(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act

As of ~~April 30,~~October 31, 2019, the registrant had ~~34,540,319~~33,583,928 shares of Common Stock outstanding.

EAGLE BANCORP, INC.

Consolidated Statements of Operations (Unaudited)

(dollars in thousands, except per share data)


	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018		2019		2018
Interest Income
Interest and fees on loans	$	97,821	$	84,430	$	102,297	$	95,570	$	302,007	$	270,924
Interest and dividends on investment securities		5,598		3,592		4,904		4,875		15,740		12,525
Interest on balances with other banks and short-term investments		1,666		981		1,762		1,897		4,533		4,152
Interest on federal funds sold		49		46		71		18		167		104
Total interest income		105,134		89,049		109,034		102,360		322,447		287,705
Interest Expense
Interest on deposits		20,900		9,129		24,576		16,719		67,937		39,896
Interest on customer repurchase agreements		98		50		82		54		255		166
Interest on short-term borrowings		140		1,111		408		1,317		1,983		3,425
Interest on long-term borrowings		2,979		2,979		2,979		2,979		8,937		8,937
Total interest expense		24,117		13,269		28,045		21,069		79,112		52,424
Net Interest Income		81,017		75,780		80,989		81,291		243,335		235,281
Provision for Credit Losses		3,360		1,969		3,186		2,441		10,146		6,060
Net Interest Income After Provision For Credit Losses		77,657		73,811		77,803		78,850		233,189		229,221

Noninterest Income
Service charges on deposits		1,694		1,614		1,494		1,814		4,794		5,188
Gain on sale of loans		1,388		1,523		2,563		1,434		5,874		4,632
Gain on sale of investment securities		912		42		153		—		1,628		68
Increase in the cash surrender value of bank owned life insurance		425		344		431		373		1,285		1,073
Other income		1,872		1,781		1,673		2,019		5,384		5,536
Total noninterest income		6,291		5,304		6,314		5,640		18,965		16,497
Noninterest Expense
Salaries and employee benefits		23,644		16,858		19,095		17,157		60,482		51,827
Premises and equipment expenses		3,852		3,929		3,503		3,889		11,007		11,691
Marketing and advertising		1,148		937		1,210		1,191		3,626		3,419
Data processing		2,375		2,317		2,183		2,423		7,161		7,144
Legal, accounting and professional fees		1,709		2,973		3,625		2,130		8,074		7,282
FDIC insurance		1,116		675		85		933		2,327		2,559
Other expenses		4,460		3,432		3,772		3,891		12,459		11,102
Total noninterest expense		38,304		31,121		33,473		31,614		105,136		95,024
Income Before Income Tax Expense		45,644		47,994		50,644		52,876		147,018		150,694
Income Tax Expense		11,895		12,279		14,149		13,928		39,531		38,735
Net Income	$	33,749	$	35,715	$	36,495	$	38,948	$	107,487	$	111,959

Earnings Per Common Share
Basic	$	0.98	$	1.04	$	1.07	$	1.14	$	3.12	$	3.26
Diluted	$	0.98	$	1.04	$	1.07	$	1.13	$	3.12	$	3.25

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net Income	$	36,495		$	38,948		$	107,487		$	111,959

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available for sale		1,174			(3,148	)		13,140			(10,206	)
Reclassification adjustment for net gains included in net income		(110	)		—			(1,190	)		(51	)
Total unrealized gain (loss) on investment securities		1,064			(3,148	)		11,950			(10,257	)
Unrealized (loss) gain on derivatives		11			625			(1,664	)		3,547
Reclassification adjustment for amounts included in net income		(205	)		(158	)		(1,374	)		(156	)
Total unrealized (loss) gain on derivatives		(194	)		467			(3,038	)		3,391
Other comprehensive income (loss)		870			(2,681	)		8,912			(6,866	)
Comprehensive Income	$	37,365		$	36,267		$	116,399		$	105,093

Three Months Ended March 31,
2019 2018
Net Income $ 33,749 $ 35,715

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available for sale 5,440 (5,123 )
Reclassification adjustment for net gains included in net income (61 ) (31 )
Total unrealized gain (loss) on investment securities 5,379 (5,154 )
Unrealized (loss) gain on derivatives (1,154 ) 2,233
Reclassification adjustment for amounts included in net income (942 ) (65 )
Total unrealized (loss) gain on derivatives (2,096 ) 2,168
Other comprehensive income (loss) 3,283 (2,986 )
Comprehensive Income $ 37,032 $ 32,729

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars in thousands except share data)

Accumulated
Additional Other Total
Common Paid Retained Comprehensive Shareholders’
Shares Amount in Capital Earnings Income (Loss) Equity
Balance January 1, 2019 34,387,919 $ 342 $ 528,380 $ 584,494 $ (4,275 ) $ 1,108,941

Net Income — — — 33,749 — 33,749
Other comprehensive income, net of tax — — — — 3,283 3,283
Stock-based compensation expense — — 2,029 — — 2,029
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes 26,034 — 296 — — 296
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes (10,944 ) 1 (1 ) — — —
Vesting of performance based stock awards, net of shares withheld for payroll taxes 17,655 — — — — —
Time based stock awards granted 112,636 — — — — —
Issuance of common stock related to employee stock purchase plan 3,893 — 190 — — 190
Balance March 31, 2019 34,537,193 $ 343 $ 530,894 $ 618,243 $ (992 ) $ 1,148,488

Balance January 1, 2018 34,185,163 $ 340 $ 520,304 $ 431,544 $ (1,750 ) $ 950,438

Net Income — — — 35,715 — 35,715
Other comprehensive income, net of tax — — — — (2,986 ) (2,986 )
Stock-based compensation expense — — 1,476 — — 1,476
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes 32,230 — 338 — — 338
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes (12,106 ) 1 (1 ) — — —
Time based stock awards granted 94,344 — — — — —
Issuance of common stock related to employee stock purchase plan 3,425 — 199 — — 199
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from AOCI (ASU 2018-02) — — — 674 (674 ) —
Balance March 31, 2018 34,303,056 $ 341 $ 522,316 $ 467,933 $ (5,410 ) $ 985,180


	Common						Additional Paid			Retained			Accumulated Other Comprehensive			Total Shareholders’
	Shares			Amount			in Capital			Earnings			Income (Loss)			Equity
Balance July 1, 2019		34,539,853		$	343		$	532,585		$	647,887		$	3,767		$	1,184,582

Net Income		—			—			—			36,495			—			36,495
Other comprehensive income, net of tax		—			—			—			—			870			870
Stock-based compensation expense		—			—			3,147			—			—			3,147
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(1,251	)		—			—			—			—			—
Issuance of common stock related to employee stock purchase plan		4,120			—			213			—			—			213
Cash dividends declared ($0.22 per share)		—			—			—			(7,327	)		—			(7,327	)
Common stock repurchased		(822,200	)		(7	)		(33,379	)		—			—			(33,386	)
Balance September 30, 2019		33,720,522		$	336		$	502,566		$	677,055		$	4,637		$	1,184,594

Balance July 1, 2018		34,305,071		$	341		$	524,176		$	505,229		$	(6,609	)	$	1,023,137

Net Income		—			—			—			38,948			—			38,948
Other comprehensive loss, net of tax		—			—			—			—			(2,681	)		(2,681	)
Stock-based compensation expense		—			—			2,031			—			—			2,031
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(320	)		—			—			—			—			—
Issuance of common stock related to employee stock purchase plan		3,722			—			216			—			—			216
Balance September 30, 2018		34,308,473		$	341		$	526,423		$	544,177		$	(9,290	)	$	1,061,651

Balance January 1, 2019		34,387,919		$	342		$	528,380		$	584,494		$	(4,275	)	$	1,108,941

Net Income		—			—			—			107,487			—			107,487
Other comprehensive income, net of tax		—			—			—			—			8,912			8,912
Stock-based compensation expense		—			—			6,648			—			—			6,648
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes		26,784			—			332			—			—			332
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(13,995	)		1			(1	)		—			—			—
Vesting of performance based stock awards, net of shares withheld for payroll taxes		17,655			—			—			—			—			—
Time based stock awards granted		112,636			—			—			—			—			—
Issuance of common stock related to employee stock purchase plan		11,723			—			585			—			—			585
Cash dividends declared ($0.44 per share)		—			—			—			(14,926	)		—			(14,926	)
Common stock repurchased		(822,200	)		(7	)		(33,378	)		—			—			(33,385	)
Balance September 30, 2019		33,720,522		$	336		$	502,566		$	677,055		$	4,637		$	1,184,594

Balance January 1, 2018		34,185,163		$	340		$	520,304		$	431,544		$	(1,750	)	$	950,438

Net Income		—			—			—			111,959			—			111,959
Other comprehensive loss, net of tax		—			—			—			—			(6,866	)		(6,866	)
Stock-based compensation expense		—			—			5,174			—			—			5,174
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes		32,230			—			338			—			—			338
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(13,681	)		1			(1	)		—			—			—
Time based stock awards granted		94,344			—			—			—			—			—
Issuance of common stock related to employee stock purchase plan		10,417			—			608			—			—			608
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from AOCI (ASU 2018-02)		—			—			—			674			(674	)		—
Balance September 30, 2018		34,308,473		$	341		$	526,423		$	544,177		$	(9,290	)	$	1,061,651

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)



	Nine Months Ended September 30,
	2019			2018
Cash Flows From Operating Activities:
Net Income	$	107,487		$	111,959
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		10,146			6,060
Depreciation and amortization		5,653			5,292
Amortization of operating lease right-of-use assets		3,022			—
Gains on sale of loans		(5,874	)		(4,632	)
Securities premium amortization (discount accretion), net		3,966			3,297
Origination of loans held for sale		(437,525	)		(325,109	)
Proceeds from sale of loans held for sale		410,454			336,109
Net increase in cash surrender value of BOLI		(1,285	)		(1,073	)
Deferred income tax expense (benefit)		3,305			(6,426	)
Net gain on sale of investment securities		(1,628	)		(68	)
Stock-based compensation expense		6,648			5,174
Net tax benefits from stock compensation		10			108
Decrease (increase) in other assets		7,274			(11,894	)
Decrease in other liabilities		(19,314	)		(10,886	)
Net cash provided by operating activities		92,339			107,911
Cash Flows From Investing Activities:
Purchases of available-for-sale investment securities		(130,693	)		(246,501	)
Proceeds from maturities of available-for-sale securities		129,879			68,901
Proceeds from sale/call of available-for-sale securities		82,982			31,974
Purchases of Federal Reserve and Federal Home Loan Bank stock		(90,219	)		(47,811	)
Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock		85,000			46,878
Net increase in loans		(574,177	)		(435,773	)
Purchase of BOLI		—			(10,000	)
Increase in premises and equipment		(2,171	)		(727	)
Net cash used in investing activities		(499,399	)		(593,059	)
Cash Flows From Financing Activities:
Increase in deposits		428,228			518,321
Decrease in customer repurchase agreements		(116	)		(40,115	)
Increase in short-term borrowings		100,000			—
Proceeds from exercise of equity compensation plans		332			338
Proceeds from employee stock purchase plan		585			608
Common stock repurchased		(33,385	)		—
Cash dividends paid		(14,926	)		—
Net cash provided by financing activities		480,718			479,152
Net Increase (Decrease) In Cash and Cash Equivalents		73,658			(5,996	)
Cash and Cash Equivalents at Beginning of Period		321,864			190,473
Cash and Cash Equivalents at End of Period	$	395,522		$	184,477
Supplemental Cash Flows Information:
Interest paid	$	81,834		$	53,405
Income taxes paid	$	43,250		$	39,900
Non-Cash Investing Activities
Initial recognition of operating lease right-of-use assets	$	29,574		$	—
Initial recognition of operating lease liabilities	$	33,535		$	—
Transfers from loans to other real estate owned	$	93		$	—

Three Months Ended March 31,
2019 2018
Cash Flows From Operating Activities:
Net Income $ 33,749 $ 35,715
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 3,360 1,969
Depreciation and amortization 1,672 1,811
Amortization of operating lease right-of-use assets 646 —
Gains on sale of loans (1,388 ) (1,523 )
Gains on sale of GNMA loans (55 ) —
Securities premium amortization (discount accretion), net 1,371 1,087
Origination of loans held for sale (91,736 ) (102,316 )
Proceeds from sale of loans held for sale 92,165 103,062
Net increase in cash surrender value of BOLI (425 ) (344 )
Deferred income tax expense (benefit) 1,264 (1,433 )
Net gain on sale of investment securities (912 ) (42 )
Stock-based compensation expense 2,029 1,476
Net tax benefits from stock compensation 10 108
Decrease (increase) in other assets 9,897 (25,519 )
Decrease in other liabilities (23,943 ) (5,430 )
Net cash provided by operating activities 27,704 8,621
Cash Flows From Investing Activities:
Purchases of available-for-sale investment securities (34,748 ) (32,269 )
Proceeds from maturities of available-for-sale securities 26,674 21,249
Proceeds from sale/call of available-for-sale securities 22,808 17,266
Purchases of Federal Reserve and Federal Home Loan Bank stock (16,164 ) (28,322 )
Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock 4,675 29,878
Net increase in loans (184,972 ) (191,918 )
Bank premises and equipment acquired (876 ) (283 )
Net cash used in investing activities (182,603 ) (184,399 )
Cash Flows From Financing Activities:
(Decrease) increase in deposits (291,366 ) 267,817
Decrease in customer repurchase agreements (3,995 ) (28,196 )
Increase (decrease) in short-term borrowings 250,000 (50,000 )
Proceeds from exercise of equity compensation plans 296 338
Proceeds from employee stock purchase plan 190 199
Net cash (used in) provided by financing activities (44,875 ) 190,158
Net (Decrease) Increase In Cash and Cash Equivalents (199,774 ) 14,380
Cash and Cash Equivalents at Beginning of Period 321,864 190,473
Cash and Cash Equivalents at End of Period $ 122,090 $ 204,853
Supplemental Cash Flows Information:
Interest paid $ 26,749 $ 15,352
Income taxes paid $ 17,950 $ 16,500
Non-Cash Investing Activities
Initial recognition of operating lease right-of-use assets $ 29,574 $ —
Initial recognition of operating lease liabilities $ 33,535 $ —

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. and its subsidiaries (the “Company”). Active subsidiaries include: EagleBank (the “Bank”), Eagle Insurance Services, LLC, ~~and~~ Bethesda Leasing, LLC, and Landroval Municipal Finance, Inc., with all significant intercompany transactions eliminated.

The Consolidated Financial Statements of the Company included herein are unaudited. The Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals that in the opinion of management, are necessary to present fairly the results for the periods presented. The amounts as of and for the ~~three months~~year ended ~~March~~December 31, ~~2019~~2018 were derived from audited Consolidated Financial Statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes to the Company’s Accounting Policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2018 except as indicated in the “Accounting Standards Adopted in 2019” section below. The Company believes that the disclosures are adequate to make the information presented not misleading. Certain reclassifications have been made to amounts previously reported to conform to the current period presentation.

These statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Operating results for the three and nine months ended ~~March 31,~~September 30, 2019 are not necessarily indicative of the results of operations to be expected for the remainder of the year, or for any other period.

Nature of Operations

The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination and sale of residential mortgage loans, the origination of small business loans, and the origination, securitization and sale of multifamily Federal Housing Administration (“FHA”) loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration (“SBA”), is typically sold to third party investors in a transaction apart from the loan’s origination. The Bank offers its products and services through ~~twenty~~20 banking offices, ~~five~~5 lending centers and various electronic capabilities, including remote deposit services and ~~mobile~~digital banking services. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements.

New Authoritative Accounting Guidance

Accounting Standards Adopted in 2019

ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 has, among other things, required lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments, measured on a discounted basis; and a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 ~~does~~did not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 became effective for us on January 1, 2019 and initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) – Targeted Improvements,” which, among other things, provides an additional transition method that allows entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon adoption of ASU 2016-02, ASU 2018-11 and ASU 2018-20 on January 1, 2019, we recognized ~~right-of-use~~ROU assets of ~~$29.6~~$29.6 million and related lease liabilities of ~~$33.5~~$33.5 million which reduced the March 31, 2019 total risk based capital ratio by six basis points. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we did not reassess (i) whether any expired or existing contracts were or contained leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also elected to not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). We utilized the modified-retrospective transition approach prescribed by ASU 2018-11.

Accounting Standards Pending Adoption

ASU 2016-13,“Measurement of Credit Losses on Financial Instruments (Topic 326).” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance for determining the allowance for credit losses delays recognition of expected future credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for the Company beginning on January 1, 2020. Entities will apply any changes resulting from the application of the new standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). We have substantially concluded our data gap ~~analysis~~analysis. Our CECL model has been substantially developed and ~~have contracted with a~~ third party ~~to develop a~~ model ~~to comply with CECL requirements.~~validation is on-going. We have entered our data into the model and are working on the qualitative and forecasting aspects of the methodology. We have established a steering committee with representation from various departments across the enterprise. The committee has agreed to a project plan and has regular meetings to ensure adherence to our implementation timeline. The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements. We preliminarily expect this rule to increase the reserve for credit losses by 10-20% inclusive of the impact on commitments to lend upon implementation on January 1, 2020. This number may change as we finalize and validate our model and update our system of internal controls as a result of the rule change.

Note 2. Cash and Due from Banks

Regulation D of the Federal Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. During 2019, the Bank maintained balances at the Federal Reserve sufficient to meet reserve requirements, as well as significant excess reserves, on which interest is paid.

Additionally, the Bank maintains interest bearing balances with the Federal Home Loan Bank of Atlanta and noninterest bearing balances with domestic correspondent banks as compensation for services they provide to the Bank.

Note 3. Investment Securities Available-for-Sale

Amortized cost and estimated fair value of securities available-for-sale are summarized as follows:

Gross Gross Estimated
March 31, 2019 Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
U. S. agency securities $ 240,675 $ 435 $ 2,091 $ 239,019
Residential mortgage backed securities 479,162 3,027 4,286 477,903
Municipal bonds 44,929 684 80 45,533
Corporate bonds 9,503 66 13 9,556
Other equity investments 218 — — 218
$ 774,487 $ 4,212 $ 6,470 $ 772,229

Gross Gross Estimated
December 31, 2018 Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
U. S. agency securities $ 260,150 $ 228 $ 4,033 $ 256,345
Residential mortgage backed securities 477,949 1,575 7,293 472,231
Municipal bonds 45,814 439 484 45,769
Corporate bonds 9,503 79 6 9,576
Other equity investments 218 — — 218
$ 793,634 $ 2,321 $ 11,816 $ 784,139

			Gross		Gross		Estimated
September 30, 2019	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
U. S. agency securities	$	171,585	$	941	$	706	$	171,820
Residential mortgage backed securities		434,042		5,404		1,417		438,029
Municipal bonds		61,680		2,278		—		63,958
Corporate bonds		9,532		82		—		9,614
U.S. Treasury		24,919		7		—		24,926
Other equity investments		198		—		—		198
	$	701,956	$	8,712	$	2,123	$	708,545

			Gross		Gross		Estimated
December 31, 2018	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
U. S. agency securities	$	260,150	$	228	$	4,033	$	256,345
Residential mortgage backed securities		477,949		1,575		7,293		472,231
Municipal bonds		45,814		439		484		45,769
Corporate bonds		9,503		79		6		9,576
Other equity investments		218		—		—		218
	$	793,634	$	2,321	$	11,816	$	784,139

In addition, at ~~March 31,~~September 30, 2019 and December 31, 2018 the Company held ~~$35.0~~$28.7 million and ~~$23.5~~$23.5 million, respectively, in equity securities in a combination of Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stocks, which are required to be held for regulatory purposes and which are not marketable, and therefore are carried at cost.

Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in a continuous unrealized loss position are as follows:

			Less than				12 Months
			12 Months				or Greater				Total						Less than				12 Months
			Estimated				Estimated				Estimated						12 Months				or Greater				Total
March 31, 2019	Number of		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
																	Estimated				Estimated				Estimated
September 30, 2019															Number of		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Securities		Value		Losses		Value		Losses		Value		Losses		Securities		Value		Losses		Value		Losses		Value		Losses
U. S. agency securities		56	$	51,185	$	325	$	157,658	$	1,766	$	208,843	$	2,091		32	$	36,162	$	132	$	59,843	$	574	$	96,005	$	706
Residential mortgage backed securities		140		22,026		123		226,380		4,163		248,406		4,286		98		53,769		287		116,438		1,130		170,207		1,417
Municipal bonds		6		—		—		13,974		80		13,974		80		1		30		—		—		—		30		—
Corporate bonds		1		1,488		13		—		—		1,488		13
		203	$	74,699	$	461	$	398,012	$	6,009	$	472,711	$	6,470		131	$	89,961	$	419	$	176,281	$	1,704	$	266,242	$	2,123


			Less than				12 Months
			12 Months				or Greater				Total
			Estimated				Estimated				Estimated
December 31, 2018	Number of		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Securities		Value		Losses		Value		Losses		Value		Losses
U. S. agency securities		58	$	72,679	$	533	$	144,636	$	3,500	$	217,315	$	4,033
Residential mortgage backed securities		151		61,199		527		225,995		6,766		287,194		7,293
Municipal bonds		11		4,299		50		17,041		434		21,340		484
Corporate bonds		1		1,494		6		—		—		1,494		6
		221	$	139,671	$	1,116	$	387,672	$	10,700	$	527,343	$	11,816

The unrealized losses that exist are generally the result of changes in market interest rates and interest spread relationships since original purchases. The weighted average duration of debt securities, which comprise ~~99.9%~~99.9% of total investment securities, is relatively short at ~~3.3 years.~~2.9 years . If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. The Company does not believe that the investment securities that were in an unrealized loss position as of ~~March 31,~~September 30, 2019 represent an other-than-temporary impairment. The Company does not intend to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.

The amortized cost and estimated fair value of investments available-for-sale at ~~March 31,~~September 30, 2019 and December 31, 2018 by contractual maturity are shown in the table below. Expected maturities for residential mortgage backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2019				December 31, 2018					September 30, 2019				December 31, 2018
	Amortized		Estimated		Amortized			Estimated		Amortized		Estimated		Amortized		Estimated
(dollars in thousands)	Cost		Fair Value		Cost			Fair Value		Cost		Fair Value		Cost		Fair Value
U. S. agency securities maturing:							��
One year or less	$	119,133	$	118,203	$	128,148		$	125,545	$	78,924	$	79,178	$	128,148	$	125,545
After one year through five years		113,513		112,943		119,856			118,883		79,835		79,809		119,856		118,883
Five years through ten years		8,029		7,873		12,146			11,917		12,826		12,833		12,146		11,917
Residential mortgage backed securities		479,162		477,903		477,949			472,231		434,042		438,029		477,949		472,231
Municipal bonds maturing:
One year or less		8,085		8,131		8,097			8,167		6,116		6,185		8,097		8,167
After one year through five years		14,203		14,372		15,025			15,081		16,474		16,940		15,025		15,081
Five years through ten years		21,576		21,866		21,626			21,385		36,028		37,540		21,626		21,385
After ten years		1,065		1,164		1,066			1,136		3,062		3,293		1,066		1,136
Corporate bonds maturing:
After one year through five years		8,003		8,056		8,003			8,076		8,032		8,114		8,003		8,076
After ten years		1,500		1,500		1,500			1,500		1,500		1,500		1,500		1,500
U.S. Treasury											24,919		24,926		—		—
Other equity investments		218		218		218			218		198		198		218		218
	$	774,487	$	772,229	$	793,634		$	784,139	$	701,956	$	745,343	$	793,634	$	784,139

For the ~~three~~nine months ended ~~March 31,~~September 30, 2019, gross realized gains on sales of investments securities were ~~$912~~$1.6 million, primarily due to $829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations, and ~~there were no~~$20 thousand gross realized losses on sales of investment securities. For the ~~three~~nine months ended ~~March 31,~~September 30, 2018, gross realized gains on sales of investments securities were ~~$67~~$93 thousand and gross realized losses on sales of investment securities were ~~$25 thousand.~~$25 thousand.

Proceeds from sales and calls of investment securities for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were ~~$22.8~~$129.9 million compared to ~~$17.3~~$42.1 million for the same period in 2018.

The carrying value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at ~~March 31,~~September 30, 2019 and December 31, 2018 was ~~$522.0~~$439.4 million and ~~$528.2~~$528.2 million, respectively, which is well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of ~~March 31,~~September 30, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. agency securities, which exceeded ~~ten~~10 percent of shareholders’ equity.

Note 4. Mortgage Banking Derivative

As part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.

Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.

The fair value of the mortgage banking derivatives is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.

At ~~March 31,~~September 30, 2019 the Bank had mortgage banking derivative financial instruments with a notional value of ~~$82.8~~$134.3 million related to its forward contracts as compared to ~~$49.6~~$49.6 million at December 31, 2018. The fair value of these mortgage banking derivative instruments at ~~March 31,~~September 30, 2019 was ~~$288~~$313 thousand included in other assets and ~~$222~~$3 thousand included in other liabilities as compared to ~~$229~~$229 thousand included in other assets and ~~$269~~$269 thousand included in other liabilities at December 31, 2018.

Included in other noninterest income for the three and nine months ended ~~March 31,~~September 30, 2019 was a net gain of ~~$134~~ $30 thousand and a net gain $249 thousand, respectively, relating to mortgage banking derivative instruments as compared to a net loss of ~~$87~~ $10 thousand and net loss of $42 thousand as of ~~March 31,~~September 30, 2018. The amount included in other noninterest income for the three and nine months ended ~~March 31,~~September 30, 2019 pertaining to its mortgage banking hedging activities was a net realized gain of ~~$45~~$277 thousand and a net realized gain of $228 thousand, respectively, as compared to a net realized gain of ~~$91~~$56 thousand and no net realized gain as of ~~March 31,~~September 30, 2018.

Note 5. Loans and Allowance for Credit Losses

The Bank makes loans to customers primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank’s loan portfolio consists of loans to businesses secured by real estate and other business assets.

Loans, net of unamortized net deferred fees, at ~~March 31,~~September 30, 2019 and December 31, 2018 are summarized by type as follows:

March 31, 2019 December 31, 2018
(dollars in thousands) Amount % Amount %
Commercial $ 1,510,835 21 % $ 1,553,112 22 %
Income producing - commercial real estate 3,370,692 47 % 3,256,900 46 %
Owner occupied - commercial real estate 990,372 14 % 887,814 13 %
Real estate mortgage - residential 101,860 1 % 106,418 2 %
Construction - commercial and residential 1,044,305 15 % 1,039,815 15 %
Construction - C&I (owner occupied) 64,845 1 % 57,797 1 %
Home equity 87,009 1 % 86,603 1 %
Other consumer 3,140 — 2,988 —
Total loans 7,173,058 100 % 6,991,447 100 %
Less: allowance for credit losses (69,943 ) (69,944 )
Net loans $ 7,103,115 $ 6,921,503


	September 30, 2019						December 31, 2018
(dollars in thousands)	Amount			%			Amount			%
Commercial	$	1,466,862			19	%	$	1,553,112			22	%
Income producing - commercial real estate		3,812,284			51	%		3,256,900			46	%
Owner occupied - commercial real estate		956,345			13	%		887,814			13	%
Real estate mortgage - residential		104,563			1	%		106,418			2	%
Construction - commercial and residential		1,053,789			14	%		1,039,815			15	%
Construction - C&I (owner occupied)		81,916			1	%		57,797			1	%
Home equity		81,117			1	%		86,603			1	%
Other consumer		2,285			—			2,988			—
Total loans		7,559,161			100	%		6,991,447			100	%
Less: allowance for credit losses		(73,720	)					(69,944	)
Net loans	$	7,485,441					$	6,921,503

Unamortized net deferred fees amounted to ~~$24.4~~$24.5 million and ~~$25.6~~$26.5 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively.

As of ~~March 31,~~September 30, 2019 and December 31, 2018, the Bank serviced ~~$105.0~~$102.9 million and ~~$111.1~~$111.1 million, respectively, of multifamily FHA loans, SBA loans and other loan participations which are not reflected as loan balances on the Consolidated Balance Sheets.

Loan Origination / Risk Management

The Company’s goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures, evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.

The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing real estate. At ~~March 31,~~September 30, 2019, owner occupied - commercial real estate and construction - C&I (owner occupied) represent approximately ~~15%~~14% of the loan portfolio. At ~~March 31,~~September 30, 2019, non-owner occupied commercial real estate and real estate construction represented approximately ~~62%~~65% of the loan portfolio. The combined owner occupied and commercial real estate loans represent approximately ~~77%~~79% of the loan portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in ~~84%~~85% of all loans being secured by real estate. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan to value of ~~80%~~80% and minimum cash flow debt service coverage of 1.15 to ~~1.0.~~1.0. Personal guarantees may be required, but may be limited. In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years.

The Company is also an active traditional commercial lender providing loans for a variety of purposes, including working capital, equipment and account receivable financing. This loan category represents approximately ~~21%~~19% of the loan portfolio at ~~March 31,~~September 30, 2019 and was generally variable or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent approximately 2%2% of the commercial loan category. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit as well as potential repairs to the SBA guarantees. The Company generally sells the guaranteed portion of the loan generating noninterest income from the gains on sale, as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial loans. SBA loans are subject to a maximum loan size established by the SBA as well as internal loan size guidelines.

Approximately 1%1% of the loan portfolio at ~~March 31,~~September 30, 2019 consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a small portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.

Approximately 1%1% of the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was 2322 months. These credits represent first liens on residential property loans originated by the Bank. While the Bank’s general practice is to originate and sell (servicing released) loans made by its Residential Lending department, from time to time certain loan characteristics do not meet the requirements of third party investors and these loans are instead maintained in the Bank’s portfolio until they are resold to another investor at a later date or mature.

Loans are secured primarily by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required.

Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.

Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and; 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination.

Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate Loan Committee. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.

Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower’s architect. Each draw request shall also include the borrower’s soft cost breakdown certified by the borrower or their Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition.

Commercial permanent loans are generally secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to ~~1.0.~~1.0. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.

Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.

The Company’s loan portfolio includes ADC real estate loans including both investment and owner occupied projects. ADC loans amounted to ~~$1.63~~$1.66 billion at ~~March 31,~~September 30, 2019. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination. ADC loans that provide for the use of interest reserves represent approximately ~~71%~~71% of the outstanding ADC loan portfolio at ~~March 31,~~September 30, 2019. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit including: (1) the feasibility of the project; (2) the experience of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) borrower equity contribution; and (5) the level of collateral protection. When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate this inherent risk, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1) construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction meetings among senior Company management, which includes monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves.

The following tables detail activity in the allowance for credit losses by portfolio segment for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

				Income Producing - Commercial			Owner Occupied - Commercial			Real Estate Mortgage -			Construction - Commercial and			Home			Other
(dollars in thousands)	Commercial			Real Estate			Real Estate			Residential			Residential			Equity			Consumer			Total

Three Months Ended September 30, 2019
Allowance for credit losses:
Balance at beginning of period	$	18,136		$	27,010		$	5,756		$	1,355		$	19,006		$	581		$	242		$	72,086
Loans charged-off		(1,794	)		—			—			—			—			—			—			(1,794	)
Recoveries of loans previously charged-off		210			—			—			—			15			—			17			242
Net loans charged-off		(1,584	)		—			—			—			15			—			17			(1,552	)
Provision for credit losses		1,617			1,517			(158	)		(3	)		251			(6	)		(32	)		3,186
Ending balance	$	18,169		$	28,527		$	5,598		$	1,352		$	19,272		$	575		$	227		$	73,720

Nine Months Ended September 30, 2019
Allowance for credit losses:
Balance at beginning of period	$	15,857		$	28,034		$	6,242		$	965		$	18,175		$	599		$	72		$	69,944
Loans charged-off		(1,799	)		(5,343	)		—			—			—			—			(2	)		(7,144	)
Recoveries of loans previously charged-off		377			302			2			3			52			—			38			774
Net loans (charged-off) recoveries		(1,422	)		(5,041	)		2			3			52			—			36			(6,370	)
Provision for credit losses		3,734			5,534			(646	)		384			1,045			(24	)		119			10,146
Ending balance	$	18,169		$	28,527		$	5,598		$	1,352		$	19,272		$	575		$	227		$	73,720

As of September 30, 2019
Allowance for credit losses:
Individually evaluated for impairment	$	8,196		$	1,200		$	375		$	650		$	—		$	13		$	—		$	10,434
Collectively evaluated for impairment		9,973			27,327			5,223			702			19,272			562			227			63,286
Ending balance	$	18,169		$	28,527		$	5,598		$	1,352		$	19,272		$	575		$	227		$	73,720

Three Months Ended September 30, 2018
Allowance for credit losses:
Balance at beginning of period	$	12,206		$	27,988		$	6,003		$	757		$	18,651		$	673		$	331		$	66,609
Loans charged-off		(1,174	)		—			—			—			(643	)		—			(15	)		(1,832	)
Recoveries of loans previously charged-off		60			—			—			1			899			6			5			971
Net loans (charged-off) recoveries		(1,114	)		—			—			1			256			6			(10	)		(861	)
Provision for credit losses		4,557			(601	)		(72	)		(9	)		(1,368	)		(48	)		(18	)		2,441
Ending balance	$	15,649		$	27,387		$	5,931		$	749		$	17,539		$	631		$	303		$	68,189

Nine Months Ended September 30, 2018
Allowance for credit losses:
Balance at beginning of period	$	13,102		$	25,376		$	5,934		$	944		$	18,492		$	770		$	140		$	64,758
Loans charged-off		(2,435	)		(121	)		(132	)		—			(1,160	)		—			(15	)		(3,863	)
Recoveries of loans previously charged-off		86			2			2			4			994			133			13			1,234
Net loans (charged-off) recoveries		(2,349	)		(119	)		(130	)		4			(166	)		133			(2	)		(2,629	)
Provision for credit losses		4,896			2,130			127			(199	)		(787	)		(272	)		165			6,060
Ending balance	$	15,649		$	27,387		$	5,931		$	749		$	17,539		$	631		$	303		$	68,189

As of September 30, 2018
Allowance for credit losses:
Individually evaluated for impairment	$	6,271		$	3,043		$	500		$	—		$	—		$	—		$	56		$	9,870
Collectively evaluated for impairment		9,378			24,344			5,431			749			17,539			631			247			58,319
Ending balance	$	15,649		$	27,387		$	5,931		$	749		$	17,539		$	631		$	303		$	68,189

(dollars in thousands) Commercial
Income Producing - Commercial
Real Estate

Owner Occupied - Commercial
Real Estate

Real Estate
Mortgage -
Residential
Construction - Commercial and Residential
Home
Equity

Other
Consumer
Total
Three Months Ended
March 31, 2019

Allowance for credit losses:
Balance at beginning of period $ 15,857 $ 28,034 $ 6,242 $ 965 $ 18,175 $ 599 $ 72 $ 69,944
Loans charged-off (4 ) (3,496 ) — — — — — (3,500 )
Recoveries of loans previously charged-off 130 — — 1 — — 8 139
Net loans charged-off 126 (3,496 ) — 1 — — 8 (3,361 )
Provision for credit losses 1,212 2,227 (262 ) (285 ) 294 6 168 3,360
Ending balance $ 17,195 $ 26,765 $ 5,980 $ 681 $ 18,469 $ 605 $ 248 $ 69,943

As of March 31, 2019
Allowance for credit losses:
Individually evaluated for impairment $ 5,892 $ 15 $ 600 $ — $ — $ — $ — $ 6,507
Collectively evaluated for impairment 11,303 26,750 5,380 681 18,469 605 248 63,436
Ending balance $ 17,195 $ 26,765 $ 5,980 $ 681 $ 18,469 $ 605 $ 248 $ 69,943

Three Months ended
March 31, 2018
Allowance for credit losses:
Balance at beginning of period $ 13,102 $ 25,376 $ 5,934 $ 944 $ 18,492 $ 770 $ 140 $ 64,758
Loans charged-off (853 ) (121 ) (132 ) — — — — (1,106 )
Recoveries of loans previously charged-off 3 — 1 2 60 117 3 186
Net loans (charged-off) recoveries (850 ) (121 ) (131 ) 2 60 117 3 (920 )
Provision for credit losses 1,106 1,213 (332 ) (212 ) 190 (188 ) 192 1,969
Ending balance $ 13,358 $ 26,468 $ 5,471 $ 734 $ 18,742 $ 699 $ 335 $ 65,807
As of March 31, 2018
Allowance for credit losses:
Individually evaluated for impairment $ 3,014 $ 2,628 $ 500 $ — $ 500 $ — $ 80 $ 6,722
Collectively evaluated for impairment 10,344 23,840 4,971 734 18,242 699 255 59,085
Ending balance $ 13,358 $ 26,468 $ 5,471 $ 734 $ 18,742 $ 699 $ 335 $ 65,807

The Company’s recorded investments in loans as of ~~March 31,~~September 30, 2019 and December 31, 2018 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:

(dollars in thousands) Commercial
Income Producing - Commercial
Real Estate

Owner Occupied - Commercial
Real Estate

Real Estate
Mortgage -
Residential
Construction - Commercial and Residential
Home
Equity

Other
Consumer
Total
March 31, 2019
Recorded investment in loans:
Individually evaluated for impairment $ 24,219 $ 58,208 $ 3,885 $ 5,367 $ 3,438 $ 487 $ — $ 95,604
Collectively evaluated for impairment 1,486,616 3,312,484 986,487 96,493 1,105,712 86,522 3,140 7,077,454
Ending balance $ 1,510,835 $ 3,370,692 $ 990,372 $ 101,860 $ 1,109,150 $ 87,009 $ 3,140 $ 7,173,058

December 31, 2018
Recorded investment in loans:
Individually evaluated for impairment $ 8,738 $ 61,747 $ 5,307 $ 1,228 $ 7,012 $ 487 $ — $ 84,519
Collectively evaluated for impairment 1,544,374 3,195,153 882,507 105,190 1,090,600 86,116 2,988 6,906,928
Ending balance $ 1,553,112 $ 3,256,900 $ 887,814 $ 106,418 $ 1,097,612 $ 86,603 $ 2,988 $ 6,991,447

			Income Producing -		Owner Occupied -		Real Estate		Construction -
			Commercial		Commercial		Mortgage -		Commercial and		Home		Other
(dollars in thousands)	Commercial		Real Estate		Real Estate		Residential		Residential		Equity		Consumer		Total

September 30, 2019
Recorded investment in loans:
Individually evaluated for impairment	$	28,155	$	39,089	$	6,616	$	5,365	$	9,148	$	750	$	—	$	89,123
Collectively evaluated for impairment		1,438,707		3,773,195		949,729		99,198		1,126,557		80,367		2,285		7,470,038
Ending balance	$	1,466,862	$	3,812,284	$	956,345	$	104,563	$	1,135,705	$	81,117	$	2,285	$	7,559,161

December 31, 2018
Recorded investment in loans:
Individually evaluated for impairment	$	8,738	$	61,747	$	5,307	$	1,228	$	7,012	$	487	$	—	$	84,519
Collectively evaluated for impairment		1,544,374		3,195,153		882,507		105,190		1,090,600		86,116		2,988		6,906,928
Ending balance	$	1,553,112	$	3,256,900	$	887,814	$	106,418	$	1,097,612	$	86,603	$	2,988	$	6,991,447

At March 31, 2019, nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia Heritage Bank (“Virginia Heritage”) have a carrying value of $277 thousand and $178 thousand, respectively, and an unpaid principal balance of $327 thousand and $982 thousand, respectively, and were evaluated separately in accordance with ASC Topic 310-30,~~“Loans and Debt Securities Acquired with Deteriorated Credit Quality~~.” At December 31, 2018, nonperforming loans acquired from Fidelity and Virginia Heritage had a carrying value of $282 thousand and $202 thousand, respectively, and an unpaid principal balance of $332 thousand and $995 thousand, respectively, and were evaluated separately in accordance with ASC Topic 310-30. The various impaired loans were recorded at estimated fair value with any excess being charged-off or treated as a non-accretable discount. Subsequent downward adjustments to the valuation of impaired loans acquired will result in additional loan loss provisions and related allowance for credit losses.

16 17

Credit Quality Indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality indicators are to use an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment.

The following are the definitions of the Company’s credit quality indicators:

Pass:

Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.

Watch:

Loan paying as agreed with generally acceptable asset quality; however the obligor’s performance has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not sustain any further setbacks. Credit is expected to be strengthened through improved obligor performance and/or additional collateral within a reasonable period of time.

Special Mention:

Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention.

Classified:	Classified (a) Substandard - Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard.

	~~Classified (b) Doubtful~~ - Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.

Classified (b) Doubtful - Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.

The Company’s credit quality indicators are updated generally on a quarterly basis, but no less frequently than annually.

The following table presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of ~~March 31,~~September 30, 2019 and December 31, 2018.

Watch and
(dollars in thousands) Pass
Special
Mention
Substandard Doubtful
Total
Loans

March 31, 2019
Commercial $ 1,448,020 $ 38,596 $ 24,219 $ — $ 1,510,835
Income producing - commercial real estate 3,293,840 18,644 58,208 — 3,370,692
Owner occupied - commercial real estate 946,074 40,413 3,885 — 990,372
Real estate mortgage - residential 95,851 642 5,367 — 101,860
Construction - commercial and residential 1,105,712 — 3,438 — 1,109,150
Home equity 85,836 686 487 — 87,009
Other consumer 3,140 — — — 3,140
Total $ 6,978,473 $ 98,981 $ 95,604 $ — $ 7,173,058

December 31, 2018
Commercial $ 1,505,477 $ 25,584 $ 22,051 $ — $ 1,553,112
Income producing - commercial real estate 3,172,479 1,536 82,885 — 3,256,900
Owner occupied - commercial real estate 844,286 38,221 5,307 — 887,814
Real estate mortgage – residential 104,543 647 1,228 — 106,418
Construction - commercial and residential 1,090,600 — 7,012 — 1,097,612
Home equity 85,434 682 487 — 86,603
Other consumer 2,988 — — — 2,988
Total $ 6,805,807 $ 66,670 $ 118,970 $ — $ 6,991,447

			Watch and						Total
(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Loans

September 30, 2019
Commercial	$	1,392,189	$	46,518	$	28,155	$	—	$	1,466,862
Income producing - commercial real estate		3,662,436		110,759		39,089		—		3,812,284
Owner occupied - commercial real estate		892,720		57,009		6,616		—		956,345
Real estate mortgage – residential		98,564		634		5,365		—		104,563
Construction - commercial and residential		1,126,557		—		9,148		—		1,135,705
Home equity		79,681		686		750		—		81,117
Other consumer		2,285		—		—		—		2,285
Total	$	7,254,432	$	215,606	$	89,123	$	—	$	7,559,161

December 31, 2018
Commercial	$	1,505,477	$	25,584	$	22,051	$	—	$	1,553,112
Income producing - commercial real estate		3,172,479		1,536		82,885		—		3,256,900
Owner occupied - commercial real estate		844,286		38,221		5,307		—		887,814
Real estate mortgage – residential		104,543		647		1,228		—		106,418
Construction - commercial and residential		1,090,600		—		7,012		—		1,097,612
Home equity		85,434		682		487		—		86,603
Other consumer		2,988		—		—		—		2,988
Total	$	6,805,807	$	66,670	$	118,970	$	—	$	6,991,447

Nonaccrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

During the first quarter of 2019, the Bank incurred an annualized net charge-off of 19 basis points of average loans substantially attributable to one residential condominium project sold at foreclosure to a third party during the first quarter of 2019. The foreclosure sale was ratified by the Court on April 8, 2019 and there is a 30 day closing requirement. Consistent with GAAP, the transaction remained in nonperforming loans as of March 31, 2019. The carrying value of the nonperforming loan at the end of the first quarter was $17.5 million, equal to the purchase price at foreclosure. No additional loss from this transaction is anticipated. Nonperforming loans increased significantly as a result of the residential condominium loan discussed above. Further increases included a $1.5 million loan characterized as nonperforming at March 31, 2019 which was paid in full shortly following the end of the first quarter. Excluding the $19.0 million of loan balances discussed above, nonperforming loans at March 31, 2019 would have been $21.3 million (0.30% of total loans).

The following table presents, by class of loan, information related to nonaccrual loans as of ~~March 31,~~September 30, 2019 and December 31, 2018.

(dollars in thousands)	September 30, 2019		December 31, 2018

Commercial	$	16,074	$	7,115
Income producing - commercial real estate		5,654		1,766
Owner occupied - commercial real estate		4,124		2,368
Real estate mortgage - residential		5,635		1,510
Construction - commercial and residential		9,148		3,031
Home equity		487		487
Total nonaccrual loans (1)(2)	$	41,122	$	16,277

(dollars in thousands) March 31, 2019 December 31, 2018
  Commercial $ 9,763 $ 7,115
  Income producing - commercial real estate 19,821 1,766
  Owner occupied - commercial real estate 1,516 2,368
  Real estate mortgage - residential 5,644 1,510
  Construction - commercial and residential 3,030 3,031
  Home equity 487 487
  Total nonaccrual loans (1)(2) $ 40,261 $ 16,277

(1)

Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling ~~$26.2~~$8.6 millionat ~~March 31,~~September 30, 2019 and ~~$24.0~~$24.0 million at December 31, 2018.

(2)

Gross interest income of ~~$701~~$2.7 million and $707 thousand ~~and $205 thousand~~ would have been recorded for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while ~~there was no~~the interest actually recorded on such loans was $598 thousand and $193 thousandfor the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, respectively. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status.

The following table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of ~~March 31,~~September 30, 2019 and December 31, 2018.

	Loans		Loans		Loans						Total Recorded
	30-59 Days		60-89 Days		90 Days or		Total Past		Current		Investment in
(dollars in thousands)	Past Due		Past Due		More Past Due		Due Loans		Loans		Loans

September 30, 2019
Commercial	$	4,639	$	3,509	$	16,074	$	24,222	$	1,442,640	$	1,466,862
Income producing - commercial real estate		21,737		22,190		5,654		66,109		3,746,175		3,812,284
Owner occupied - commercial real estate		3,626		21,768		4,124		29,518		926,827		956,345
Real estate mortgage – residential		634		—		5,635		6,269		98,294		104,563
Construction - commercial and residential		—		1,866		9,148		11,014		1,124,691		1,135,705
Home equity		86		130		487		703		80,414		81,117
Other consumer		13		8		—		21		2,264		2,285
Total	$	30,735	$	49,471	$	41,122	$	137,856	$	7,421,305	$	7,559,161

December 31, 2018
Commercial	$	4,535	$	2,870	$	7,115	$	14,520	$	1,538,592	$	1,553,112
Income producing - commercial real estate		5,855		27,479		1,766		35,100		3,221,800		3,256,900
Owner occupied - commercial real estate		5,051		2,370		2,368		9,789		878,025		887,814
Real estate mortgage – residential		2,456		1,698		1,510		5,664		100,754		106,418
Construction - commercial and residential		4,392		—		3,031		7,423		1,090,189		1,097,612
Home equity		630		47		487		1,164		85,439		86,603
Other consumer		—		—		—		—		2,988		2,988
Total	$	22,919	$	34,464	$	16,277	$	73,660	$	6,917,787	$	6,991,447

Loans Loans Loans Total Recorded
30-59 Days 60-89 Days 90 Days or Total Past Current Investment in
(dollars in thousands) Past Due Past Due More Past Due Due Loans Loans Loans
March 31, 2019
Commercial $ 5,248 $ 2,102 $ 9,763 $ 17,113 $ 1,493,722 $ 1,510,835
Income producing - commercial real estate 14,734 10,250 19,821 44,805 3,325,887 3,370,692
Owner occupied - commercial real estate 21,670 — 1,516 23,186 967,186 990,372
Real estate mortgage - residential 1,022 — 5,644 6,666 95,194 101,860
Construction - commercial and residential 259 5,268 3,030 8,557 1,100,593 1,109,150
Home equity 400 47 487 934 86,075 87,009
Other consumer 13 — — 13 3,127 3,140
Total $ 43,346 $ 17,667 $ 40,261 $ 101,274 $ 7,071,784 $ 7,173,058

December 31, 2018
Commercial $ 4,535 $ 2,870 $ 7,115 $ 14,520 $ 1,538,592 $ 1,553,112
Income producing - commercial real estate 5,855 27,479 1,766 35,100 3,221,800 3,256,900
Owner occupied - commercial real estate 5,051 2,370 2,368 9,789 878,025 887,814
Real estate mortgage - residential 2,456 1,698 1,510 5,664 100,754 106,418
Construction - commercial and residential 4,392 — 3,031 7,423 1,090,189 1,097,612
Home equity 630 47 487 1,164 85,439 86,603
Other consumer — — — �� 2,988 2,988
Total $ 22,919 $ 34,464 $ 16,277 $ 73,660 $ 6,917,787 $ 6,991,447

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are ~~charged off~~charged-off when deemed uncollectible.

The following table presents, by class of loan, information related to impaired loans for the periods ended ~~March 31,~~September 30, 2019 and December 31, 2018.

	Unpaid		Recorded		Recorded							Average Recorded				Interest Income					Unpaid		Recorded		Recorded
	Contractual		Investment		Investment			Total				Investment				Recognized					Contractual		Investment		Investment		Total				Average Recorded Investment				Interest Income Recognized
	Principal		With No		With			Recorded		Related		Quarter		Year		Quarter			Year		Principal		With No		With		Recorded		Related		Quarter		Year		Quarter			Year
(dollars in thousands)	Balance		Allowance		Allowance			Investment		Allowance		To Date		To Date		To Date			To Date		Balance		Allowance		Allowance		Investment		Allowance		To Date		To Date		To Date			To Date
March 31, 2019

September 30, 2019
Commercial	$	13,453	$	4,124	$	8,857		$	12,981	$	5,892	$	10,561	$	10,561	$	19		$	19	$	18,243	$	5,641	$	11,331	$	16,972	$	8,196	$	16,967	$	15,638	$	117		$	220
Income producing - commercial real estate		42,939		39,397		46			39,443		15		30,423		30,423		263			263		10,041		1,853		8,188		10,041		1,200		9,497		19,479		412			510
Owner occupied - commercial real estate		4,853		3,483		1,370			4,853		600		5,292		5,292		46			46		7,407		6,630		777		7,407		375		6,113		5,693		120			213
Real estate mortgage – residential		5,644		5,644		—			5,644		—		3,577		3,577		—			—		5,635		3,179		2,456		5,635		650		5,638		5,640		—			—
Construction - commercial and residential		4,190		3,030		—			3,030		—		3,031		3,031		—			—		10,308		9,148		—		9,148		—		9,152		7,111		—			15
Home equity		487		487		—			487		—		487		487		—			—		487		487		—		487		13		487		487		—			—
Other consumer		—		—		—			—		—		—		—		—			—		—		—		—		—		—		—		—		—			—
Total	$	71,566	$	56,165	$	10,273		$	66,438	$	6,507	$	53,371	$	53,371	$	328		$	328	$	52,121	$	26,938	$	22,752	$	49,690	$	10,434	$	47,854	$	54,048	$	649		$	958

December 31, 2018
Commercial	$	8,613	$	2,057	$	6,084	��	$	8,141	$	4,803	$	10,306	$	8,359	$	(126	)	$	190	$	8,613	$	2,057	$	6,084	$	8,141	$	4,803	$	10,306	$	8,359	$	(126	)	$	190
Income producing - commercial real estate		21,402		1,720		19,682			21,402		2,465		15,331		12,309		189			550		21,402		1,720		19,682		21,402		2,465		15,331		12,309		189			550
Owner occupied - commercial real estate		5,731		4,361		1,370			5,731		600		5,746		6,011		47			196		5,731		4,361		1,370		5,731		600		5,746		6,011		47			196
Real estate mortgage – residential		1,510		1,510		—			1,510		—		1,516		1,688		—			2		1,510		1,510		—		1,510		—		1,516		1,688		—			2
Construction - commercial and residential		3,031		3,031		—			3,031		1,050		3,031		2,028		—			68		3,031		3,031		—		3,031		1,050		3,031		2,028		—			68
Home equity		487		487		—			487		—		487		491		—			—		487		487		—		487		—		487		491		—			—
Other consumer		—		—		—			—		—		46		69		—			—		—		—		—		—		—		46		69		—			—
Total	$	40,774	$	13,166	$	27,136		$	40,302	$	8,918	$	36,463	$	30,955	$	110		$	1,006	$	40,774	$	13,166	$	27,136	$	40,302	$	8,918	$	36,463	$	30,955	$	110		$	1,006

Modifications

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. As of ~~March 31,~~September 30, 2019, all performing TDRs were categorized as interest-only modifications.

Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.

The following table presents by class, the recorded investment of loans modified in TDRs held by the Company for the periods ended ~~March 31,~~September 30, 2019 and 2018.


	For the nine months Ended September 30, 2019
	Number of				Income Producing -		Owner Occupied -		Construction -
(dollars in thousands)	Contracts		Commercial		Commercial Real Estate		Commercial Real Estate		Commercial Real Estate		Total
Troubled debt restructurings
Restructured accruing		7	$	898	$	4,387	$	3,283	$	—	$	8,568
Restructured nonaccruing		3		1,521		—		—		—		1,521
Total		10	$	2,419	$	4,387	$	3,283	$	—	$	10,089

Specific allowance			$	—	$	1,000	$	—	$	—	$	1,000

Restructured and subsequently defaulted			$		$	2,300	$	—	$	—	$	2,300

	For the nine months Ended September 30, 2018
	Number of				Income Producing -		Owner Occupied -		Construction -
(dollars in thousands)	Contracts		Commercial		Commercial Real Estate		Commercial Real Estate		Commercial Real Estate		Total
Troubled debt restructurings
Restructured accruing		10	$	4,942	$	9,212	$	3,391	$	—	$	17,545
Restructured nonaccruing		4		723		—		—		—		723
Total		14	$	5,665	$	9,212	$	3,391	$	—	$	18,268

Specific allowance			$	2,000	$	3,500	$	—	$	—	$	5,500

Restructured and subsequently defaulted			$	—	$	937	$	—	$	—	$	937

For the Three Months Ended March 31, 2019
(dollars in thousands) Number of Contracts Commercial Income Producing - Commercial Real Estate Owner Occupied - Commercial Real Estate Construction - Commercial Real Estate Total
Troubled debt restructurings
Restructured accruing 10 $ 3,218 $ 19,622 $ 3,337 $ — $ 26,177
Restructured nonaccruing 3 538 — — — 538
Total 13 $ 3,756 $ 19,622 $ 3,337 $ — $ 26,715

Specific allowance $ 775 $ 3,000 $ — $ — $ 3,775

Restructured and subsequently defaulted $ — $ — $ — $ — $ —

For the Three Months Ended March 31, 2018
(dollars in thousands) Number of Contracts Commercial Income Producing - Commercial Real Estate Owner Occupied - Commercial Real Estate Construction - Commercial Real Estate Total
Troubled debt restructings
Restructured accruing 8 $ 1,230 $ 9,198 $ 1,071 $ — $ 11,499
Restructured nonaccruing 5 1,649 — — — 1,649
Total 13 $ 2,879 $ 9,198 $ 1,071 $ — $ 13,148

Specific allowance $ 595 $ 2,350 $ — $ — $ 2,945

Restructured and subsequently defaulted $ — $ 121 $ — $ — $ 121

The Company had ~~thirteen~~ 10TDR’s at ~~March 31,~~September 30, 2019 totaling approximately ~~$26.7 million. Ten~~$10.1 million. NaN of these loans totaling approximately ~~$26.2~~$8.6 millionare performing under their modified terms. ~~For~~There was 1performing TDR totaling $2.3 millionthat defaulted on its modified terms which was reclassified to nonperforming loans during the ~~first quarter of 2019,~~nine months ended September 30, 2019. During the nine months ended September 30, 2018, there were no 2performing ~~TDR loans~~ TDRs totaling $937 thousandthat defaulted on their modified terms ~~as compared~~which were reclassified to ~~the three months ended March 31, 2018, when there was one default on a $121 thousand restructured loan which was charged off.~~nonperforming loans. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. For the three months ended September 30, 2019, there was 1restructured loan totaling approximately $309 thousand that was paid off from the sale proceeds of the collateral property. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. For the three months ended ~~March 31,~~September 30, 2019, there ~~was one loan totaling $2.3 million~~were no loans modified in a TDR, as compared to the three months ended ~~March 31,~~September 30, 2018 which had ~~no loans~~1loan totaling $2.4 million modified in a TDR.

Note 6. Leases

A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02“Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branch offices, ATM locations, and corporate office space. Substantially all of our leases are classified as operating leases, and as such, were previously not recognized on the Company’s consolidated statements of condition. With the adoption of Topic 842, operating lease agreements ~~are~~were required to be recognized on the consolidated statements of condition as a right-of-use (“ROU”) asset and a corresponding lease liability.

~~On January 1,~~

As of September 30, 2019, the Company ~~recorded $29.6~~had $26.6 million of ~~right-of-use~~operating lease ROU assets ~~in the premises~~ and ~~equipment line item~~$29.6 million of operating lease liabilities on the Company’s ~~Consolidated Balance Sheets. On January 1, 2019, the Company recorded $33.5 million of lease liabilities in Other Liabilities on the~~ Consolidated Balance Sheet. The Company elects not to recognize ~~right of use~~ROU assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Statements of Condition.

Our leases contain terms and conditions of options to extend or terminate the lease which are recognized as part of the ~~right of use~~ROU assets and lease liabilities when an economic benefit to exercise the option exists and there is a ~~90%~~90% probability that the Company will exercise the option. If these criteria are not met, the options are not included in our ~~right of use~~ROU assets and lease liabilities.

As of ~~March 31,~~September 30, 2019, our leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or the Company’s ability to incur additional financial obligations. As of ~~March 31,~~September 30, 2019, there were no leases that have been signed but did not yet commence as of the reporting date that create significant rights and obligations for the Company.

The following table presents lease costs and other lease information.

	Nine Months Ended
(dollars in thousands)	September 30, 2019
Lease Cost
Operating Lease Cost (Cost resulting from lease payments)	$	5,857
Variable Lease Cost (Cost excluded from lease payments)		815
Sublease Income		(282	)
Net Lease Cost	$	6,390

	~~Three Months Ended~~
~~(dollars in thousands)~~	~~March 31, 2019~~
~~Lease Cost~~
~~Operating Lease Cost (Cost resulting from lease payments)~~		~~1,863~~
~~Variable Lease Cost (Cost excluded from lease payments)~~		~~244~~
~~Sublease Income~~		~~(94~~	)
~~Net Lease Cost~~		~~2,013~~

~~Operating Lease - Operating Cash Flows (Fixed Payments)~~		~~2,024~~
~~Operating Lease - Operating Cash Flows (Liability Reduction)~~		~~1,715~~
~~Right-of-Use Assets - Operating Leases~~		~~28,928~~
~~Weighted Average Lease Term - Operating Leases~~		~~5.50 yrs~~
~~Weighted Average Discount Rate - Operating Leases~~		~~4.00~~	%

Operating Lease - Operating Cash Flows (Fixed Payments)	$	6,382
Operating Lease - Operating Cash Flows (Liability Reduction)		5,458
Right-of-Use Assets - Operating Leases		26,552
Weighted Average Lease Term - Operating Leases		5.11 years
Weighted Average Discount Rate - Operating Leases		4.00	%

Future minimum payments for operating leases with initial or remaining terms of one year or more as of ~~March 31,~~September 30, 2019 were as follows:

(dollars in thousands)
Twelve Months Ended:
September 30, 2020	$	8,532
September 30, 2021		7,857
September 30, 2022		5,868
September 30, 2023		4,379
September 30, 2024		3,663
Thereafter		4,327
Total Future Minimum Lease Payments		34,626
Amounts Representing Interest		(5,040	)
Present Value of Net Future Minimum Lease Payments	$	29,586

~~(dollars in thousands)~~
~~Twelve Months Ended:~~
~~March 31, 2020~~	~~8,045~~
~~March 31, 2021~~	~~7,380~~
~~March 31, 2022~~	~~6,619~~
~~March 31, 2023~~	~~4,234~~
~~March 30, 2024~~	~~3,500~~
~~Thereafter~~	~~5,894~~
~~Total Future Minimum Lease Payments~~	~~35,672~~
~~Amounts Representing Interest~~	~~(2,920~~	)
~~Present Value of Net Future Minimum Lease Payments~~	~~32,752~~

Note ~~7 –~~7. Affordable Housing Projects Tax Credit Partnerships

Included in Other Assets, the Company makes equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of affordable housing products offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.

The Company is a limited partner in each LIHTC limited partnership. Each limited partnership is managed by an unrelated third party general partner who exercises significant control over the affairs of the limited partnership. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to the limited partner(s) relating to the approval of certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement or is negligent in performing its duties.

The general partner of each limited partnership has both the power to direct the activities which most significantly affect the performance of each partnership and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC partnership. The Company accounts for its affordable housing tax credit investments using the proportional amortization method. The Company’s net affordable housing tax credit investments were ~~$27.2~~$28.0 million and related unfunded commitments were ~~$15.4~~$11.0 million as of ~~March 31,~~September 30, 2019 and are included in Other Assets and Other Liabilities in the Consolidated Statements of Condition. The Company’s net affordable housing tax credit investments were ~~$28.2~~$28.2 million and related unfunded commitments were ~~$15.0~~$15.0 million as of December 31, 2018.

Note 8. Other Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.

Cash Flow Hedges of Interest Rate ~~Swap Derivatives~~Risk

The Company uses interest rate swap agreements to assist in its interest rate risk management. The Company’s objective in using interest rate derivatives designated as cash flow hedges is to add stability to interest expense and to better manage its exposure to interest rate movements. To accomplish this objective, the Company utilizes interest rate swaps as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on the Bank’s cost of funds. The notional amounts of the interest rate swaps designated as cash flow hedges do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties. The interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from one counterparty in exchange for the Company making fixed payments. The Company’s intent is to hedge its exposure to the variability in potential future interest rate conditions on existing financial instruments.

As of March 31, 2019, the Company had one designated cash flow hedge notional interest rate swap transaction outstanding amounting to $100 million associated with the Company’s variable rate deposits, as compared to three designated cash flow hedge notional interest rate swap transactions outstanding as of December 31, 2018 amounting to $250 million associated with the Company’s variable rate deposits. The decline in the amount of hedged variable rate deposits was due to a reduction in such deposits. The net unrealized gain before income tax on the swaps was $908 thousand at March 31, 2019 compared to a net unrealized gain before income tax of $3.7 million at December 31, 2018. The unrealized loss in value since year end 2018 was due to the termination of two of the interest rate swap transactions as part of the Company’s asset liability strategy. As a result of the swap terminations, the Company recognized $829 thousand in noninterest income during March 2019. Additionally, the Company will amortize $495 thousand of realized gain as a reduction to interest expense through the swap’s original maturity date of March 31, 2020.

For derivatives designated as cash flow hedges, changes in the fair value of the derivative are initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions.

As of September 30, 2019, the Company had one designated cash flow hedge notional interest rate swap transaction outstanding amounting to $100 millionassociated with the Company’s variable rate deposits, as compared to three designated cash flow hedge notional interest rate swap transactions outstanding as of December 31, 2018 amounting to $250 millionassociated with the Company’s variable rate deposits. The decline in the amount of hedged variable rate deposits was due to a reduction in such variable rate deposits. The net unrealized loss before income tax on the swap was $362 thousandat September 30, 2019 compared to a net unrealized gain before income tax of $3.7 millionat December 31, 2018. The unrealized loss in value since year end 2018 was due to the termination of two of the interest rate swap transactions as part of the Company’s asset liability strategy as well as declines in market interest rates. As a result of the swap terminations, the Company recognized $829 thousandin noninterest income during March 2019. Additionally, the Company will amortize $248 thousandof realized gain as a reduction to interest expense through the swap’s original maturity date of March 31, 2020.

Amounts reported in accumulated other comprehensive income related to designated cash flow hedge derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the quarter ended ~~March 31,~~September 30, 2019, the Company reclassified ~~$462~~$264 thousand related to designated cash flow hedge derivatives from accumulated other comprehensive income to decrease interest expense. During the next twelve months, the Company estimates (based on existing interest rates) that ~~$615~~$134 thousand will be reclassified as ~~a decrease~~an increase in interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

The Company entered into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities.

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

The Company is exposed to credit risk in the event of nonperformance by the interest rate ~~swap~~derivative counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate ~~swaps.~~derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815,“Derivatives and Hedging.” In addition, the interest rate ~~swap~~derivative agreements contain language outlining collateral-pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits.

The ~~designated cash flow hedge~~ interest rate ~~swap~~derivative agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party’s exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; 3) if the Company fails to maintain its status as a well capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of ~~March 31,~~September 30, 2019, the aggregate fair value of ~~our designated cash flow hedge~~ derivative ~~contract~~contracts with credit risk contingent features (i.e., containing collateral posting or termination provisions based on our capital status) that was in a net ~~asset~~liability position totaled ~~$908~~$362 thousand ~~(this contract was not in a net liability position as of March 31, 2019)~~. The Company has a minimum collateral posting threshold with its derivative counterparty. As of ~~March 31,~~September 30, 2019, the Company was not required to post collateral with its derivative counterparty against its obligations under this ~~agreement because the agreement was in a net asset position.~~agreement. If the Company had breached any provisions under the agreement at ~~March 31,~~September 30, 2019, it could have been required to settle its obligations under the agreement at the termination value.

During the third quarter of 2018, the Company entered into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. These derivatives are not designated as hedges, are not speculative, and have a notional value of $27.5 million as of March 31, 2019. The changes in fair value for these contracts are recognized directly in earnings.

The table below identifies the balance sheet category and fair ~~values~~value of the Company’s designated cash flow hedge derivative instruments and non-designated hedges as of ~~March 31,~~September 30, 2019 and December 31, 2018.

													September 30, 2019					December 31, 2018
		March 31, 2019					December 31, 2018						Notional				Balance Sheet	Notional				Balance Sheet
		Notional		Fair		Balance Sheet	Notional		Fair		Balance Sheet		Amount		Fair Value		Category	Amount		Fair Value		Category
		Amount		Value		Category	Amount		Value		Category
Derivatives designated as hedging instruments	Derivatives designated as hedging instruments											Derivatives designated as hedging instruments

(dollars in thousands)
Interest rate product		$	100,000	$	908	Other Assets	$	250,000	$	3,727	Other Assets		$	—	$	—	Other Assets	$	250,000	$	3,727	Other Assets


(dollars in thousands)
Interest rate product													$	100,000	$	348	Other Liabilities	$	—	$	—	Other Liabilities

Derivatives not designated as hedging instruments	Derivatives not designated as hedging instruments											Derivatives not designated as hedging instruments

(dollars in thousands)
Interest rate product													$	26,000	$	15
Interest rate product														26,517		213
Interest rate product													$	52,517	$	228	Other Assets	$	—	$	—	Other Assets

(dollars in thousands)
Interest rate product													$	26,000	$	15	Other Liabilities	$	—	$	—	Other Liabilities
Interest rate product														26,517		220	Other Liabilities
Other Contracts		$	27,500	$	71	Other Liabilities	$	27,500	$	59	Other Liabilities			27,500		117	Other Liabilities		27,500		59	Other Liabilities
													$	80,017	$	352	Other Liabilities	$	27,500	$	59	Other Liabilities

The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018.

Derivatives in Subtopic 815-20 Hedging Relationships (dollars in thousands)	Amount of Gain or (Loss) Recognized in OCI on Derivative					Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
	Three Months Ended September 30,						Three Months Ended September 30,
	2019			2018			2019		2018
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(107	)	$	849	Interest Expense	$	264	$	214
Total	$	(107	)	$	849		$	264	$	214

Derivatives in Subtopic 815-20 Hedging
Amount of Gain or (Loss) Recognized in OCI on Derivative
Three Months Ended March 31,
Location of Gain or (Loss)Recognized from Accumulated Other Amount of Gain or (Loss) Reclassified fromAccumulated OCI into Income Three Months Ended March 31,
Relationships (dollars in thousands)
2019 2018 Comprehensive Income into Income 2019 2018
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products $ (1,034 ) $ 2,443 Interest Expense $ 462 $ (88 )
Interest Rate Products — — Gain on sale of investment securities (829 ) —
Total $ (1,034 ) $ 2,443 $ (366 ) $ (88 )

Derivatives in Subtopic 815-20 Hedging Relationships (dollars in thousands)	Amount of Gain or (Loss) Recognized in OCI on Derivative					Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019		2018
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(1,974	)	$	4,401	Interest Expense	$	1,039	$	230
Interest Rate Products		—			—	Gain on sale of investment securities		829		—
Total	$	(1,974	)	$	4,401		$	1,868	$	230

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018.

The Effect of Fair Value and Cash Flow Hedge Accounting on the Statement of Financial Performance

Location and Amount of Gain or (Loss) Recognized
March 31, 2019 March 31, 2018
(dollars in thousands) Interest Expense Interest Expense
Total amounts of income and expense line items presented in the
statement of financial performance in which the effects of fair value or
cash flow hedges are recorded $ (366 ) $ (88 )

Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ 462 $ (88 )
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring $ (829 ) $ —

	Location and Amount of Gain or (Loss) Recognized in Income on Fair Value
	and Cash Flow Hedging Relationships (in 000's)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2019		2018
	Interest Expense				Interest Expense		Gain on sale of investment securities		Interest Expense
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded	$	264	$	214	$	1,039	$	829	$	16

Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	264	$	214	$	1,039	$	—	$	230
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring	$	—	$	—	$	—	$	829	$	—
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component	$	264	$	214	$	1,039	$	829	$	230
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Excluded Component	$	—	$	—	$	—	$	—	$	—

Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance	Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance							Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20									Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative					Amount of Gain or (Loss) Recognized in Income on Derivative
		Location of Gain or	Amount of Gain or (Loss) Recognized in Income on Derivative							Three Months Ended September 30,					Nine Months Ended September 30,
Derivatives Not Designated as Hedging		(Loss) Recognized in	Three Months Ended March 31,
Instruments under Subtopic 815-20		Income on Derivative	2019			2018
(dollars in thousands)
										2019			2018		2019			2018

Interest Rate Products									Other income / (expense)		(7	)				(7	)
Other Contracts		Other income / (expense)	$	(13	)	$	—		Other income / (expense)		(16	)		—		(58	)		—
Total			$	(13	)	$	—				(23	)		—		(65	)		—

Balance Sheet ~~Offsetting:~~Offsetting: Our designated cash flow hedge interest rate ~~swap~~ derivatives are eligible for offset in the Consolidated Balance Sheets and are subject to master netting arrangements. Our derivative transactions with counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. The Company generally offsets such financial instruments for financial reporting purposes.

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s cash flow hedge derivatives as of ~~March 31,~~September 30, 2019 and December 31, 2018.

As of March 31, 2019
Offsetting of Derivative Assets(dollars in thousands) Gross Amounts Not Offset in the Balance Sheet
Gross Amounts of Recognized Assets Gross Amounts Offset in the Balance Sheet Net Amounts of Assets presented in the Balance Sheet Financial Instruments Cash Collateral
Posted Net Amount
Counterparty 1 $ 944 $ — $ 944 $ — $ — $ 944
Counterparty 2 — — — — — —
Counterparty 3 (71 ) — (71 ) — — (71 )
$ 873 $ — $ 873 $ — $ — $ 873

As of September 30, 2019
Offsetting of Derivative Assets (dollars in thousands)							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets presented in the Balance Sheet		Financial Instruments		Cash Collateral Posted		Net Amount
Derivatives	$	228	$	—	$	228	$	—	$	—	$	228

Offsetting of Derivative Liabilities (dollars in thousands)							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Liabilities presented in the Balance Sheet		Financial Instruments		Cash Collateral Posted		Net Amount
Derivatives	$	669	$	—	$	669	$	—	$	—	$	669

As of December 31, 2018
Offsetting of Derivative Assets(dollars in thousands) Gross Amounts Not Offset in the Balance Sheet
Gross Amounts of Recognized Assets Gross Amounts Offset in the Balance Sheet Net Amounts of Assets presented in the Balance Sheet Financial Instruments Cash Collateral Posted Net Amount
Counterparty 1 $ 2,948 $ — $ 2,948 $ — $ — $ 2,948
Counterparty 2 892 — 892 — — 892
Counterparty 3 (59 ) — (59 ) — — (59 )
$ 3,781 $ — $ 3,781 $ — $ — $ 3,781


As of December 31, 2018
Offsetting of Derivative Assets (dollars in thousands)							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets presented in the Balance Sheet		Financial Instruments		Cash Collateral Posted		Net Amount
Derivatives	$	3,840	$	—	$	3,840	$	—	$	—	$	3,840

Offsetting of Derivative Liabilities (dollars in thousands)							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Liabilities presented in the Balance Sheet		Financial Instruments		Cash Collateral Posted		Net Amount
Derivatives	$	59	$	—	$	59	$	—	$	—	$	59

Note 9. Other Real Estate Owned

The activity within Other Real Estate Owned (“OREO”) for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 is presented in the table below. There were notwo residential real estate loans in the process of foreclosure as of ~~March 31, 2019.~~ September 30, 2019 totaling $4.0 million.

For the three and nine months ended ~~March 31,~~September 30, 2019 and 2018, there were no sales of OREO property.


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2019		2018		2019		2018
Beginning Balance	$	1,394	$	1,394	$	1,394	$	1,394
Real estate acquired from borrowers		93		—		93		—
Properties sold		—		—		—		—
Ending Balance	$	1,487	$	1,394	$	1,487	$	1,394

Three Months Ended March 31,
(dollars in thousands) 2019 2018
Balance at January 1, $ 1,394 $ 1,394
Real estate acquired from borrowers — —
Properties sold — —
Ending balance $ 1,394 �� $ 1,394

Note 10. Long-Term Borrowings

The following table presents information related to the Company’s long-term borrowings as of ~~March 31,~~September 30, 2019 and December 31, 2018.

(dollars in thousands)	September 30, 2019			December 31, 2018
Subordinated Notes, 5.75%	$	70,000		$	70,000
Subordinated Notes, 5.00%		150,000			150,000
Less: unamortized debt issuance costs		(2,411	)		(2,704	)
Long-term borrowings	$	217,589		$	217,296

(dollars in thousands) March 31, 2019 December 31, 2018
Subordinated Notes, 5.75% $ 70,000 $ 70,000
Subordinated Notes, 5.0% 150,000 150,000
Less: unamortized debt issuance costs (2,606 ) (2,704 )
Long-term borrowings $ 217,394 $ 217,296

On August 5, 2014, the Company completed the sale of ~~$70.0~~$70.0 million of its ~~5.75%~~5.75% subordinated notes, due September 1, 2024 (the “2024 Notes”). The 2024 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately ~~$68.8~~$68.8 million, which includes ~~$1.2~~$1.2 million in deferred financing costs which are being amortized over the life of the 2024 Notes.

On July 26, 2016, the Company completed the sale of ~~$150.0~~$150.0 million of its ~~5.00%~~5.00% Fixed-to-Floating Rate Subordinated Notes, due August 1, 2026 (the “2026 Notes”). The 2026 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately ~~$147.35~~$147.35 million, which includes ~~$2.6~~$2.6 million in deferred financing costs which are being amortized over the life of the 2026 Notes.

Note 11. Net Income per Common Share

The calculation of net income per common share for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 was as ~~follows.~~follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars and shares in thousands, except per share data)	2019		2018		2019		2018
Basic:
Net income	$	36,495	$	38,948	$	107,487	$	111,959
Average common shares outstanding		34,233		34,309		34,418		34,292
Basic net income per common share	$	1.07	$	1.14	$	3.12	$	3.26

Diluted:
Net income	$	36,495	$	38,948	$	107,487	$	111,959
Average common shares outstanding		34,233		34,309		34,418		34,292
Adjustment for common share equivalents		23		152		33		152
Average common shares outstanding-diluted		34,256		34,461		34,451		34,444
Diluted net income per common share	$	1.07	$	1.13	$	3.12	$	3.25

Anti-dilutive shares		2		3		20		—

Three Months Ended March 31,
(dollars and shares in thousands, except per share data) 2019 2018
Basic:
Net income $ 33,749 $ 35,715
Average common shares outstanding 34,481 34,261
Basic net income per common share $ 0.98 $ 1.04

Diluted:
Net income $ 33,749 $ 35,715
Average common shares outstanding 34,481 34,261
Adjustment for common share equivalents 55 145
Average common shares outstanding-diluted 34,536 34,406
Diluted net income per common share $ 0.98 $ 1.04

Anti-dilutive shares 3 —

Note 12. Other Comprehensive Income

The following table presents the components of other comprehensive income (loss) for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018.

(dollars in thousands)	Before Tax			Tax Effect			Net of Tax

Three Months Ended September 30, 2019
Net unrealized gain on securities available-for-sale	$	1,585		$	411		$	1,174
Less: Reclassification adjustment for net gains included in net income		(153	)		(43	)		(110	)
Total unrealized gain		1,432			368			1,064

Net unrealized gain on derivatives		24			(13	)		11
Less: Reclassification adjustment for gain included in net income		(285	)		(80	)		(205	)
Total unrealized loss		(261	)		(67	)		(194	)

Other Comprehensive Income	$	1,171		$	301		$	870

Three Months Ended September 30, 2018
Net unrealized loss on securities available-for-sale	$	(4,253	)	$	1,105		$	(3,148	)
Less: Reclassification adjustment for net gains included in net income		—			—			—
Total unrealized loss		(4,253	)		1,105			(3,148	)

Net unrealized gain on derivatives		846			221			625
Less: Reclassification adjustment for losses included in net income		(211	)		(53	)		(158	)
Total unrealized gain		635			168			467

Other Comprehensive Loss	$	(3,618	)	$	1,273		$	(2,681	)

Nine Months Ended September 30, 2019
Net unrealized gain on securities available-for-sale	$	17,712		$	(4,572	)	$	13,140
Less: Reclassification adjustment for net gains included in net income		(1,628	)		(438	)		(1,190	)
Total unrealized gain		16,084			(5,010	)		11,950

Net unrealized loss on derivatives		(2,210	)		546			(1,664	)
Less: Reclassification adjustment for gain included in net income		(1,879	)		(505	)		(1,374	)
Total unrealized loss		(4,089	)		41			(3,038	)

Other Comprehensive Income	$	11,995		$	(4,969	)	$	8,912

Nine Months Ended September 30, 2018
Net unrealized loss on securities available-for-sale	$	(13,079	)	$	2,873		$	(10,206	)
Less: Reclassification adjustment for net gains included in net income		(68	)		(17	)		(51	)
Total unrealized loss		(13,147	)		2,856			(10,257	)

Net unrealized gain on derivatives		4,380			833			3,547
Less: Reclassification adjustment for losses included in net income		(209	)		(53	)		(156	)
Total unrealized gain		4,171			780			3,391

Other Comprehensive Loss	$	(8,976	)	$	3,636		$	(6,866	)

(dollars in thousands) Before Tax Tax Effect Net of Tax
Three Months Ended March 31, 2019
Net unrealized gain on securities available-for-sale $ 7,322 $ 1,882 $ 5,440
Less: Reclassification adjustment for net gains included in net income (83 ) (22 ) (61 )
Total unrealized gain 7,239 1,860 5,379

Net unrealized loss on derivatives (1,545 ) (391 ) (1,154 )
Less: Reclassification adjustment for gain included in net income (1,275 ) (333 ) (942 )
Total unrealized loss (2,820 ) (724 ) (2,096 )

Other Comprehensive Income $ 4,419 $ 1,136 $ 3,283

Three Months Ended March 31, 2018
Net unrealized loss on securities available-for-sale $ (6,221 ) $ 1,098 $ (5,123 )
Less: Reclassification adjustment for net gains included in net income (42 ) (11 ) (31 )
Total unrealized loss (6,263 ) 1,087 (5,154 )

Net unrealized gain on derivatives 2,607 374 2,233
Less: Reclassification adjustment for losses included in net income (88 ) (23 ) (65 )
Total unrealized gain 2,519 351 2,168

Other Comprehensive Loss $ (3,744 ) $ 1,438 $ (2,986 )

The following table presents the changes in each component of accumulated other comprehensive ~~loss,~~income (loss), net of tax, for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018.

(dollars in thousands)	Securities Available For Sale			Derivatives			Accumulated Other Comprehensive Income (Loss)

Three Months Ended September 30, 2019
Balance at Beginning of Period	$	3,842		$	75		$	(3,767	)
Other comprehensive income (loss) before reclassifications		1,174			(11	)		1,185
Amounts reclassified from accumulated other comprehensive income		(110	)		(205	)		(315	)
Net other comprehensive income (loss) during period		1,064			(194	)		870
Balance at End of Period	$	4,906		$	(269	)	$	4,637

Three Months Ended September 30, 2018
Balance at Beginning of Period	$	(10,914	)	$	4,305		$	(6,609	)
Other comprehensive income (loss) before reclassifications		(3,148	)		625			(2,523	)
Amounts reclassified from accumulated other comprehensive income		—			(158	)		(158	)
Net other comprehensive (loss) income during period		(3,148	)		467			(2,681	)
Balance at End of Period	$	(14,062	)	$	4,772		$	(9,290	)

(dollars in thousands)	Securities Available For Sale			Derivatives			Accumulated Other Comprehensive Income (Loss)
Nine Months Ended September 30, 2019
Balance at Beginning of Period	$	(7,044	)	$	2,769		$	(4,275	)
Other comprehensive income (loss) before reclassifications		13,140			(1,664	)		11,476
Amounts reclassified from accumulated other comprehensive income		(1,190	)		(1,374	)		(2,564	)
Net other comprehensive income (loss) during period		11,950			(3,038	)		8,912
Balance at End of Period	$	4,906		$	(269	)	$	4,637

Nine Months Ended September 30, 2018
Balance at Beginning of Period	$	(3,131	)	$	1,381		$	(1,750	)
Other comprehensive income (loss) before reclassifications		(10,206	)		3,547			(6,659	)
Amounts reclassified from accumulated other comprehensive income		(51	)		(156	)		(207	)
Net other comprehensive (loss) income during period		(10,257	)		3,391			(6,866	)
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI		(674	)		—			(674	)
Balance at End of Period	$	(14,062	)	$	4,772		$	(9,290	)

(dollars in thousands) Securities Available For Sale Derivatives Accumulated Other Comprehensive Income (Loss)
Three Months Ended March 31, 2019
Balance at Beginning of Period $ (7,044 ) $ 2,769 $ (4,275 )
Other comprehensive income (loss) before reclassifications 5,440 (1,154 ) 4,286
Amounts reclassified from accumulated other comprehensive income (loss) (61 ) (942 ) (1,003 )
Net other comprehensive income (loss) during period 5,379 (2,096 ) 3,283
Balance at End of Period $ (1,665 ) $ 673 $ (992 )

Three Months Ended March 31, 2018
Balance at Beginning of Period $ (3,131 ) $ 1,381 $ (1,750 )
Other comprehensive income (loss) before reclassifications (5,123 ) 2,233 (2,890 )
Amounts reclassified from accumulated other comprehensive income (loss) (31 ) (65 ) (96 )
Net other comprehensive income (loss) during period (5,154 ) 2,168 (2,986 )
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI (674 ) — (674 )
Balance at End of Period $ (8,959 ) $ 3,549 $ (5,410 )

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) ~~income~~ for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018.


Details about Accumulated Other Comprehensive Income Components (dollars in thousands)	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)						Affected Line Item in the Statement Where Net Income is Presented
	Three Months Ended September 30,
	2019			2018
Realized gain on sale of investment securities	$	153		$	—		Gain on sale of investment securities
Interest income (expense) derivative deposits		285			(211	)	Interest expense on deposits
Income tax (expense) benefit		(123	)		53		Income Tax Expense
Total Reclassifications for the Period	$	315		$	(158	)	Net Income

Details about Accumulated Other	Amount Reclassified from						Affected Line Item in
Comprehensive Income Components	Accumulated Other						the Statement Where
(dollars in thousands)	Comprehensive (Loss) Income						Net Income is Presented

Details about Accumulated Other Comprehensive Income Components (dollars in thousands)								Amount Reclassified from Accumulated Other Comprehensive Income						Affected Line Item in the Statement Where Net Income is Presented
	Three Months Ended March 31,							Nine Months Ended September 30,
	2019			2018				2019			2018
Realized gain on sale of investment securities	$	83		$	42		Gain on sale of investment securities	$	1,628		$	(68	)	Gain on sale of investment securities
Realized gain on swap termination		829			—		Gain on sale of investment securities		829			—		Gain on sale of investment securities
Interest income (expense) derivative deposits		446			(88	)	Interest expense on deposits		1,050			(209	)	Interest expense on deposits
Income tax (expense) benefit		(355	)		12		Income Tax Expense
Income tax (benefit) expense									(943	)		70		Income Tax Expense
Total Reclassifications for the Period	$	1,003		$	(34	)	Net Income	$	2,564		$	(207	)	Net Income

Note 13. Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820,“Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level1

Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. Government and agency securities actively traded in over-the-counter markets.

Level2

Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.

Level3

Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of ~~March 31,~~September 30, 2019 and December 31, 2018.

(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
March 31, 2019
September 30, 2019
Assets:
Investment securities available-for-sale:
U. S. agency securities	$	—	$	239,019	$	—	$	239,019	$	—	$	171,820	$	—	$	171,820
Residential mortgage backed securities		—		477,903		—		477,903		—		438,029		—		438,029
Municipal bonds		—		45,533		—		45,533		—		63,958		—		63,958
Corporate bonds		—		—		9,556		9,556		—		—		9,614		9,614
U.S. Treasury										—		24,926		—		24,926
Other equity investments		—		—		218		218		—		—		198		198
Loans held for sale		—		20,268		—		20,268		—		52,199		—		52,199
Interest Rate Caps										—		228		—		228
Mortgage banking derivatives		—		—		288		288		—		—		313		313
Interest rate swap derivatives		—		908		—		908
Total assets measured at fair value on a recurring basis as of March 31, 2019	$	—	$	783,631	$	10,062	$	793,693
Total assets measured at fair value on a recurring basis as of September 30, 2019									$	—	$	751,160	$	10,125	$	761,285

Liabilities:
Interest rate swap derivatives									$	—	$	362	$	—	$	362
Derivative liability										—		117		—		117
Interest Rate Caps										—		235		—		235
Mortgage banking derivatives	$	—	$	—	$	222	$	222		—		—		3		3
Total liabilities measured at fair value on a recurring basis as of March 31, 2019	$	—	$	—	$	222	$	222

December 31, 2018
Assets:
Investment securities available-for-sale:
U. S. agency securities	$	—	$	256,345	$	—	$	256,345
Residential mortgage backed securities		—		472,231		—		472,231
Municipal bonds		—		45,769		—		45,769
Corporate bonds		—		—		9,576		9,576
Other equity investments		—		—		218		218
Loans held for sale		—		19,254		—		19,254
Mortgage banking derivatives		—		—		229		229
Interest rate swap derivatives		—		3,727		—		3,727
Total assets measured at fair value on a recurring basis as of December 31, 2018	$	—	$	797,326	$	10,023	$	807,349

Liabilities:
Mortgage banking derivatives	$	—	$	—	$	269	$	269
Total liabilities measured at fair value on a recurring basis as of December 31, 2018	$	—	$	—	$	269	$	269
Total liabilities measured at fair value on a recurring basis as of September 30, 2019									$	—	$	714	$	3	$	717


December 31, 2018
Assets:
Investment securities available-for-sale:
U. S. agency securities	$	—	$	256,345	$	—	$	256,345
Residential mortgage backed securities		—		472,231		—		472,231
Municipal bonds		—		45,769		—		45,769
Corporate bonds		—		—		9,576		9,576
Other equity investments		—		—		218		218
Loans held for sale		—		19,254		—		19,254
Mortgage banking derivatives		—		—		229		229
Interest rate swap derivatives		—		3,727		—		3,727
Total assets measured at fair value on a recurring basis as of December 31, 2018	$	—	$	797,326	$	10,023	$	807,349

Liabilities:
Mortgage banking derivatives	$	—	$	—	$	269	$	269
Total liabilities measured at fair value on a recurring basis as of December 31, 2018	$	—	$	—	$	269	$	269

Investment Securities Available-for-Sale:Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. agency debt securities, mortgage backed securities issued by Government Sponsored Entities (“GSE’s”) and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, the carrying amounts approximate the fair value.

Loans held for ~~sale:~~sale: The Company has elected to carry loans held for sale at fair value. This election reduces certain timing differences in the Consolidated Statement of Operations and better aligns with the management of the portfolio from a business perspective. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Operations. Gains and losses on sales of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Operations. As such, the Company classifies loans subjected to fair value adjustments as Level 2 valuation.

The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of ~~March 31,~~September 30, 2019 and December 31, 2018.


	September 30, 2019
(dollars in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Difference

Residential mortgage loans held for sale	$	52,199	$	51,291	$	908
FHA mortgage loans held for sale	$	—	$	—	$	—

	December 31, 2018
(dollars in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Difference

Residential mortgage loans held for sale	$	19,254	$	18,797	$	457
FHA mortgage loans held for sale	$	—	$	—	$	—

March 31, 2019
Aggregate Unpaid
(dollars in thousands) Fair Value Principal Balance Difference
Residential mortgage loans held for sale $ 20,268 $ 19,825 $ 443
FHA mortgage loans held for sale $ — $ — $ —

December 31, 2018
Aggregate Unpaid
(dollars in thousands) Fair Value Principal Balance Difference
Residential mortgage loans held for sale $ 19,254 $ 18,797 $ 457
FHA mortgage loans held for sale $ — $ — $ —

No residential mortgage loans held for sale were 90 or more days past due or on nonaccrual status as of ~~March 31,~~September 30, 2019 or December 31, 2018.

Interest rate swap derivatives:These derivative instruments consist of ~~forward starting~~ interest rate swap agreements, which are accounted for as cash flow hedges under ASC 815. The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility. Derivative contracts are executed with a Credit Support Annex, which is a bilateral agreement that requires collateral postings when the market value exceeds certain threshold limits. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration.

Credit Risk Participation ~~Agreements:~~Agreements: The Company enters into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2.

Interest Rate Caps: the Company entered into an interest rate cap agreement (“cap”) with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the cap’s strike rate. The fair value of the cap is calculated by determining the total expected asset or liability exposure of the derivatives. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities. Accordingly, the cap falls within Level 2.

Mortgage banking derivatives:The Company relies on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a Level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing.

The following is a reconciliation of activity for assets and liabilities measured at fair value based on Significant Other Unobservable Inputs (Level 3):

(dollars in thousands)	Investment Securities			Mortgage Banking Derivatives		Total
Assets:
Beginning balance at January 1, 2019	$	9,794		$	229	$	10,023
Realized (loss) gain included in earnings		(20	)		84		64
Unrealized gain included in other comprehensive income		12			—		12
Purchases of available-for-sale securities		3,030			—		3,030
Principal redemption		(3,004	)		—		(3,004	)
Ending balance at September 30, 2019	$	9,812		$	313	$	10,125

	Investment			Mortgage Banking
(dollars in thousands)	Securities			Derivatives			Total
Assets:
Beginning balance at January 1, 2019	$	9,794		$	229		$	10,023
Realized gain included in earnings		—			59			59
Unrealized loss included in other comprehensive income		(20	)		—			(20	)
Principal redemption		—			—			—
Ending balance at March 31, 2019	$	9,774		$	288		$	10,062

Liabilities:
Beginning balance at January 1, 2019	$	—		$	269		$	269		$	—	$	269		$	269
Realized gain included in earnings		—			(47	)		(47	)		—		(266	)		(266	)
Principal redemption		—			—			—			—		—			—
Ending balance at March 31, 2019	$	—		$	222		$	222
Ending balance at September 30, 2019										$	—	$	3		$	3

(dollars in thousands)	Investment Securities		Mortgage Banking Derivatives		Total
Assets:
Beginning balance at January 1, 2018	$	1,718	$	43	$	1,761
Realized gain included in earnings		—		186		186
Purchases of available-for-sale securities		8,076		—		8,076
Principal redemption		—		—		—
Ending balance at December 31, 2018	$	9,794	$	229	$	10,023


Liabilities:
Beginning balance at January 1, 2018	$	—	$	10	$	10
Realized loss included in earnings		—		259		259
Principal redemption		—		—		—
Ending balance at December 31, 2018	$	—	$	269	$	269

Investment Mortgage Banking
(dollars in thousands) Securities Derivatives Total
Assets:
Beginning balance at January 1, 2018 $ 1,718 $ 43 $ 1,761
    Realized gain included in earnings — 186 186
    Purchases of available-for-sale securities 8,076 — 8,076
    Principal redemption — — —
Ending balance at December 31, 2018 $ 9,794 $ 229 $ 10,023

Liabilities:
Beginning balance at January 1, 2018 $ — $ 10 $ 10
    Realized loss included in earnings — 259 259
    Principal redemption — — —
Ending balance at December 31, 2018 $ — $ 269 $ 269

The other equity securities classified as Level 3 consist of equity investments in the form of common stock of two local banking companies which are not publicly traded, and for which the carrying amount approximates fair value.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company measures certain assets at fair value on a nonrecurring basis and the following is a general description of the methods used to value such assets.

Impaired ~~loans:~~loans: The Company does not record loans at fair value on a recurring basis; however, from time to time, a loan is considered impaired and an allowance for loan loss is established. The Company considers a loan impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management has determined that nonaccrual loans and loans that have had their terms restructured in a troubled debt restructuring meet this impaired loan definition. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310,“Receivables.” The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At ~~March 31,~~September 30, 2019, substantially all of the Company’s impaired loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company classifies as a Level 3 valuation.

Other real estate ~~owned:~~owned: Other real estate owned is initially recorded at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral, which the Company classifies as a Level 3 valuation.

Assets measured at fair value on a nonrecurring basis are included in the table below:


(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
September 30, 2019
Impaired loans:
Commercial	$	—	$	—	$	8,776	$	8,776
Income producing - commercial real estate		—		—		8,841		8,841
Owner occupied - commercial real estate		—		—		7,032		7,032
Real estate mortgage - residential		—		—		4,985		4,985
Construction - commercial and residential		—		—		9,148		9,148
Home equity		—		—		474		474
Other real estate owned		—		—		1,487		1,487
Total assets measured at fair value on a nonrecurring basis as of September 30, 2019	$	—	$	—	$	40,743	$	40,743

(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
December 31, 2018
Impaired loans:
Commercial	$	—	$	—	$	3,338	$	3,338
Income producing - commercial real estate		—		—		18,937		18,937
Owner occupied - commercial real estate		—		—		5,131		5,131
Real estate mortgage - residential		—		—		1,510		1,510
Construction - commercial and residential		—		—		1,981		1,981
Home equity		—		—		487		487
Other real estate owned		—		—		1,394		1,394
Total assets measured at fair value on a nonrecurring basis as of December 31, 2018	$	—	$	—	$	32,778	$	32,778

(dollars in thousands)
Quoted Prices
(Level 1)

Significant Other Observable Inputs
(Level 2)
Significant Other Unobservable Inputs
(Level 3) Total
(Fair Value)
March 31, 2019
Impaired loans:
Commercial $ — $ — $ 7,089 $ 7,089
Income producing - commercial real estate — — 39,428 39,428
Owner occupied - commercial real estate — — 4,253 4,253
Real estate mortgage - residential — — 5,644 5,644
Construction - commercial and residential — — 3,030 3,030
Home equity — — 487 487
Other real estate owned — — 1,394 1,394
Total assets measured at fair value on a nonrecurring basis as of March 31, 2019 $ — $ — $ 61,325 $ 61,325

(dollars in thousands)
Quoted Prices
(Level 1)
Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs
(Level 3) Total
(Fair Value)
December 31, 2018
Impaired loans:
Commercial $ — $ — $ 3,338 $ 3,338
Income producing - commercial real estate — — 18,937 18,937
Owner occupied - commercial real estate — — 5,131 5,131
Real estate mortgage - residential — — 1,510 1,510
Construction - commercial and residential — — 1,981 1,981
Home equity — — 487 487
Other real estate owned — — 1,394 1,394
Total assets measured at fair value on a nonrecurring basis as of December 31, 2018 $ — $ — $ 32,778 $ 32,778

Fair Value of Financial Instruments

The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists.

Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole.

The estimated fair ~~values~~value of the Company’s financial instruments at ~~March 31,~~September 30, 2019 and December 31, 2018 are as follows:


					Fair Value Measurements
(dollars in thousands)	Carrying Value		Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2019
Assets
Cash and due from banks	$	6,657	$	6,657	$	—	$	6,657	$	—
Federal funds sold		27,711		27,711		—		27,711		—
Interest bearing deposits with other banks		361,154		361,154		—		361,154		—
Investment securities		708,545		708,545		—		698,733		9,812
Federal Reserve and Federal Home Loan Bank stock		28,725		28,725		—		28,725		—
Loans held for sale		52,199		52,199		—		52,199		—
Loans		7,485,441		7,572,385		—		—		7,572,385
Bank owned life insurance		74,726		74,726		—		74,726		—
Annuity investment		12,103		12,103		—		12,103		—
Interest Rate Caps		228		228		—		228		—
Mortgage banking derivatives		313		313		—		—		313

Liabilities
Noninterest bearing deposits		2,051,106		2,051,106		—		2,051,106		—
Interest bearing deposits		3,952,541		3,952,541		—		3,952,541		—
Certificates of deposit		1,398,866		1,443,542		—		1,443,542		—
Customer repurchase agreements		30,297		30,297		—		30,297		—
Borrowings		317,589		328,330		—		328,330		—
Interest rate swap derivatives		362		362				362		—
Derivative liability		117		117		—		117		—
Interest Rate Caps		235		235		—		235		—
Mortgage banking derivatives		3		3		—		—		3

December 31, 2018
Assets
Cash and due from banks	$	6,773	$	6,773	$	—	$	6,773	$	—
Federal funds sold		11,934		11,934		—		11,934		—
Interest bearing deposits with other banks		303,157		303,157		—		303,157		—
Investment securities		784,139		784,139		—		774,345		9,794
Federal Reserve and Federal Home Loan Bank stock		23,506		23,506		—		23,506		—
Loans held for sale		19,254		19,254		—		19,254		—
Loans		6,921,503		6,921,048		—		—		6,921,048
Bank owned life insurance		73,441		73,441		—		73,441		—
Annuity investment		12,417		12,417		—		12,417		—
Mortgage banking derivatives		229		229		—		—		229
Interest rate swap derivatives		3,727		3,727		—		3,727		—

Liabilities
Noninterest bearing deposits		2,104,220		2,104,220		—		2,104,220		—
Interest bearing deposits		3,542,666		3,542,666		—		3,542,666		—
Certificates of deposit		1,327,400		1,325,209		—		1,325,209		—
Customer repurchase agreements		30,413		30,413		—		30,413		—
Borrowings		217,196		218,006		—		218,006		—
Mortgage banking derivatives		269		269		—		—		269

Fair Value Measurements

Quoted
Prices

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

(dollars in thousands) Carrying Value Fair Value (Level 1) (Level 2) (Level 3)
March 31, 2019
Assets
Cash and due from banks $ 6,817 $ 6,817 $ — $ 6,817 $ —
Federal funds sold 15,403 15,403 — 15,403 —
Interest bearing deposits with other banks 99,870 99,870 — 99,870 —
Investment securities 772,229 772,229 — 762,455 9,774
Federal Reserve and Federal Home Loan Bank stock 34,995 34,995 — 34,995 —
Loans held for sale 20,268 20,268 — 20,268 —
Loans 7,103,115 7,105,850 — — 7,105,850
Bank owned life insurance 73,865 73,865 — 73,865 —
Annuity investment 12,290 12,290 — 12,290 —
Mortgage banking derivatives 288 288 — — 288
Interest rate swap derivatives 908 908 — 908 —

Liabilities
Noninterest bearing deposits 2,216,270 2,216,270 — 2,216,270 —
Interest bearing deposits 3,103,595 3,103,595 — 3,103,595 —
Certificates of deposit 1,363,054 1,363,641 — 1,363,641 —
Customer repurchase agreements 26,418 26,418 — 26,418 —
Borrowings 467,394 460,272 — 460,272 —
Mortgage banking derivatives 222 222 — — 222

December 31, 2018
Assets
Cash and due from banks $ 6,773 $ 6,773 $ — $ 6,773 $ —
Federal funds sold 11,934 11,934 — 11,934 —
Interest bearing deposits with other banks 303,157 303,157 — 303,157 —
Investment securities 784,139 784,139 — 774,345 9,794
Federal Reserve and Federal Home Loan Bank stock 23,506 23,506 — 23,506 —
Loans held for sale 19,254 19,254 — 19,254 —
Loans 6,921,503 6,921,048 — — 6,921,048
Bank owned life insurance 73,441 73,441 — 73,441 —
Annuity investment 12,417 12,417 — 12,417 —
Mortgage banking derivatives 229 229 — — 229
Interest rate swap derivatives 3,727 3,727 — 3,727 —

Liabilities
Noninterest bearing deposits 2,104,220 2,104,220 — 2,104,220 —
Interest bearing deposits 3,542,666 3,542,666 — 3,542,666 —
Certificates of deposit 1,327,400 1,325,209 — 1,325,209 —
Customer repurchase agreements 30,413 30,413 — 30,413 —
Borrowings 217,196 218,006 — 218,006 —
Mortgage banking derivatives 269 269 — — 269

Note 14. Supplemental Executive Retirement Plan

The Bank has entered into Supplemental Executive Retirement and Death Benefit Agreements (the “SERP Agreements”) with certain of the Bank’s executive officers, ~~other than Mr. Paul,~~ which upon the executive’s retirement, will provide for a stated monthly payment for such executive’s lifetime subject to certain death benefits described below. The retirement benefit is computed as a percentage of each executive’s projected average base salary over the five years preceding retirement, assuming retirement at age ~~67.~~67. The SERP Agreements provide that (a) the benefits vest ratably over six years of service to the Bank, with the executive receiving credit for years of service prior to entering into the SERP Agreement, (b) death, disability and change-in-control shall result in immediate vesting, and (c) the monthly amount will be reduced if retirement occurs earlier than age 67 for any reason other than death, disability or change-in-control. The SERP Agreements further provide for a death benefit in the event the retired executive dies prior to receiving 180 monthly installments, paid either in a lump sum payment or continued monthly installment payments, such that the executive’s beneficiary has received payment(s) sufficient to equate to a cumulative 180 monthly installments.

The SERP Agreements are unfunded arrangements maintained primarily to provide supplemental retirement benefits and comply with Section 409A of the Internal Revenue Code. The Bank financed the retirement benefits by purchasing fixed annuity contracts with ~~four~~4 insurance carriers in 2013 totaling ~~$11.4~~$11.4 million that have been designed to provide a future source of funds for the lifetime retirement benefits of the SERP Agreements. The primary impetus for utilizing fixed annuities is a substantial savings in compensation expenses for the Bank as opposed to a traditional SERP Agreement. For the three and nine months ended ~~March 31,~~September 30, 2019, the annuity contracts accrued $51 thousand of income and $147 thousand of income offset by $165 thousand of annual fees, respectively, which were included in other noninterest income on the Consolidated Statement of Operations. For the three and nine months ended September 30, 2018, the annuity contracts accrued ~~$32~~$56 thousand ~~and $27 thousand~~ of income and $161 thousand of income offset by $123 thousand of annual fees, respectively, which were included in other noninterest income on the Consolidated Statement of Operations. The cash surrender value of the annuity contracts was ~~$12.3~~$12.1 million and ~~$12.4~~$12.4 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, and is included in other assets on the Consolidated Balance ~~Sheet.~~Sheets. For the three and nine months ended ~~March 31,~~September 30, 2019, the Company recorded benefit expense accruals of ~~$101~~$101 thousand and $303 thousand, respectively, for this post retirement benefit. For the three and nine months ended ~~March 31,~~September 30, 2018, the Company recorded benefit expense accruals of ~~$100~~$100 thousand and $586 thousand, respectively, for this post retirement benefit.

Upon death of a named executive, the annuity contract related to such executive terminates. The Bank has purchased additional bank owned life insurance contracts, which would effectively finance payments (up to a 15 year certain amount) to the executives’ named beneficiaries.

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides information about the results of operations, and financial condition, liquidity, and capital resources of the Company and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

This report contains forward looking statements within the meaning of the Securities Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward- looking statements can be identified by use of such words as “may,” “will,” “anticipate,” “believes,” “expects,” “plans,” “estimates,” “potential,” “continue,” “should,” and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors and other conditions, which by their nature are not susceptible to accurate forecast, and are subject to significant uncertainty. For details on factors that could affect these expectations, see the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward looking statements.

GENERAL

~~GENERAL~~

The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating twenty-one years of successful operations. The Company provides general commercial and consumer banking services through the Bank, its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System. The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the Company’s primary market area. The Company’s philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of twenty branch offices, including nine in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C.

The Bank offers a broad range of commercial banking services to its business and professional clients as well as full service consumer banking services to individuals living and/or working primarily in the Bank’s market area. The Bank emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, non-profit organizations and associations, and investors living and working in and near the primary service area. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, “NOW” accounts and money market and savings accounts, business, construction, and commercial loans, residential mortgages and consumer loans, and cash management services. The Bank is also active in the origination and sale of residential mortgage loans and the origination of SBA loans. The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under best efforts and mandatory delivery commitments with the investors to purchase the loans subject to compliance with pre-established criteria. The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated. The Company originates multifamily FHA loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”). The Company securitizes these loans through the Government National Mortgage Association (“Ginnie Mae”) MBS I program and sells the resulting securities in the open market to authorized dealers in the normal course of business and ~~generally retains~~periodically bundles and sells the servicing rights. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages other real estate owned (“OREO”) assets. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Additionally, the Bank offers investment advisory services through referral programs with third parties. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.

CRITICAL ACCOUNTING POLICIES

The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company’s Annual report on Form 10-K for the year ended December 31, 2018. There have been no significant changes to the Company’s Accounting Policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2018 except as indicated in “Accounting Standards Adopted in 2019” in Note 1 to the Consolidated Financial Statements.

RESULTS OF OPERATIONS

Earnings Summary

Net income for the three months ended ~~March 31,~~September 30, 2019 was ~~$33.7~~$36.5 million ~~a 6% decrease over the $35.7~~compared to $38.9 million net income for the three months ended ~~March 31, 2018.~~September 30, 2018, a 6% decrease. Net income per ~~both~~ basic common ~~and diluted shares~~share for the three months ended ~~March 31,~~September 30, 2019 was ~~$0.98~~$1.07 compared to ~~$1.04~~$1.14 for the same period in 2018, a 6% decrease. Net income per diluted common share for the three months ended September 30, 2019 was $1.07 compared to $1.13 for the same period in 2018, a 5% decrease.

Net income declined for the three months ended September 30, 2019 relative to the same period in 2018 due to slightly higher revenues (i.e. net interest income plus noninterest income) offset by a larger increase in noninterest expenses in the 2019 period. Furthermore, earnings in the third quarter of 2019 were impacted by two significant non-recurring expense items. First, the Company recorded $2.0 million of accelerated shared based compensation expense due to the resignation of certain directors of the Company and Bank. Second, as a result of the FDIC Deposit Insurance Fund exceeding 1.38% of insured deposits at June 30, 2019, EagleBank recognized a $1.1 million credit to its FDIC assessment expense in the third quarter of 2019. Excluding these two non-recurring items, net income for the third quarter of 2019 ~~earnings include~~would have been $37.1 million ($1.08 per diluted share).

The provision for income taxes was $14.1 million, an increase of $221 thousand, or 2%, compared to the same period in 2018. The most significant portion of revenue is net interest income, which decreased by less than 1% for the three months ended September 30, 2019 over the same period in 2018 ($81.0 million versus $81.3 million).

For the three months ended September 30, 2019, the Company reported an annualized return on average assets (“ROAA”) of 1.62% as compared to 1.93% for the three months ended September 30, 2018. The annualized return on average common equity (“ROACE”) for the three months ended September 30, 2019 was 12.09% as compared to 14.85% for the three months ended September 30, 2018. The annualized return on average tangible common equity (“ROATCE”) for the three months ended September 30, 2019 was 13.25% as compared to 16.54% for the three months ended September 30, 2018. The decline in these ratios was primarily due to net interest margin compression, the net impact of the two non-recurring expense items discussed above, as well as additional legal costs associated with ongoing investigations discussed in the “Noninterest Expense” section.

For the nine months ended September 30, 2019, the Company’s net income was $107.5 million, a 4% decrease from $112.0 million net income for the same period in 2018. Net income per basic common share for the nine months ended September 30, 2019 was $3.12 compared to $3.26 for the same period in 2018, a 4% decrease. Net income per diluted common share for the nine months ended September 30, 2019 was $3.12 compared to $3.25 for the same period in 2018, a 4% decrease.

The decrease in net income for the nine months ended September 30, 2019 can be attributed primarily to $8.2 million of nonrecurring charges related to acceleration of share based compensation ~~awards and~~expenses associated with the retirement of our former Chairman and Chief Executive Officer ~~Mr. Ronald D. Paul as announced in late March. For~~and the ~~first quarter~~resignation of ~~2019, salaries and benefit expenses include $6.2 million ($0.13 per diluted share) of nonrecurring noninterest expenses.~~

Excluding nonrecurring costs, net earnings for the first quarter of 2019 were $38.5 million ($1.11 per diluted share) as compared to $35.7 million net income ($1.04 per diluted share) for the first quarter in 2018, an 8% increase.

Excluding nonrecurring costs, the increase in net income for the three months ended March 31, 2019 can be attributed primarily to an increase in total revenue (i.e. net interest income plus noninterest income) of 8% over the same period in 2018.certain directors. The provision for income taxes was ~~$11.9~~$39.5 million, ~~a decrease~~an increase of ~~$384~~$796 thousand or 3%2% compared to the same period in 2018. The most significant portion of revenue is net interest income, which increased 7%3% for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 over the same period in 2018 ($~~81.0~~243.3 million versus ~~$75.8~~$235.3 million), resulting from growth in average earning assets of 11% partially offset by a decline in the net interest margin to 3.88% from 4.15%.

For the ~~three~~nine months ended ~~March 31,~~September 30, 2019, the Company reported an annualized ~~return on average assets (“ROAA”)~~ROAA of ~~1.62% (1.85% excluding nonrecurring costs)~~1.66% as compared to ~~1.91%~~1.92% for the ~~three~~nine months ended ~~March 31,~~September 30, 2018. The annualized ~~return on average common equity (“ROACE”)~~ROACE for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 was ~~12.12% (13.84% excluding nonrecurring costs)~~12.34% as compared to ~~14.99%~~14.92% for the ~~three~~nine months ended ~~March 31,~~September 30, 2018. The annualized ~~return on average tangible common equity (“ROATCE”)~~ROATCE for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 was ~~13.38% (15.26% excluding nonrecurring costs)~~13.57% as compared to ~~16.86%~~16.70% for the ~~three~~nine months ended ~~March 31,~~September 30, 2018. The decline in these ratios was primarily due to net interest margin compression and the nonrecurring charges related to acceleration of share based compensation expenses discussed above.

The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, was ~~4.02%~~3.72% for the three months ended ~~March 31,~~September 30, 2019 and ~~4.17%~~4.14% for the same period in 2018. Average earning asset yields ~~increased 31~~decreased 21 basis points to ~~5.21%~~5.00% for the three months ended ~~March 31,~~September 30, 2019, as compared to ~~4.90%~~5.21% for the same period in 2018. The average cost of interest bearing liabilities increased by 7827 basis points (to ~~1.96%~~2.02% from ~~1.18%~~1.75%) for the three months ended ~~March 31,~~September 30, 2019 as compared to the same period in 2018. Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 4748 basis points for the three months ended ~~March 31,~~September 30, 2019 as compared to 2018 ~~(3.25%~~(2.98% versus ~~3.72%~~3.46%).

The benefit of noninterest sources funding earning assets increased by 326 basis points to 7774 basis points from 4568 basis points for the three months ended ~~March 31,~~September 30, 2019 versus the same period in 2018. The combination of a 4748 basis point decrease in the net interest spread and a 326 basis point increase in the value of noninterest sources resulted in a 1542 basis point decrease in the net interest margin for the three months ended ~~March 31,~~September 30, 2019 as compared to the same period in 2018. The Company considers the value of its noninterest sources of funds as very significant to its business model and its overall profitability.

The net interest margin was 3.88% for the nine months ended September 30, 2019 and 4.15% for the same period in 2018. Average earning asset yields increased 6 basis points to 5.14% for the nine months ended September 30, 2019, as compared to 5.08% for the same period in 2018. The average cost of interest bearing liabilities increased by 52 basis points (to 2.02% from 1.50%) for the nine months ended September 30, 2019 as compared to the same period in 2018. Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 46 basis points for the nine months ended September 30, 2019 as compared to 2018 (3.12% versus 3.58%).

The benefit of noninterest sources funding earning assets increased by 19 basis points to 76 basis points from 57 basis points for the nine months ended September 30, 2019 versus the same period in 2018. The combination of a 46 basis point decrease in the net interest spread and a 19 basis point increase in the value of noninterest sources resulted in a 27 basis point decrease in the net interest margin for the nine months ended September 30, 2019 as compared to the same period in 2018.

The Company believes it has effectively managed its net interest margin and shown some growth in net interest income over the past twelve months as market interest rates ~~(on average)~~ have trended ~~higher.~~sharply lower. This factor has been significant to overall earnings performance over the past twelve months as net interest income represents 93% of the Company’s total revenue for the three months ended ~~March 31,~~September 30, 2019.

For the first ~~three~~nine months of 2019, total loans grew 3%8% over December 31, 2018, and average loans were 9%11% higher in the first ~~three~~nine months of 2019 as compared to the first ~~three~~nine months of 2018. At ~~March 31,~~September 30, 2019, total deposits were ~~4% lower~~6% higher than deposits at December 31, 2018, while average deposits were ~~15%~~13% higher for the first ~~three~~nine months of 2019 compared with the first ~~three~~nine months of 2018.

In order to fund growth in average loans of 9%11% over the ~~three~~nine months ended ~~March 31,~~September 30, 2019 as compared to the same period in 2018, as well as sustain significant liquidity, the Company has relied on ~~both core deposit growth and brokered deposits. The major component of the growth in core deposits during the first quarter of 2019 has been growth in both noninterest~~funding from interest bearing accounts primarily as a result of effectively building new and enhanced client relationships, and ~~to a~~an enhanced focus on time ~~deposit program to lock in more fixed rate deposits at terms approximating 10 months.~~deposits.

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 87% and 86% of average earning assets for the first ~~three~~nine months of 2019 ~~compared to 87% for the same period in 2018.~~and 2018, respectively. For the first ~~three~~nine months of 2019, as compared to the same period in 2018, average loans, excluding loans held for sale, increased ~~$604.7~~$715.0 million, ~~a 9% increase,~~or 11%, due primarily to growth in ~~owner occupied~~income producing - commercial real estate, ~~income producing~~owner occupied - commercial real estate, and commercial loans. Average investment securities for both the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018 amounted to ~~10% and 8%~~9% of average earning ~~assets, respectively.~~assets. The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 4% and 5% of average earning assets for ~~both~~ the first ~~three~~nine months of 2019 and 2018. The average combination of federal funds sold, interest bearing deposits with other banks and loans held for sale increased $10.9 million for the three months ended March 31, 2019 as compared to the same period in 2018.2018, respectively.

The provision for credit losses was ~~$3.4~~$3.2 million for the three months ended ~~March 31,~~September 30, 2019 as compared to ~~$2.0~~$2.4 million for the three months ended ~~March 31,~~September 30, 2018. Net charge-offs of ~~$3.4~~$1.5 million in the ~~first~~third quarter of 2019 represented an annualized ~~0.19%~~0.08% of average loans, excluding loans held for sale, as compared to ~~$920~~$862 thousand, or an annualized ~~0.06%~~0.05% of average loans, excluding loans held for sale, in the ~~first~~third quarter of 2018. Net charge-offs in the ~~first~~third quarter of 2019 were attributable primarily to commercial ~~real estate~~ loans ($~~3.5~~1.6 million) ~~offset by a net recovery in commercial loans ($126 thousand)~~.

At ~~March 31,~~September 30, 2019 the allowance for credit losses represented 0.98% of loans outstanding, as compared to 1.00% at December 31, 2018. The allowance for credit losses at September 30, 2019 represented ~~174%~~128% of nonperforming loans, ~~at March 31, 2019,~~ as compared to ~~492% at March 31, 2018 and~~ 430% at December 31, 2018. Nonperforming loans of $57.7 million as of September 30, 2019 included one loan of $16.5 million which was brought current shortly after quarter end. Excluding a $16.5 million nonperforming loan that was brought current shortly after quarter end, the ~~$19.0 million of nonperforming loans discussed above, the allowance for loan losses at March 31, 2019~~coverage ratio would have been ~~329%~~179% as of September 30, 2019. The lower coverage ratio was due to an increase in nonperforming loans at September 30, 2019, substantially attributable to softness in ~~line with prior quarters and well above peer banking companies.~~the market for ultra high-end residential properties.

Total noninterest income for the three months ended ~~March 31,~~September 30, 2019 increased to $6.3 million from ~~$5.3~~$5.6 million for the three months ended ~~March 31,~~September 30, 2018, a ~~19%~~12% increase, due substantially to higher net investment gains in the first quarter of 2019 as compared to 2018. Net investment gains were $912 thousand for the three months ended March 31, 2019 compared to $42 thousand for the same period in 2018. Residential mortgage loans closed were $93$1.1 million ~~for the first quarter of 2019 versus $100 million for the first quarter of 2018. As a result of lower volume,~~higher gains on the sale of residential mortgage loans ($2.5 million versus $1.4 million) resulting from higher loan origination and sales volume as compared to 2018, partially offset by lower service charges on deposit accounts of $320 thousand. Residential mortgage loans closed were ~~lower during~~$224 million for the ~~first~~third quarter of 2019 ~~compared to~~versus $107 million for the ~~same period in 2018 ($1.3 million versus $1.4 million). Gains on sales of FHA multifamily loans in the first quarter of 2019 were $55 thousand versus $48 thousand in the first~~third quarter of 2018.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was ~~43.87%~~38.34% for the ~~first~~third quarter of 2019, ~~(36.82% excluding $6.2 million of nonrecurring costs defined above)~~ as compared to ~~38.38%~~36.37% for the ~~first~~third quarter of 2018. Noninterest expenses totaled ~~$38.3~~$33.5 million for the three months ended ~~March 31,~~September 30, 2019, as compared to ~~$31.1~~$31.6 million for the three months ended ~~March 31,~~September 30, 2018, a ~~23%~~6% increase. ~~Excluding $6.2~~Salaries and employee benefits expense increased by $1.9 million ~~nonrecurring salaries~~due primarily to $2.0 million of non-recurring charges related to the acceleration of share based compensation expense. Legal, accounting and ~~benefit costs defined above, noninterest expenses were $32.2~~professional fees increased $1.5 million from $2.1 million to $3.6 million, as discussed in the “Noninterest Expense” section. Data processing expense decreased by $240 thousand primarily due to ongoing contract renegotiations. FDIC insurance decreased $848 thousand from $933 thousand to $85 thousand as the increased premium cost of a higher assessment base was effectively offset by the $1.1 million FDIC assessment credit detailed in the “Earnings Summary” section.

The provision for credit losses was $10.1 million for the ~~first quarter~~nine months ended September 30, 2019 as compared to $6.1 million for the nine months ended September 30, 2018. The higher provisioning for the nine months ended September 30, 2019, as compared to the same period in 2018, is due primarily to higher net charge-offs. Net charge-offs of $6.4 million for the nine months ended September 30, 2019 ~~a 3% increase over noninterest expenses~~represented an annualized 0.12% of average loans, excluding loans held for sale, as compared to $2.6 million, or an annualized 0.05% of average loans, excluding loans held for sale, in the first ~~quarter~~nine months of 2018.

Net charge-offs in the first nine months of 2019 were attributable to commercial real estate loans ($5.0 million) and commercial loans ($1.4 million).

Total noninterest income for the nine months ended September 30, 2019 increased to $19.0 million from $16.5 million for the nine months ended September 30, 2018, a 15% increase, due substantially to $1.6 million higher gains on the sale of investment securities primarily due to $829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations, and $1.4 million higher gains on the sale of residential mortgage loans ($5.7 million versus $4.3 million) resulting from higher volume as compared to 2018, offset by $394 thousand lower service charges on deposit accounts. Residential mortgage loans closed were $470 million for the nine months ended September 30, 2019 versus $334 million for the same period in 2018.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 40.08% for the first nine months of 2019, as compared to 37.74% for the same period in 2018. Noninterest expenses totaled $105.1 million for the nine months ended September 30, 2019, as compared to $95.0 million for the nine months ended September 30, 2018, an 11% increase. Cost increases for salaries and benefits for the nine months ended September 30, 2019 were ~~$6.8~~$8.7 million, ~~$6.2~~due primarily to $8.2 million of ~~which were~~ nonrecurring charges related to acceleration of share based compensation ~~awards and~~expenses associated with the retirement of ~~Mr. Paul. The remaining increase was due primarily to increased staff~~our former Chairman and ~~merit increases. Marketing~~Chief Executive Officer and ~~advertising costs increased $211 thousand due primarily to print and digital advertising and sponsorships.~~the resignation of certain directors. Legal, accounting, and professional fees ~~decreased $1.3~~increased by $792 thousand from $7.3 million ~~a significant portion~~to $8.1 million, the reasons of which ~~was due to higher expenses during~~are further discussed in the first quarter of 2018 for independent consulting and professional services associated with the internet event late in 2017. FDIC expenses increased $441 thousand due substantially to a higher assessment base resulting from growth in total assets.“Noninterest Expense” section. Other expenses increased ~~$1.0~~$1.4 million, due primarily to ~~higher broker fees~~real estate and utility costs on special assets ($~~660~~441 thousand) and director compensation ($424 thousand).

The ratio of common equity to total assets ~~increased~~decreased to ~~13.69%~~13.16% at ~~March 31,~~September 30, 2019 from 13.22% at December 31, 2018, due primarily to total assets growing faster than retained ~~earnings.~~earnings, which were reduced by the two non-recurring items discussed in the “Earnings Summary” section. As discussed later in “Capital Resources and Adequacy,” the regulatory capital ratios of the Bank and Company remain above well capitalized levels.

Net Interest Income and Net Interest Margin

Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investment securities. The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings. Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations). Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.

For the three months ended ~~March 31,~~September 30, 2019, net interest income decreased by less than 1%, average loans increased 7%by $846.6 million, and average deposits increased by $834.2 million over the same period for 2018. ~~Average loans increased by $604.7 million and average deposits increased by $924.5 million.~~ The net interest margin was ~~4.02%~~3.72% for the three months ended ~~March 31,~~September 30, 2019 and ~~4.17%~~4.14% for the same period in 2018.

For the nine months ended September 30, 2019, net interest income increased 3%, average loans increased by $715.0 million and average deposits increased by $794.2 million over the same period for 2018. The ~~table~~net interest margin was 3.88% for the nine months ended September 30, 2019 and 4.15% for the same period in 2018. The Company believes its current net interest margin remains favorable compared to peer banking companies.

The tables below ~~presents~~present the average balances and rates of the major categories of the Company’s assets and liabilities for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018. Included in the table is a measurement of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets.

Eagle Bancorp, Inc.

Consolidated Average Balances, Interest Yields And Rates (Unaudited)

(dollars in thousands)

	Three Months Ended September 30,
	2019							2018
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
ASSETS
Interest earning assets:
Interest bearing deposits with other banks and other short-term investments	$	344,853	$	1,762		2.03	%	$	377,324	$	1,897		1.99	%
Loans held for sale (1)		49,765		492		3.95	%		23,511		274		4.66	%
Loans (1) (2)		7,492,816		101,805		5.39	%		6,646,264		95,296		5.69	%
Investment securities available for sale (2)		741,907		4,904		2.62	%		735,586		4,875		2.63	%
Federal funds sold		25,855		71		1.09	%		10,737		18		0.67	%
Total interest earning assets		8,655,196		109,034		5.00	%		7,793,422		102,360		5.21	%

Total noninterest earning assets		341,452							297,815
Less: allowance for credit losses		73,242							67,702
Total noninterest earning assets		268,210							230,113
TOTAL ASSETS	$	8,923,406						$	8,023,535

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing transaction	$	791,785	$	1,828		0.92	%	$	482,820	$	973		0.80	%
Savings and money market		2,922,751		13,606		1.85	%		2,596,010		9,636		1.47	%
Time deposits		1,444,328		9,142		2.51	%		1,220,755		6,110		1.99	%
Total interest bearing deposits		5,158,864		24,576		1.89	%		4,299,585		16,719		1.54	%
Customer repurchase agreements		27,809		82		1.17	%		30,445		54		0.70	%
Other short-term borrowings		100,100		408		1.59	%		216,851		1,317		2.38	%
Long-term borrowings		217,555		2,979		5.36	%		217,164		2,979		5.37	%
Total interest bearing liabilities		5,504,328		28,045		2.02	%		4,764,045		21,069		1.75	%

Noninterest bearing liabilities:
Noninterest bearing demand		2,160,450							2,185,559
Other liabilities		61,115							33,105
Total noninterest bearing liabilities		2,221,565							2,218,664

Shareholders’ Equity		1,197,513							1,040,826
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	8,923,406						$	8,023,535

Net interest income			$	80,989						$	81,291
Net interest spread						2.98	%						3.46	%
Net interest margin						3.72	%						4.14	%
Cost of funds						1.28	%						1.07	%

Three Months Ended March 31,
2019 2018

Average
Balance
Interest Average Yield/Rate Average Balance Interest Average Yield/Rate
ASSETS
Interest earning assets:
Interest bearing deposits with other banks and other short-term investments $ 301,020 $ 1,666 2.24 % $ 282,440 $ 981 1.41 %
Loans held for sale (1) 17,919 200 4.46 % 24,960 274 4.39 %
Loans (1) (2) 7,038,472 97,621 5.62 % 6,433,730 84,156 5.30 %
Investment securities available for sale (2) 810,550 5,598 2.80 % 614,064 3,592 2.37 %
Federal funds sold 17,750 49 1.12 % 18,341 46 1.02 %
     Total interest earning assets 8,185,711 105,134 5.21 % 7,373,535 89,049 4.90 %

Total noninterest earning assets 339,420 289,333
Less: allowance for credit losses 69,451 65,383
     Total noninterest earning assets 269,969 223,950
     TOTAL ASSETS $ 8,455,680 $ 7,597,485

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing transaction $ 590,853 $ 1,181 0.81 % $ 372,893 $ 464 0.50 %
Savings and money market 2,792,552 11,963 1.74 % 2,769,722 5,664 0.83 %
Time deposits 1,330,939 7,756 2.36 % 888,083 3,001 1.37 %
     Total interest bearing deposits 4,714,344 20,900 1.80 % 4,030,698 9,129 0.92 %
Customer repurchase agreements 27,793 98 1.43 % 68,043 50 0.30 %
Other short-term borrowings 21,059 140 2.66 % 238,356 1,111 1.86 %
Long-term borrowings 217,357 2,979 5.48 % 216,970 2,979 5.49 %
     Total interest bearing liabilities 4,980,553 24,117 1.96 % 4,554,067 13,269 1.18 %

Noninterest bearing liabilities:
Noninterest bearing demand 2,273,124 2,032,319
Other liabilities 73,134 44,514
     Total noninterest bearing liabilities 2,346,258 2,076,833

Shareholders’ Equity 1,128,869 966,585
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 8,455,680 $ 7,597,485

Net interest income $ 81,017 $ 75,780
Net interest spread 3.25 % 3.72 %
Net interest margin 4.02 % 4.17 %
Cost of funds 1.19 % 0.73 %

(1)

Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled ~~$4.1~~$4.3 million and ~~$4.7~~$5.0 million for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively.

(2)

Interest and fees on loans and investments exclude tax equivalent adjustments.

Eagle Bancorp, Inc.

Consolidated Average Balances, Interest Yields and Rates (Unaudited)

(dollars in thousands)

	Nine Months Ended September 30,
	2019							2018
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
ASSETS
Interest earning assets:
Interest bearing deposits with other banks and other short-term investments	$	285,150	$	4,533		2.13	%	$	321,266	$	4,152		1.73	%
Loans held for sale (1)		34,265		1,041		4.05	%		24,692		839		4.53	%
Loans (1) (2)		7,265,726		300,966		5.54	%		6,550,754		270,085		5.51	%
Investment securities available-for-sale (2)		784,970		15,740		2.68	%		664,798		12,525		2.52	%
Federal funds sold		21,352		167		1.05	%		15,060		104		0.92	%
Total interest earning assets		8,391,463		322,447		5.14	%		7,576,570		287,705		5.08	%

Total noninterest earning assets		339,355							294,948
Less: allowance for credit losses		70,902							66,429
Total noninterest earning assets		268,453							228,519
TOTAL ASSETS	$	8,659,916						$	7,805,089

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing transaction	$	696,825	$	4,206		0.81	%	$	433,921	$	2,252		0.69	%
Savings and money market		2,781,663		37,848		1.82	%		2,670,578		23,846		1.19	%
Time deposits		1,406,237		25,883		2.46	%		1,078,608		13,798		1.71	%
Total interest bearing deposits		4,884,725		67,937		1.86	%		4,183,107		39,896		1.28	%
Customer repurchase agreements		29,617		255		1.15	%		45,504		166		0.49	%
Other short-term borrowings		113,845		1,983		2.30	%		228,398		3,425		1.98	%
Long-term borrowings		217,458		8,937		5.42	%		217,068		8,937		5.43	%
Total interest bearing liabilities		5,245,645		79,112		2.02	%		4,674,077		52,424		1.50	%

Noninterest bearing liabilities:
Noninterest bearing demand		2,183,412							2,090,868
Other liabilities		66,318							36,705
Total noninterest bearing liabilities		2,249,730							2,127,573

Shareholders’ equity		1,164,541							1,003,439
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	8,659,916						$	7,805,089

Net interest income			$	243,335						$	235,281
Net interest spread						3.12	%						3.58	%
Net interest margin						3.88	%						4.15	%
Cost of funds						1.26	%						0.93	%

(1)

Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $13.1 million and $14.9 million for the nine months ended September 30, 2019 and 2018, respectively.

(2)

Interest and fees on loans and investments exclude tax equivalent adjustments.

Provision for Credit Losses

The provision for credit losses represents the amount of expense charged to current earnings to fund the allowance for credit losses. The amount of the allowance for credit losses is based on many factors which reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.

Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies. The results of this process, in combination with conclusions of the Bank’s outside consultants’ review of the risk inherent in the loan ~~review consultant,~~portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under the caption “Critical Accounting Policies” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table aton page 44 which reflects activity in the allowance for credit losses.

During the three months ended ~~March 31,~~September 30, 2019, the allowance for credit losses reflected ~~$3.4~~$3.2 million in provision for credit losses and ~~$3.4~~$1.5 million ~~in net charge-offs during the period. During the three months ended December 31, 2018, the allowance for credit losses reflected $2.6 million in provision for credit losses and $844 thousand~~ in net charge-offs during the period. The provision for credit losses was ~~$3.4~~$3.2 million for the three months ended ~~March 31,~~September 30, 2019 as compared to ~~$2.0~~$2.4 million for the same period in 2018. Net charge-offs of ~~$3.4~~$1.5 million in the ~~first~~third quarter of 2019 represented an annualized ~~0.19%~~0.08% of average loans, excluding loans held for sale, as compared to ~~$920~~$862 thousand, or an annualized ~~0.06%~~0.05% of average loans, excluding loans held for sale, in the third quarter of 2018.

During the nine months ended September 30, 2019, the allowance for credit losses reflected $10.1 million in provision for credit losses and $6.4 million in net charge-offs during the period. The provision for credit losses was $10.1 million for the nine months ended September 30, 2019 as compared to $6.1 million for the same period in 2018. Net charge-offs of $6.4 million in the first nine months of 2019 represented an annualized 0.12% of average loans, excluding loans held for sale, as compared to $2.6 million, or an annualized 0.05% of average loans, excluding loans held for sale, in the first ~~quarter~~nine months of 2018.

As part of its comprehensive loan review process, the ~~Bank’s Board of Directors and~~ Loan Committee or Credit Review Committee carefully evaluate loans which are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves.

The maintenance of a high quality loan portfolio, with an adequate allowance for possible credit losses, will continue to be a primary management objective for the Company.

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

Three Months Ended March 31,
(dollars in thousands) 2019 2018
Balance at beginning of period $ 69,944 $ 64,758
Charge-offs:
     Commercial 4 853
     Income producing - commercial real estate 3,496 121
     Owner occupied - commercial real estate — 132
     Real estate mortgage - residential — —
     Construction - commercial and residential — —
     Construction - C&I (owner occupied) — —
     Home equity — —
     Other consumer — —
Total charge-offs 3,500 1,106

Recoveries:
     Commercial 130 3
     Income producing - commercial real estate — —
     Owner occupied - commercial real estate — 1
     Real estate mortgage - residential 1 2
     Construction - commercial and residential — 60
     Construction - C&I (owner occupied) — —
     Home equity — 117
     Other consumer 8 3
Total recoveries 139 186
Net charge-offs 3,361 920
Provision for Credit Losses 3,360 1,969
Balance at end of period $ 69,943 $ 65,807

Annualized ratio of net charge-offs during the period  to average loans outstanding during the period 0.19 % 0.06 %

	Nine Months Ended September 30,
(dollars in thousands)	2019			2018
Balance at beginning of period	$	69,944		$	64,758
Charge-offs:
Commercial		1,799			2,435
Income producing - commercial real estate		5,343			121
Owner occupied - commercial real estate		—			132
Real estate mortgage - residential		—			—
Construction - commercial and residential		—			1,160
Construction - C&I (owner occupied)		—			—
Home equity		—			—
Other consumer		2			15
Total charge-offs		7,144			3,863

Recoveries:
Commercial		377			86
Income producing - commercial real estate		302			2
Owner occupied - commercial real estate		2			2
Real estate mortgage - residential		3			4
Construction - commercial and residential		52			994
Construction - C&I (owner occupied)		—			—
Home equity		—			133
Other consumer		38			13
Total recoveries		774			1,234
Net charge-offs		6,370			2,629
Provision for Credit Losses		10,146			6,060
Balance at end of period	$	73,720		$	68,189

Annualized ratio of net charge-offs during the period to average loans outstanding during the period		0.12	%		0.05	%

The following table reflects the allocation of the allowance for credit losses at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category.

	March 31, 2019				December 31, 2018				September 30, 2019					December 31, 2018
(dollars in thousands)		Amount	%(1)			Amount	%(1)		Amount		%(1)			Amount		%(1)
Commercial	$	17,195	21	%	$	15,857	22	%	$	18,169		19	%	$	15,857		22	%
Income producing - commercial real estate		26,765	47	%		28,034	46	%		28,527		51	%		28,034		46	%
Owner occupied - commercial real estate		5,980	14	%		6,242	13	%		5,598		13	%		6,242		13	%
Real estate mortgage - residential		681	1	%		965	2	%		1,352		1	%		965		2	%
Construction - commercial and residential		17,389	15	%		17,484	15	%		17,882		14	%		17,484		15	%
Construction - C&I (owner occupied)		1,080	1	%		691	1	%		1,390		1	%		691		1	%
Home equity		605	1	%		599	1	%		575		1	%		599		1	%
Other consumer		248	—			72	—			227		—			72		—
Total allowance	$	69,943	100	%	$	69,944	100	%	$	73,720		100	%	$	69,944		100	%

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

Nonperforming Assets

As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, nonaccrual loans, which includes the nonperforming portion of TDRs, and OREO, totaled ~~$41.7~~$59.1 million at ~~March 31,~~September 30, 2019 representing ~~0.50%~~0.66% of total assets, ~~($22.6 million or 0.27% of assets excluding recurring costs),~~ as compared to $17.7 million of nonperforming assets, or 0.21% of total assets, at December 31, 2018. Nonperforming assets of $59.1 million as of September 30, 2019 included one loan of $16.5 million which was brought current shortly after quarter end. Excluding this loan the ratio of nonperforming assets to total assets would have been 0.47% as of September 30, 2019. The additional increase in nonperforming loans at ~~March 31,~~September 30, 2019, was substantially attributable to ~~one~~softness in the market for ultra high-end residential condominium project sold at foreclosure to a third party during the first quarter of 2019. The foreclosure sale was ratified by the Court on April 8, 2019 and there is a 30 day closing requirement. Consistent with GAAP, the transaction remained in nonperforming loans as of March 31, 2019. The carrying value of the nonperforming loan at the end of the first quarter was $17.5 million, equal to the purchase price at foreclosure. No additional loss from this transaction is anticipated. Nonperforming loans increased significantly as a result of the residential condominium loan discussed above. Further increases included a $1.5 million loan characterized as nonperforming at March 31, 2019 which was paid in full shortly following the end of the first quarter. Excluding the $19.0 million of loan balances discussed above, nonperforming loans at March 31, 2019 would have been $22.6 million (0.27% of total assets).properties.

The Company had one accruing loan 90 days or more past due at September 30, 2019. This loan totaled $16.5 million and was brought current shortly after quarter end. The Company had no accruing loans 90 days or more past due at ~~March 31, 2019 or~~ December 31, 2018. Management remains attentive to early signs of deterioration in borrowers’ financial conditions and to taking the appropriate action to mitigate risk. Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 0.98% of total loans at ~~March 31,~~September 30, 2019, is adequate to absorb potential credit losses within the loan portfolio at that date.

Included in nonperforming assets are loans that the Company considers to be impaired. Impaired loans are defined as those as to which we believe it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a TDR that have not shown a period of performance as required under applicable accounting standards. Valuation allowances for those loans determined to be impaired are evaluated in accordance with ASC Topic 310—”“Receivables,” and updated quarterly. For collateral dependent impaired loans, the carrying amount of the loan is determined by current appraised value less estimated costs to sell the underlying collateral, which may be adjusted downward under certain circumstances for actual events and/or changes in market conditions. For example, current average actual selling prices less average actual closing costs on an impaired multi-unit real estate project may indicate the need for an adjustment in the appraised valuation of the project, which in turn could increase the associated ASC Topic 310 specific reserve for the loan. Generally, all appraisals associated with impaired loans are updated on a not less than annual basis.

Loans are considered to have been modified in a TDR when, due to a borrower’s financial difficulties, the Company makes unilateral concessions to the borrower that it would not otherwise consider. Concessions could include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Alternatively, management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions, and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant. Such modifications are not considered to be TDRs as the accommodation of a borrower’s request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty. For example: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business which suggests a temporary interest only period on an amortizing loan; (2) there may be delays in absorption on a real estate project which reasonably suggests extension of the loan maturity at market terms; or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing. The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the change in terms, and the exercise of prudent business judgment. The Company had ~~thirteen~~ten TDR’s at ~~March 31,~~September 30, 2019 totaling approximately ~~$26.7~~$10.1 million. ~~Ten~~Seven of these loans totaling approximately ~~$26.2~~$8.6 million are performing under their modified terms. There was one performing TDR totaling $2.3 million that defaulted on its modified terms which was reclassified to nonperforming loans during the nine months ended September 30, 2019. During ~~2019,~~the nine months ended September 30, 2018, there were notwo performing ~~TDR loans~~TDRs totaling $937 thousand that defaulted on their modified terms ~~as compared~~which were reclassified to ~~the three months ended March 31, 2018, there was one default on a $121 thousand restructured loan which was charged off.~~nonperforming loans. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. For the three months ended September 30, 2019, there was one restructured loan totaling approximately $309 thousand that was paid off from the sale proceeds of the collateral property. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. For the three months ended ~~March 31,~~September 30, 2019, there ~~was one loan totaling $2.3 million~~were no loans modified in a TDR, as compared to the three months ended ~~March 31,~~September 30, 2018 which had ~~no loans~~one loan totaling $2.4 million modified in a TDR.

Total nonperforming loans amounted to ~~$40.3~~$57.7 million at ~~March 31,~~September 30, 2019 ~~(0.56%~~(0.76% of total loans) compared to $16.3 million at December 31, 2018 (0.23% of total loans). Nonperforming loans of $57.7 million as of September 30, 2019 included one loan of $16.5 million which was brought current shortly after quarter end. Excluding this loan the ratio of nonperforming loans to total loans would have been 0.54% as of September 30, 2019. The additional increase in the ratio of nonperforming loans to total loans at ~~March 31,~~September 30, 2019 as compared to December 31, 2018 was due to increased nonperforming loans substantially attributable to ~~one~~softness in the market for ultra high-end residential condominium project sold at foreclosure to a third party during the first quarter of 2019. The foreclosure sale was ratified by the Court on April 8, 2019 and there is a 30 day closing requirement. Consistent with GAAP, the transaction remained in nonperforming loans as of March 31, 2019. The carrying value of the nonperforming loan at the end of the first quarter was $17.5 million, equal to the purchase price at foreclosure. No additional loss from this transaction is anticipated. Nonperforming loans increased significantly as a result of the residential condominium loan discussed above. Further increases included a $1.5 million loan characterized as nonperforming at March 31, 2019 which was paid in full shortly following the end of the first quarter. Excluding the $19.0 million of loan balances discussed above, nonperforming loans at March 31, 2019 would have been $21.3 million (0.30% of total loans).properties.

Included in nonperforming assets at ~~March 31,~~September 30, 2019 ~~and~~was $1.5 million of OREO consisting of three foreclosed properties. Included in nonperforming assets at December 31, 2018 was $1.4 million of OREO, consisting of one foreclosed property. The Company had one foreclosed property with a net carrying value of $1.4 million at ~~March 31,~~September 30, 2018. OREO properties are carried at fair value less estimated costs to sell. It is the Company’s policy to obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties generally not less frequently than annually. Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. There were no sales of OREO property during the first ~~three~~nine months of 2019 and 2018.

The following table shows the amounts of nonperforming assets at the dates indicated.

	March 31,			December 31,			September 30,			December 31,
(dollars in thousands)	2019			2018			2019			2018
Nonaccrual Loans:
Commercial	$	9,763		$	7,115		$	16,074		$	7,115
Income producing - commercial real estate		19,821			1,766			5,654			1,766
Owner occupied - commercial real estate		1,516			2,368			4,124			2,368
Real estate mortgage - residential		5,644			1,510			5,635			1,510
Construction - commercial and residential		3,030			3,031			9,148			3,031
Construction - C&I (owner occupied)		—			—			—			—
Home equity		487			487			487			487
Other consumer		—			—			—			—
Accrual loans-past due 90 days		—			—			16,528			—
Total nonperforming loans (1)		40,261			16,277			57,650			16,277
Other real estate owned		1,394			1,394			1,487			1,394
Total nonperforming assets	$	41,655		$	17,671		$	59,137		$	17,671

Coverage ratio, allowance for credit losses to total nonperforming loans		173.72	%		429.72	%		127.87	%		429.72	%
Ratio of nonperforming loans to total loans		0.56	%		0.23	%		0.76	%		0.23	%
Ratio of nonperforming assets to total assets		0.50	%		0.21	%		0.66	%		0.21	%

(1)

Nonaccrual loans reported in the table above include ~~loans that migrated from performing troubled debt restructuring. There were no loans~~one loan totaling $2.3 million that migrated from a performing TDRs during the ~~three~~nine months ended ~~March 31,~~September 30, 2019, as compared to the ~~three~~nine months ended ~~March 31,~~September 30, 2018 where there ~~was one loan~~were two loans totaling ~~$786~~$937 thousand that migrated from performing TDRs.

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

At ~~March 31,~~September 30, 2019, there were ~~$57.1~~$48.3 million of performing loans considered potential problem loans, defined as loans that are not included in the 90 day past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. Potential problem loans decreased to ~~$57.1~~$48.3 million at ~~March 31,~~September 30, 2019 from $102.7 million at December 31, ~~2018 due primarily to two commercial real estate secured relationships migrating to nonperforming loans during the quarter.~~2018. The Company has taken a conservative posture with respect to risk rating its loan portfolio. Based upon their status as potential problem loans, these loans receive heightened scrutiny and ongoing intensive risk management. Additionally, the Company’s loan loss allowance methodology incorporates increased reserve factors for certain loans considered potential problem loans as compared to the general portfolio. See “Provision for Credit Losses” for a description of the allowance methodology.

Noninterest Income

Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from BOLI and other income.

Total noninterest income for the nine months ended ~~March 31,~~September 30, 2019 ~~compared~~increased to ~~$42 thousand~~$19.0 million from $16.5 million for the ~~same period in~~nine months ended September 30, 2018, a 15% increase, due substantially to $1.6 million higher gains on the sale of investment securities primarily due to $829 thousand of noninterest income recognized during March 2019 on interest rate swap ~~terminations. Residential mortgage loans closed were $93~~terminations, and $1.4 million ~~for the first quarter of 2019 versus $100 million for the first quarter of 2018. As a result of lower volume,~~higher gains on the sale of residential mortgage loans ~~were lower during the first quarter of 2019~~($5.7 million versus $4.3 million) resulting from higher volume as compared to 2018, offset by $394 thousand lower service charges on deposit accounts. Residential mortgage loans closed were $470 million for the nine months ended September 30, 2019 versus $334 million for the same period in ~~2018 ($1.3 million versus $1.4 million). Gains on sales of FHA multifamily loans in the first quarter of 2019 were $55 thousand versus $48 thousand in the first quarter of~~ 2018.

Servicing agreements relating to the Ginnie Mae mortgage-backed securities program require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. The Company will generally recover funds advanced pursuant to these arrangements under the FHA insurance and guarantee program. However, in the interim, the Company must absorb the cost of the funds it advances during the time the advance is outstanding. The Company must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan. At ~~March 31,~~September 30, 2019, the Company had no funds advanced outstanding under FHA mortgage loan servicing agreements. To the extent the mortgage loans underlying the Company’s servicing portfolio experience delinquencies, the Company would be required to dedicate cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

Service charges on deposit accounts ~~increased~~decreased by ~~$80~~$320 thousand, or 5%18%, from ~~$1.6~~$1.8 million for the three months ended ~~March 31,~~September 30, 2018 to ~~$1.7~~$1.5 million for the same period in 2019. Service charges on deposit accounts decreased by $394 thousand, or 8%, from $5.2 million for the nine months ended September 30, 2018 to $4.8 million for the same period in 2019. The ~~increase~~decrease for the three and nine month period was due primarily ~~related~~ to ~~increased transaction volume.~~a lower volume of insufficient funds and return item charges.

The Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to sell those loans, servicing released. ~~Sales of residential mortgage loans yielded gains of $1.3 million for the three months ended March 31, 2019 compared to $1.4 million in the same period in 2018.~~ Loans sold are subject to repurchase in circumstances where documentation is deficient or the underlying loan becomes delinquent or pays off within a specified period following loan funding and sale. The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under generally accepted accounting principles for possible repurchases. There were no repurchases due to fraud by the borrower during the three months ended ~~March 31,~~September 30, 2019. The reserve amounted to ~~$46~~$67 thousand at ~~March 31,~~September 30, 2019 and is included in other liabilities on the Consolidated Balance Sheets. The Bank does not originate “sub-prime” loans and has no exposure to this market segment.

The Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium. Income from this source was ~~$108~~$47 thousand for the three months ended ~~March 31,~~September 30, 2019 compared to ~~$169~~$73 thousand for the same period in 2018. Income from this source was $171 thousand for the nine months ended September 30, 2019 compared to $373 thousand for the same period in 2018. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter.

Other income totaled ~~$1.9~~$1.7 million for the three months ended ~~March 31,~~September 30, 2019 as compared to ~~$1.8~~$2.0 million for the same period in 2018, ~~an increase~~a decrease of 5%17%. ATM fees decreased slightly to ~~$312~~$361 thousand for the three months ended ~~March 31,~~September 30, 2019 from ~~$356~~$363 thousand for the same period in 2018, a decrease of ~~12%~~less than 1%. Noninterest fee income totaled ~~$474~~$437 thousand for the three months ended ~~March 31,~~September 30, 2019 ~~an increase~~a decrease of ~~$32~~$120 thousand, or 7%20%, over the total for the same period in 2018.

Other income totaled $5.4 million for the nine months ended September 30, 2019 as compared to $5.5 million for the same period in 2018, a decrease of 3%. ATM fees decreased to $1.0 million for the nine months ended September 30, 2019 from $1.1 million for the same period in 2018, a decrease of 4%. Noninterest fee income totaled $1.4 million for both the nine months ended September 30, 2019 and 2018, a decrease of $35 thousand, or 2.5%.

Net investment gains were ~~$912~~$153 thousand for the three months ended ~~March 31,~~September 30, 2019 compared to ~~$42~~no gains for the same period in 2018. Net investment gains were $1.6 million for the nine months ended September 30, 2019 compared to $68 thousand for the same period in ~~2018.~~2018 primarily due to $829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations.

Noninterest Expense

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

Total noninterest expenses totaled ~~$38.3~~$33.5 million for the three months ended ~~March 31,~~September 30, 2019, as compared to ~~$31.1~~$31.6 million for the three months ended ~~March 31,~~September 30, 2018, a ~~23%~~6% increase. ~~Excluding $6.2 million of nonrecurring salaries and benefit costs defined above,~~Total noninterest expenses ~~were $32.2~~totaled $105.1 million for the ~~first quarter in~~nine months ended September 30, 2019, ~~a 3% increase over noninterest expenses in~~as compared to $95.0 million for the ~~first quarter of 2018.~~nine months ended September 30, 2018, an 11% increase.

Salaries and employee benefits were ~~$23.6~~$19.1 million ~~($17.5 million excluding nonrecurring costs)~~ for the three months ended ~~March 31,~~September 30, 2019, as compared to ~~$16.9~~$17.2 million for the same period in 2018, ~~a 40%~~an increase ~~(4% increase excluding nonrecurring costs). The remaining increase was~~of 11% due primarily to ~~increased staff~~$2.0 million of non-recurring charges related to the acceleration of share based compensation expense associated with the resignation of certain directors. Salaries and ~~merit increases.~~ employee benefits were $60.5 million for the nine months ended September 30, 2019, as compared to $51.8 million for the same period in 2018, an increase of 17% due primarily to $8.2 million of nonrecurring charges related to acceleration of share based compensation expenses associated with the retirement of our former Chairman and Chief Executive Officer and the resignation of certain directors.

At ~~March 31,~~September 30, 2019, the Company’s full time equivalent staff numbered ~~480,~~482, as compared to 470 at December 31, 2018, and ~~474~~478 at ~~March 31,~~September 30, 2018.

Premises and equipment expenses amounted to $3.5 million and $3.9 million for ~~both~~ the three ~~month periods~~months ended ~~March 31,~~September 30, 2019 and ~~2017,~~2018, respectively, a 2%10% decrease. For the three months ended ~~March 31,~~September 30, 2019, the Company recognized ~~$124~~$126 thousand of sublease revenue as compared to ~~$133~~$123 thousand for the same period in 2018. Premises and equipment expenses amounted to $11.0 million and $11.7 million for the nine month periods ended September 30, 2019 and 2018, respectively, a 6% decrease. For the nine months ended September 30, 2019, the Company recognized $377 thousand of sublease revenue as compared to $379 thousand for the same period in 2018. Sublease revenue is accounted for as a reduction to premises and equipment expenses.

Marketing and advertising expenses ~~increased to $1.1~~totaled $1.2 million for both the three months ended ~~March 31,~~September 30, 2019 ~~from $937 thousand for the same period in 2018, a 23% increase, primarily due to print~~ and ~~digital~~2018. Marketing and advertising ~~and sponsorships.~~

~~Data processing expense~~expenses increased to ~~$2.4~~$3.6 million for the ~~three~~nine months ended ~~March 31, 2019 from $2.3 million for the same period in 2018, a 3% increase.~~

Legal, accounting and professional fees decreased to $1.7 million for the three months ended March 31, 2019 from $3.0 million for the same period in 2018, a 43% decrease. The decrease in expense for the three month period was due substantially to higher expenses during the first quarter of 2018 for independent consulting and professional services associated with the internet event late in 2017.

FDIC insurance increased to $1.1 million for the three months ended March 31, 2019 from $675 thousand for the same period in 2018, a 65% increase. The increase for the three month period was primarily due to a higher assessment base resulting from growth in total assets.

~~Other expenses increased to $4.5 million for the three months ended March 31,~~September 30, 2019 from $3.4 million for the same period in 2018, a 6% increase, primarily due to increased digital, radio and television advertising spend.

Data processing expense decreased to $2.2 million for the three months ended September 30, 2019 from $2.4 million for the same period in 2018, a 10% decrease primarily due to ongoing contract renegotiations. Data processing expense increased to $7.2 million for the nine months ended September 30, 2019 from $7.1 million for the same period in 2018, an increase of ~~30%, due~~less than 1%.

Legal, accounting and professional fees and expenses for the three months ended September 30, 2019 increased to $3.6 million from $2.1 million for the same period in 2018, a 70% increase. Legal, accounting and professional fees and expenses for the nine months ended September 30, 2019 increased to $8.1 million from $7.3 million for the same period in 2018, an 11% increase. The increased expenses for both the quarter and year to date 2019 periods were primarily associated with government agencies investigations previously disclosed in the second quarter 2019 earnings press release. The Company expects to incur elevated levels of legal and professional fees and expenses for at least the remainder of 2019 as it continues to cooperate with these investigations. Other than these increased costs, we do not believe at this time that the resolution of these investigations will be materially adverse to the Company. As a result of these ongoing investigations, there have been no regulatory restrictions placed on the Company’s ability to fully engage in its banking business as presently conducted. We are, however, unable to predict the duration, scope or outcome of these investigations.

FDIC insurance decreased to $85 thousand for the three months ended September 30, 2019 from $933 thousand for the same period in 2018, a 91% decrease as the increased premium cost of a higher ~~broker fees ($660 thousand)~~assessment base was effectively offset by the $1.1 million FDIC assessment credit detailed in the “Earnings Summary” section. FDIC insurance decreased to $2.3 million for the nine months ended September 30, 2019 from $2.6 million for the same period in 2018, a 9% decrease.

Other expenses decreased to $3.8 million for the three months ended September 30, 2019 from $3.9 million for the same period in 2018, a decrease of 3%. The major components of cost in this category include broker fees, franchise taxes, core deposit intangible amortization, and insurance expense. Other expenses increased to $12.5 million for the nine months ended September 30, 2019 from $11.1 million for the same period in 2018, an increase of 12%, due primarily to real estate and utility costs on special assets ($441 thousand) and director compensation ($424 thousand).

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was ~~43.87%~~38.34% for the ~~first~~third quarter of 2019, ~~(36.82% excluding the $6.2 million of nonrecurring costs defined above)~~ as compared to ~~38.38%~~36.37% for the ~~first~~third quarter of 2018. For the first nine months of 2019, the efficiency ratio was 40.08% as compared to 37.74% for the same period in 2018.

As a percentage of average assets, total noninterest expense (annualized) was 1.50% for the three months ended September 30, 2019 as compared to 1.58% for the same period in 2018. As a percentage of average assets, total noninterest expense (annualized) was ~~1.81% (1.52% excluding~~1.62% for both the ~~$6.2 million of nonrecurring costs defined above) for the three~~nine months ended ~~March 31,~~September 30, 2019 ~~as compared to 1.64% for the same period in~~and 2018.

Income Tax Expense

The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) increased to ~~26.1%~~27.9% and 26.9% for the three and nine months ended ~~March 31,~~September 30, 2019, respectively, as compared to ~~25.6%~~26.3% and 25.7%, respectively, for the same ~~period~~periods in 2018. The higher effective tax rate for the three and nine months ended ~~March 31,~~September 30, 2019, was due primarily to an increase in nondeductible expenses and a decrease in federal tax ~~credits and an increase in nondeductible expenses. Excluding the $6.2 million of nonrecurring costs, the effective tax rate for the first quarter of 2019 was 25.7%.~~credits.

FINANCIAL CONDITION

Summary

Total assets at September 30, 2019 were $9.00 billion, a 7% increase as compared to $8.39 billion at ~~both March 31, 2019 and~~ December 31, 2018. Total loans (excluding loans held for sale) were ~~$7.17~~$7.56 billion at ~~March 31,~~September 30, 2019, ~~a 3%~~an 8% increase as compared to $6.99 billion at December 31, 2018. In accordance with the new accounting standard (ASC 842) adopted as of January 1, 2019, a right of use lease asset was recorded in the first quarter of 2019 for $29.6 million. See Note 6 for additional detail.

Loans held for sale amounted to ~~$20.3~~$52.2 million at ~~March 31,~~September 30, 2019, a 171% increase as compared to $19.3 million at December 31, ~~2018, a 5% increase.~~2018. The investment portfolio totaled ~~$772.2~~$708.5 million at ~~March 31,~~September 30, 2019, a 2%10% decrease ~~from the~~as compared to $784.1 million ~~balance~~ at December 31, 2018.

Total deposits at ~~March 31,~~September 30, 2019 were ~~$6.68~~$7.40 billion, compared to deposits of $6.97 billion at December 31, 2018, a ~~4% decrease.~~6% increase. Total borrowed funds (excluding customer repurchase agreements) were ~~$467.4~~$317.6 million at ~~March 31,~~September 30, 2019 of which ~~$250.0~~$100.0 million were FHLB advances ~~and~~that mature in August 2029. Total borrowed funds were $217.3 million at December 31, ~~2018.~~2018 none of which were FHLB ~~advances outstanding totaling $250.0 million as of March 31, 2019 will mature in March 2020 but can be repaid at anytime.~~advances. We continue to work on expanding the breadth and depth of our existing ~~customer~~ relationships while we pursue building new relationships. ~~The deposit decline in the first quarter of 2019 was deemed seasonal.~~

Total shareholders’ equity at ~~March 31,~~September 30, 2019 ~~was $1.15~~increased 7% to $1.18 billion ~~a 4% increase~~ from $1.11 billion at December 31, ~~2018. The increase in shareholders’ equity at March 31, 2019 compared to the year end~~ 2018 ~~was~~ primarily as the result of growth in retained earnings. The Company’s capital position remains substantially in excess of regulatory requirements for well capitalized status, with a total risk based capital ratio of ~~16.22%~~16.08% at ~~March 31,~~both September 30, 2019 ~~as compared to 16.07% at December 31, 2018. In addition, the tangible common equity ratio was 12.59% at March 31, 2019, compared to 12.11% at~~and December 31, 2018. Tangible book value per share was ~~$30.20~~$32.02 at ~~March 31,~~September 30, 2019, a 4%10% increase over $29.17 at December 31, 2018. A $0.22 per share dividend was declared in respect of the common stock on September 25, 2019 to shareholders of record on October 15, 2019 and was paid on October 31, 2019. In addition, the tangible common equity ratio was 12.13% at September 30, 2019 and 12.11% at December 31, 2018. Furthermore, Kroll Bond Rating Agency reaffirmed our BBB+ senior unsecured debt rating (A- at the Bank level) based on our strong capital position, above-peer earnings, low operating expense base relative to peer, and a history of strong asset quality metrics.

Under the capital rules applicable to the Company and Bank, in order to be considered well-capitalized, the Bank must have a common equity Tier 1 risk based capital (“CET1”) ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. The Company and the Bank meet all these requirements, and satisfy the requirement to maintain the fully phased in capital conservation buffer of 2.5% of common equity tier 1 capital for capital adequacy purposes. Failure to maintain the required capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.

Loans, net of amortized deferred fees and costs, at ~~March 31,~~September 30, 2019 and December 31, 2018 by major category are summarized below.

	March 31, 2019						December 31, 2018						September 30, 2019						December 31, 2018
(dollars in thousands)	Amount			%			Amount			%			Amount			%			Amount			%
Commercial	$	1,510,835			21	%	$	1,553,112			22	%	$	1,466,862			19	%	$	1,553,112			22	%
Income producing - commercial real estate		3,370,692			47	%		3,256,900			46	%		3,812,284			51	%		3,256,900			46	%
Owner occupied - commercial real estate		990,372			14	%		887,814			13	%		956,345			13	%		887,814			13	%
Real estate mortgage - residential		101,860			1	%		106,418			2	%		104,563			1	%		106,418			2	%
Construction - commercial and residential		1,044,305			15	%		1,039,815			15	%		1,053,789			14	%		1,039,815			15	%
Construction - C&I (owner occupied)		64,845			1	%		57,797			1	%		81,916			1	%		57,797			1	%
Home equity		87,009			1	%		86,603			1	%		81,117			1	%		86,603			1	%
Other consumer		3,140			—			2,988			—			2,285			—			2,988			—
Total loans		7,173,058			100	%		6,991,447			100	%		7,559,161			100	%		6,991,447			100	%
Less: allowance for credit losses		(69,943	)					(69,944	)					(73,720	)					(69,944	)
Net loans	$	7,103,115					$	6,921,503					$	7,485,441					$	6,921,503

In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank. Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio, and meeting the lending needs in the markets served, while maintaining sound asset quality.

Loans outstanding reached ~~$7.17~~$7.60 billion at ~~March 31,~~September 30, 2019, an increase of ~~$181.6~~$567.7 million, or 3%8%, as compared to $6.99 billion at December 31, 2018. Loan growth during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 was predominantly in the income producing – commercial real estate and owner occupied – commercial real estate loan categories. Despite an increased level of in-market competition for business, the Bank continued to experience organic loan growth across the portfolio. Notwithstanding increased supply of units, multi-family commercial real estate leasing in the Bank’s market area has held up well, particularly for well-located close-in projects. While as a general comment there has been some softening in the ~~suburban~~Suburban Maryland office leasing market, in certain well located pockets and submarkets, the sector has evidenced some positive absorption. Overall, commercial real estate values have generally held up well with price escalation in prime pockets, but we continue to be cautious of the cap rates at which some assets are trading and we are being careful with valuations as a result. ~~The~~While the ultra high-end real estate market has softened, the moderately priced housing market has remained stable to increasing, with well-located, Metro accessible properties garnering a premium.

Deposits and Other Borrowings

The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, savings accounts and certificates of deposit. The deposit base includes transaction accounts, time and savings accounts and accounts which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the FHLB, federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and Promontory Interfinancial Network, LLC (“Promontory”).

For the ~~three~~nine months ended ~~March 31,~~September 30, 2019, noninterest bearing deposits ~~increased $112.1~~decreased $53.1 million as compared to December 31, 2018, while interest bearing deposits ~~decreased~~increased by ~~$403.4~~$481.3 million during the same period. ~~Deposit growth tends to be seasonally lower in the first quarter of each year.~~

From time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from national brokerage networks, including Promontory. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (“CDARS”) and the Insured Cash Sweep product (“ICS”), which provides for reciprocal (“two-way”) transactions among banks facilitated by Promontory for the purpose of maximizing FDIC insurance. The Bank also is able to obtain one-way CDARS deposits and participates in Promontory’s Insured Network Deposit (“IND”). At ~~March 31,~~September 30, 2019, total deposits included ~~$1.28~~$1.70 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented ~~19%~~23% of total deposits. At December 31, 2018, total brokered deposits (excluding the CDARS and ICS two-way) were $1.36 billion, or 20% of total deposits. The CDARS and ICS two-way component represented ~~$489.6~~$638.9 million, or 7%9%, of total deposits and $391.7 million, or 6%, of total deposits at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank. However, to the extent that the condition, regulatory position, or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits. In that event we would be required to obtain alternate sources for funding.

At ~~March 31,~~September 30, 2019 the Company had ~~$2.22~~$2.05 billion in noninterest bearing demand deposits, representing ~~33%~~28% of total deposits, compared to $2.10 billion of noninterest bearing demand deposits at December 31, 2018, or 30% of total deposits. Average noninterest bearing deposits were ~~33%~~31% of total deposits for the first ~~three~~nine months of 2019 and ~~34%~~33% for the first ~~three~~nine months of 2018. The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets.

As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds which are not suited for either a certificate of deposit or a money market account. The balances in these accounts were ~~$26.4~~$30.3 million at ~~March 31,~~September 30, 2019 compared to $30.4 million at December 31, 2018. Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S. agency securities and/or U.S. agency backed mortgage backed securities. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.

At ~~March 31,~~September 30, 2019 the Company had ~~$1.36~~$1.40 billion in time deposits. Time deposits increased by ~~$35.7~~$71.5 million from year end December 31, 2018. The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered CDs to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning.

The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at ~~March 31,~~September 30, 2019 and December 31, 2018. The Bank had ~~$250.0~~$100.0 million in short-term borrowings outstanding under its credit facility from the FHLB at ~~March 31,~~September 30, 2019. The Bank did not have short-term borrowings outstanding at December 31, 2018. Outstanding FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank’s commercial mortgage, residential mortgage and home equity loan portfolios.

Long-term borrowings outstanding at ~~March 31,~~September 30, 2019 included the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024 and the Company’s July 26, 2016 issuance of $150.0 million of subordinated notes, due August 1, 2026. For additional information on the subordinated notes, please refer to Note 10 to the Consolidated Financial Statements included in this report.

Liquidity Management

Liquidity is a measure of the Company’s and Bank’s ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank’s primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. The Bank’s investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements, and public funds, to generate cash from sales as needed to meet ongoing loan demand. These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial. Additionally, the Bank can purchase up to $172.5 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at ~~March 31,~~September 30, 2019, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of ~~$1.26~~$1.35 billion, against which there was ~~$26.4~~$35.3 million outstanding at ~~March 31,~~September 30, 2019. The Bank also has a commitment from Promontory to place up to $700.0 million of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of ~~$447.1~~$431.8 million at ~~March 31,~~September 30, 2019. At ~~March 31,~~September 30, 2019 the Bank was also eligible to make advances from the FHLB up to ~~$1.5~~$1.7 billion based on collateral at the FHLB, of which there was ~~$250~~$100 million outstanding at ~~March 31,~~September 30, 2019. The Bank may enter into repurchase agreements as well as obtain additional borrowing capabilities from the FHLB provided adequate collateral exists to secure these lending relationships. The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank of Richmond (“Federal Reserve Bank”). This facility, which amounts to approximately ~~$687.0~~$639.0 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only.

The loss of deposits, through disintermediation, is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank was founded under a philosophy of relationship banking and, therefore, believes that it has less of an exposure to disintermediation and resultant liquidity concerns than do many banks. The Bank makes competitive deposit interest rate comparisons weekly and feels its interest rate offerings are competitive. There is, however, a risk that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks’ lines of credit to offset a decline in deposits in the short run. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The Asset Liability Committee of the ~~Bank’s~~Bank (“ALCO”) and the full Board of Directors ~~(“ALCO”) has~~of the Bank have adopted policy guidelines which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan. Additionally, as noted above, if the condition, regulatory treatment or reputation of the Company or Bank deteriorates, we may experience an outflow of brokered deposits as a result of our inability to attract them or to accept or renew them. In that event we would be required to obtain alternate sources for funding.

At ~~March 31,~~September 30, 2019, under the Bank’s liquidity formula, it had ~~$4.40~~$4.57 billion of primary and secondary liquidity sources. The amount is deemed adequate to meet current and projected funding needs.

Commitments and Contractual Obligations

Loan commitments outstanding and lines and letters of credit at ~~March 31,~~September 30, 2019 are as follows:

(dollars in thousands)	2019		2019
Unfunded loan commitments	$	2,203,579	$	2,140,889
Unfunded lines of credit		96,849		88,495
Letters of credit		76,940		68,851
Total	$	2,377,368	$	2,298,235

Unfunded loan commitments are agreements whereby the Bank has made a commitment and the borrower has accepted the commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment, as is the case in asset based lending credit facilities. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. As of ~~March 31,~~September 30, 2019, unfunded loan commitments included ~~$72.6~~$103.4 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature.

Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.

Letters of credit include standby and commercial letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank’s customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary.

Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk

A fundamental risk in banking is exposure to market risk, or interest rate risk, since a bank’s net income is largely dependent on net interest income. The Bank’s ALCO formulates and monitors the management of interest rate risk through policies and guidelines established by it and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and re-pricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives.

During the three months ended ~~March 31,~~September 30, 2019, as compared to the same period in 2018, the Company was able to ~~increase~~maintain its net interest income ~~by 7%,~~relatively stable, produce a net interest margin of ~~4.02%~~3.72%, and continue to manage its overall interest rate risk position.

The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits. In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and prepayment risk in its portfolio of mortgage backed securities should interest rates remain at current levels. Further, the Company has been managing the investment portfolio to ~~mitigate extension risk~~provide liquidity and ~~related declines in market values in that same portfolio should interest rates increase.~~provide some additional yield over cash. Additionally, the Company has limited call risk in its U.S. agency investment portfolio. During the three months ended ~~March 31,~~September 30, 2019, the average investment portfolio balances increased modestly as compared to average balances for the three months ended September 30, 2018, but decreased from balances at ~~March~~December 31, 2018. The cash received from deposit growth along with cash flows from the investment portfolio were deployed into loans and the purchase of replacement ~~investments.~~investments and held in cash.

The percentage mix of municipal securities was 6%9% of total investments at ~~March 31,~~September 30, 2019 and ~~10%~~6% at ~~March 31, 2018, the~~September 30, 2018. The portion of the portfolio invested in mortgage backed securities ~~increased to~~was 73% at September 30, 2019 and 72% at ~~March 31, 2019 from 62% at March 31, 2018, as the Company sought additional investments that produced monthly cash flows.~~September 30, 2018. The portion of the portfolio invested in U.S. agency investments was ~~20%~~14% at ~~March 31,~~September 30, 2019 and ~~26%~~21% at ~~March 31,~~September 30, 2018. Shorter duration floating rate corporate bonds were 1% of total investments at both ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018, and SBA bonds, which are included in mortgage backed securities, were 10% and 11% of total investments at ~~March 31,~~September 30, 2019 and ~~7% at March 31, 2018. Over~~September 30, 2018, respectively. More recently over the ~~past 12~~last three months, as a result of generally lower interest rates, mortgage prepayment speeds increased and the duration of the investment portfolio decreased to ~~3.3~~2.9 years at ~~March 31,~~September 30, 2019 from ~~3.8~~3.9 years at ~~March 31,~~September 30, 2018.

The re-pricing duration of the loan portfolio was 1820 months at ~~March 31,~~September 30, 2019 versus 17 months at December 31, 2018, with fixed rate loans amounting to ~~39%~~40% and ~~33%~~36% of total loans at ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018, respectively. Variable and adjustable rate loans comprised ~~61%~~60% and ~~67%~~64% of total loans at ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018, respectively. Variable rate loans are generally indexed to either the one month LIBOR interest rate, or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate.

The duration of the deposit portfolio increased to 2729 months at ~~March 31,~~September 30, 2019 from 2226 months at ~~March~~December 31, 2018. The change since ~~March~~December 31, 2018 was due substantially to a change in the mix and duration of ~~money market~~time deposits as market interest rates ~~increased.~~decreased and customers anticipated continuing rate declines. Additionally, the Bank maintained a higher percentage of fixed rate time deposits at ~~quarter end~~September 30, 2019 than was the case ~~in March~~at December 31, 2018.

The Company has continued its emphasis on funding loans in its marketplace ~~and has been able to achieve favorable loan pricing,~~ although competition for new loans persists. A disciplined approach to loan pricing, with variable and adjustable rate loans comprising ~~61%~~60% of total loans (at ~~March 31,~~September 30, 2019), has resulted in a loan portfolio yield of ~~5.62%~~5.39% for the three months ended ~~March 31,~~September 30, 2019 as compared to ~~5.30%~~5.69% for the same period in 2018. Variable and adjustable rate loans provide additional income opportunities should interest rates rise from current levels.

The net unrealized ~~loss~~gain before income tax on the investment portfolio was ~~$2.3~~$9.1 million at ~~March 31,~~September 30, 2019 as compared to a net unrealized loss before tax of $9.5 million at December 31, 2018. The ~~decrease~~increase in the net unrealized ~~loss~~gain on the investment portfolio at ~~March 31,~~September 30, 2019 as compared to December 31, 2018 was due primarily to lower interest rates at ~~March 31,~~September 30, 2019. At ~~March 31,~~September 30, 2019, the net unrealized ~~loss~~gain position represented ~~-0.3%~~1.3% of the investment portfolio’s book value.

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

One of the tools used by the Company to manage its interest rate risk is a static GAP analysis presented below. The Company also employs an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related income statement effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities (including prepayments), loan prepayments, interest rates, and the level of noninterest income and noninterest expense. The data is then subjected to a “shock test” which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from ~~March 31,~~September 30, 2019. In addition to analysis of simultaneous changes in interest rates along the yield curve, changes based on interest rate “ramps” is also performed. This analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes.

For the analysis presented below, at ~~March 31,~~September 30, 2019, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 10 basis points, and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.

As quantified in the table below, the Company’s analysis at ~~March 31,~~September 30, 2019 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points. This moderate impact is due substantially to the significant level of variable rate and re-priceable assets and liabilities and related shorter relative durations. The re-pricing duration of the investment portfolio at ~~March 31,~~September 30, 2019 is ~~3.3~~2.9 years, the loan portfolio ~~1.5~~1.7 years, the interest bearing deposit portfolio ~~2.3~~2.4 years, and the borrowed funds portfolio ~~1.3~~4.4 years.

The following table reflects the result of simulation analysis on the ~~March 31,~~September 30, 2019 asset and liabilities balances:

Change in interest rates (basis points)

Percentage change in net interest income

Percentage change in net income

Percentage change in market value of portfolio equity

Percentage change in
net interest income

Percentage change in
net income

Percentage change in market
value of portfolio equity

+400

+17.2%

+29.9%

+3.5%

+19.2%

+32.7%

+6.9%

+300

+12.9%

+22.4%

+3.0%

+14.4%

+24.6%

+6.0%

+200

+8.7%

+15.0%

+2.4%

+9.7%

+16.4%

+4.9%

+100

+4.4%

+7.6%

+1.4%

+4.8%

+8.2%

+2.9%

—

-100

-4.1%

-7.1%

-3.3%

-3.7%

-6.3%

-4.3%

-200

-5.5%

-9.7%

-7.7%

-8.0%

-13.6%

-14.0%

The results of simulation are within the relevant policy limits adopted by the Company. For net interest income, the Company has adopted a policy limit of -10% for a 100 basis point change, -12% for a 200 basis point change, -18% for a 300 basis point change and -24% for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change. Due to the level of market rates at September 30, 2019, interest rate shocks of -300 and -400 basis points leave the Bank with zero and negative rate instruments and are not considered practical or informative. The changes in net interest income, net income and the economic value of equity in both a higher and lower interest rate shock scenario at ~~March 31,~~September 30, 2019 are not considered to be excessive. The ~~positive~~ impact of ~~+4.4%~~-3.7% in net interest income and ~~+7.6%~~-6.3% in net income given a 100 basis point ~~increase~~decrease in market interest rates reflects in large measure the impact of variable rate loans and fed funds sold repricing ~~counteracting the repricing of interest~~downward while non-interest bearing deposits ~~and floating rate FHLB advances.~~are not expected to have lower interest costs.

In the ~~first~~third quarter of 2019, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above. The interest rate risk position at ~~March 31,~~September 30, 2019 was similar to the interest rate risk position at December 31, 2018.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.

During the ~~first~~third quarter of 2019, average market interest rates decreased across the yield curve. Overall, there was a flattening of the yield curve as compared to the ~~first~~third quarter of 2018 with rate decreases being generally more significant at the longer end of the yield curve.

As compared to the ~~first~~third quarter of 2018, the average two-year U.S. Treasury rate ~~increased~~decreased by 3389 basis points from ~~2.16%~~2.58% to ~~2.49%~~1.69%, the average five year U.S. Treasury rate decreased by 7118 basis points from ~~2.53%~~2.81% to ~~2.46%~~1.63% and the average ten year U.S. Treasury rate decreased by 11112 basis points from ~~2.76%~~2.92% to ~~2.65%~~1.80%. The Company’s net interest margin was ~~4.02%~~3.72% for the ~~first~~third quarter of 2019 and ~~4.17%~~4.15% in the third quarter of 2018. The Company believes that the net interest margin in the most recent quarter as compared to 2018’s ~~first~~third quarter has been consistent with its interest risk analysis at December 31, 2018.

GAP Position

Banks and other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities. This revenue represented 93% and 94% of the Company’s revenue for ~~both~~ the ~~first~~third quarter of 2019 and ~~2018.~~2018, respectively.

In falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by lower yielding short-term funds, or what is referred to as a negative mismatch or GAP. Conversely, in a rising interest rate environment, net interest income is maximized with shorter term, higher yielding assets being funded by longer-term liabilities or what is referred to as a positive mismatch or GAP.

The GAP position, which is a measure of the difference in maturity and repricing volume between assets and liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indication of the sensitivity of the Company to changes in interest rates. A negative GAP indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods.

At ~~March 31,~~September 30, 2019, the Company had a positive GAP position of approximately ~~$427~~$420 million or 5% of total assets out to three months and a positive cumulative GAP position of ~~$337~~$384 million or 4% of total assets out to 12 months; as compared to a positive GAP position of approximately $604 million or 7% of total assets out to three months and a positive cumulative GAP position of $417 million or 5% of total assets out to 12 months at December 31, 2018. The change in the positive GAP position at ~~March 31,~~September 30, 2019, as compared to December 31, 2018, was due to an ~~decrease~~increase in ~~cash and cash equivalents, as surge deposits from December 31, 2018 ran off and the Company booked new loans.~~immediately repricing interest bearing liabilities while increasing fixed rate assets. The change in the GAP position at ~~March 31,~~September 30, 2019 as compared to December 31, 2018 is not deemed material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis which captures the full optionality within the balance sheet. The current position is within guideline limits established by the ALCO. While management believes that this overall position creates a reasonable balance in managing its interest rate risk and maximizing its net interest margin within plan objectives, there can be no assurance as to actual results.

Management has carefully considered its strategy to maximize interest income by reviewing interest rate levels, economic indicators and call features within its investment portfolio, as well as interest rate floors within its loan portfolio. These factors have been discussed with the ALCO and management believes that current strategies are appropriate to current economic and interest rate trends.

If interest rates increase by 100 basis points, the Company’s net interest income and net interest margin are expected to increase modestly due to the impact of significant volumes of variable rate assets together with the assumption of an increase in money market interest rates by 70% of the change in market interest rates.

If interest rates decline by 100 basis points, the Company’s net interest income and margin are expected to decline modestly as the impact of lower market rates on a large amount of liquid assets more than offsets the ability to lower interest rates on interest bearing liabilities.

Because competitive market behavior does not necessarily track the trend of interest rates but at times moves ahead of financial market influences, the change in the cost of liabilities may be different than anticipated by the GAP model. If this were to occur, the effects of a declining interest rate environment may not be in accordance with management’s expectations.

GAP Analysis
~~March 31,~~

September 30, 2019

(dollars in thousands)

Repricible in: 0-3 months 4-12 months 13-36 months 37-60 months Over 60 months Total Rate Sensitive Non Sensitive Total
RATE SENSITIVE ASSETS:
Investment securities $ 123,370 $ 101,201 $ 175,575 $ 165,281 $ 241,797 $ 807,224
Loans (1)(2) 3,867,214 596,688 1,092,334 927,023 710,067 7,193,326
Fed funds and other short-term investments 115,273 — — — — 115,273
Other earning assets 73,865 — — — — 73,865
Total $ 4,179,722 $ 697,889 $ 1,267,909 $ 1,092,304 $ 951,864 $ 8,189,688 $ 198,718 $ 8,388,406

RATE SENSITIVE LIABILITIES:
Noninterest bearing demand $ 85,341 $ 236,247 $ 506,173 $ 366,181 $ 1,022,328 $ 2,216,270
Interest bearing transaction 588,326 — — — — 588,326
Savings and money market 2,515,269 — — — — 2,515,269
Time deposits 386,987 552,140 384,118 36,665 3,144 1,363,054
Customer repurchase agreements and fed funds purchased 26,418 — — — — 26,418
Other borrowings 250,000 — 148,064 — 69,330 467,394
Total $ 3,852,341 $ 788,387 $ 1,038,355 $ 402,846 �� $ 1,094,802 $ 7,176,731 $ 63,187 $ 7,239,918
GAP $ 327,381 $ (90,498 ) $ 229,554 $ 689,458 $ (142,938 ) $ 1,012,957
Cumulative GAP $ 327,381 $ 236,883 $ 466,437 $ 1,155,895 $ 1,012,957

Cumulative gap as percent of total assets 3.90 % 2.82 % 5.56 % 13.78 % 12.08 %

OFF BALANCE-SHEET:
Interest Rate Swaps - LIBOR based $ 100,000 $ — $ (100,000 ) $ — $ — $ —
Interest Rate Swaps - Fed Funds based — — — — — —
Total $ 100,000 $ — $ (100,000 ) $ — $ — $ — $ — $ —
GAP $ 427,381 $ (90,498 ) $ 129,554 $ 689,458 $ (142,938 ) $ 1,012,957
Cumulative GAP $ 427,381 $ 336,883 $ 466,437 $ 1,155,895 $ 1,012,957 $ —
Cumulative gap as percent of total assets 5.09 % 4.02 % 5.56 % 13.78 % 12.08 %

Repricible in:	0-3 months			4-12 months			13-36 months			37-60 months			Over 60 months			Total Rate Sensitive		Non Sensitive		Total
RATE SENSITIVE ASSETS:
Investment securities	$	161,837		$	81,444		$	161,635		$	123,778		$	208,576		$	737,270
Loans (1)(2)		3,878,017			648,834			1,271,654			971,558			841,297			7,611,360
Fed funds and other short-term investments		388,865			—			—			—			—			388,865
Other earning assets		74,726			—			—			—			—			74,726
Total	$	4,503,445		$	730,278		$	1,433,289		$	1,095,336		$	1,049,873		$	8,812,221	$	191,246	$	9,003,467

RATE SENSITIVE LIABILITIES:
Noninterest bearing demand	$	77,850		$	215,716		$	463,364		$	336,501		$	957,675		$	2,051,106
Interest bearing transaction		918,011			—			—			—			—			918,011
Savings and money market		2,809,530			—			—			—			225,000			3,034,530
Time deposits		348,057			550,545			369,117			128,008			3,139			1,398,866
Customer repurchase agreements and fed funds purchased		30,297			—			—			—			—			30,297
Other borrowings		—			—			148,197			69,392			100,000			317,589
Total	$	4,183,745		$	766,261		$	980,678		$	533,901		$	1,285,814		$	7,750,399	$	68,474	$	7,818,873
GAP	$	319,700		$	(35,983	)	$	452,611		$	561,435		$	(235,941	)	$	1,061,822
Cumulative GAP	$	319,700		$	283,717		$	736,328		$	1,297,763		$	1,061,822

Cumulative gap as percent of total assets		3.55	%		3.15	%		8.18	%		14.41	%		11.79	%

OFF BALANCE-SHEET:
Interest Rate Swaps - LIBOR based	$	100,000		$	—		$	(100,000	)	$	—		$	—		$	—
Interest Rate Swaps - Fed Funds based		—			—			—			—			—			—
Total	$	100,000		$	—		$	(100,000	)	$	—		$	—		$	—	$	—	$	—
GAP	$	419,700		$	(35,983	)	$	352,611		$	561,435		$	(235,941	)	$	1,061,822
Cumulative GAP	$	419,700		$	383,717		$	736,328		$	1,297,763		$	1,061,822		$	—
Cumulative gap as percent of total assets		4.66	%		4.26	%		8.18	%		14.41	%		11.79	%

~~(1) Includes loans held for sale~~

(1)

Includes loans held for sale.

(2)

Nonaccrual loans are included in the over 60 months category.

~~(2) Nonaccrual loans are included in the over 60 months category~~

Capital Resources and Adequacy

The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company’s current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At ~~March 31,~~September 30, 2019, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represent ~~329%~~355% of total risk based capital. Construction, land and land development loans represent ~~122%~~123% of total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive Capital Plan and Policy, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.

The Board of Governors of the Federal Reserve Board and the FDIC have adopted rules (the “Basel III Rules”) implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (commonly known as Basel III). Under the Basel III rules, the Company and Bank are required to maintain, inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of 7.0%; a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5% a minimum total capital to risk-weighted assets ratio of 10.5% and requires a minimum leverage ratio of 4.0%. The Company and the Bank meet all these requirements, and satisfy the requirement to maintain the fully phased in capital conservation buffer of 2.5% of common equity tier 1 capital for capital adequacy purposes.

During the third quarter of 2019, the Company adopted its first share repurchase program. Under the repurchase program, the Company may repurchase up to 1,715,547 shares of its common stock, or approximately 5% of its outstanding shares of common stock at June 30, 2019 of approximately 34,539,853. The repurchase program will expire on December 31, 2019, subject to earlier termination of the program by the Board of Directors. Through September 30, 2019, the Company has repurchased 822,200 shares at a weighted average price of $40.58 per share.

The Company announced a regular quarterly cash dividend on September 25, 2019 of $0.22 per share to shareholders of record on October 15, 2019 and payable October 31, 2019.

The actual capital amounts and ratios for the Company and Bank as of ~~March 31,~~September 30, 2019 and December 31, 2018 are presented in the table below.

	Company					Bank					Minimum			To Be Well Capitalized Under Prompt			Company					Bank								To Be Well Capitalized Under Prompt
	Actual					Actual					Required For Capital			Corrective Action			Actual					Actual					Minimum Required For			Corrective Action
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Adequacy Purposes			Regulations*			Amount		Ratio			Amount		Ratio			Capital Adequacy Purposes			Regulations *
As of March 31, 2019
CET1 capital (to risk weighted aseets)	$	1,043,435		12.68	%	$	1,185,503		14.42	%		7.000	%		6.5	%
As of September 30, 2019
CET1 capital (to risk weighted assets)																	$	1,074,526		12.76	%	$	1,220,452		14.51	%		7.000	%		6.5	%
Total capital (to risk weighted assets)		1,333,424		16.21	%		1,255,492		15.27	%		10.500	%		10.0	%		1,354,313		16.08	%		1,294,239		15.38	%		10.500	%		10.0	%
Tier 1 capital (to risk weighted assets)		1,043,435		12.68	%		1,185,503		14.42	%		8.500	%		8.0	%		1,074,526		12.76	%		1,220,452		14.51	%		8.500	%		8.0	%
Tier 1 capital (to average assets)		1,043,435		12.48	%		1,185,503		14.19	%		4.000	%		5.0	%		1,074,526		12.19	%		1,220,452		13.87	%		4.000	%		5.0	%

As of December 31, 2018
CET1 capital (to risk weighted aseets)	$	1,007,438		12.49	%	$	1,147,151		14.23	%		6.375	%		6.5	%
CET1 capital (to risk weighted assets)																	$	1,007,438		12.49	%	$	1,147,151		14.23	%		6.375	%		6.5	%
Total capital (to risk weighted assets)		1,297,427		16.08	%		1,217,140		15.10	%		9.875	%		10.0	%		1,297,427		16.08	%		1,217,140		15.10	%		9.875	%		10.0	%
Tier 1 capital (to risk weighted assets)		1,007,438		12.49	%		1,147,151		14.23	%		7.875	%		8.0	%		1,007,438		12.49	%		1,147,151		14.23	%		7.875	%		8.0	%
Tier 1 capital (to average assets)		1,007,438		12.10	%		1,147,151		13.78	%		5.000	%		5.0	%		1,007,438		12.10	%		1,147,151		13.78	%		5.000	%		5.0	%

* Applies to Bank only

Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At ~~March 31,~~September 30, 2019 the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained required capital ratios.

Use of Non-GAAP Financial Measures

The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP.

Tangible common equity to tangible assets (the “tangible common equity ratio”) and tangible book value per common share are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders’ equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders’ equity by common shares outstanding. The Company calculates return on average tangible common equity by dividing annualized year to date net income by tangible common equity. The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios.

GAAP Reconciliation (Unaudited)

(dollars in thousands except per share data)

Three Months Ended Twelve Months Ended
March 31, 2019 December 31, 2018
Common shareholders’ equity $ 1,148,488 $ 1,108,941
Less: Intangible assets (105,466 ) (105,766 )
Tangible common equity $ 1,043,022 $ 1,003,175

Book value per common share $ 33.25 $ 32.25
Less: Intangible book value per common share (3.05 ) (3.08 )
Tangible book value per common share $ 30.20 $ 29.17

Total assets $ 8,388,406 $ 8,389,137
Less: Intangible assets (105,466 ) (105,766 )
Tangible assets $ 8,282,940 $ 8,283,371
Tangible common equity ratio 12.59 % 12.11 %

Average common shareholders’ equity $ 1,128,869 $ 1,022,642
Less: Average intangible assets (105,581 ) (106,806 )
Average tangible common equity $ 1,023,288 $ 915,836

Net Income $ 33,750 $ 152,276
Average tangible common equity $ 1,023,288 $ 915,836
Annualized Return on Average Tangible Common Equity 13.38 % 16.63 %

	Three Months Ended			Nine Months Ended			Twelve Months Ended			Three Months Ended			Nine Months Ended
	September 30, 2019			September 30, 2019			December 31, 2018			September 30, 2018			September 30, 2018
Common shareholders’ equity				$	1,184,594		$	1,108,941					$	1,061,651
Less: Intangible assets					(104,915	)		(105,766	)					(106,481	)
Tangible common equity				$	1,079,679		$	1,003,175					$	955,170

Book value per common share				$	35.13		$	32.25					$	30.94
Less: Intangible book value per common share					(3.11	)		(3.08	)					(3.10	)
Tangible book value per common share				$	32.02		$	29.17					$	27.84

Total assets				$	9,003,467		$	8,389,137					$	8,057,855
Less: Intangible assets					(104,915	)		(105,766	)					(106,481	)
Tangible assets				$	8,898,552		$	8,283,371					$	7,951,374
Tangible common equity ratio					12.13	%		12.11	%					12.01	%

Average common shareholders’ equity	$	1,197,513		$	1,164,541		$	1,022,642		$	1,040,826		$	1,003,439
Less: Average intangible assets		(105,034	)		(105,297	)		(106,806	)		(106,629	)		(106,949	)
Average tangible common equity	$	1,092,479		$	1,059,245		$	915,836		$	934,197		$	896,490

Net Income Available to Common Shareholders	$	36,495		$	107,487		$	152,276		$	38,949		$	111,959
Average tangible common equity	$	1,092,479		$	1,059,245		$	915,836		$	934,197		$	896,490
Annualized Return on Average Tangible Common Equity		13.25	%		13.57	%		16.63	%		16.54	%		16.70	%

Eagle Bancorp, Inc.
GAAP Reconciliation (Unaudited)
(dollars in thousands except per share data)
Three Months Ended March 31, 2019
GAAP Change Non-GAAP
Noninterest Expense
Salaries and employee benefits 23,644 (6,153 ) 17,491
Total noninterest expense 38,304 (6,153 ) 32,151
Income Before Income Tax Expense 45,645 6,153 51,798
Income Tax Expense 11,895 1,404 13,299
Net Income $ 33,749 $ 4,749 $ 38,499

Earnings Per Common Share
Basic $ 0.98 $ 0.14 $ 1.12
Diluted $ 0.98 $ 0.13 $ 1.11

Book value per common share at period end $ 33.25 $ 33.39
Tangible book value per common share at period end $ 30.20 $ 30.33

Performance Ratios (annualized):
Return on average assets 1.62 % 1.85 %
Return on average common equity 12.12 % 13.84 %
Return on average tangible common equity 13.38 % 15.26 %
Efficiency ratio 43.87 % 36.82 %
Effective tax rate 26.06 % 25.67 %

Other Ratios:
Common equity to total assets 13.69 % 13.75 %
Tier 1 capital (to average assets) 12.49 % 12.55 %
Tier 1 risk based capital ratio 11.69 % 11.69 %
Total capital (to risk weighted assets) 16.22 % 16.27 %
Common equity tier 1 capital (to risk weighted assets) 12.69 % 12.75 %
Tangible common equity ratio 12.59 % 12.65 %
Non Interest Expense as a % of average assets 1.81 % 1.52 %
Allowance for credit losses to total nonperforming loans (4) 173.72 % 329.15 %
Nonperforming loans to total loans (4) 0.56 % 0.30 %

(dollars in thousands except per share data)	Nine Months Ended September 30, 2019
	GAAP			Change			Non-GAAP
Noninterest Expense
Nonperforming assets	$	59,137		$	(16,528	)	$	42,609
Nonperforming loans	$	57,650		$	(16,528	)	$	41,122

Other Ratios (annualized):
Nonperforming assets to total assets		0.66	%					0.47	%
Nonperforming loans to total loans		0.76	%					0.54	%
Allowance for credit losses to total nonperforming loans		127.87	%					179.27	%

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Please refer to Item 2 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk.”

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934) required by Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, our Chief Executive Officer and our Chief Financial Officer have concluded that the Company maintained effective disclosure controls and procedures as of ~~March 31,~~September 30, 2019.

Changes in internal controls. There were no changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the ~~first~~third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

From time to time the Company and its subsidiaries are participants in various legal proceedings incidental to their business. In the opinion of management, the liabilities (if any) resulting from such legal proceedings will not have a material effect on the financial position of the Company.

On July 24, 2019, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York against the Company, its current and former President and Chief Executive Officer and its current and former Chief Financial Officer, on behalf of persons similarly situated, who purchased or otherwise acquired Company securities between March 2, 2015 and July 17, 2019. Shiva Stein vs. Eagle Bancorp, Inc., et. al. (Case 1:19-cv-06873). The plaintiff in the action alleges that certain of the Company’s 10-K reports and other public disclosures contained material misrepresentations, or omitted material information, about the business, operations and management of the Company, including the effectiveness of its internal controls and related party transactions, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 20(a) of that act, resulting in injury to the purported class members as a result the decline in the value of the Company’s common stock following the disclosure of increased legal expenses associated with certain government investigations involving the Company. The relief sought in the lawsuit includes damages. While we continue to review the complaint, the Company believes that the claims asserted are without merit and intends to defend vigorously against them.

Item 1A - Risk Factors

There have been no material changes as of ~~March 31,~~September 30, 2019 in the risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

(a)Sales of Unregistered ~~Securities.~~Securities

None


	(b) Use of ~~Proceeds.~~Proceeds	Not Applicable


	(c)Issuer Purchases of ~~Securities.~~Securities	~~None~~

Period	Total Number of Shares Purchased		Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1-31, 2019	—	$	—	—	—
August 1-31, 2019	610,500		39.90	610,500	1,105,047
September 1-30, 2019	211,700		42.54	211,700	893,347
Total	822,200		40.58	822,200	893,347

(1) In August 2019, the Company’s Board of Directors authorized the purchase of up to 1,715,547 shares of the Company’s common stock from the date of approval of the plan through December 31, 2019, subject to earlier termination by the Board of Directors (the “Repurchase Program”). The Repurchase Program was announced by a press release dated August 9, 2019 and a Form 8-K filed on August 9, 2019. Under the Repurchase Program, the Company may acquire its common stock in the open market or in privately negotiated transactions, including 10b5-1 plans. The Repurchase Program may be modified, suspended or terminated by the Board of Directors at any time without notice. No shares were purchased during the three months ended September 30, 2019 other than pursuant to the Repurchase Program.

Item 3 - Defaults Upon Senior Securities

None

Item 4 - Mine Safety Disclosures

Not Applicable

Item 5 - Other Information

(a) Required 8-K Disclosures

None

(b)Changes in Procedures for Director Nominations

None

Item 6 - Exhibits


3.1	Certificate of Incorporation of the Company, as amended (1)
3.2	Bylaws of the Company (2)
4.1	Subordinated Indenture, dated as of August 5, 2014, between the Company and Wilmington Trust, National Association, as Trustee (3)
4.2	First Supplemental Indenture, dated as of August 5, 2014, between the Company and Wilmington Trust, National Association, as Trustee (4)
4.3	Form of Global Note representing the 5.75% Subordinated Notes due September 1, 2024 (included in Exhibit 4.2)
4.4	Second Supplemental Indenture, dated as of July 26, 2016, between the Company and Wilmington Trust, National Association, as Trustee (5)
4.5	Form of Global Note representing the 5.00% Fixed-to-Floating Rate Subordinated Notes due August 1, 2026 (included in Exhibit 4.4)
10.1	2016 Stock Option Plan (6)
10.2	2006 Stock Plan (7)
10.3	Employment Agreement dated as of April 7, 2017, between EagleBank and Charles D. Levingston (8)
10.4	Amended and Restated Employment Agreement dated as of January 31, 2017, between EagleBank and Antonio F. Marquez (9)
10.5	Amended and Restated Employment Agreement dated as of January 31, 2017, between EagleBank and Susan G. Riel (10)
10.6	Amended and Restated Employment Agreement dated as of January 31, 2017, between EagleBank and Janice L. Williams (11)
10.7	Non-Compete Agreement dated as of April 7, 2017, between EagleBank and Charles D. Levingston (12)
10.8	Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Antonio F. Marquez (13)

10.9	Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Susan G. Riel (14)
10.10	Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Janice L. Williams (15)
10.11	Form of Supplemental Executive Retirement Plan Agreement (16)
10.12	Amended and Restated Employment Agreement dated as of January 31, 2017 between EagleBank and Lindsey S. Rheaume (17)
10.13	Non-Compete Agreement dated as of December 15, 2014, between EagleBank and Lindsey S. Rheaume (18)
10.14	Virginia Heritage Bank 2006 Stock Option Plan (19)
10.15	Virginia Heritage Bank 2010 Long-Term Incentive Plan (20)
10.16	First Amendment to Employment Agreement of Charles D. Levingston (21)
10.17	First Amendment to Amended and Restated Employment Agreement of Antonio F. Marquez (22)
10.18	First Amendment to Amended and Restated Employment Agreement of Susan G. Riel (23)
10.19	First Amendment to Amended and Restated Employment Agreement of Janice L. Williams (24)
10.20	First Amendment to Amended and Restated Employment Agreement of Lindsey S. Rheaume (25)
10.21	~~2018~~2019 Senior Executive Incentive Plan (26)
10.22	~~2018~~2019 Long Term Incentive Plan (27)
10.23	Chairman Compensation Agreement dated as of May 31, 2019 among Eagle Bancorp, Inc. Eagle Bank and Norman R. Pozez
10.24	Non-Compete Agreement dated as of May 31, 2019 among Eagle Bancorp, Inc. Eagle Bank and Norman R. Pozez
11	Statement Regarding Computation of Per Share Income
	See Note 11 of the Notes to Consolidated Financial Statements

21	Subsidiaries of the Registrant
31.1	Certification of Susan G. Riel
31.2	Certification of Charles D. Levingston
32.1	Certification of Susan G. Riel
32.2	Certification of Charles D. Levingston
101	Interactive data files pursuant to Rule 405 of Regulation S-T:


		(i)	Consolidated Balance Sheets at ~~March 31,~~September 30, 2019, December 31, 2018
		(ii)	Consolidated Statement of Operations for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018
		(iii)	Consolidated Statement of Comprehensive Income for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018

		(iv)	Consolidated Statement of Changes in Shareholders’ Equity for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018
		(v)	Consolidated Statement of Cash Flows for the nine months ended ~~March 31,~~September 30, 2019 and 2018
		(vi)	Notes to the Consolidated Financial Statements

(1)	Incorporated by reference to the Exhibit of the same number to the Company’s Current Report on Form 8-K filed on May 17, 2016.
(2)	Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on December 18, 2017.
(3)	Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 5, 2014.
(4)	Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 5, 2014.
(5)	Incorporated by Reference to Exhibit 4.2 to the Company’s Current report on Form 8-K filed on July 22, 2016.
(6)	Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 (Registration No. 333-211857) filed on June 6, 2016.
(7)	Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 (No. 333-187713)
(8)	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 11, 2017.
(9)	Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 6, 2017.
(10)	Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 6, 2017.
(11)	Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 6, 2017.
(12)	Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 11, 2017.

(13)	Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on December 15, 2014.
(14)	Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on December 15, 2014.
(15)	Incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on December 15, 2014.
(16)	Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2013.
(17)	Incorporated by reference to Exhibit 10.7 to the Company’s current Report on Form 8-K filed on February 6, 2017.
(18)	Incorporated by reference to Exhibit 10.29 to the Company’s Form 10-Q for the Quarter ended March 31, 2015.
(19)	Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (No. 333-199875)
(20)	Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (No. 333-199875)
(21)	Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 28, 2018.
(22)	Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 28, 2018.
(23)	Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 28, 2018.
(24)	Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 28, 2018.
(25)	Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on February 28, 2018.
(26)	Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February ~~16, 2018.~~15, 2019.
(27)	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February ~~16, 2018.~~15, 2019.

6166

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	EAGLE BANCORP, INC.

Date: ~~May 10,~~November 12, 2019	By:	/s/ Susan G. Riel
		Susan G. Riel, President and Chief Executive Officer of the Company


Date: ~~May 10,~~November 12, 2019	By:	/s/ Charles D. Levingston
		Charles D. Levingston, Executive Vice President and Chief Financial Officer of the Company

6267

Maryland		52-2061461
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


7830 Old Georgetown Road, Third Floor, Bethesda, Maryland		20814
(Address of principal executive offices)		(Zip Code)

Title of Each Class		Trading Symbol(s)		Name of Each Exchange on Which Registered
Common Stock, $0.01 par value		EGBN		The Nasdaq Stock Market LLC

	Large accelerated filer☒	Accelerated filer ☐
	Non-accelerated filer ☐	Smaller Reporting Company ☐
		Emerging Growth Company ☐

☐
	For the Quarterly Period Ended September 30, 2019

	OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)		3
	Consolidated Balance Sheets		3
	Consolidated Statements of Operations		4
	Consolidated Statements of Comprehensive Income		5
	Consolidated Statements of Changes in Shareholders’ Equity		6
	Consolidated Statements of Cash Flows		7
	Notes to Consolidated Financial Statements		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35	37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58	61

Item 4.	Controls and Procedures	58	62

PART II.	OTHER INFORMATION	~~OTHER INFORMATION~~	62

Item 1.	Legal Proceedings	59	62

Item 1A.	Risk Factors	59	62

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59	62

Item 3.	Defaults Upon Senior Securities	59	62

Item 4.	Mine Safety Disclosures	59	62

Item 5.	Other Information	59	62

Item 6.	Exhibits	59	62

Signatures		62	65

											Accumulated
						Additional					Other			Total
	Common					Paid			Retained		Comprehensive			Shareholders’
	Shares			Amount		in Capital			Earnings		Income (Loss)			Equity
Balance January 1, 2019		34,387,919		$	342	$	528,380		$	584,494	$	(4,275	)	$	1,108,941

Net Income		—			—		—			33,749		—			33,749
Other comprehensive income, net of tax		—			—		—			—		3,283			3,283
Stock-based compensation expense		—			—		2,029			—		—			2,029
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes		26,034			—		296			—		—			296
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(10,944	)		1		(1	)		—		—			—
Vesting of performance based stock awards, net of shares withheld for payroll taxes		17,655			—		—			—		—			—
Time based stock awards granted		112,636			—		—			—		—			—
Issuance of common stock related to employee stock purchase plan		3,893			—		190			—		—			190
Balance March 31, 2019		34,537,193		$	343	$	530,894		$	618,243	$	(992	)	$	1,148,488

Balance January 1, 2018		34,185,163		$	340	$	520,304		$	431,544	$	(1,750	)	$	950,438

Net Income		—			—		—			35,715		—			35,715
Other comprehensive income, net of tax		—			—		—			—		(2,986	)		(2,986	)
Stock-based compensation expense		—			—		1,476			—		—			1,476
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes		32,230			—		338			—		—			338
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(12,106	)		1		(1	)		—		—			—
Time based stock awards granted		94,344			—		—			—		—			—
Issuance of common stock related to employee stock purchase plan		3,425			—		199			—		—			199
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from AOCI (ASU 2018-02)		—			—		—			674		(674	)		—
Balance March 31, 2018		34,303,056		$	341	$	522,316		$	467,933	$	(5,410	)	$	985,180

(dollars in thousands)	Commercial			Income Producing - Commercial Real Estate			Owner Occupied - Commercial Real Estate			Real Estate Mortgage - Residential			Construction - Commercial and Residential		Home Equity			Other Consumer		Total
Three Months Ended March 31, 2019
Allowance for credit losses:
Balance at beginning of period	$	15,857		$	28,034		$	6,242		$	965		$	18,175	$	599		$	72	$	69,944
Loans charged-off		(4	)		(3,496	)		—			—			—		—			—		(3,500	)
Recoveries of loans previously charged-off		130			—			—			1			—		—			8		139
Net loans charged-off		126			(3,496	)		—			1			—		—			8		(3,361	)
Provision for credit losses		1,212			2,227			(262	)		(285	)		294		6			168		3,360
Ending balance	$	17,195		$	26,765		$	5,980		$	681		$	18,469	$	605		$	248	$	69,943

As of March 31, 2019
Allowance for credit losses:
Individually evaluated for impairment	$	5,892		$	15		$	600		$	—		$	—	$	—		$	—	$	6,507
Collectively evaluated for impairment		11,303			26,750			5,380			681			18,469		605			248		63,436
Ending balance	$	17,195		$	26,765		$	5,980		$	681		$	18,469	$	605		$	248	$	69,943

Three Months ended March 31, 2018
Allowance for credit losses:
Balance at beginning of period	$	13,102		$	25,376		$	5,934		$	944		$	18,492	$	770		$	140	$	64,758
Loans charged-off		(853	)		(121	)		(132	)		—			—		—			—		(1,106	)
Recoveries of loans previously charged-off		3			—			1			2			60		117			3		186
Net loans (charged-off) recoveries		(850	)		(121	)		(131	)		2			60		117			3		(920	)
Provision for credit losses		1,106			1,213			(332	)		(212	)		190		(188	)		192		1,969
Ending balance	$	13,358		$	26,468		$	5,471		$	734		$	18,742	$	699		$	335	$	65,807
As of March 31, 2018
Allowance for credit losses:
Individually evaluated for impairment	$	3,014		$	2,628		$	500		$	—		$	500	$	—		$	80	$	6,722
Collectively evaluated for impairment		10,344			23,840			4,971			734			18,242		699			255		59,085
Ending balance	$	13,358		$	26,468		$	5,471		$	734		$	18,742	$	699		$	335	$	65,807

	For the Three Months Ended March 31, 2019
(dollars in thousands)	Number of Contracts		Commercial		Income Producing - Commercial Real Estate		Owner Occupied - Commercial Real Estate		Construction - Commercial Real Estate		Total
Troubled debt restructurings
Restructured accruing		10	$	3,218	$	19,622	$	3,337	$	—	$	26,177
Restructured nonaccruing		3		538		—		—		—		538
Total		13	$	3,756	$	19,622	$	3,337	$	—	$	26,715

Specific allowance			$	775	$	3,000	$	—	$	—	$	3,775

Restructured and subsequently defaulted			$	—	$	—	$	—	$	—	$	—

Derivatives in Subtopic 815-20 Hedging	Amount of Gain or (Loss) Recognized in OCI on Derivative Three Months Ended March 31,					Location of Gain or (Loss)Recognized from Accumulated Other		Amount of Gain or (Loss) Reclassified fromAccumulated OCI into Income Three Months Ended March 31,
Relationships (dollars in thousands)	2019			2018		Comprehensive Income into Income	2019			2018
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(1,034	)	$	2,443	Interest Expense	$	462		$	(88	)
Interest Rate Products		—			—	Gain on sale of investment securities		(829	)		—
Total	$	(1,034	)	$	2,443		$	(366	)	$	(88	)

	Location and Amount of Gain or (Loss) Recognized
	March 31, 2019			March 31, 2018
(dollars in thousands)	Interest Expense			Interest Expense
Total amounts of income and expense line items presented in the
statement of financial performance in which the effects of fair value or
cash flow hedges are recorded	$	(366	)	$	(88	)

Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	462		$	(88	)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring	$	(829	)	$	—

As of March 31, 2019
Offsetting of Derivative Assets(dollars in thousands)									Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets			Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets presented in the Balance Sheet			Financial Instruments		Cash Collateral Posted		Net Amount
Counterparty 1	$	944		$	—	$	944		$	—	$	—	$	944
Counterparty 2		—			—		—			—		—		—
Counterparty 3		(71	)		—		(71	)		—		—		(71	)
	$	873		$	—	$	873		$	—	$	—	$	873

Three Months Ended March 31, 2018
Net unrealized loss on securities available-for-sale	$	(6,221	)	$	1,098		$	(5,123	)
Less: Reclassification adjustment for net gains included in net income		(42	)		(11	)		(31	)
Total unrealized loss		(6,263	)		1,087			(5,154	)

Net unrealized gain on derivatives		2,607			374			2,233
Less: Reclassification adjustment for losses included in net income		(88	)		(23	)		(65	)
Total unrealized gain		2,519			351			2,168

Other Comprehensive Loss	$	(3,744	)	$	1,438		$	(2,986	)

	March 31, 2019
				Aggregate Unpaid
(dollars in thousands)		Fair Value		Principal Balance		Difference
Residential mortgage loans held for sale	$	20,268	$	19,825	$	443
FHA mortgage loans held for sale	$	—	$	—	$	—

					Fair Value Measurements
						Quoted Prices		Significant Other Observable Inputs		Significant Unobservable Inputs
(dollars in thousands)		Carrying Value		Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2019
Assets
Cash and due from banks	$	6,817	$	6,817	$	—	$	6,817	$	—
Federal funds sold		15,403		15,403		—		15,403		—
Interest bearing deposits with other banks		99,870		99,870		—		99,870		—
Investment securities		772,229		772,229		—		762,455		9,774
Federal Reserve and Federal Home Loan Bank stock		34,995		34,995		—		34,995		—
Loans held for sale		20,268		20,268		—		20,268		—
Loans		7,103,115		7,105,850		—		—		7,105,850
Bank owned life insurance		73,865		73,865		—		73,865		—
Annuity investment		12,290		12,290		—		12,290		—
Mortgage banking derivatives		288		288		—		—		288
Interest rate swap derivatives		908		908		—		908		—

Liabilities
Noninterest bearing deposits		2,216,270		2,216,270		—		2,216,270		—
Interest bearing deposits		3,103,595		3,103,595		—		3,103,595		—
Certificates of deposit		1,363,054		1,363,641		—		1,363,641		—
Customer repurchase agreements		26,418		26,418		—		26,418		—
Borrowings		467,394		460,272		—		460,272		—
Mortgage banking derivatives		222		222		—		—		222

December 31, 2018
Assets
Cash and due from banks	$	6,773	$	6,773	$	—	$	6,773	$	—
Federal funds sold		11,934		11,934		—		11,934		—
Interest bearing deposits with other banks		303,157		303,157		—		303,157		—
Investment securities		784,139		784,139		—		774,345		9,794
Federal Reserve and Federal Home Loan Bank stock		23,506		23,506		—		23,506		—
Loans held for sale		19,254		19,254		—		19,254		—
Loans		6,921,503		6,921,048		—		—		6,921,048
Bank owned life insurance		73,441		73,441		—		73,441		—
Annuity investment		12,417		12,417		—		12,417		—
Mortgage banking derivatives		229		229		—		—		229
Interest rate swap derivatives		3,727		3,727		—		3,727		—

Liabilities
Noninterest bearing deposits		2,104,220		2,104,220		—		2,104,220		—
Interest bearing deposits		3,542,666		3,542,666		—		3,542,666		—
Certificates of deposit		1,327,400		1,325,209		—		1,325,209		—
Customer repurchase agreements		30,413		30,413		—		30,413		—
Borrowings		217,196		218,006		—		218,006		—
Mortgage banking derivatives		269		269		—		—		269

Eagle Bancorp, Inc.
GAAP Reconciliation (Unaudited)
(dollars in thousands except per share data)
	Three Months Ended March 31, 2019
	GAAP			Change			Non-GAAP
Noninterest Expense
Salaries and employee benefits		23,644			(6,153	)		17,491
Total noninterest expense		38,304			(6,153	)		32,151
Income Before Income Tax Expense		45,645			6,153			51,798
Income Tax Expense		11,895			1,404			13,299
Net Income	$	33,749		$	4,749		$	38,499

Earnings Per Common Share
Basic	$	0.98		$	0.14		$	1.12
Diluted	$	0.98		$	0.13		$	1.11

Book value per common share at period end	$	33.25					$	33.39
Tangible book value per common share at period end	$	30.20					$	30.33

Performance Ratios (annualized):
Return on average assets		1.62	%					1.85	%
Return on average common equity		12.12	%					13.84	%
Return on average tangible common equity		13.38	%					15.26	%
Efficiency ratio		43.87	%					36.82	%
Effective tax rate		26.06	%					25.67	%

Other Ratios:
Common equity to total assets		13.69	%					13.75	%
Tier 1 capital (to average assets)		12.49	%					12.55	%
Tier 1 risk based capital ratio		11.69	%					11.69	%
Total capital (to risk weighted assets)		16.22	%					16.27	%
Common equity tier 1 capital (to risk weighted assets)		12.69	%					12.75	%
Tangible common equity ratio		12.59	%					12.65	%
Non Interest Expense as a % of average assets		1.81	%					1.52	%
Allowance for credit losses to total nonperforming loans (4)		173.72	%					329.15	%
Nonperforming loans to total loans (4)		0.56	%					0.30	%