OREO property in the third quarter 2020.

The ratio of nonperforming loans to total loans increased to 0.32% as of September 30, 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 September 30, 2020 compared to 0.22% as of December 31, 2019, due primarily to the loans mentioned above.

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

As of September 30, 2020, the Company did not have any OREO.

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

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

During the third quarter 2020, we wrote off the balance of OREO and are currently evaluating alternatives related to the ultimate disposition of this property.

As of September 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.

8 unchanged sentences

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.

The following table shows the Company’s deferrals by loan portfolio type that have been granted through October 30, 2020.

The balances shown are as of September 30, 2020.

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

15 unchanged sentences

Total commercial and consumer loans $ 19,932 $ 2,950,160 0.7 %

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 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.

During the first and second quarters 2020 and into early third quarter 2020, the single tenant lease financing and healthcare finance portfolios had comprised a significant majority of total loan deferrals.

However, as of October 30, 2020, these portfolios had declined to approximately 0.26% of the total loan portfolio.

Earlier in the year, borrowers in these portfolios had 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 49% and all borrowers, except for one relationship that is on nonaccrual status, made their loan payments in a timely manner prior to entering a deferral program.

Furthermore, there are no delinquencies for performing 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.

As of October 30, 2020, this percentage had dropped to 0.5%.

All borrowers who have come off a deferral program have resumed making scheduled loan payments without delinquency.

Small Business Administration Paycheck Protection Program

1 unchanged sentence

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 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.

These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA.

As a preferred SBA lender, we assisted our clients in participating in the PPP to help them maintain their workforces in an uncertain and challenging environment.

The loans bear an interest rate of 1.00% and we received weighted average origination fees of 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.

As of September 30, 2020, we had 447 PPP loans totaling $58.3 million outstanding.

The Company anticipates that the majority of these loans will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program.

As of September 30, 2020, the Company did not receive any formal applications for forgiveness from PPP borrowers.

Management anticipates that loan forgiveness applications will increase during the fourth quarter 2020.

Allowance for Loan Losses

1 unchanged sentence

(dollars in thousands) Three Months Ended

September 30,

2020 June 30,

2020 March 31,

1 unchanged sentence

2019 September 30,

2019 June 30,

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

4 unchanged sentences

Net charge-offs to average loans 0.01 % 0.12 % 0.06 % 0.04 % 0.15 %

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.

The allowance for loan losses was $26.9 million as of September 30, 2020, compared to $21.8 million as of December 31, 2019.

While total loan balances experienced a modest increase of $49.4 million, or 1.7%, 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 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.

The allowance for loan losses as a percentage of total loans was 0.89% at September 30, 2020, or 0.91% when excluding PPP Loans, compared to 0.74% at December 31, 2019.

The allowance for loan losses as a percentage of nonperforming loans decreased to 275.4% as of September 30, 2020, compared to 324.4% as of December 31, 2019.

The provision for loan losses in the third quarter 2020 was $2.5 million, compared to $2.8 million for the third quarter 2019.

During the third quarter 2020, the Company recorded net charge-offs of $0.1 million, compared to net charge-offs of $1.1 million for the third quarter 2019.

Investment Securities Portfolio

1 unchanged sentence

(in thousands)

Amortized Cost June 30,

Amortized Cost September 30,

2020 June 30,

2020 March 31,

1 unchanged sentence

2019 September 30,

2019 June 30,

Securities available-for-sale

12 unchanged sentences

(in thousands)

Approximate Fair Value June 30,

Approximate Fair Value September 30,

2020 June 30,

2020 March 31,

1 unchanged sentence

2019 September 30,

2019 June 30,

Securities available-for-sale

11 unchanged sentences

Total securities $ 597,487 $ 658,169 $ 678,150 $ 603,412 $ 592,297

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 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.

The approximate fair value of available-for-sale investment securities decreased $12.5 million, or 2.4%, to $528.3 million as of September 30, 2020, compared to $540.9 million as of December 31, 2019.

The decrease was due primarily to decreases of $12.2 million in agency securities, $11.2 million in municipal securities and $8.1 million in agency mortgage-backed securities.

These decreases were driven primarily by prepayments and maturities in agency and agency mortgage-backed securities, as well as early redemptions and maturities in municipal securities.

The decreases were partially offset by purchases of corporate and private label mortgage-backed securities as liquidity from deposit growth was deployed.

Accrued Income and Other Assets

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.

Accrued income and other assets were $66.5 million at September 30, 2020 compared to $67.1 million at December 31, 2019.

As of these dates, the Company pledged $33.7 million and $42.3 million, respectively, of cash collateral to counterparties on interest rate swap agreements as security for its obligations related to these agreements.

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

The decrease in cash collateral pledged was partially offset by an increase of $5.3 million in deferred tax assets.

Accrued Expenses and Other Liabilities

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

Accrued expenses and other liabilities were $57.2 million at September 30, 2020 compared to $53.0 million at December 31, 2019.

The increase of $4.2 million, or 7.9%, was due primarily to a $4.9 million trade date accrual related to securities that were purchased in September 2020 but did not settle until October 2020, a $3.4 million increase in income taxes payable and a $1.5 million increase in accrued salaries and benefits.

These increases were partially offset by a $5.0 million decrease in the fair value of interest rate swap agreements.

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

(dollars in thousands) June 30,

(dollars in thousands) September 30,

2020 June 30,

2020 March 31,

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2019 September 30,

2019 June 30,

Noninterest-bearing deposits $ 86,088 2.6 % $ 82,864 2.5 % $ 70,562 2.2 % $ 57,115 1.8 % $ 50,560 1.6 %

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Total deposits $ 3,372,391 100.0 % $ 3,380,789 100.0 % $ 3,178,506 100.0 % $ 3,153,963 100.0 % $ 3,148,242 100.0 %

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.

Total deposits increased $218.4 million, or 6.9%, to $3.4 billion as of September 30, 2020, compared to $3.2 billion as of December 31, 2019.

This increase was due primarily to an increase of $572.8 million, or 72.8%, in money market accounts, offset by declines of $252.9 million, or 15.7%, in certificates of deposits and $176.8 million, or 2.8%, in brokered deposits.

The Company experienced strong growth in money market balances due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part 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.

Recent Debt and Equity Offerings

Recent Debt Offerings

Subsequent to the end of the quarter, on October 26, 2020, the Company issued $10.0 million in aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”).

The Notes were offered and sold by the Company in a private placement and are scheduled to mature on November 1, 2030.

The 2030 Notes bear interest at a fixed rate of 6.0% per annum from and including October 26, 2020, to, but excluding, November 1, 2025, and thereafter at a floating interest rate initially equal to the three-month term SOFR plus 5.795%.

The 2030 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025.

The 2030 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.

We intend to use the net proceeds to redeem the 2025 Note on or before January 15, 2021, subject to the receipt of any applicable regulatory approvals.

In June 2019, the Company issued $37.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2029 Notes”) in a public offering.

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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 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.

The following tables present actual and required capital ratios as of September 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 September 30, 2020 and December 31, 2019 based on the Basel III Capital Rules.

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.

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

As of June 30, 2020:

As of September 30, 2020:

Common equity tier 1 capital to risk-weighted assets

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Shareholders’ Dividends

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’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable October 15, 2020 to shareholders of record as of October 1, 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 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.

As of September 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 (the “2025 Note”), its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 and the 2029 Notes.

Subsequent to the end of the quarter, on October 26, 2020, we issued an additional $10.0 million aggregate principal amount of 2030 Notes.

The agreements that govern our outstanding subordinated debt, including the 2030 Notes, 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.

If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock.

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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 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 the first nine months of 2020, the Company sold $143.0 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.

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 intend to modestly reduce the size of our balance sheet during the fourth quarter 2020 through continued deposit repricing to help manage capital levels.

A component of this balance sheet management strategy is expected to include reducing our cash balances from the levels at September 30, 2020.

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.

At September 30, 2020, on a consolidated basis, the Company had $1.1 billion in cash and cash equivalents and investment securities available-for-sale and $76.2 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 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.

At September 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 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.

At September 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 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.

At September 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 September 30, 2020 totaled $931.0 million.

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.

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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, 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.

Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets ratio, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, allowance for loan losses to loans, excluding PPP loans, adjusted income before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on shareholders’ equity, adjusted return on average tangible common equity and adjusted effective income tax rate 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 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

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

September 30,

2020 June 30,

2020 March 31,

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2019 September 30,

2019 June 30,

2020 June 30,

2019 September 30,

2020 September 30,

Total equity - GAAP $ 318,102 $ 307,711 $ 304,913 $ 295,140 $ 295,140 $ 318,102 $ 295,140

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Return on average tangible common equity 10.83 % 5.23 % 9.61 % 8.53 % 8.53 % 8.02 % 8.33 %

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

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

September 30,

2020 June 30,

2020 March 31,

1 unchanged sentence

2019 September 30,

2019 June 30,

2020 June 30,

2019 September 30,

2020 September 30,

Total interest income $ 32,750 $ 34,222 $ 37,877 $ 37,964 $ 37,694 $ 103,216 $ 109,537

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1 Assuming a 21% tax rate

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

September 30,

2020 June 30,

2020 March 31,

2020 December 31,

2019 September 30,

2020 September 30,

Income before income taxes - GAAP $ 9,806 $ 3,664 $ 6,282 $ 7,698 $ 6,775 $ 19,752 $ 19,458

Write-down of other real estate owned 2,065 — — — — 2,065 —

Adjusted income before income taxes $ 11,871 $ 3,664 $ 6,282 $ 7,698 $ 6,775 $ 21,817 $ 19,458

Income tax provision (benefit) - GAAP $ 1,395 $ (268) $ 263 $ 602 $ 449 $ 1,390 $ 1,315

Write-down of other real estate owned 434 — — — — 434 —

Adjusted income tax provision (benefit) $ 1,829 $ (268) $ 263 $ 602 $ 449 $ 1,824 $ 1,315

Net income - GAAP $ 8,411 $ 3,932 $ 6,019 $ 7,096 $ 6,326 $ 18,362 $ 18,143

Write-down of other real estate owned 1,631 — — — — 1,631 —

Adjusted net income $ 10,042 $ 3,932 $ 6,019 $ 7,096 $ 6,326 $ 19,993 $ 18,143

Diluted average common shared outstanding 9,773,224 9,768,227 9,750,528 9,843,829 9,980,612 9,827,182 10,116,507

Diluted earnings per share - GAAP $ 0.86 $ 0.40 $ 0.62 $ 0.72 $ 0.63 $ 1.87 $ 1.79

Effect of write-down of other real estate owned 0.17 — — — — 0.16 —

Adjusted diluted earnings per share $ 1.03 $ 0.40 $ 0.62 $ 0.72 $ 0.63 $ 2.03 $ 1.79

Return on average assets 0.78 % 0.37 % 0.59 % 0.69 % 0.63 % 0.58 % 0.64 %

Effect of write-down of other real estate owned 0.15 % 0.00 % 0.00 % 0.00 % 0.00 % 0.05 % 0.00 %

Adjusted return on average assets 0.93 % 0.37 % 0.59 % 0.69 % 0.63 % 0.63 % 0.64 %

Return on average shareholders' equity 10.67 % 5.15 % 7.78 % 9.46 % 8.40 % 7.90 % 8.20 %

Effect of write-down of other real estate owned 2.07 % 0.00 % 0.00 % 0.00 % 0.00 % 0.70 % 0.00 %

Adjusted return on average shareholders’ equity 12.74 % 5.15 % 7.78 % 9.46 % 8.40 % 8.60 % 8.20 %

Return on average tangible common equity 10.83 % 5.23 % 7.90 % 9.61 % 8.53 % 8.02 % 8.33 %

Effect of write-down of other real estate owned 2.10 % 0.00 % 0.00 % 0.71 % 0.00 %

Adjusted return on average tangible common equity 12.93 % 5.23 % 7.90 % 9.61 % 8.53 % 8.73 % 8.33 %

Effective income tax rate 14.2 % (7.3) % 4.2 % 7.8 % 6.6 % 7.0 % 6.8 %

Effect of write-down of other real estate owned 1.2 % 0.0 % 0.0 % 0.0 % 0.0 % 1.4 % 0.0 %

Adjusted effective income tax rate 15.4 % (7.3) % 4.2 % 7.8 % 6.6 % 8.4 % 6.8 %

Critical Accounting Policies and Estimates

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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 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.

At September 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 related 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 September 30, 2020 and December 31, 2019, the Company had commitments to sell residential real estate loans of $118.0 million and $115.0 million, respectively.

These contracts mature in less than one year.

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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