UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington,
DC 20549



FORM
10-Q



(Mark
One)



|☒ | QUARTERLY
    REPORT PURSUANT TO SECTION 13 OR 15(d)  | 
|- | ----------------------------------------------------- | 
|  | OF THE SECURITIES
    EXCHANGE ACT OF 1934            | 
|  |                                                       | 
|  | For the Quarterly
    Period Ended June 30, 2019      | 
|  |                                                       | 
|  | OR                                                    | 
|  |                                                       | 
|☐ | TRANSITION REPORT
    PURSUANT TO SECTION 13 OR 15(d) | 
|  | OF THE SECURITIES
    EXCHANGE ACT OF 1934            | 



For
the transition period from to_________



Commission
File Number 0-25923



Eagle
Bancorp, Inc.

(Exact
name of registrant as specified in its charter)





|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)         





(301)
986-1800

(Registrant’s
telephone number, including area code)

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



Securities
Registered under Section 12(b) of the Act:



|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             



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.





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



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

Yes
☐ No ☒



As
of July 31, 2019, the registrant had 34,542,796 shares of Common Stock outstanding.




















EAGLE
BANCORP, INC.

TABLE
OF CONTENTS



|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                                                 |  | 8 
|           | Notes to Consolidated Financial Statements                                            |  | 9 
|           |                                                                                       |  |   
|Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 38
|           |                                                                                       |  |   
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                            |  | 62
|           |                                                                                       |  |   
|Item 4.    | Controls and Procedures                                                               |  | 62
|           |                                                                                       |  |   
|PART II.   | OTHER INFORMATION                                                                     |  | 63
|           |                                                                                       |  |   
|Item 1.    | Legal Proceedings                                                                     |  | 63
|           |                                                                                       |  |   
|Item 1A.   | Risk Factors                                                                          |  | 63
|           |                                                                                       |  |   
|Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 63
|           |                                                                                       |  |   
|Item 3.    | Defaults Upon Senior Securities                                                       |  | 63
|           |                                                                                       |  |   
|Item 4.    | Mine Safety Disclosures                                                               |  | 63
|           |                                                                                       |  |   
|Item 5.    | Other Information                                                                     |  | 63
|           |                                                                                       |  |   
|Item 6.    | Exhibits                                                                              |  | 63
|           |                                                                                       |  |   
|Signatures |                                                                                       |  | 66





2







Item
1 – Financial Statements (Unaudited)



EAGLE
BANCORP, INC.

Consolidated
Balance Sheets (Unaudited)

(dollars
in thousands, except per share data)





|Assets                                                                                                                                           |  | June
    30, 2019 |           |   | December
    31, 2018 |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | --------- | - | --------------------- | -
|Cash and
    due from banks                                                                                                                      |  | $                 | 6,735     |   |                       | $
|Federal funds sold                                                                                                                               |  |                   | 17,914    |   |                       |  
|Interest bearing deposits
    with banks and other short-term investments                                                                        |  |                   | 171,985   |   |                       |  
|Investment securities
    available-for-sale, at fair value                                                                                      |  |                   | 745,343   |   |                       |  
|Federal Reserve and
    Federal Home Loan Bank stock                                                                                             |  |                   | 33,993    |   |                       |  
|Loans held for sale                                                                                                                              |  |                   | 37,506    |   |                       |  
|Loans                                                                                                                                            |  |                   | 7,392,615 |   |                       |  
|Less
    allowance for credit losses                                                                                                             |  |                   | (72,086   | ) |                       |  
|Loans,
    net                                                                                                                                   |  |                   | 7,320,529 |   |                       |  
|Premises and equipment,
    net                                                                                                                  |  |                   | 15,176    |   |                       |  
|Operating lease right-of-use
    assets                                                                                                          |  |                   | 28,214    |   |                       |  
|Deferred income taxes                                                                                                                            |  |                   | 30,220    |   |                       |  
|Bank owned life insurance                                                                                                                        |  |                   | 74,295    |   |                       |  
|Intangible assets,
    net                                                                                                                       |  |                   | 105,219   |   |                       |  
|Other real estate owned                                                                                                                          |  |                   | 1,394     |   |                       |  
|Other
    assets                                                                                                                                 |  |                   | 81,480    |   |                       |  
|Total
    Assets                                                                                                                                 |  | $                 | 8,670,003 |   |                       | $
|                                                                                                                                                 |  |                   |           |   |                       |  
|Liabilities
    and Shareholders’ Equity                                                                                                         |  |                   |           |   |                       |  
|Liabilities                                                                                                                                      |  |                   |           |   |                       |  
|Deposits:                                                                                                                                        |  |                   |           |   |                       |  
|Noninterest
    bearing demand                                                                                                                   |  | $                 | 1,873,902 |   |                       | $
|Interest
    bearing transaction                                                                                                                 |  |                   | 862,553   |   |                       |  
|Savings
    and money market                                                                                                                     |  |                   | 2,712,143 |   |                       |  
|Time,
    $100,000 or more                                                                                                                       |  |                   | 801,469   |   |                       |  
|Other
    time                                                                                                                                   |  |                   | 699,825   |   |                       |  
|Total
    deposits                                                                                                                               |  |                   | 6,949,892 |   |                       |  
|Customer repurchase
    agreements                                                                                                               |  |                   | 31,669    |   |                       |  
|Other short-term borrowings                                                                                                                      |  |                   | 225,000   |   |                       |  
|Long-term borrowings                                                                                                                             |  |                   | 217,491   |   |                       |  
|Operating lease liabilities                                                                                                                      |  |                   | 31,659    |   |                       |  
|Other
    liabilities                                                                                                                            |  |                   | 29,710    |   |                       |  
|Total
    Liabilities                                                                                                                            |  |                   | 7,485,421 |   |                       |  
|                                                                                                                                                 |  |                   |           |   |                       |  
|Shareholders’
    Equity                                                                                                                         |  |                   |           |   |                       |  
|Common
    stock, par value $.01 per share; shares authorized 100,000,000, shares issued and outstanding 34,539,853 and 34,387,919, respectively |  |                   | 343       |   |                       |  
|Additional paid in
    capital                                                                                                                   |  |                   | 532,585   |   |                       |  
|Retained earnings                                                                                                                                |  |                   | 647,887   |   |                       |  
|Accumulated
    other comprehensive income (loss)                                                                                                |  |                   | 3,767     |   |                       |  
|Total
    Shareholders’ Equity                                                                                                                   |  |                   | 1,184,582 |   |                       |  
|Total
    Liabilities and Shareholders’ Equity                                                                                                   |  | $                 | 8,670,003 |   |                       | $



See
notes to consolidated financial statements.





3







EAGLE
BANCORP, INC.

Consolidated
Statements of Operations (Unaudited)

(dollars
in thousands, except per share data)





|                                                                      |  | Three
    Months Ended June 30, |         |  | Six
    Months Ended June 30, |  
|--------------------------------------------------------------------- |  | ------------------------------- | ------- |  | ----------------------------- | -
|                                                                      |  | 2019                            |         |  | 2018                          |  
|Interest
    Income                                                   |  |                                 |         |  |                               |  
|Interest
    and fees on loans                                        |  | $                               | 101,889 |  |                               | $
|Interest
    and dividends on investment securities                   |  |                                 | 5,238   |  |                               |  
|Interest
    on balances with other banks and short-term investments  |  |                                 | 1,105   |  |                               |  
|Interest
    on federal funds sold                                    |  |                                 | 47      |  |                               |  
|Total
    interest income                                             |  |                                 | 108,279 |  |                               |  
|Interest
    Expense                                                  |  |                                 |         |  |                               |  
|Interest
    on deposits                                              |  |                                 | 22,461  |  |                               |  
|Interest
    on customer repurchase agreements                        |  |                                 | 75      |  |                               |  
|Interest
    on short-term borrowings                                 |  |                                 | 1,435   |  |                               |  
|Interest
    on long-term borrowings                                  |  |                                 | 2,979   |  |                               |  
|Total
    interest expense                                            |  |                                 | 26,950  |  |                               |  
|Net
    Interest Income                                               |  |                                 | 81,329  |  |                               |  
|Provision
    for Credit Losses                                       |  |                                 | 3,600   |  |                               |  
|Net
    Interest Income After Provision For Credit Losses             |  |                                 | 77,729  |  |                               |  
|                                                                      |  |                                 |         |  |                               |  
|Noninterest
    Income                                                |  |                                 |         |  |                               |  
|Service
    charges on deposits                                       |  |                                 | 1,606   |  |                               |  
|Gain
    on sale of loans                                             |  |                                 | 1,923   |  |                               |  
|Gain
    on sale of investment securities                             |  |                                 | 563     |  |                               |  
|Increase
    in the cash surrender value of bank owned life insurance |  |                                 | 429     |  |                               |  
|Other
    income                                                      |  |                                 | 1,839   |  |                               |  
|Total
    noninterest income                                          |  |                                 | 6,360   |  |                               |  
|Noninterest
    Expense                                               |  |                                 |         |  |                               |  
|Salaries
    and employee benefits                                    |  |                                 | 17,743  |  |                               |  
|Premises
    and equipment expenses                                   |  |                                 | 3,652   |  |                               |  
|Marketing
    and advertising                                         |  |                                 | 1,268   |  |                               |  
|Data
    processing                                                   |  |                                 | 2,603   |  |                               |  
|Legal,
    accounting and professional fees                           |  |                                 | 2,740   |  |                               |  
|FDIC
    insurance                                                    |  |                                 | 1,126   |  |                               |  
|Other
    expenses                                                    |  |                                 | 4,227   |  |                               |  
|Total
    noninterest expense                                         |  |                                 | 33,359  |  |                               |  
|Income
    Before Income Tax Expense                                  |  |                                 | 50,730  |  |                               |  
|Income
    Tax Expense                                                |  |                                 | 13,487  |  |                               |  
|Net
    Income                                                        |  | $                               | 37,243  |  |                               | $
|                                                                      |  |                                 |         |  |                               |  
|Earnings
    Per Common Share                                         |  |                                 |         |  |                               |  
|Basic                                                                 |  | $                               | 1.08    |  |                               | $
|Diluted                                                               |  | $                               | 1.08    |  |                               | $



See
notes to consolidated financial statements.



4







EAGLE
BANCORP, INC.

Consolidated
Statements of Comprehensive Income (Unaudited)

(dollars
in thousands)



|                                                                     |  | Three
    Months Ended June 30, |        |   | Six
    Months Ended June 30, |  
|-------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | -
|                                                                     |  | 2019                            |        |   | 2018                          |  
|Net
    Income                                                       |  | $                               | 37,243 |   |                               | $
|                                                                     |  |                                 |        |   |                               |  
|Other
    comprehensive income (loss), net of tax:                   |  |                                 |        |   |                               |  
|Unrealized
    gain (loss) on securities available for sale          |  |                                 | 5,925  |   |                               |  
|Reclassification
    adjustment for net gains included in net income |  |                                 | (417   | ) |                               |  
|Total
    unrealized gain (loss) on investment securities            |  |                                 | 5,508  |   |                               |  
|Unrealized
    (loss) gain on derivatives                            |  |                                 | (513   | ) |                               |  
|Reclassification
    adjustment for amounts included in net income   |  |                                 | (236   | ) |                               |  
|Total
    unrealized (loss) gain on derivatives                      |  |                                 | (749   | ) |                               |  
|Other
    comprehensive income (loss)                                |  |                                 | 4,759  |   |                               |  
|Comprehensive
    Income                                             |  | $                               | 42,002 |   |                               | $



See
notes to consolidated financial statements.





5







EAGLE
BANCORP, INC.

Consolidated
Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars
in thousands except share data)





|                                                                                                         |  | Common |            |   | Additional
    Paid |   |     | Retained       |  |   | Accumulated
                                                                                Other
                                         Comprehensive |  |  | Total
    Shareholders’ |        
|-------------------------------------------------------------------------------------------------------- |  | ------ | ---------- | - | ------------------- | - | --- | -------------- |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----------------------- | -------
|                                                                                                         |  | Shares |            |   | Amount              |   |     | in
    Capital |  |   | Earnings                                                                                                                                                 |  |  | Income
    (Loss)       |        
|Balance
    April 1, 2019                                                                                |  |        | 34,537,193 |   |                     | $ | 343 |                |  | $ | 530,894                                                                                                                                                  |  |  | $                       | 618,243
|                                                                                                         |  |        |            |   |                     |   |     |                |  |   |                                                                                                                                                          |  |  |                         |        
|Net
    Income                                                                                           |  |        | —          |   |                     |   | —   |                |  |   | —                                                                                                                                                        |  |  |                         | 37,243 
|Other
    comprehensive income, net of tax                                                               |  |        | —          |   |                     |   | —   |                |  |   | —                                                                                                                                                        |  |  |                         | —      
|Stock-based
    compensation expense                                                                     |  |        | —          |   |                     |   | —   |                |  |   | 1,471                                                                                                                                                    |  |  |                         | —      
|Issuance
    of common stock related to options exercised, net of shares withheld for payroll taxes      |  |        | 750        |   |                     |   | —   |                |  |   | 37                                                                                                                                                       |  |  |                         | —      
|Vesting
    of time based stock awards issued at date of grant, net of shares withheld for payroll taxes |  |        | (1,800     | ) |                     |   | —   |                |  |   | —                                                                                                                                                        |  |  |                         | —      
|Issuance
    of common stock related to employee stock purchase plan                                     |  |        | 3,710      |   |                     |   | —   |                |  |   | 183                                                                                                                                                      |  |  |                         | —      
|Cash
    dividends declared ($0.22 per share)                                                            |  |        | —          |   |                     |   | —   |                |  |   | —                                                                                                                                                        |  |  |                         | (7,599 
|Balance
    June 30, 2019                                                                                |  |        | 34,539,853 |   |                     | $ | 343 |                |  | $ | 532,585                                                                                                                                                  |  |  | $                       | 647,887
|                                                                                                         |  |        |            |   |                     |   |     |                |  |   |                                                                                                                                                          |  |  |                         |        
|Balance
    April 1, 2018                                                                                |  |        | 34,303,056 |   |                     | $ | 341 |                |  | $ | 522,316                                                                                                                                                  |  |  | $                       | 467,933
|                                                                                                         |  |        |            |   |                     |   |     |                |  |   |                                                                                                                                                          |  |  |                         |        
|Net
    Income                                                                                           |  |        | —          |   |                     |   | —   |                |  |   | —                                                                                                                                                        |  |  |                         | 37,296 
|Other
    comprehensive loss, net of tax                                                                 |  |        | —          |   |                     |   | —   |                |  |   | —                                                                                                                                                        |  |  |                         | —      
|Stock-based
    compensation expense                                                                     |  |        | —          |   |                     |   | —   |                |  |   | 1,667                                                                                                                                                    |  |  |                         | —      
|Vesting
    of time based stock awards issued at date of grant, net of shares withheld for payroll taxes |  |        | (1,255     | ) |                     |   | —   |                |  |   | —                                                                                                                                                        |  |  |                         | —      
|Issuance
    of common stock related to employee stock purchase plan                                     |  |        | 3,270      |   |                     |   | —   |                |  |   | 193                                                                                                                                                      |  |  |                         | —      
|Balance
    June 30, 2018                                                                                |  |        | 34,305,071 |   |                     | $ | 341 |                |  | $ | 524,176                                                                                                                                                  |  |  | $                       | 505,229



See
notes to consolidated financial statements.





6







EAGLE
BANCORP, INC.

Consolidated
Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars
in thousands except share data)



|                                                                                                         |  | Common |            |   | Additional
    Paid |   |     | Retained       |  |   | Accumulated
                                                                                Other
                                                                                Comprehensive |   |  | Shareholders’     |        
|-------------------------------------------------------------------------------------------------------- |  | ------ | ---------- | - | ------------------- | - | --- | -------------- |  | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - |  | ----------------- | -------
|                                                                                                         |  | Shares |            |   | Amount              |   |     | in
    Capital |  |   | Earnings                                                                                                                                                                                        |   |  | Income
    (Loss) |        
|Balance
    January 1, 2019                                                                              |  |        | 34,387,919 |   |                     | $ | 342 |                |  | $ | 528,380                                                                                                                                                                                         |   |  | $                 | 584,494
|                                                                                                         |  |        |            |   |                     |   |     |                |  |   |                                                                                                                                                                                                 |   |  |                   |        
|Net
    Income                                                                                           |  |        | —          |   |                     |   | —   |                |  |   | —                                                                                                                                                                                               |   |  |                   | 70,992 
|Other
    comprehensive income, net of tax                                                               |  |        | —          |   |                     |   | —   |                |  |   | —                                                                                                                                                                                               |   |  |                   | —      
|Stock-based
    compensation expense                                                                     |  |        | —          |   |                     |   | —   |                |  |   | 3,501                                                                                                                                                                                           |   |  |                   | —      
|Issuance
    of common stock related to options exercised, net of shares withheld for payroll taxes      |  |        | 26,784     |   |                     |   | —   |                |  |   | 332                                                                                                                                                                                             |   |  |                   | —      
|Vesting
    of time based stock awards issued at date of grant, net of shares withheld for payroll taxes |  |        | (12,744    | ) |                     |   | 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                                     |  |        | 7,603      |   |                     |   | —   |                |  |   | 373                                                                                                                                                                                             |   |  |                   | —      
|Cash
    dividends declared ($0.22 per share)                                                            |  |        | —          |   |                     |   | —   |                |  |   | —                                                                                                                                                                                               |   |  |                   | (7,599 
|Balance
    June 30, 2019                                                                                |  |        | 34,539,853 |   |                     | $ | 343 |                |  | $ | 532,585                                                                                                                                                                                         |   |  | $                 | 647,887
|                                                                                                         |  |        |            |   |                     |   |     |                |  |   |                                                                                                                                                                                                 |   |  |                   |        
|Balance
    January 1, 2018                                                                              |  |        | 34,185,163 |   |                     | $ | 340 |                |  | $ | 520,304                                                                                                                                                                                         |   |  | $                 | 431,544
|                                                                                                         |  |        |            |   |                     |   |     |                |  |   |                                                                                                                                                                                                 |   |  |                   |        
|Net
    Income                                                                                           |  |        | —          |   |                     |   | —   |                |  |   | —                                                                                                                                                                                               |   |  |                   | 73,011 
|Other
    comprehensive loss, net of tax                                                                 |  |        | —          |   |                     |   | —   |                |  |   | —                                                                                                                                                                                               |   |  |                   | —      
|Stock-based
    compensation expense                                                                     |  |        | —          |   |                     |   | —   |                |  |   | 3,143                                                                                                                                                                                           |   |  |                   | —      
|Issuance
    of common stock related to options exercised, net of shares withheld for payroll taxes      |  |        | 32,230     |   |                     |   | —   |                |  |   | 338                                                                                                                                                                                             |   |  |                   | —      
|Vesting
    of time based stock awards issued at date of grant, net of shares withheld for payroll taxes |  |        | (13,361    | ) |                     |   | 1   |                |  |   | (1                                                                                                                                                                                              | ) |  |                   | —      
|Time
    based stock awards granted                                                                      |  |        | 94,344     |   |                     |   | —   |                |  |   | —                                                                                                                                                                                               |   |  |                   | —      
|Issuance
    of common stock related to employee stock purchase plan                                     |  |        | 6,695      |   |                     |   | —   |                |  |   | 392                                                                                                                                                                                             |   |  |                   | —      
|Reclassification
    of the income tax effects of the Tax Cuts and Jobs Act from AOCI (ASU 2018-02)      |  |        | —          |   |                     |   | —   |                |  |   | —                                                                                                                                                                                               |   |  |                   | 674    
|Balance
    June 30, 2018                                                                                |  |        | 34,305,071 |   |                     | $ | 341 |                |  | $ | 524,176                                                                                                                                                                                         |   |  | $                 | 505,229



See
notes to consolidated financial statements.



7







EAGLE
BANCORP, INC.

Consolidated
Statements of Cash Flows (Unaudited)

(dollars
in thousands)



|                                                                                      |  | Six
    Months Ended June 30, |         
|------------------------------------------------------------------------------------- |  | ----------------------------- | --------
|                                                                                      |  | 2019                          |         
|Cash
    Flows From Operating Activities:                                             |  |                               |         
|Net
    Income                                                                        |  | $                             | 70,992  
|Adjustments
    to reconcile net income to net cash provided by operating activities: |  |                               |         
|Provision
    for credit losses                                                       |  |                               | 6,960   
|Depreciation
    and amortization                                                     |  |                               | 3,567   
|Amortization
    of operating lease right-of-use assets                               |  |                               | 1,360   
|Gains
    on sale of loans                                                            |  |                               | (3,311  
|Gains
    on sale of GNMA loans                                                       |  |                               | (71     
|Securities
    premium amortization (discount accretion), net                         |  |                               | 2,519   
|Origination
    of loans held for sale                                                |  |                               | (230,865
|Proceeds
    from sale of loans held for sale                                         |  |                               | 215,995 
|Net
    increase in cash surrender value of BOLI                                      |  |                               | (854    
|Deferred
    income tax expense (benefit)                                             |  |                               | 2,807   
|Net
    gain on sale of investment securities                                         |  |                               | (1,475  
|Stock-based
    compensation expense                                                  |  |                               | 3,501   
|Net
    tax benefits from stock compensation                                          |  |                               | 10      
|Decrease
    (increase) in other assets                                               |  |                               | 6,912   
|Decrease
    in other liabilities                                                     |  |                               | (29,242 
|Net
    cash provided by operating activities                                         |  |                               | 48,805  
|Cash
    Flows From Investing Activities:                                             |  |                               |         
|Purchases
    of available-for-sale investment securities                             |  |                               | (63,572 
|Proceeds
    from maturities of available-for-sale securities                         |  |                               | 67,223  
|Proceeds
    from sale/call of available-for-sale securities                          |  |                               | 42,143  
|Purchases
    of Federal Reserve and Federal Home Loan Bank stock                     |  |                               | (76,150 
|Proceeds
    from redemption of Federal Reserve and Federal Home Loan Bank stock      |  |                               | 65,663  
|Net
    increase in loans                                                             |  |                               | (405,986
|Decrease
    (increase) in premises and equipment                                     |  |                               | 1,675   
|Net
    cash used in investing activities                                             |  |                               | (369,004
|Cash
    Flows From Financing Activities:                                             |  |                               |         
|(Decrease)
    increase in deposits                                                   |  |                               | (24,393 
|Increase
    (decrease) in customer repurchase agreements                             |  |                               | 1,256   
|Increase
    (decrease) in short-term borrowings                                      |  |                               | 225,000 
|Proceeds
    from exercise of equity compensation plans                               |  |                               | 332     
|Proceeds
    from employee stock purchase plan                                        |  |                               | 373     
|Cash
    dividends paid                                                               |  |                               | (7,599  
|Net
    cash provided by financing activities                                         |  |                               | 194,969 
|Net
    (Decrease) Increase In Cash and Cash Equivalents                              |  |                               | (125,230
|Cash
    and Cash Equivalents at Beginning of Period                                  |  |                               | 321,864 
|Cash
    and Cash Equivalents at End of Period                                        |  | $                             | 196,634 
|Supplemental
    Cash Flows Information:                                              |  |                               |         
|Interest
    paid                                                                     |  | $                             | 51,735  
|Income
    taxes paid                                                                 |  | $                             | 31,850  
|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.





8







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, 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 year ended December 31, 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 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 six months
ended June 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 banking offices, five lending centers and various electronic capabilities,
including remote deposit services and mobile 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.





9







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 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 ROU assets of $29.6 million and related lease liabilities of $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 and have contracted with third parties
to develop and evaluate a model to comply with CECL requirements. 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.



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.



10







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 | 
|-------------------------------------- |  | --------- | ------- |  | ---------- | - | ----- | ---------- |  | - | --------- | 
|June 30, 2019                          |  | Amortized |         |  | Unrealized |   |       | Unrealized |  |   | Fair      | 
|(dollars in thousands)                 |  | Cost      |         |  | Gains      |   |       | Losses     |  |   | Value     | 
|U. S. agency securities                |  | $         | 225,389 |  |            | $ | 940   |            |  | $ | 659       | 
|Residential mortgage backed securities |  |           | 440,243 |  |            |   | 5,186 |            |  |   | 1,884     | 
|Municipal bonds                        |  |           | 67,835  |  |            |   | 1,503 |            |  |   | —         | 
|Corporate bonds                        |  |           | 6,502   |  |            |   | 70    |            |  |   | —         | 
|Other equity investments               |  |           | 218     |  |            |   | —     |            |  |   | —         | 
|                                       |  | $         | 740,187 |  |            | $ | 7,699 |            |  | $ | 2,543     | 



|                                       |  |           |         |  | 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     | 
|Residential mortgage backed securities |  |           | 477,949 |  |            |   | 1,575 |            |  |   | 7,293     | 
|Municipal bonds                        |  |           | 45,814  |  |            |   | 439   |            |  |   | 484       | 
|Corporate bonds                        |  |           | 9,503   |  |            |   | 79    |            |  |   | 6         | 
|Other equity investments               |  |           | 218     |  |            |   | —     |            |  |   | —         | 
|                                       |  | $         | 793,634 |  |            | $ | 2,321 |            |  | $ | 11,816    | 





In
addition, at June 30, 2019 and December 31, 2018 the Company held $34.0 million and $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     | 
|                                           |  |               |     |  | Estimated     |   |        |                |  |   | Estimated | 
|June 30, 2019                              |  | Number
    of |     |  | Fair          |   |        | Unrealized     |  |   | Fair      | 
|(dollars in thousands)                     |  | Securities    |     |  | Value         |   |        | Losses         |  |   | Value     | 
|U.
    S. agency securities                |  |               | 39  |  |               | $ | 26,149 |                |  | $ | 50        | 
|Residential
    mortgage backed securities |  |               | 103 |  |               |   | 4,234  |                |  |   | 13        | 
|Municipal
    bonds                        |  |               | 2   |  |               |   | 1,500  |                |  |   | —         | 
|                                           |  |               | 144 |  |               | $ | 31,883 |                |  | $ | 63        | 



|                                           |  |               |     |  |               |   |         |                |  |   |           |  |  |            |         |  |           |   |        |            | 
|------------------------------------------ |  | ------------- | --- |  | ------------- | - | ------- | -------------- |  | - | --------- |  |  | ---------- | ------- |  | --------- | - | ------ | ---------- | 
|                                           |  |               |     |  | 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  |            | 
|Residential
    mortgage backed securities |  |               | 151 |  |               |   | 61,199  |                |  |   | 527       |  |  |            | 225,995 |  |           |   | 6,766  |            | 
|Municipal
    bonds                        |  |               | 11  |  |               |   | 4,299   |                |  |   | 50        |  |  |            | 17,041  |  |           |   | 434    |            | 
|Corporate
    bonds                        |  |               | 1   |  |               |   | 1,494   |                |  |   | 6         |  |  |            | —       |  |           |   | —      |            | 
|                                           |  |               | 221 |  |               | $ | 139,671 |                |  | $ | 1,116     |  |  | $          | 387,672 |  |           | $ | 10,700 |            | 



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% of total investment securities, is
relatively short at 3.0 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 June 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.





11







The
amortized cost and estimated fair value of investments available-for-sale at June 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.





|                                       |  | June
    30, 2019 |         |  | December
    31, 2018 |  
|-------------------------------------- |  | ----------------- | ------- |  | --------------------- | -
|                                       |  | Amortized         |         |  | Estimated             |  
|(dollars in thousands)                 |  | Cost              |         |  | Fair
    Value        |  
|U. S. agency securities maturing:      |  |                   |         |  |                       |  
|One
    year or less                   |  | $                 | 114,260 |  |                       | $
|After one year
    through five years  |  |                   | 103,105 |  |                       |  
|Five years through
    ten years       |  |                   | 8,024   |  |                       |  
|Residential mortgage backed securities |  |                   | 440,243 |  |                       |  
|Municipal bonds maturing:              |  |                   |         |  |                       |  
|One year or less                       |  |                   | 6,947   |  |                       |  
|After one year
    through five years  |  |                   | 13,426  |  |                       |  
|Five years through
    ten years       |  |                   | 46,399  |  |                       |  
|After ten years                        |  |                   | 1,063   |  |                       |  
|Corporate bonds maturing:              |  |                   |         |  |                       |  
|After one year
    through five years  |  |                   | 5,002   |  |                       |  
|After ten years                        |  |                   | 1,500   |  |                       |  
|Other equity investments               |  |                   | 218     |  |                       |  
|                                       |  | $                 | 740,187 |  |                       | $





For
the six months ended June 30, 2019, gross realized gains on sales of investments securities were $1.5 million, primarily due to
$829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations, and there were no gross realized
losses on sales of investment securities. For the six months ended June 30, 2018, gross realized gains on sales of investments
securities were $93 thousand and gross realized losses on sales of investment securities were $25 thousand.



Proceeds
from sales and calls of investment securities for the three months ended June 30, 2019 were $42.1 million compared to $29.0 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 June 30, 2019 and December 31, 2018 was $460.6 million and $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 June 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 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.





12







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
June 30, 2019 the Bank had mortgage banking derivative financial instruments with a notional value of $124.5 million related to
its forward contracts as compared to $49.6 million at December 31, 2018. The fair value of these mortgage banking derivative instruments
at June 30, 2019 was $387 thousand included in other assets and $309 thousand included in other liabilities as compared to $229
thousand included in other assets and $269 thousand included in other liabilities at December 31, 2018.



Included
in other noninterest income for the three and six months ended June 30, 2019 was a net gain of $84 thousand and a net gain $219
thousand, respectively, relating to mortgage banking derivative instruments as compared to a net gain of $55 thousand and net
loss of $31 thousand as of June 30, 2018. The amount included in other noninterest income for the three and six months ended June
30, 2019 pertaining to its mortgage banking hedging activities was a net realized loss of $94 thousand and a net realized loss
of $49 thousand, respectively, as compared to a net realized loss of $147 thousand and a net realized loss of $56 thousand as
of June 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 June 30, 2019 and December 31, 2018 are summarized by type as follows:





|                                          |  | June
    30, 2019 |           |   | December
    31, 2018 | 
|----------------------------------------- |  | ----------------- | --------- | - | --------------------- | 
|(dollars
    in thousands)                |  | Amount            |           |   | %                     | 
|Commercial                                |  | $                 | 1,475,201 |   |                       | 
|Income producing - commercial real estate |  |                   | 3,666,815 |   |                       | 
|Owner occupied - commercial real estate   |  |                   | 970,850   |   |                       | 
|Real estate mortgage - residential        |  |                   | 105,191   |   |                       | 
|Construction - commercial and residential |  |                   | 1,012,789 |   |                       | 
|Construction - C&I (owner occupied)       |  |                   | 76,324    |   |                       | 
|Home equity                               |  |                   | 83,447    |   |                       | 
|Other consumer                            |  |                   | 1,998     |   |                       | 
|Total
    loans                           |  |                   | 7,392,615 |   |                       | 
|Less: allowance
    for credit losses     |  |                   | (72,086   | ) |                       | 
|Net
    loans                             |  | $                 | 7,320,529 |   |                       | 



Unamortized
net deferred fees amounted to $25.2 million and $26.5 million at June 30, 2019 and December 31, 2018, respectively.



As
of June 30, 2019 and December 31, 2018, the Bank serviced $101.8 million and $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.





13







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 June 30, 2019, owner occupied - commercial real estate and construction - C&I (owner occupied) represent
approximately 14% of the loan portfolio. At June 30, 2019, non-owner occupied commercial real estate and real estate construction
represented approximately 64% of the loan portfolio. The combined owner occupied and commercial real estate loans represent approximately
78% of the loan portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in 84% 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% and minimum cash flow debt service coverage of 1.15 to 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 20% of the loan portfolio at June 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% 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% of the loan portfolio at June 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% of the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was 20 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.





14







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. 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 $1.62 billion at June 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% of
the outstanding ADC loan portfolio at June 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.



15







The
following tables detail activity in the allowance for credit losses by portfolio segment for the three and six months ended June
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 June 30, 2019           |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Allowance
    for credit losses:               |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Balance
    at beginning of period             |  | $          | 17,195 |   |                                                                                                                                                                                                                                                               | $ | 26,765 |                                                                                                                                                      |  | $ | 5,980                                                                                                                                                                                    |   |  | $                                                                                                                                                                                               | 681   |   |        | $ | 18,469 |          |  | $ | 605   |  
|Loans
    charged-off                          |  |            | (1     | ) |                                                                                                                                                                                                                                                               |   | (1,847 | )                                                                                                                                                    |  |   | —                                                                                                                                                                                        |   |  |                                                                                                                                                                                                 | —     |   |        |   | —      |          |  |   | —     |  
|Recoveries
    of loans previously charged-off |  |            | 37     |   |                                                                                                                                                                                                                                                               |   | 302    |                                                                                                                                                      |  |   | 2                                                                                                                                                                                        |   |  |                                                                                                                                                                                                 | 2     |   |        |   | 37     |          |  |   | —     |  
|Net
    loans charged-off                      |  |            | 36     |   |                                                                                                                                                                                                                                                               |   | (1,545 | )                                                                                                                                                    |  |   | 2                                                                                                                                                                                        |   |  |                                                                                                                                                                                                 | 2     |   |        |   | 37     |          |  |   | —     |  
|Provision
    for credit losses                |  |            | 905    |   |                                                                                                                                                                                                                                                               |   | 1,790  |                                                                                                                                                      |  |   | (226                                                                                                                                                                                     | ) |  |                                                                                                                                                                                                 | 672   |   |        |   | 500    |          |  |   | (24   | )
|Ending
    balance                             |  | $          | 18,136 |   |                                                                                                                                                                                                                                                               | $ | 27,010 |                                                                                                                                                      |  | $ | 5,756                                                                                                                                                                                    |   |  | $                                                                                                                                                                                               | 1,355 |   |        | $ | 19,006 |          |  | $ | 581   |  
|                                               |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Six
    Months Ended June 30, 2019             |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Allowance
    for credit losses:               |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Balance
    at beginning of period             |  | $          | 15,857 |   |                                                                                                                                                                                                                                                               | $ | 28,034 |                                                                                                                                                      |  | $ | 6,242                                                                                                                                                                                    |   |  | $                                                                                                                                                                                               | 965   |   |        | $ | 18,175 |          |  | $ | 599   |  
|Loans
    charged-off                          |  |            | (5     | ) |                                                                                                                                                                                                                                                               |   | (5,343 | )                                                                                                                                                    |  |   | —                                                                                                                                                                                        |   |  |                                                                                                                                                                                                 | —     |   |        |   | —      |          |  |   | —     |  
|Recoveries
    of loans previously charged-off |  |            | 167    |   |                                                                                                                                                                                                                                                               |   | 302    |                                                                                                                                                      |  |   | 2                                                                                                                                                                                        |   |  |                                                                                                                                                                                                 | 3     |   |        |   | 37     |          |  |   | —     |  
|Net
    loans (charged-off) recoveries         |  |            | 162    |   |                                                                                                                                                                                                                                                               |   | (5,041 | )                                                                                                                                                    |  |   | 2                                                                                                                                                                                        |   |  |                                                                                                                                                                                                 | 3     |   |        |   | 37     |          |  |   | —     |  
|Provision
    for credit losses                |  |            | 2,117  |   |                                                                                                                                                                                                                                                               |   | 4,017  |                                                                                                                                                      |  |   | (488                                                                                                                                                                                     | ) |  |                                                                                                                                                                                                 | 387   |   |        |   | 794    |          |  |   | (18   | )
|Ending
    balance                             |  | $          | 18,136 |   |                                                                                                                                                                                                                                                               | $ | 27,010 |                                                                                                                                                      |  | $ | 5,756                                                                                                                                                                                    |   |  | $                                                                                                                                                                                               | 1,355 |   |        | $ | 19,006 |          |  | $ | 581   |  
|                                               |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|As
    of June 30, 2019                        |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Allowance
    for credit losses:               |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Individually
    evaluated for impairment      |  | $          | 7,905  |   |                                                                                                                                                                                                                                                               | $ | 1,000  |                                                                                                                                                      |  | $ | 475                                                                                                                                                                                      |   |  | $                                                                                                                                                                                               | 650   |   |        | $ | —      |          |  | $ | —     |  
|Collectively
    evaluated for impairment      |  |            | 10,231 |   |                                                                                                                                                                                                                                                               |   | 26,010 |                                                                                                                                                      |  |   | 5,281                                                                                                                                                                                    |   |  |                                                                                                                                                                                                 | 705   |   |        |   | 19,006 |          |  |   | 581   |  
|Ending
    balance                             |  | $          | 18,136 |   |                                                                                                                                                                                                                                                               | $ | 27,010 |                                                                                                                                                      |  | $ | 5,756                                                                                                                                                                                    |   |  | $                                                                                                                                                                                               | 1,355 |   |        | $ | 19,006 |          |  | $ | 581   |  
|                                               |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Three
    Months Ended June 30, 2018           |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Allowance
    for credit losses:               |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Balance
    at beginning of period             |  | $          | 13,358 |   |                                                                                                                                                                                                                                                               | $ | 26,468 |                                                                                                                                                      |  | $ | 5,471                                                                                                                                                                                    |   |  | $                                                                                                                                                                                               | 734   |   |        | $ | 18,742 |          |  | $ | 699   |  
|Loans
    charged-off                          |  |            | (408   | ) |                                                                                                                                                                                                                                                               |   | —      |                                                                                                                                                      |  |   | —                                                                                                                                                                                        |   |  |                                                                                                                                                                                                 | —     |   |        |   | (517   | )        |  |   | —     |  
|Recoveries
    of loans previously charged-off |  |            | 23     |   |                                                                                                                                                                                                                                                               |   | 2      |                                                                                                                                                      |  |   | 1                                                                                                                                                                                        |   |  |                                                                                                                                                                                                 | 1     |   |        |   | 35     |          |  |   | 10    |  
|Net
    loans (charged-off) recoveries         |  |            | (385   | ) |                                                                                                                                                                                                                                                               |   | 2      |                                                                                                                                                      |  |   | 1                                                                                                                                                                                        |   |  |                                                                                                                                                                                                 | 1     |   |        |   | (482   | )        |  |   | 10    |  
|Provision
    for credit losses                |  |            | (767   | ) |                                                                                                                                                                                                                                                               |   | 1,518  |                                                                                                                                                      |  |   | 531                                                                                                                                                                                      |   |  |                                                                                                                                                                                                 | 22    |   |        |   | 391    |          |  |   | (36   | )
|Ending
    balance                             |  | $          | 12,206 |   |                                                                                                                                                                                                                                                               | $ | 27,988 |                                                                                                                                                      |  | $ | 6,003                                                                                                                                                                                    |   |  | $                                                                                                                                                                                               | 757   |   |        | $ | 18,651 |          |  | $ | 673   |  
|                                               |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Six
    Months Ended June 30, 2018             |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Allowance
    for credit losses:               |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Balance
    at beginning of period             |  | $          | 13,102 |   |                                                                                                                                                                                                                                                               | $ | 25,376 |                                                                                                                                                      |  | $ | 5,934                                                                                                                                                                                    |   |  | $                                                                                                                                                                                               | 944   |   |        | $ | 18,492 |          |  | $ | 770   |  
|Loans
    charged-off                          |  |            | (1,261 | ) |                                                                                                                                                                                                                                                               |   | (121   | )                                                                                                                                                    |  |   | (132                                                                                                                                                                                     | ) |  |                                                                                                                                                                                                 | —     |   |        |   | (517   | )        |  |   | —     |  
|Recoveries
    of loans previously charged-off |  |            | 26     |   |                                                                                                                                                                                                                                                               |   | 2      |                                                                                                                                                      |  |   | 2                                                                                                                                                                                        |   |  |                                                                                                                                                                                                 | 3     |   |        |   | 95     |          |  |   | 127   |  
|Net
    loans (charged-off) recoveries         |  |            | (1,235 | ) |                                                                                                                                                                                                                                                               |   | (119   | )                                                                                                                                                    |  |   | (130                                                                                                                                                                                     | ) |  |                                                                                                                                                                                                 | 3     |   |        |   | (422   | )        |  |   | 127   |  
|Provision
    for credit losses                |  |            | 339    |   |                                                                                                                                                                                                                                                               |   | 2,731  |                                                                                                                                                      |  |   | 199                                                                                                                                                                                      |   |  |                                                                                                                                                                                                 | (190  | ) |        |   | 581    |          |  |   | (224  | )
|Ending
    balance                             |  | $          | 12,206 |   |                                                                                                                                                                                                                                                               | $ | 27,988 |                                                                                                                                                      |  | $ | 6,003                                                                                                                                                                                    |   |  | $                                                                                                                                                                                               | 757   |   |        | $ | 18,651 |          |  | $ | 673   |  
|                                               |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|As
    of June 30, 2018                        |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Allowance
    for credit losses:               |  |            |        |   |                                                                                                                                                                                                                                                               |   |        |                                                                                                                                                      |  |   |                                                                                                                                                                                          |   |  |                                                                                                                                                                                                 |       |   |        |   |        |          |  |   |       |  
|Individually
    evaluated for impairment      |  | $          | 4,506  |   |                                                                                                                                                                                                                                                               | $ | 3,543  |                                                                                                                                                      |  | $ | 500                                                                                                                                                                                      |   |  | $                                                                                                                                                                                               | —     |   |        | $ | —      |          |  | $ | —     |  
|Collectively
    evaluated for impairment      |  |            | 7,700  |   |                                                                                                                                                                                                                                                               |   | 24,445 |                                                                                                                                                      |  |   | 5,503                                                                                                                                                                                    |   |  |                                                                                                                                                                                                 | 757   |   |        |   | 18,651 |          |  |   | 673   |  
|Ending
    balance                             |  | $          | 12,206 |   |                                                                                                                                                                                                                                                               | $ | 27,988 |                                                                                                                                                      |  | $ | 6,003                                                                                                                                                                                    |   |  | $                                                                                                                                                                                               | 757   |   |        | $ | 18,651 |          |  | $ | 673   |  



16







The
Company’s recorded investments in loans as of June 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:





|                                          |  |            |           |  | 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  | 
|                                          |  |            |           |  |                        |   |           |                      |  |   |                 |  |  |                    |         |  |        |   |           |          |  |   |        | 
|June
    30, 2019                         |  |            |           |  |                        |   |           |                      |  |   |                 |  |  |                    |         |  |        |   |           |          |  |   |        | 
|Recorded
    investment in loans:         |  |            |           |  |                        |   |           |                      |  |   |                 |  |  |                    |         |  |        |   |           |          |  |   |        | 
|Individually
    evaluated for impairment |  | $          | 26,980    |  |                        | $ | 37,900    |                      |  | $ | 3,879           |  |  | $                  | 5,367   |  |        | $ | 9,155     |          |  | $ | 487    | 
|Collectively
    evaluated for impairment |  |            | 1,448,221 |  |                        |   | 3,628,915 |                      |  |   | 966,971         |  |  |                    | 99,824  |  |        |   | 1,079,958 |          |  |   | 82,960 | 
|Ending
    balance                        |  | $          | 1,475,201 |  |                        | $ | 3,666,815 |                      |  | $ | 970,850         |  |  | $                  | 105,191 |  |        | $ | 1,089,113 |          |  | $ | 83,447 | 
|                                          |  |            |           |  |                        |   |           |                      |  |   |                 |  |  |                    |         |  |        |   |           |          |  |   |        | 
|December
    31, 2018                     |  |            |           |  |                        |   |           |                      |  |   |                 |  |  |                    |         |  |        |   |           |          |  |   |        | 
|Recorded
    investment in loans:         |  |            |           |  |                        |   |           |                      |  |   |                 |  |  |                    |         |  |        |   |           |          |  |   |        | 
|Individually
    evaluated for impairment |  | $          | 8,738     |  |                        | $ | 61,747    |                      |  | $ | 5,307           |  |  | $                  | 1,228   |  |        | $ | 7,012     |          |  | $ | 487    | 
|Collectively
    evaluated for impairment |  |            | 1,544,374 |  |                        |   | 3,195,153 |                      |  |   | 882,507         |  |  |                    | 105,190 |  |        |   | 1,090,600 |          |  |   | 86,116 | 
|Ending
    balance                        |  | $          | 1,553,112 |  |                        | $ | 3,256,900 |                      |  | $ | 887,814         |  |  | $                  | 106,418 |  |        | $ | 1,097,612 |          |  | $ | 86,603 | 



At
June 30, 2019, nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia
Heritage Bank (“Virginia Heritage”) have a carrying value of $273 thousand and $155 thousand, respectively, and an
unpaid principal balance of $323 thousand and $968 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.



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.



18







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 June 30, 2019 and December 31, 2018.





|                                              |  |      |           |  | Watch
    and       |   |         |             |  |   |          |  |  | Total |  
|--------------------------------------------- |  | ---- | --------- |  | ------------------- | - | ------- | ----------- |  | - | -------- |  |  | ----- | -
|(dollars
    in thousands)                    |  | Pass |           |  | Special
    Mention |   |         | Substandard |  |   | Doubtful |  |  | Loans |  
|                                              |  |      |           |  |                     |   |         |             |  |   |          |  |  |       |  
|June
    30, 2019                             |  |      |           |  |                     |   |         |             |  |   |          |  |  |       |  
|Commercial                                    |  | $    | 1,398,098 |  |                     | $ | 50,123  |             |  | $ | 26,980   |  |  | $     | —
|Income producing - commercial
    real estate |  |      | 3,611,968 |  |                     |   | 16,947  |             |  |   | 37,900   |  |  |       | —
|Owner occupied - commercial
    real estate   |  |      | 924,643   |  |                     |   | 42,328  |             |  |   | 3,879    |  |  |       | —
|Real estate mortgage
    – residential        |  |      | 99,188    |  |                     |   | 636     |             |  |   | 5,367    |  |  |       | —
|Construction - commercial
    and residential |  |      | 1,079,958 |  |                     |   | —       |             |  |   | 9,155    |  |  |       | —
|Home equity                                   |  |      | 82,274    |  |                     |   | 686     |             |  |   | 487      |  |  |       | —
|Other
    consumer                            |  |      | 1,998     |  |                     |   | —       |             |  |   | —        |  |  |       | —
|Total                                         |  | $    | 7,198,127 |  |                     | $ | 110,720 |             |  | $ | 83,768   |  |  | $     | —
|                                              |  |      |           |  |                     |   |         |             |  |   |          |  |  |       |  
|December
    31, 2018                         |  |      |           |  |                     |   |         |             |  |   |          |  |  |       |  
|Commercial                                    |  | $    | 1,505,477 |  |                     | $ | 25,584  |             |  | $ | 22,051   |  |  | $     | —
|Income producing - commercial
    real estate |  |      | 3,172,479 |  |                     |   | 1,536   |             |  |   | 82,885   |  |  |       | —
|Owner occupied - commercial
    real estate   |  |      | 844,286   |  |                     |   | 38,221  |             |  |   | 5,307    |  |  |       | —
|Real estate mortgage
    – residential        |  |      | 104,543   |  |                     |   | 647     |             |  |   | 1,228    |  |  |       | —
|Construction - commercial
    and residential |  |      | 1,090,600 |  |                     |   | —       |             |  |   | 7,012    |  |  |       | —
|Home equity                                   |  |      | 85,434    |  |                     |   | 682     |             |  |   | 487      |  |  |       | —
|Other
    consumer                            |  |      | 2,988     |  |                     |   | —       |             |  |   | —        |  |  |       | —
|Total                                         |  | $    | 6,805,807 |  |                     | $ | 66,670  |             |  | $ | 118,970  |  |  | $     | —



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.



19







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



|(dollars
    in thousands)                    |  | June
    30, 
    2019 |        |  | December
    31, 
    2018 |  
|--------------------------------------------- |  | ---------------------- | ------ |  | -------------------------- | -
|                                              |  |                        |        |  |                            |  
|Commercial                                    |  | $                      | 16,053 |  |                            | $
|Income producing
    - commercial real estate |  |                        | 4,563  |  |                            |  
|Owner occupied
    - commercial real estate   |  |                        | 1,510  |  |                            |  
|Real estate
    mortgage - residential        |  |                        | 5,640  |  |                            |  
|Construction
    - commercial and residential |  |                        | 9,155  |  |                            |  
|Home
    equity                               |  |                        | 487    |  |                            |  
|Total
    nonaccrual loans (1)(2)             |  | $                      | 37,408 |  |                            | $



| | (1) | Excludes
                                         troubled debt restructurings (“TDRs”) that were performing under their restructured
                                         terms totaling $8.6 million at June 30, 2019 and $24.0 million at December 31, 2018.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Gross
                                         interest income of $1.2 million and $321 thousand would have been recorded
                                         for the six months ended June 30, 2019 and 2018, respectively, if nonaccrual loans shown
                                         above had been current and in accordance with their original terms, while the interest
                                         actually recorded on such loans was $86 thousand and $6 thousand for the six months
                                         ended June 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 June 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              |  
|                                              |  |                |        |  |                |   |        |                   |  |   |                |  |  |         |        |  |                    |  
|June
    30, 2019                             |  |                |        |  |                |   |        |                   |  |   |                |  |  |         |        |  |                    |  
|Commercial                                    |  | $              | 4,784  |  |                | $ | 1,112  |                   |  | $ | 16,053         |  |  | $       | 21,949 |  |                    | $
|Income
    producing - commercial real estate |  |                | 2,253  |  |                |   | 4,656  |                   |  |   | 4,563          |  |  |         | 11,472 |  |                    |  
|Owner
    occupied - commercial real estate   |  |                | 445    |  |                |   | 3,654  |                   |  |   | 1,510          |  |  |         | 5,609  |  |                    |  
|Real
    estate mortgage – residential        |  |                | —      |  |                |   | —      |                   |  |   | 5,640          |  |  |         | 5,640  |  |                    |  
|Construction
    - commercial and residential |  |                | 2,011  |  |                |   | 1,866  |                   |  |   | 9,155          |  |  |         | 13,032 |  |                    |  
|Home
    equity                               |  |                | 1,413  |  |                |   | 47     |                   |  |   | 487            |  |  |         | 1,947  |  |                    |  
|Other
    consumer                            |  |                | 21     |  |                |   | 10     |                   |  |   | —              |  |  |         | 31     |  |                    |  
|Total                                         |  | $              | 10,927 |  |                | $ | 11,345 |                   |  | $ | 37,408         |  |  | $       | 59,680 |  |                    | $
|                                              |  |                |        |  |                |   |        |                   |  |   |                |  |  |         |        |  |                    |  
|December
    31, 2018                         |  |                |        |  |                |   |        |                   |  |   |                |  |  |         |        |  |                    |  
|Commercial                                    |  | $              | 4,535  |  |                | $ | 2,870  |                   |  | $ | 7,115          |  |  | $       | 14,520 |  |                    | $
|Income
    producing - commercial real estate |  |                | 5,855  |  |                |   | 27,479 |                   |  |   | 1,766          |  |  |         | 35,100 |  |                    |  
|Owner
    occupied - commercial real estate   |  |                | 5,051  |  |                |   | 2,370  |                   |  |   | 2,368          |  |  |         | 9,789  |  |                    |  
|Real
    estate mortgage – residential        |  |                | 2,456  |  |                |   | 1,698  |                   |  |   | 1,510          |  |  |         | 5,664  |  |                    |  
|Construction
    - commercial and residential |  |                | 4,392  |  |                |   | —      |                   |  |   | 3,031          |  |  |         | 7,423  |  |                    |  
|Home
    equity                               |  |                | 630    |  |                |   | 47     |                   |  |   | 487            |  |  |         | 1,164  |  |                    |  
|Other
    consumer                            |  |                | —      |  |                |   | —      |                   |  |   | —              |  |  |         | —      |  |                    |  
|Total                                         |  | $              | 22,919 |  |                | $ | 34,464 |                   |  | $ | 16,277         |  |  | $       | 73,660 |  |                    | $



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 when deemed uncollectible.



20









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





|                                              |  | Unpaid      |        |  | Recorded    |   |        | Recorded   |  |   |            |  |  |           |        |  |                                 |   |        |                                |  |   |             |  |  |             |       
|--------------------------------------------- |  | ----------- | ------ |  | ----------- | - | ------ | ---------- |  | - | ---------- |  |  | --------- | ------ |  | ------------------------------- | - | ------ | ------------------------------ |  | - | ----------- |  |  | ----------- | ------
|                                              |  | Contractual |        |  | Investment  |   |        | Investment |  |   | Total      |  |  |           |        |  | Average
    Recorded Investment |   |        | Interest
    Income Recognized | 
|                                              |  | 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 |       
|                                              |  |             |        |  |             |   |        |            |  |   |            |  |  |           |        |  |                                 |   |        |                                |  |   |             |  |  |             |       
|June
    30, 2019                             |  |             |        |  |             |   |        |            |  |   |            |  |  |           |        |  |                                 |   |        |                                |  |   |             |  |  |             |       
|Commercial                                    |  | $           | 17,434 |  |             | $ | 5,003  |            |  | $ | 11,959     |  |  | $         | 16,962 |  |                                 | $ | 7,905  |                                |  | $ | 14,972      |  |  | $           | 12,695
|Income
    producing - commercial real estate |  |             | 8,953  |  |             |   | 4,563  |            |  |   | 4,390      |  |  |           | 8,953  |  |                                 |   | 1,000  |                                |  |   | 24,198      |  |  |             | 23,266
|Owner
    occupied - commercial real estate   |  |             | 4,819  |  |             |   | 3,449  |            |  |   | 1,370      |  |  |           | 4,819  |  |                                 |   | 475    |                                |  |   | 4,836       |  |  |             | 5,134 
|Real
    estate mortgage – residential        |  |             | 5,640  |  |             |   | 3,184  |            |  |   | 2,456      |  |  |           | 5,640  |  |                                 |   | 650    |                                |  |   | 5,642       |  |  |             | 4,265 
|Construction
    - commercial and residential |  |             | 10,315 |  |             |   | 9,155  |            |  |   | —          |  |  |           | 9,155  |  |                                 |   | —      |                                |  |   | 6,093       |  |  |             | 5,072 
|Home
    equity                               |  |             | 487    |  |             |   | 487    |            |  |   | —          |  |  |           | 487    |  |                                 |   | —      |                                |  |   | 487         |  |  |             | 487   
|Other
    consumer                            |  |             | —      |  |             |   | —      |            |  |   | —          |  |  |           | —      |  |                                 |   | —      |                                |  |   | —           |  |  |             | —     
|Total                                         |  | $           | 47,648 |  |             | $ | 25,841 |            |  | $ | 20,175     |  |  | $         | 46,016 |  |                                 | $ | 10,030 |                                |  | $ | 56,228      |  |  | $           | 50,919
|                                              |  |             |        |  |             |   |        |            |  |   |            |  |  |           |        |  |                                 |   |        |                                |  |   |             |  |  |             |       
|December
    31, 2018                         |  |             |        |  |             |   |        |            |  |   |            |  |  |           |        |  |                                 |   |        |                                |  |   |             |  |  |             |       
|Commercial                                    |  | $           | 8,613  |  |             | $ | 2,057  |            |  | $ | 6,084      |  |  | $         | 8,141  |  |                                 | $ | 4,803  |                                |  | $ | 10,306      |  |  | $           | 8,359 
|Income
    producing - commercial real estate |  |             | 21,402 |  |             |   | 1,720  |            |  |   | 19,682     |  |  |           | 21,402 |  |                                 |   | 2,465  |                                |  |   | 15,331      |  |  |             | 12,309
|Owner
    occupied - commercial real estate   |  |             | 5,731  |  |             |   | 4,361  |            |  |   | 1,370      |  |  |           | 5,731  |  |                                 |   | 600    |                                |  |   | 5,746       |  |  |             | 6,011 
|Real
    estate mortgage – residential        |  |             | 1,510  |  |             |   | 1,510  |            |  |   | —          |  |  |           | 1,510  |  |                                 |   | —      |                                |  |   | 1,516       |  |  |             | 1,688 
|Construction
    - commercial and residential |  |             | 3,031  |  |             |   | 3,031  |            |  |   | —          |  |  |           | 3,031  |  |                                 |   | 1,050  |                                |  |   | 3,031       |  |  |             | 2,028 
|Home
    equity                               |  |             | 487    |  |             |   | 487    |            |  |   | —          |  |  |           | 487    |  |                                 |   | —      |                                |  |   | 487         |  |  |             | 491   
|Other
    consumer                            |  |             | —      |  |             |   | —      |            |  |   | —          |  |  |           | —      |  |                                 |   | —      |                                |  |   | 46          |  |  |             | 69    
|Total                                         |  | $           | 40,774 |  |             | $ | 13,166 |            |  | $ | 27,136     |  |  | $         | 40,302 |  |                                 | $ | 8,918  |                                |  | $ | 36,463      |  |  | $           | 30,955



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 June 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.





21







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



|                                            |  | For
    the Six Months Ended June 30, 2019 |   
|------------------------------------------- |  | ------------------------------------------ | --
|                                            |  | Number
    of                              |   
|(dollars
    in thousands)                  |  | Contracts                                  |   
|Troubled debt restructurings                |  |                                            |   
|Restructured
    accruing                   |  |                                            | 7 
|Restructured
    nonaccruing                |  |                                            | 4 
|Total                                       |  |                                            | 11
|                                            |  |                                            |   
|Specific
    allowance                      |  |                                            |   
|                                            |  |                                            |   
|Restructured
    and subsequently defaulted |  |                                            |   





|                                            |  | For
    the Six Months Ended June 30, 2018 |   
|------------------------------------------- |  | ------------------------------------------ | --
|                                            |  | Number
    of                              |   
|(dollars
    in thousands)                  |  | Contracts                                  |   
|Troubled debt restructings                  |  |                                            |   
|Restructured
    accruing                   |  |                                            | 9 
|Restructured
    nonaccruing                |  |                                            | 4 
|Total                                       |  |                                            | 13
|                                            |  |                                            |   
|Specific
    allowance                      |  |                                            |   
|                                            |  |                                            |   
|Restructured
    and subsequently defaulted |  |                                            |   



The
Company had eleven TDR’s at June 30, 2019 totaling approximately $11.4 million. Seven of these loans totaling approximately
$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 six months ended June 30, 2019. During the six months
ended June 30, 2018, there were two performing TDRs totaling $937 thousand that defaulted on their modified terms which were reclassified
to nonperforming loans. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed
on nonaccrual. For the three months ended June 30, 2019, there was one restructured loan totaling approximately $4.8 million that
had its collateral property sold for approximately $3 million and the remaining $1.8 million was charged-off during the quarter,
as compared to the same period in 2018, there was one defaulted loan totaling approximately $315 thousand that was charged-off. 
During the three months ended June 30, 2019, there was one loan totaling $10.4 million that was re-underwritten into two new loans
which provided better collateral for the Bank, as compared to the three months ended June 30, 2018, there was one loan totaling
$274 thousand that was partially paid off from the sale proceeds of the business which totaled approximately $236 thousand. The
remaining balance on the loan of $38 thousand was charged-off. 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 June 30, 2019, there were no loans modified in a TDR, as compared to the three months ended June 30, 2018 which had two
loans totaling $4.0 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
were required to be recognized on the consolidated statements of condition as a right-of-use (“ROU”) asset and a corresponding
lease liability.



22









As
of June 30, 2019, the Company had $28.2 million of operating lease ROU assets and $31.7 million of operating lease liabilities
on the Company’s Consolidated Balance Sheet. The Company elects not to recognize 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 ROU assets
and lease liabilities when an economic benefit to exercise the option exists and there is a 90% probability that the Company will
exercise the option. If these criteria are not met, the options are not included in our ROU assets and lease liabilities.



As
of June 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 June 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.



|                                                                 |  | Six
    Months Ended |                                                  
|---------------------------------------------------------------- |  | -------------------- | -------------------------------------------------
|(dollars
    in thousands)                                       |  | June
    30, 2019    |                                                  
|Lease Cost                                                       |  |                      |                                                  
|Operating
    Lease Cost (Cost resulting from lease payments)    |  | $                    | 3,898                                            
|Variable
    Lease Cost (Cost excluded from lease payments)      |  |                      | 535                                              
|Sublease
    Income                                              |  |                      | (188                                             
|Net
    Lease Cost                                               |  | $                    | 4,245                                            
|                                                                 |  |                      |                                                  
|Operating Lease - Operating
    Cash Flows (Fixed Payments)      |  | $                    | 4,246                                            
|Operating Lease - Operating
    Cash Flows (Liability Reduction) |  |                      | 3,619                                            
|Right-of-Use Assets
    - Operating Leases                       |  |                      | 28,214                                           
|Weighted Average Lease
    Term - Operating Leases               |  |                      | 5.59
                                         yrs
|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 June 30, 2019 were as follows:



|(dollars
    in thousands)                             |  |   |       
|------------------------------------------------------ |  | - | ------
|Twelve Months Ended:                                   |  |   |       
|June
    30, 2020                                      |  | $ | 8,581 
|June
    30, 2021                                      |  |   | 8,104 
|June
    30, 2022                                      |  |   | 6,541 
|June
    30, 2023                                      |  |   | 4,500 
|June
    29, 2024                                      |  |   | 3,895 
|Thereafter                                             |  |   | 5,140 
|Total
    Future Minimum Lease Payments                |  |   | 36,761
|Amounts
    Representing Interest                      |  |   | (5,102
|Present
    Value of Net Future Minimum Lease Payments |  | $ | 31,659



23







Note
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 $28.8 million and related unfunded commitments were $15.2 million as of June 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 million and related unfunded commitments were $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 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.



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.



24







As
of June 30, 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 loss before income tax on the swap was $101 thousand at June 30, 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 $372 thousand
of 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 June 30, 2019, the Company reclassified $313 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 $114 thousand will be reclassified as a decrease 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 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 derivatives. The Company monitors counterparty
risk in accordance with the provisions of ASC Topic 815, “Derivatives and Hedging.” In addition, the interest
rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty. Collateral must
be posted when the market value exceeds certain threshold limits.



The
interest rate 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 June 30, 2019, the aggregate fair value of derivative contracts with credit risk contingent features (i.e., containing collateral
posting or termination provisions based on our capital status) that was in a net liability position totaled $101 thousand. The
Company has a minimum collateral posting threshold with its derivative counterparty. As of June 30, 2019, the Company was not
required to post collateral with its derivative counterparty against its obligations under this agreement. If the Company had
breached any provisions under the agreement at June 30, 2019, it could have been required to settle its obligations under the
agreement at the termination value.



25









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





|                                                      |  | June
    30, 2019 |         | December
    31, 2018
|----------------------------------------------------- |  | ----------------- | ------- | ---------------------
|                                                      |  | Notional          |         |                      
|                                                      |  | Amount            |         | Fair
    Value       
|                                                      |  |                   |         |                      
|Derivatives
    designated as hedging instruments     |  |                   |         |                      
|                                                      |  |                   |         |                      
|(dollars
    in thousands)                            |  |                   |         |                      
|Interest
    rate product                             |  | $                 | —       |                      
|                                                      |  |                   |         |                      
|                                                      |  |                   |         |                      
|(dollars
    in thousands)                            |  |                   |         |                      
|Interest
    rate product                             |  | $                 | 100,000 |                      
|                                                      |  |                   |         |                      
|Derivatives
    not designated as hedging instruments |  |                   |         |                      
|                                                      |  |                   |         |                      
|(dollars
    in thousands)                            |  |                   |         |                      
|Interest
    rate product                             |  | $                 | 26,000  |                      
|                                                      |  |                   |         |                      
|(dollars
    in thousands)                            |  |                   |         |                      
|Interest rate product                                 |  | $                 | 26,000  |                      
|Other
    Contracts                                   |  |                   | 27,500  |                      
|                                                      |  | $                 | 53,500  |                      





The
table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the three and six months
ended June 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 June 30,                              |      |                                                                                                   |  | Three
    Months Ended June 30,                                            |      
|                                                                                                               |  | 2019                                                         |      | 2018                                                                                              |  |                                                                            |      
|Derivatives in Cash Flow Hedging Relationships                                                                 |  |                                                              |      |                                                                                                   |  |                                                                            |      
|Interest
    Rate Products                                                                                     |  | $                                                            | (834 | )                                                                                                 |  | $                                                                          | 1,109
|Total                                                                                                          |  | $                                                            | (834 | )                                                                                                 |  | $                                                                          | 1,109







|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
|------------------------------------------------------------------------------- |  | ------------------------------------------------------------ | ------ | ------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------
|                                                                                |  | Six
    Months Ended June 30,                                |        |                                                                                                   |  | Six
    Months Ended June 30,                                             
|                                                                                |  | 2019                                                         |        | 2018                                                                                              |  |                                                                           
|Derivatives
    in Cash Flow Hedging Relationships                              |  |                                                              |        |                                                                                                   |  |                                                                           
|Interest
    Rate Products                                                      |  | $                                                            | (1,867 | )                                                                                                 |  | $                                                                         
|Interest
    Rate Products                                                      |  |                                                              | —      |                                                                                                   |  |                                                                           
|Total                                                                           |  | $                                                            | (1,867 | )                                                                                                 |  | $                                                                         

















26







The
table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations
for the three and six months ended June 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 in Income on Fair Value
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------
|                                                                                                                                                                           |  | and Cash Flow Hedging Relationships (in 000's)                          
|                                                                                                                                                                           |  | Three Months Ended June 30,                                             
|                                                                                                                                                                           |  | 2019                                                                    
|                                                                                                                                                                           |  | 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     |  | $                                                                       
|                                                                                                                                                                           |  |                                                                         
|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                                                                             |  | $                                                                       
|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 |  | $                                                                       





|Effect
    of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance | 
|--------------------------------------------------------------------------------------------------------- | 
|Derivatives
    Not Designated as
    Hedging Instruments under Subtopic
    815-20                       | 
|                                                                                                          | 
|                                                                                                          | 
|                                                                                                          | 
|Other
    Contracts                                                                                       | 
|Total                                                                                                     | 



27







Balance
Sheet Offsetting: Our designated cash flow hedge interest rate 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 June 30, 2019 and December 31, 2018.





|As
    of June 30, 2019                                   
|----------------------------------------------------------
|Offsetting of Derivative Assets
    (dollars in thousands)
|                                                          
|Derivatives                                               



|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    
|Derivatives                                                     |  | $                                           | 224 |  |                                                  



|                                                           |  |                                        |       |  |                                                   |   |   |                                                          |  |   |                           |  |                            |   |   |                |  
|---------------------------------------------------------- |  | -------------------------------------- | ----- |  | ------------------------------------------------- | - | - | -------------------------------------------------------- |  | - | ------------------------- |  | -------------------------- | - | - | -------------- | -
|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                     |  |                            | $ | — |                | $



|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    
|Derivatives                                                     |  | $                                           | 59 |  |                                                  



Note
9. Other Real Estate Owned



The
activity within Other Real Estate Owned (“OREO”) for the three and six months ended June 30, 2019 and 2018 is presented
in the table below. There was one residential real estate loan in the process of foreclosure as of June 30, 2019 totaling $985
thousand. For the three and six months ended June 30, 2019 and 2018, there were no sales of OREO property.



|                                    |  | Three
    Months Ended June 30, |       |  | Six
    Months Ended June 30, |  
|----------------------------------- |  | ------------------------------- | ----- |  | ----------------------------- | -
|(dollars in thousands)              |  | 2019                            |       |  | 2018                          |  
|Beginning Balance                   |  | $                               | 1,394 |  |                               | $
|Real estate acquired from borrowers |  |                                 | —     |  |                               |  
|Properties sold                     |  |                                 | —     |  |                               |  
|Ending Balance                      |  | $                               | 1,394 |  |                               | $



28







Note
10. Long-Term Borrowings



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



|(dollars in thousands)                    |  | June
    30, 
    2019 |         |   | December
    31, 
    2018 |  
|----------------------------------------- |  | ---------------------- | ------- | - | -------------------------- | -
|Subordinated Notes, 5.75%                 |  | $                      | 70,000  |   |                            | $
|Subordinated Notes, 5.0%                  |  |                        | 150,000 |   |                            |  
|Less: unamortized
    debt issuance costs |  |                        | (2,509  | ) |                            |  
|Long-term borrowings                      |  | $                      | 217,491 |   |                            | $



On
August 5, 2014, the Company completed the sale of $70.0 million of its 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 million, which includes
$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 million of its 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
million, which includes $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 six months ended June 30, 2019 and 2018 was as follows:



|                                                             |  | Three
    Months Ended June 30, |        |  | Six
    Months Ended June 30, |  
|------------------------------------------------------------ |  | ------------------------------- | ------ |  | ----------------------------- | -
|(dollars and shares in thousands, except
    per share data) |  | 2019                            |        |  | 2018                          |  
|Basic:                                                       |  |                                 |        |  |                               |  
|Net
    income                                               |  | $                               | 37,243 |  |                               | $
|Average common shares outstanding                            |  |                                 | 34,540 |  |                               |  
|Basic net income
    per common share                        |  | $                               | 1.08   |  |                               | $
|                                                             |  |                                 |        |  |                               |  
|Diluted:                                                     |  |                                 |        |  |                               |  
|Net income                                                   |  | $                               | 37,243 |  |                               | $
|Average common shares outstanding                            |  |                                 | 34,540 |  |                               |  
|Adjustment for
    common share equivalents                  |  |                                 | 25     |  |                               |  
|Average common shares outstanding-diluted                    |  |                                 | 34,565 |  |                               |  
|Diluted net income
    per common share                      |  | $                               | 1.08   |  |                               | $
|                                                             |  |                                 |        |  |                               |  
|Anti-dilutive shares                                         |  |                                 | 2      |  |                               |  



29







Note
12. Other Comprehensive Income



The
following table presents the components of other comprehensive income (loss) for the three and six months ended June 30, 2019
and 2018.



|(dollars
    in thousands)                                                 |  | Before
    Tax |        |   | Tax
    Effect |   |        | Net
    of Tax | 
|-------------------------------------------------------------------------- |  | -------------- | ------ | - | -------------- | - | ------ | -------------- | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Three Months Ended June 30, 2019                                           |  |                |        |   |                |   |        |                | 
|Net unrealized gain on securities
    available-for-sale                   |  | $              | 7,976  |   |                | $ | 2,051  |                | 
|Less: Reclassification
    adjustment for net gains included in net income |  |                | (563   | ) |                |   | (146   | )              | 
|Total unrealized gain                                                      |  |                | 7,413  |   |                |   | 1,905  |                | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Net unrealized loss on derivatives                                         |  |                | (171   | ) |                |   | (342   | )              | 
|Less: Reclassification
    adjustment for gain included in net income      |  |                | (319   | ) |                |   | (83    | )              | 
|Total unrealized loss                                                      |  |                | (490   | ) |                |   | 259    |                | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Other
    Comprehensive Income                                             |  | $              | 6,923  |   |                | $ | 2,164  |                | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Three Months Ended June 30, 2018                                           |  |                |        |   |                |   |        |                | 
|Net unrealized loss on securities available-for-sale                       |  | $              | (2,605 | ) |                | $ | 670    |                | 
|Less: Reclassification
    adjustment for net gains included in net income |  |                | (26    | ) |                |   | (6     | )              | 
|Total unrealized loss                                                      |  |                | (2,631 | ) |                |   | 664    |                | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Net unrealized gain on derivatives                                         |  |                | 930    |   |                |   | 238    |                | 
|Less: Reclassification
    adjustment for losses included in net income    |  |                | 87     |   |                |   | 23     |                | 
|Total unrealized gain                                                      |  |                | 1,017  |   |                |   | 261    |                | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Other
    Comprehensive Loss                                               |  | $              | (1,614 | ) |                | $ | 925    |                | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Six Months Ended June 30, 2019                                             |  |                |        |   |                |   |        |                | 
|Net unrealized gain on securities available-for-sale                       |  | $              | 16,127 |   |                | $ | (4,148 | )              | 
|Less: Reclassification
    adjustment for net gains included in net income |  |                | (1,475 | ) |                |   | (383   | )              | 
|Total unrealized gain                                                      |  |                | 14,652 |   |                |   | (4,531 | )              | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Net unrealized loss on derivatives                                         |  |                | (2,234 | ) |                |   | 569    |                | 
|Less: Reclassification
    adjustment for gain included in net income      |  |                | (1,594 | ) |                |   | (414   | )              | 
|Total unrealized loss                                                      |  |                | (3,828 | ) |                |   | 155    |                | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Other
    Comprehensive Income                                             |  | $              | 10,824 |   |                | $ | (4,376 | )              | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Six Months Ended June 30, 2018                                             |  |                |        |   |                |   |        |                | 
|Net unrealized loss on securities available-for-sale                       |  | $              | (8,826 | ) |                | $ | 1,768  |                | 
|Less: Reclassification
    adjustment for net gains included in net income |  |                | (68    | ) |                |   | (17    | )              | 
|Total unrealized loss                                                      |  |                | (8,894 | ) |                |   | 1,751  |                | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Net unrealized gain on derivatives                                         |  |                | 3,537  |   |                |   | 612    |                | 
|Less: Reclassification
    adjustment for losses included in net income    |  |                | (1     | ) |                |   | —      |                | 
|Total unrealized gain                                                      |  |                | 3,536  |   |                |   | 612    |                | 
|                                                                           |  |                |        |   |                |   |        |                | 
|Other
    Comprehensive Loss                                               |  | $              | (5,358 | ) |                | $ | 2,363  |                | 



30







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



|(dollars
    in thousands)                                           |  | Securities
    Available For Sale |         |   | Derivatives |   |       | Accumulated
    Other Comprehensive Income (Loss) | 
|-------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ----------- | - | ----- | ------------------------------------------------- | 
|                                                                     |  |                                   |         |   |             |   |       |                                                   | 
|Three
    Months Ended June 30, 2019                                 |  |                                   |         |   |             |   |       |                                                   | 
|Balance
    at Beginning of Period                                   |  | $                                 | (1,665  | ) |             | $ | 673   |                                                   | 
|Other
    comprehensive income (loss) before reclassifications       |  |                                   | 5,925   |   |             |   | (513  | )                                                 | 
|Amounts
    reclassified from accumulated other comprehensive income |  |                                   | (417    | ) |             |   | (236  | )                                                 | 
|Net
    other comprehensive income (loss) during period              |  |                                   | 5,508   |   |             |   | (749  | )                                                 | 
|Balance
    at End of Period                                         |  | $                                 | 3,843   |   |             | $ | (76   | )                                                 | 
|                                                                     |  |                                   |         |   |             |   |       |                                                   | 
|Three
    Months Ended June 30, 2018                                 |  |                                   |         |   |             |   |       |                                                   | 
|Balance
    at Beginning of Period                                   |  | $                                 | (8,959  | ) |             | $ | 3,549 |                                                   | 
|Other
    comprehensive income (loss) before reclassifications       |  |                                   | (1,935  | ) |             |   | 692   |                                                   | 
|Amounts
    reclassified from accumulated other comprehensive income |  |                                   | (20     | ) |             |   | 64    |                                                   | 
|Net
    other comprehensive (loss) income during period              |  |                                   | (1,955  | ) |             |   | 756   |                                                   | 
|Balance
    at End of Period                                         |  | $                                 | (10,914 | ) |             | $ | 4,305 |                                                   | 



|(dollars
    in thousands)                                                            |  | Securities
    Available For Sale |         |   | Derivatives |   |        | Accumulated
    Other Comprehensive Income (Loss) | 
|------------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ----------- | - | ------ | ------------------------------------------------- | 
|Six Months Ended June 30, 2019                                                        |  |                                   |         |   |             |   |        |                                                   | 
|Balance at Beginning of
    Period                                                    |  | $                                 | (7,044  | ) |             | $ | 2,769  |                                                   | 
|Other comprehensive
    income (loss) before reclassifications                        |  |                                   | 11,979  |   |             |   | (1,665 | )                                                 | 
|Amounts
    reclassified from accumulated other comprehensive income                  |  |                                   | (1,092  | ) |             |   | (1,180 | )                                                 | 
|Net
    other comprehensive income (loss) during period                               |  |                                   | 10,887  |   |             |   | (2,845 | )                                                 | 
|Balance at End of Period                                                              |  | $                                 | 3,843   |   |             | $ | (76    | )                                                 | 
|                                                                                      |  |                                   |         |   |             |   |        |                                                   | 
|Six Months Ended June 30, 2018                                                        |  |                                   |         |   |             |   |        |                                                   | 
|Balance at Beginning of Period                                                        |  | $                                 | (3,131  | ) |             | $ | 1,381  |                                                   | 
|Other comprehensive
    income (loss) before reclassifications                        |  |                                   | (7,058  | ) |             |   | 2,925  |                                                   | 
|Amounts
    reclassified from accumulated other comprehensive income                  |  |                                   | (51     | ) |             |   | (1     | )                                                 | 
|Net
    other comprehensive (loss) income during period                               |  |                                   | (7,109  | ) |             |   | 2,924  |                                                   | 
|Reclassification
    of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI |  |                                   | (674    | ) |             |   | —      |                                                   | 
|Balance at End of Period                                                              |  | $                                 | (10,914 | ) |             | $ | 4,305  |                                                   | 



31







The
following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the
three and six months ended June 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 June 30,                                                  |      |   |                                                                        
|                                                                                             |  | 2019                                                                             |      |   | 2018                                                                   
|Realized
    gain on sale of investment securities                                           |  | $                                                                                | 563  |   |                                                                        
|Interest
    income (expense) derivative deposits                                            |  |                                                                                  | 319  |   |                                                                        
|Income
    tax (expense) benefit                                                             |  |                                                                                  | (229 | ) |                                                                        
|Total
    Reclassifications for the Period                                                   |  | $                                                                                | 653  |   |                                                                        



|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
|-------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------- | ----- | - | -----------------------------------------------------------------------
|                                                                                             |  | Six
    Months Ended June 30,                                             |       |   |                                                                        
|                                                                                             |  | 2019                                                                      |       |   | 2018                                                                   
|Realized
    gain on sale of investment securities                                           |  | $                                                                         | 1,475 |   |                                                                        
|Realized
    gain on swap termination                                                        |  |                                                                           | 829   |   |                                                                        
|Interest
    income (expense) derivative deposits                                            |  |                                                                           | 765   |   |                                                                        
|Income
    tax expense                                                                       |  |                                                                           | (797  | ) |                                                                        
|Total
    Reclassifications for the Period                                                   |  | $                                                                         | 2,272 |   |                                                                        



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:



| | Level
                           1 | 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.
| | ---------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Level
                           2 | 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.
| | ---------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Level
                           3 | 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.
| | ---------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32







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 June 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) | 
|----------------------------------------------------------------------------------------- |  | --------------------------- | - |  | ------------------------------------------------- | - | ------- | --------------------------------------------------- |  | - | ----------------------- | 
|June 30, 2019                                                                             |  |                             |   |  |                                                   |   |         |                                                    
|Assets:                                                                                   |  |                             |   |  |                                                   |   |         |                                                    
|Investment securities available-for-sale:                                                 |  |                             |   |  |                                                   |   |         |                                                     |  |   |                         | 
|U. S. agency securities                                                                   |  | $                           | — |  |                                                   | $ | 225,670 |                                                     |  | $ | —                       | 
|Residential mortgage backed securities                                                    |  |                             | — |  |                                                   |   | 443,545 |                                                     |  |   | —                       | 
|Municipal bonds                                                                           |  |                             | — |  |                                                   |   | 69,338  |                                                     |  |   | —                       | 
|Corporate bonds                                                                           |  |                             | — |  |                                                   |   | —       |                                                     |  |   | 6,572                   | 
|Other equity investments                                                                  |  |                             | — |  |                                                   |   | —       |                                                     |  |   | 218                     | 
|Loans held for sale                                                                       |  |                             | — |  |                                                   |   | 37,506  |                                                     |  |   | —                       | 
|Interest Rate Caps                                                                        |  |                             | — |  |                                                   |   | 41      |                                                     |  |   | —                       | 
|Mortgage banking derivatives                                                              |  |                             | — |  |                                                   |   | —       |                                                     |  |   | 387                     | 
|Total assets measured at fair value on a recurring basis as of June
    30, 2019          |  | $                           | — |  |                                                   | $ | 776,100 |                                                     |  | $ | 7,177                   | 
|                                                                                          |  |                             |   |  |                                                   |   |         |                                                     |  |   |                         | 
|Liabilities:                                                                              |  |                             |   |  |                                                   |   |         |                                                     |  |   |                         | 
|Interest rate swap derivatives                                                            |  | $                           | — |  |                                                   | $ | 101     |                                                     |  | $ | —                       | 
|Derivative liability                                                                      |  |                             | — |  |                                                   |   | 101     |                                                     |  |   | —                       | 
|Interest Rate Caps                                                                        |  |                             | — |  |                                                   |   | 40      |                                                     |  |   | —                       | 
|Mortgage banking derivatives                                                              |  |                             | — |  |                                                   |   | —       |                                                     |  |   | 309                     | 
|Total liabilities measured at fair value on a recurring basis as of
    June 30, 2019     |  | $                           | — |  |                                                   | $ | 242     |                                                     |  | $ | 309                     | 
|                                                                                          |  |                             |   |  |                                                   |   |         |                                                     |  |   |                         | 
|December 31, 2018                                                                         |  |                             |   |  |                                                   |   |         |                                                     |  |   |                         | 
|Assets:                                                                                   |  |                             |   |  |                                                   |   |         |                                                     |  |   |                         | 
|Investment securities available-for-sale:                                                 |  |                             |   |  |                                                   |   |         |                                                     |  |   |                         | 
|U. S. agency securities                                                                   |  | $                           | — |  |                                                   | $ | 256,345 |                                                     |  | $ | —                       | 
|Residential mortgage backed securities                                                    |  |                             | — |  |                                                   |   | 472,231 |                                                     |  |   | —                       | 
|Municipal bonds                                                                           |  |                             | — |  |                                                   |   | 45,769  |                                                     |  |   | —                       | 
|Corporate bonds                                                                           |  |                             | — |  |                                                   |   | —       |                                                     |  |   | 9,576                   | 
|Other equity investments                                                                  |  |                             | — |  |                                                   |   | —       |                                                     |  |   | 218                     | 
|Loans held for sale                                                                       |  |                             | — |  |                                                   |   | 19,254  |                                                     |  |   | —                       | 
|Mortgage banking derivatives                                                              |  |                             | — |  |                                                   |   | —       |                                                     |  |   | 229                     | 
|Interest rate swap derivatives                                                            |  |                             | — |  |                                                   |   | 3,727   |                                                     |  |   | —                       | 
|Total assets measured at fair value on a recurring basis as of
    December 31, 2018      |  | $                           | — |  |                                                   | $ | 797,326 |                                                     |  | $ | 10,023                  | 
|                                                                                          |  |                             |   |  |                                                   |   |         |                                                     |  |   |                         | 
|Liabilities:                                                                              |  |                             |   |  |                                                   |   |         |                                                     |  |   |                         | 
|Mortgage banking derivatives                                                              |  | $                           | — |  |                                                   | $ | —       |                                                     |  | $ | 269                     | 
|Total liabilities measured at fair value on a recurring basis as of
    December 31, 2018 |  | $                           | — |  |                                                   | $ | —       |                                                     |  | $ | 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: 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.



33







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 June 30, 2019 and December 31, 2018.



|                                             |  | June
    30, 2019 |       
|-------------------------------------------- |  | ----------------- | ------
|(dollars
    in thousands)                   |  | Fair
    Value    |       
|                                             |  |                   |       
|Residential mortgage loans
    held for sale |  | $                 | 37,506
|FHA mortgage loans held for sale             |  | $                 | —     



|                                             |  | December
    31, 2018 |       
|-------------------------------------------- |  | --------------------- | ------
|(dollars
    in thousands)                   |  | Fair
    Value        |       
|                                             |  |                       |       
|Residential mortgage loans
    held for sale |  | $                     | 19,254
|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 June 30, 2019 or December
31, 2018.



Interest
rate swap derivatives:These derivative instruments consist of 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: 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.



34







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 |       | 
|Realized gain
    included in earnings                     |  |                           | —      |   |                                  |   | 158 |       | 
|Unrealized loss
    included in other comprehensive income |  |                           | —      |   |                                  |   | —   |       | 
|Principal
    redemption                                   |  |                           | (3,004 | ) |                                  |   | —   |       | 
|Ending balance at June 30, 2019                            |  | $                         | 6,790  |   |                                  | $ | 387 |       | 
|                                                           |  |                           |        |   |                                  |   |     |       | 
|Liabilities:                                               |  |                           |        |   |                                  |   |     |       | 
|Beginning balance at January 1, 2019                       |  | $                         | —      |   |                                  | $ | 269 |       | 
|Realized gain
    included in earnings                     |  |                           | —      |   |                                  |   | 40  |       | 
|Principal
    redemption                                   |  |                           | —      |   |                                  |   | —   |       | 
|Ending balance at June 30, 2019                            |  | $                         | —      |   |                                  | $ | 309 |       | 



|(dollars
    in thousands)                     |  | Investment
    Securities |       |  | Mortgage
    Banking Derivatives |   |     | Total | 
|---------------------------------------------- |  | ------------------------- | ----- |  | -------------------------------- | - | --- | ----- | 
|Assets:                                        |  |                           |       |  |                                  |   |     |       | 
|Beginning balance at January 1, 2018           |  | $                         | 1,718 |  |                                  | $ | 43  |       | 
|Realized gain
    included in earnings         |  |                           | —     |  |                                  |   | 186 |       | 
|Purchases of
    available-for-sale securities |  |                           | 8,076 |  |                                  |   | —   |       | 
|Principal
    redemption                       |  |                           | —     |  |                                  |   | —   |       | 
|Ending balance at December 31, 2018            |  | $                         | 9,794 |  |                                  | $ | 229 |       | 
|                                               |  |                           |       |  |                                  |   |     |       | 
|Liabilities:                                   |  |                           |       |  |                                  |   |     |       | 
|Beginning balance at January 1, 2018           |  | $                         | —     |  |                                  | $ | 10  |       | 
|Realized loss
    included in earnings         |  |                           | —     |  |                                  |   | 259 |       | 
|Principal
    redemption                       |  |                           | —     |  |                                  |   | —   |       | 
|Ending balance at December 31, 2018            |  | $                         | —     |  |                                  | $ | 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: 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 June 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.



35







Other
real estate 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) | 
|----------------------------------------------------------------------------------- |  | --------------------------- | - |  | ------------------------------------------------- | - | - | --------------------------------------------------- |  | - | ----------------------- | 
|June
    30, 2019                                                                   |  |                             |   |  |                                                   |   |   |                                                     |  |   |                         | 
|Impaired
    loans:                                                                 |  |                             |   |  |                                                   |   |   |                                                     |  |   |                         | 
|Commercial                                                                          |  | $                           | — |  |                                                   | $ | — |                                                     |  | $ | 9,057                   | 
|Income
    producing - commercial real estate                                       |  |                             | — |  |                                                   |   | — |                                                     |  |   | 7,953                   | 
|Owner
    occupied - commercial real estate                                         |  |                             | — |  |                                                   |   | — |                                                     |  |   | 4,344                   | 
|Real
    estate mortgage - residential                                              |  |                             | — |  |                                                   |   | — |                                                     |  |   | 4,990                   | 
|Construction
    - commercial and residential                                       |  |                             | — |  |                                                   |   | — |                                                     |  |   | 9,155                   | 
|Home
    equity                                                                     |  |                             | — |  |                                                   |   | — |                                                     |  |   | 487                     | 
|Other
    real estate owned                                                         |  |                             | — |  |                                                   |   | — |                                                     |  |   | 1,394                   | 
|Total
    assets measured at fair value on a nonrecurring basis as of June 30, 2019 |  | $                           | — |  |                                                   | $ | — |                                                     |  | $ | 37,380                  | 



|(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                   | 
|Income
    producing - commercial real estate                                           |  |                             | — |  |                                                   |   | — |                                                     |  |   | 18,937                  | 
|Owner
    occupied - commercial real estate                                             |  |                             | — |  |                                                   |   | — |                                                     |  |   | 5,131                   | 
|Real
    estate mortgage - residential                                                  |  |                             | — |  |                                                   |   | — |                                                     |  |   | 1,510                   | 
|Construction
    - commercial and residential                                           |  |                             | — |  |                                                   |   | — |                                                     |  |   | 1,981                   | 
|Home
    equity                                                                         |  |                             | — |  |                                                   |   | — |                                                     |  |   | 487                     | 
|Other
    real estate owned                                                             |  |                             | — |  |                                                   |   | — |                                                     |  |   | 1,394                   | 
|Total
    assets measured at fair value on a nonrecurring basis as of December 31, 2018 |  | $                           | — |  |                                                   | $ | — |                                                     |  | $ | 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.



36







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





|                                                 |  |                    |           |  |                |   |           | Fair
    Value Measurements | 
|------------------------------------------------ |  | ------------------ | --------- |  | -------------- | - | --------- | --------------------------- | 
|(dollars
    in thousands)                       |  | Carrying
    Value |           |  | Fair
    Value |   |           | Quoted
    Prices (Level 1) | 
|June 30, 2019                                    |  |                    |           |  |                |   |           |                             | 
|Assets                                           |  |                    |           |  |                |   |           |                             | 
|Cash and due from banks                          |  | $                  | 6,735     |  |                | $ | 6,735     |                             | 
|Federal funds sold                               |  |                    | 17,914    |  |                |   | 17,914    |                             | 
|Interest bearing deposits with other banks       |  |                    | 171,985   |  |                |   | 171,985   |                             | 
|Investment securities                            |  |                    | 745,343   |  |                |   | 745,343   |                             | 
|Federal Reserve and Federal Home Loan Bank stock |  |                    | 33,903    |  |                |   | 33,903    |                             | 
|Loans held for sale                              |  |                    | 37,506    |  |                |   | 37,506    |                             | 
|Loans                                            |  |                    | 7,320,529 |  |                |   | 7,392,664 |                             | 
|Bank owned life insurance                        |  |                    | 74,295    |  |                |   | 74,295    |                             | 
|Annuity investment                               |  |                    | 12,088    |  |                |   | 12,088    |                             | 
|Interest Rate Caps                               |  |                    | 41        |  |                |   | 41        |                             | 
|Mortgage banking derivatives                     |  |                    | 387       |  |                |   | 387       |                             | 
|                                                 |  |                    |           |  |                |   |           |                             | 
|Liabilities                                      |  |                    |           |  |                |   |           |                             | 
|Noninterest bearing deposits                     |  |                    | 1,873,902 |  |                |   | 1,873,902 |                             | 
|Interest bearing deposits                        |  |                    | 3,574,696 |  |                |   | 3,574,696 |                             | 
|Certificates of deposit                          |  |                    | 1,501,294 |  |                |   | 1,509,812 |                             | 
|Customer repurchase agreements                   |  |                    | 31,669    |  |                |   | 31,669    |                             | 
|Borrowings                                       |  |                    | 467,491   |  |                |   | 468,790   |                             | 
|Interest rate swap derivatives                   |  |                    | 101       |  |                |   | 101       |                             | 
|Derivative liability                             |  |                    | 101       |  |                |   | 101       |                             | 
|Interest Rate Caps                               |  |                    | 40        |  |                |   | 40        |                             | 
|Mortgage banking derivatives                     |  |                    | 309       |  |                |   | 309       |                             | 
|                                                 |  |                    |           |  |                |   |           |                             | 
|December 31, 2018                                |  |                    |           |  |                |   |           |                             | 
|Assets                                           |  |                    |           |  |                |   |           |                             | 
|Cash and due from banks                          |  | $                  | 6,773     |  |                | $ | 6,773     |                             | 
|Federal funds sold                               |  |                    | 11,934    |  |                |   | 11,934    |                             | 
|Interest bearing deposits with other banks       |  |                    | 303,157   |  |                |   | 303,157   |                             | 
|Investment securities                            |  |                    | 784,139   |  |                |   | 784,139   |                             | 
|Federal Reserve and Federal Home Loan Bank stock |  |                    | 23,506    |  |                |   | 23,506    |                             | 
|Loans held for sale                              |  |                    | 19,254    |  |                |   | 19,254    |                             | 
|Loans                                            |  |                    | 6,921,503 |  |                |   | 6,921,048 |                             | 
|Bank owned life insurance                        |  |                    | 73,441    |  |                |   | 73,441    |                             | 
|Annuity investment                               |  |                    | 12,417    |  |                |   | 12,417    |                             | 
|Mortgage banking derivatives                     |  |                    | 229       |  |                |   | 229       |                             | 
|Interest rate swap derivatives                   |  |                    | 3,727     |  |                |   | 3,727     |                             | 
|                                                 |  |                    |           |  |                |   |           |                             | 
|Liabilities                                      |  |                    |           |  |                |   |           |                             | 
|Noninterest bearing deposits                     |  |                    | 2,104,220 |  |                |   | 2,104,220 |                             | 
|Interest bearing deposits                        |  |                    | 3,542,666 |  |                |   | 3,542,666 |                             | 
|Certificates of deposit                          |  |                    | 1,327,400 |  |                |   | 1,325,209 |                             | 
|Customer repurchase agreements                   |  |                    | 30,413    |  |                |   | 30,413    |                             | 
|Borrowings                                       |  |                    | 217,196   |  |                |   | 218,006   |                             | 
|Mortgage banking derivatives                     |  |                    | 269       |  |                |   | 269       |                             | 







37







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, 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. 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 insurance carriers in 2013 totaling $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 six months ended
June 30, 2019, the annuity contracts accrued $40 thousand of income offset by annual fees of $141 thousand, and $81 thousand
of income offset by $150 thousand of annual fees, respectively, which were included in other noninterest income on the
Consolidated Statement of Operations. For the three and six months ended June 30, 2018, the annuity contracts accrued $65
thousand of income offset by $110 thousand of annual fees, and $102 thousand of income offset by $119 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 $12.1 million and $12.4 million at June 30, 2019 and December 31, 2018,
respectively, and is included in other assets on the Consolidated Balance Sheet. For the three and six months ended June 30,
2019, the Company recorded benefit expense accruals of $101 thousand and $202 thousand, respectively, for this post
retirement benefit. For the three and six months ended June 30, 2018, the Company recorded benefit expense accruals of $385
thousand and $486 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.



38







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 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 except as indicated in “Accounting Standards Adopted in 2019” in Note 1.



39







RESULTS
OF OPERATIONS



Earnings
Summary






Net
income for the three months ended June 30, 2019 was $37.2 million compared to $37.3 million net income for the three months ended
June 30, 2018. Net income per basic common share for the three months ended June 30, 2019 was $1.08 compared to $1.09 for the
same period in 2018. Net income per diluted common share was $1.08 for both the three months ended June 30, 2019 and June 30,
2018.



Net
income remained flat for the three months ended June 30, 2019 relative to the same period in 2018 due to higher revenues (i.e.
net interest income plus noninterest income) offset by higher expenses in the 2019 period. The provision for income taxes was
$13.5 million, an increase of $959 thousand or 8% compared to the same period in 2018. The most significant portion of revenue
is net interest income, which increased 4% for the three months ended June 30, 2019 over the same period in 2018 ($81.3 million
versus $78.2 million), resulting from growth in average earning assets of 10%.



For
the three months ended June 30, 2019, the Company reported an annualized return on average assets (“ROAA”) of 1.74%
as compared to 1.92% for the three months ended June 30, 2018. The annualized return on average common equity (“ROACE”)
for the three months ended June 30, 2019 was 12.81% as compared to 14.93% for the three months ended June 30, 2018. The annualized
return on average tangible common equity (“ROATCE”) for the three months ended June 30, 2019 was 14.08% as compared
to 16.71% for the three months ended June 30, 2018. The decline in these ratios was primarily due to a decline in the net interest margin.



For
the six months ended June 30, 2019, the Company’s net income was $71.0 million, a 3% decrease from the $73.0 million of
net income for the same period in 2018. Net income per basic common share for the six months ended June 30, 2019 was $2.06 compared
to $2.13 for the same period in 2018, a 3% decrease. Net income per diluted common share for the six months ended June 30, 2019
was $2.05 compared to $2.12 for the same period in 2018, a 3% decrease.



The
decrease in net income for the six months ended June 30, 2019 can be attributed primarily to $6.2 million in nonrecurring charges
recognized during the first quarter of 2019 related to share based compensation awards and the retirement of our former Chairman
and Chief Executive Officer, Mr. Ronald D. Paul. The provision for income taxes was $25.4 million, an increase of $575 thousand
or 2% compared to the same period in 2018. The most significant portion of revenue is net interest income, which increased 5%
for the six months ended June 30, 2019 over the same period in 2018 ($162.3 million versus $154.0 million), resulting from growth
in average earning assets of 11%.



For
the six months ended June 30, 2019, the Company reported an annualized ROAA of 1.68% as compared to 1.91% for the six months ended
June 30, 2018. The annualized ROACE for the six months ended June 30, 2019 was 12.47% as compared to 14.96% for the six months
ended June 30, 2018. The annualized ROATCE for the six months ended June 30, 2019 was 13.73% as compared to 16.78% for the six
months ended June 30, 2018. The decline in these ratios was primarily due to a decline in the net interest margin.



The
net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as
a percentage of earning assets, was 3.91% for the three months ended June 30, 2019 and 4.15% for the same period in 2018. Average
earning asset yields increased 10 basis points to 5.21% for the three months ended June 30, 2019, as compared to 5.11% for the
same period in 2018. The average cost of interest bearing liabilities increased by 52 basis points (to 2.06% from 1.54%) for the
three months ended June 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 42 basis points for the three months ended June
30, 2019 as compared to 2018 (3.15% versus 3.57%).



The
benefit of noninterest sources funding earning assets increased by 18 basis points to 76 basis points from 58 basis points for
the three months ended June 30, 2019 versus the same period in 2018. The combination of a 42 basis point decrease in the net interest
spread and an 18 basis point increase in the value of noninterest sources resulted in a 24 basis point decrease in the net interest
margin for the three months ended June 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.



40







The
net interest margin was 3.97% for the six months ended June 30, 2019 and 4.16% for the same period in 2018. Average earning asset
yields increased 20 basis points to 5.21% for the six months ended June 30, 2019, as compared to 5.01% for the same period in
2018. The average cost of interest bearing liabilities increased by 64 basis points (to 2.01% from 1.37%) for the six months ended
June 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 44 basis points for the six months ended June 30, 2019 as compared to
2018 (3.20% versus 3.64%).



The
benefit of noninterest sources funding earning assets increased by 25 basis points to 77 basis points from 52 basis points for
the six months ended June 30, 2019 versus the same period in 2018. The combination of a 44 basis point decrease in the net interest
spread and a 25 basis point increase in the value of noninterest sources resulted in a 19 basis point decrease in the net interest
margin for the six months ended June 30, 2019 as compared to the same period in 2018.



The
Company believes it has effectively managed its net interest margin and net interest income over the past twelve months as market
interest rates (on average) have trended higher. 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 June 30, 2019.



For
the first six months of 2019, total loans grew 6% over December 31, 2018, and average loans were 10% higher in the first six months
of 2019 as compared to the first six months of 2018. At June 30, 2019, total deposits were slightly lower than deposits at December
31, 2018, while average deposits were 13% higher for the first six months of 2019 compared with the first six months of 2018.



In order to fund growth in average loans of 10% over the six months ended June 30, 2019 as compared to the
same period in 2018, as well as sustain significant liquidity, the Company has relied on funding from interest bearing accounts
primarily as a result of effectively building new and enhanced client relationships, and a focus on time deposits to lock in more
fixed rate deposits at terms approximating 16 months.



In
terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets,
represented 87% of average earning assets for both the first six months of 2019 and 2018. For the first six months of 2019, as
compared to the same period in 2018, average loans, excluding loans held for sale, increased $648.1 million, a 10% increase, due
primarily to growth in income producing - commercial real estate, owner occupied - commercial real estate, and commercial loans.
Average investment securities for the six months ended June 30, 2019 and 2018 amounted to 10% and 8% of average earning assets,
respectively. The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented
4% of average earning assets for both the first six months of 2019 and 2018.



The
provision for credit losses was $3.6 million for the three months ended June 30, 2019 as compared to $1.7 million for the three
months ended June 30, 2018. Net charge-offs of $1.5 million in the second quarter of 2019 represented an annualized 0.08% of average
loans, excluding loans held for sale, as compared to $848 thousand, or an annualized 0.05% of average loans, excluding loans held
for sale, in the second quarter of 2018. Net charge-offs in the second quarter of 2019 were attributable primarily to commercial
real estate loans ($1.5 million).



At
June 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 represented 193% of nonperforming loans at June 30, 2019, as compared to 430% at December 31,
2018.  The lower ratio was due to an increase
in nonperforming loans at June 30, 2019, substantially attributable to softness in the market for high-end residential properties.



Total
noninterest income for the three months ended June 30, 2019 increased to $6.4 million from $5.6 million for the three months ended
June 30, 2018, a 15% increase, due substantially to $537 thousand higher gains on the sale of investment securities and $362 thousand
higher gains on the sale of residential mortgage loans ($1.9 million versus $1.5 million) resulting from higher volume as compared
to 2018. Residential mortgage loans closed were $152 million for the second quarter of 2019 versus $126 million for the second
quarter of 2018.



The
efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 38.04% for the second quarter of 2019,
as compared to 38.55% for the second quarter of 2018. Noninterest expenses totaled $33.4 million for the three months ended June
30, 2019, as compared to $32.3 million for the three months ended June 30, 2018, a 3% increase. Data processing expense increased
by $199 thousand due primarily to the costs of software and infrastructure investments. Legal, accounting and professional fees
increased $561 thousand from $2.2 million to $2.7 million, the reasons of which are further discussed in the “Noninterest
Expense” section. Other expenses increased $448 thousand, due primarily to $354 thousand higher real estate and utility
costs on special assets.



41







The
provision for credit losses was $7.0 million for the six months ended June 30, 2019 as compared to $3.6 million for the six months
ended June 30, 2018. The higher provisioning for the six months ended June 30, 2019, as compared to the same period in 2018, is
due primarily to higher net charge-offs. Net charge-offs of $4.8 million for the six months ended June 30, 2019 represented an
annualized 0.13% of average loans, excluding loans held for sale, as compared to $1.8 million, or an annualized 0.05% of average
loans, excluding loans held for sale, in the first six months of 2018. Net charge-offs in the first six months of 2019 were attributable
primarily to commercial real estate loans ($5.0 million) offset by a recovery in commercial loans ($162 thousand).



Total
noninterest income for the six months ended June 30, 2019 increased to $12.7 million from $10.9 million for the six months ended
June 30, 2018, a 17% increase, due substantially to $1.4 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 $288 thousand higher
gains on the sale of residential mortgage loans ($3.2 million versus $2.9 million) resulting from higher volume as compared to
2018. Residential mortgage loans closed were $246 million for the six months ended June 30, 2019 versus $226 million for the same
period in 2018.



The
efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 40.95% for the first six months of 2019,
as compared to 38.47% for the same period in 2018. Noninterest expenses totaled $71.7 million for the six months ended June 30,
2019, as compared to $63.4 million for the six months ended June 30, 2018, a 13% increase. Cost increases for salaries and benefits
for the six months ended June 30, 2019 were $6.7 million, due primarily to $6.2 million of nonrecurring charges related to share
based compensation and the retirement of our former Chairman and Chief Executive Officer, Mr. Ronald D. Paul, and secondly to
increased overall headcount. Marketing and advertising expense increased by $188 thousand due primarily to increased digital,
radio and television advertising spend. Data processing expense increased by $257 thousand due primarily to the costs of software
and infrastructure investments. Legal, accounting, and professional fees decreased $703 thousand from $5.2 million to $4.4 million,
the reasons of which are further discussed in the “Noninterest Expense” section. Other expenses increased $1.5 million,
due primarily to broker fees ($554 thousand) and real estate and utility costs on special assets ($369 thousand).



The
ratio of common equity to total assets increased to 13.66% at June 30, 2019 from 13.22% at December 31, 2018, due primarily to
retained earnings. 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 June 30, 2019, net interest income increased 4% over the same period for 2018. Average loans increased
by $691.0 million and average deposits increased by $624.9 million. The net interest margin was 3.91% for the three months ended
June 30, 2019 and 4.15% for the same period in 2018.



For
the six months ended June 30, 2019, net interest income increased 5% over the same period for 2018. Average loans increased by
$648.1 million and average deposits increased by $773.8 million. The net interest margin was 3.97% for the six months ended June
30, 2019 and 4.16% for the same period in 2018. The Company believes its current net interest margin remains favorable compared
to peer banking companies.



The
tables below present the average balances and rates of the major categories of the Company’s assets and liabilities for
the three and six months ended June 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.



42







Eagle
Bancorp, Inc.

Consolidated
Average Balances, Interest Yields And Rates (Unaudited)

(dollars
in thousands)





|                                                                                |  | Three
    Months Ended June 30, |          
|------------------------------------------------------------------------------- |  | ------------------------------- | ---------
|                                                                                |  | 2019                            |          
|                                                                                |  | Average
    Balance             |          
|ASSETS                                                                          |  |                                 |          
|Interest earning assets:                                                        |  |                                 |          
|Interest
    bearing deposits with other banks and other short-term investments |  | $                               | 209,096  
|Loans held for sale
    (1)                                                     |  |                                 | 34,760   
|Loans (1) (2)                                                                   |  |                                 | 7,260,899
|Investment securities
    available for sale (2)                                |  |                                 | 803,207  
|Federal
    funds sold                                                          |  |                                 | 20,361   
|Total
    interest earning assets                                               |  |                                 | 8,328,323
|                                                                                |  |                                 |          
|Total noninterest earning
    assets                                            |  |                                 | 337,172  
|Less:
    allowance for credit losses                                           |  |                                 | 69,972   
|Total
    noninterest earning assets                                            |  |                                 | 267,200  
|TOTAL
    ASSETS                                                                |  | $                               | 8,595,523
|                                                                                |  |                                 |          
|LIABILITIES
    AND SHAREHOLDERS’ EQUITY                                        |  |                                 |          
|Interest bearing liabilities:                                                   |  |                                 |          
|Interest bearing transaction                                                    |  | $                               | 705,628  
|Savings and money market                                                        |  |                                 | 2,628,255
|Time
    deposits                                                               |  |                                 | 1,442,197
|Total
    interest bearing deposits                                             |  |                                 | 4,776,080
|Customer repurchase
    agreements                                              |  |                                 | 33,248   
|Other short-term borrowings                                                     |  |                                 | 219,508  
|Long-term
    borrowings                                                        |  |                                 | 217,458  
|Total
    interest bearing liabilities                                          |  |                                 | 5,246,294
|                                                                                |  |                                 |          
|Noninterest bearing
    liabilities:                                            |  |                                 |          
|Noninterest bearing
    demand                                                  |  |                                 | 2,117,901
|Other
    liabilities                                                           |  |                                 | 64,841   
|Total
    noninterest bearing liabilities                                       |  |                                 | 2,182,742
|                                                                                |  |                                 |          
|Shareholders’
    Equity                                                        |  |                                 | 1,166,487
|TOTAL
    LIABILITIES AND SHAREHOLDERS’ EQUITY                                  |  | $                               | 8,595,523
|                                                                                |  |                                 |          
|Net
    interest income                                                         |  |                                 |          
|Net interest spread                                                             |  |                                 |          
|Net interest margin                                                             |  |                                 |          
|Cost of funds                                                                   |  |                                 |          





| | (1) | Loans
                                         placed on nonaccrual status are included in average balances. Net loan fees and late
                                         charges included in interest income on loans totaled $4.7 million and $5.2 million for
                                         the three months ended June 30, 2019 and 2018, respectively.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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





43









Eagle
Bancorp, Inc.

Consolidated
Average Balances, Interest Yields and Rates (Unaudited)

(dollars
in thousands)





|                                                                                |  | Six
    Months Ended June 30, |          
|------------------------------------------------------------------------------- |  | ----------------------------- | ---------
|                                                                                |  | 2019                          |          
|                                                                                |  | Average
    Balance           |          
|ASSETS                                                                          |  |                               |          
|Interest
    earning assets:                                                    |  |                               |          
|Interest
    bearing deposits with other banks and other short-term investments |  | $                             | 254,804  
|Loans
    held for sale (1)                                                     |  |                               | 26,386   
|Loans
    (1) (2)                                                               |  |                               | 7,150,300
|Investment
    securities available-for-sale (2)                                |  |                               | 806,858  
|Federal
    funds sold                                                          |  |                               | 19,063   
|Total
    interest earning assets                                               |  |                               | 8,257,411
|                                                                                |  |                               |          
|Total
    noninterest earning assets                                            |  |                               | 338,290  
|Less:
    allowance for credit losses                                           |  |                               | 69,713   
|Total
    noninterest earning assets                                            |  |                               | 268,577  
|TOTAL
    ASSETS                                                                |  | $                             | 8,525,988
|                                                                                |  |                               |          
|LIABILITIES
    AND SHAREHOLDERS’ EQUITY                                        |  |                               |          
|Interest
    bearing liabilities:                                               |  |                               |          
|Interest
    bearing transaction                                                |  | $                             | 648,557  
|Savings
    and money market                                                    |  |                               | 2,709,950
|Time
    deposits                                                               |  |                               | 1,386,876
|Total
    interest bearing deposits                                             |  |                               | 4,745,383
|Customer
    repurchase agreements                                              |  |                               | 30,536   
|Other
    short-term borrowings                                                 |  |                               | 120,832  
|Long-term
    borrowings                                                        |  |                               | 217,408  
|Total
    interest bearing liabilities                                          |  |                               | 5,114,159
|                                                                                |  |                               |          
|Noninterest
    bearing liabilities:                                            |  |                               |          
|Noninterest
    bearing demand                                                  |  |                               | 2,195,084
|Other
    liabilities                                                           |  |                               | 68,963   
|Total
    noninterest bearing liabilities                                       |  |                               | 2,264,047
|                                                                                |  |                               |          
|Shareholders’
    equity                                                        |  |                               | 1,147,782
|TOTAL
    LIABILITIES AND SHAREHOLDERS’ EQUITY                                  |  | $                             | 8,525,988
|                                                                                |  |                               |          
|Net
    interest income                                                         |  |                               |          
|Net
    interest spread                                                         |  |                               |          
|Net
    interest margin                                                         |  |                               |          
|Cost
    of funds                                                               |  |                               |          





| | (1) | Loans
                                         placed on nonaccrual status are included in average balances. Net loan fees and late
                                         charges included in interest income on loans totaled $8.8 million and $9.9 million for
                                         the six months ended June 30, 2019 and 2018, respectively.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



44







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 loan review consultant, 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 at page 46 which reflects activity in the allowance for credit losses.



During
the three months ended June 30, 2019, the allowance for credit losses reflected $3.6 million in provision for credit losses and
$1.5 million in net charge-offs during the period. The provision for credit losses was $3.6 million for the three months ended
June 30, 2019 as compared to $1.7 million for the same period in 2018. Net charge-offs of $1.5 million in the second quarter of
2019 represented an annualized 0.08% of average loans, excluding loans held for sale, as compared to $848 thousand, or an annualized
0.05% of average loans, excluding loans held for sale, in the second quarter of 2018.



During
the six months ended June 30, 2019, the allowance for credit losses reflected $7.0 million in provision for credit losses and
$4.8 million in net charge-offs during the period. The provision for credit losses was $7.0 million for the six months ended June
30, 2019 as compared to $3.6 million for the same period in 2018. Net charge-offs of $4.8 million in the first six months of 2019
represented an annualized 0.13% of average loans, excluding loans held for sale, as compared to $1.8 million, or an annualized
0.05% of average loans, excluding loans held for sale, in the first six months of 2018.



As
part of its comprehensive loan review process, the 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.



45







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



|                                                                                                          |  | Six
    Months Ended June 30, |       
|--------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------
|(dollars
    in thousands)                                                                                |  | 2019                          |       
|Balance
    at beginning of period                                                                        |  | $                             | 69,944
|Charge-offs:                                                                                              |  |                               |       
|Commercial                                                                                                |  |                               | 5     
|Income
    producing - commercial real estate                                                             |  |                               | 5,343 
|Owner
    occupied - commercial real estate                                                               |  |                               | —     
|Real
    estate mortgage - residential                                                                    |  |                               | —     
|Construction
    - commercial and residential                                                             |  |                               | —     
|Construction
    - C&I (owner occupied)                                                                   |  |                               | —     
|Home
    equity                                                                                           |  |                               | —     
|Other
    consumer                                                                                        |  |                               | 2     
|Total
    charge-offs                                                                                     |  |                               | 5,350 
|                                                                                                          |  |                               |       
|Recoveries:                                                                                               |  |                               |       
|Commercial                                                                                                |  |                               | 167   
|Income
    producing - commercial real estate                                                             |  |                               | 302   
|Owner
    occupied - commercial real estate                                                               |  |                               | 2     
|Real
    estate mortgage - residential                                                                    |  |                               | 3     
|Construction
    - commercial and residential                                                             |  |                               | 37    
|Construction
    - C&I (owner occupied)                                                                   |  |                               | —     
|Home
    equity                                                                                           |  |                               | —     
|Other
    consumer                                                                                        |  |                               | 21    
|Total
    recoveries                                                                                      |  |                               | 532   
|Net
    charge-offs                                                                                       |  |                               | 4,818 
|Provision
    for Credit Losses                                                                           |  |                               | 6,960 
|Balance
    at end of period                                                                              |  | $                             | 72,086
|                                                                                                          |  |                               |       
|Annualized
    ratio of net charge-offs during the period  to average loans outstanding during the period |  |                               | 0.13  



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.





|                                              |  | June
    30, 2019 |        |  | December
    31, 2018 | 
|--------------------------------------------- |  | ----------------- | ------ |  | --------------------- | 
|(dollars
    in thousands)                    |  | Amount            |        |  | %(1)                  | 
|Commercial                                    |  | $                 | 18,136 |  |                       | 
|Income producing - commercial
    real estate |  |                   | 27,010 |  |                       | 
|Owner occupied - commercial
    real estate   |  |                   | 5,756  |  |                       | 
|Real estate mortgage
    - residential        |  |                   | 1,355  |  |                       | 
|Construction - commercial
    and residential |  |                   | 17,674 |  |                       | 
|Construction - C&I
    (owner occupied)       |  |                   | 1,332  |  |                       | 
|Home equity                                   |  |                   | 581    |  |                       | 
|Other
    consumer                            |  |                   | 242    |  |                       | 
|Total
    allowance                           |  | $                 | 72,086 |  |                       | 





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



46







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 $38.8 million at June 30, 2019 representing
0.45% of total assets, as compared to $17.7 million of nonperforming assets, or 0.21% of total assets, at December 31, 2018. The
increase in nonperforming loans at June 30, 2019, was substantially attributable to softness in the market for high-end residential properties.



The
Company had no accruing loans 90 days or more past due at June 30, 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 June 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 eleven TDR’s at June 30,
2019 totaling approximately $11.4 million. Seven of these loans totaling approximately $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 six months ended June 30, 2019, as compared to the six months ended June 30, 2018, there were
two performing TDRs totaling $937 thousand that defaulted on their modified terms which were reclassified to nonperforming loans.
A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. For the
three months ended June 30, 2019, there was one restructured loan totaling approximately $4.8 million that had its collateral
property sold for approximately $3 million and the remaining $1.8 million was charged-off during the quarter, as compared to the
same period in 2018, there was one defaulted loan totaling approximately $315 thousand that was charged-off.  During the
three months ended June 30, 2019, there was one loan totaling $10.4 million that was re-underwritten into two new loans which
provided better collateral for the Bank, as compared to the three months ended June 30, 2018, there was one loan totaling $274
thousand that was partially paid off from the sale proceeds of the business which totaled approximately $236 thousand, the remaining
balance on the loan of $38 thousand was charged-off. 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 June 30,
2019, there were no loans modified in a TDR, as compared to the three months ended June 30, 2018 which had two loans totaling
$4.0 million modified in a TDR.



47









Total nonperforming loans amounted to $37.4 million at June 30, 2019 (0.51% of total loans) compared to $16.3
million at December 31, 2018 (0.23% of total loans). The increase in the ratio of nonperforming loans to total loans at June 30,
2019 as compared to December 31, 2018 was due to increased nonperforming loans substantially attributable to softness in the market
for high-end residential properties.



Included
in nonperforming assets at June 30, 2019 and 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 June 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 six months of 2019 and 2018.



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



|                                                                             |  | June
    30, |        |   | December
    31, |  
|---------------------------------------------------------------------------- |  | ------------ | ------ | - | ---------------- | -
|(dollars
    in thousands)                                                   |  | 2019         |        |   | 2018             |  
|Nonaccrual Loans:                                                            |  |              |        |   |                  |  
|Commercial                                                                   |  | $            | 16,053 |   |                  | $
|Income
    producing - commercial real estate                                |  |              | 4,563  |   |                  |  
|Owner
    occupied - commercial real estate                                  |  |              | 1,510  |   |                  |  
|Real
    estate mortgage - residential                                       |  |              | 5,640  |   |                  |  
|Construction
    - commercial and residential                                |  |              | 9,155  |   |                  |  
|Construction
    - C&I (owner occupied)                                      |  |              | —      |   |                  |  
|Home
    equity                                                              |  |              | 487    |   |                  |  
|Other
    consumer                                                           |  |              | —      |   |                  |  
|Accrual
    loans-past due 90 days                                           |  |              | —      |   |                  |  
|Total
    nonperforming loans (1)                                            |  |              | 37,408 |   |                  |  
|Other
    real estate owned                                                  |  |              | 1,394  |   |                  |  
|Total
    nonperforming assets                                               |  | $            | 38,802 |   |                  | $
|                                                                             |  |              |        |   |                  |  
|Coverage ratio, allowance
    for credit losses to total nonperforming loans |  |              | 192.70 | % |                  |  
|Ratio of nonperforming
    loans to total loans                              |  |              | 0.51   | % |                  |  
|Ratio of nonperforming
    assets to total assets                            |  |              | 0.45   | % |                  |  



| | (1) | Nonaccrual
                                         loans reported in the table above include one loan totaling $2.3 million that migrated from a performing
                                         TDRs during the six months ended June 30, 2019, as compared to the six months ended June
                                         30, 2018 where there were two loans totaling $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
June 30, 2019, there were $46.6 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 $46.6 million at June 30, 2019 from $102.7 million at December 31, 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.





48







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 three months ended June 30, 2019 increased to $6.4 million from $5.6 million for the three months ended
June 30, 2018, a 15% increase, due substantially to $537 thousand higher gains on the sale of investment securities and $362 thousand
higher gains on the sale of residential mortgage loans ($1.9 million versus $1.5 million) resulting from higher volume as compared
to 2018. Residential mortgage loans closed were $152 million for the second quarter of 2019 versus $126 million for the second
quarter of 2018. Gains on sale of FHA multifamily loan securities in the second quarter of 2019 were $81 thousand versus zero
in the second quarter of 2018.



Total
noninterest income for the six months ended June 30, 2019 increased to $12.7 million from $10.9 million for the six months ended
June 30, 2018, a 17% increase. The increase was due substantially to $1.4 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 $288
thousand higher gains on the sale of residential mortgage loans ($3.2 million versus $2.9 million) resulting from higher volume
as compared to 2018. Residential mortgage loans closed were $246 million for the six months ended June 30, 2019 versus $226 million
for the same period in 2018. Gains on sale of FHA multifamily loan securities in the first six months of 2019 were $137 thousand
versus $48 thousand in the same period 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 June 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 decreased by $154 thousand, or 9%, from $1.8 million for the three months ended June 30, 2018 to $1.6
million for the same period in 2019. Service charges on deposit accounts decreased by $74 thousand, or 2%, from $3.4 million for
the six months ended June 30, 2018 to $3.3 million for the same period in 2019. The decrease for the three and six month period
was due primarily to 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. 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 June 30, 2019. The reserve amounted to $54 thousand at June 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 $16 thousand for the three months ended June 30, 2019 compared to $130 thousand for the same period in 2018. Income
from this source was $124 thousand for the six months ended June 30, 2019 compared to $300 thousand for the same period in 2018.
Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter.





49







Other
income totaled $1.8 million for the three months ended June 30, 2019 as compared to $1.7 million for the same period in 2018,
an increase of 6%. ATM fees decreased slightly to $368 thousand for the three months ended June 30, 2019 from $373 thousand for
the same period in 2018, a decrease of 1%. Noninterest fee income totaled $471 thousand for the three months ended June 30, 2019
an increase of $40 thousand, or 9%, over the total for the same period in 2018.



Other
income totaled $3.7 million for the six months ended June 30, 2019 as compared to $3.5 million for the same period in 2018, an
increase of 6%. ATM fees decreased to $681 thousand for the six months ended June 30, 2019 from $728 thousand for the same period
in 2018, a decrease of 6%. Noninterest fee income totaled $946 thousand for the six months ended June 30, 2019 an increase of
$72 thousand, or 8%, over the total for the same period in 2018.



Net
investment gains were $563 thousand for the three months ended June 30, 2019 compared to $26 thousand for the same period in 2018.
Net investment gains were $1.5 million for the six months ended June 30, 2019 compared to $68 thousand for the same period in
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, FDIC insurance, and other expenses.



Total
noninterest expenses totaled $33.4 million for the three months ended June 30, 2019, as compared to $32.3 million for the three
months ended June 30, 2018, a 3% increase. Total noninterest expenses totaled $71.7 million for the six months ended June 30,
2019, as compared to $63.4 million for the six months ended June 30, 2018, a 13% increase.



Salaries
and employee benefits were $17.7 million for the three months ended June 30, 2019, as compared to $17.8 million for the same period
in 2018, a decrease of less than 1%. Salaries and employee benefits were $41.4 million for the six months ended June 30, 2019,
as compared to $34.7 million for the same period in 2018, an increase of 19% due primarily to $6.2 million of nonrecurring charges
related to share based compensation and the retirement of our former Chairman and Chief Executive Officer, Mr. Ronald D. Paul
and secondly to increased overall headcount.



At
June 30, 2019, the Company’s full time equivalent staff numbered 496, as compared
to 470 at December 31, 2018, and 479 at June 30, 2018.



Premises
and equipment expenses amounted to $3.7 million and $3.9 million for the three months ended June 30, 2019 and 2018, respectively,
a 6% decrease. For the three months ended June 30, 2019, the Company recognized $126 thousand of sublease revenue as compared
to $123 thousand for the same period in 2018. Premises and equipment expenses amounted to $7.5 million and $7.8 million for the
six month periods ended June 30, 2019 and 2018, respectively, a 4% decrease. For the six months ended June 30, 2019, the Company
recognized $251 thousand of sublease revenue as compared to $256 thousand for the same period in 2018. Sublease revenue is accounted
for as a reduction to premises and equipment expenses.



Marketing
and advertising expenses were $1.3 million for both the three months ended June 30, 2019 and June 30, 2018. Marketing and advertising
expenses increased to $2.4 million for the six months ended June 30, 2019 from $2.2 million for the same period in 2018, an 8%
increase, primarily due to increased digital, radio and television advertising spend.



Data
processing expense increased to $2.6 million for the three months ended June 30, 2019 from $2.4 million for the same period in
2018, an 8% increase, due primarily to costs of software and infrastructure investments. Data processing expense increased to
$5.0 million for the six months ended June 30, 2019 from $4.7 million for the same period in 2018, a 5% increase, due primarily
to costs of software and infrastructure investments.





50







During
the three month periods ended June 30, 2019 and June 30, 2018, the Company incurred legal, accounting and professional fees and
expenses of $2.7 million and $2.2 million, respectively, which represented an increase of 26%. For the six month periods ended
June 30, 2019 and June 30, 2018, the Company incurred legal, accounting and professional fees and expenses of $4.4 million and
$5.2 million, respectively, which represented a decrease of 14%. During the three months ended June 30, 2018, these expenses related
substantially to the Company’s engagement of independent accounting, legal and compliance consultants who conducted various
investigations for the Company, in addition to consulting costs to enhance our governance and risk management systems. During
the three months ended June 30, 2019, such expenses related primarily to legal fees and expenditures in connection with our responses
to investigations and related document requests and subpoenas from government agencies examining matters, including the Company’s
identification, classification and disclosure of related party transactions; the retirement of certain former officers and directors;
and the relationship of the Company and certain of its former officers and directors with a local public official. The Company
has D&O insurance that may provide reimbursement for all or part of advancement and indemnification costs requested by current
and former officers and directors, and those costs cannot be estimated at this time. While we are unable to estimate the amount
of these legal expenditures at this time, the Company expects that it will continue 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 increased to $1.1 million for the three months ended June 30, 2019 from $951 thousand for the
same period in 2018, an 18% increase. FDIC insurance increased to $2.2 million for the six months ended June 30, 2019 from $1.6
million for the same period in 2018, a 38% increase. The increase for the three and six month period was due to a higher assessment
base and factors.



Other
expenses increased to $4.2 million for the three months ended June 30, 2019 from $3.8 million for the same period in 2018, an
increase of 12%, due primarily to $354 thousand higher real estate and utility costs on special assets. The major components of
cost in this category include broker fees, franchise taxes, core deposit intangible amortization, and insurance expense.



Other
expenses increased to $8.7 million for the six months ended June 30, 2019 from $7.2 million for the same period in 2018, an increase
of 20%, due primarily to broker fees ($554 thousand) and real estate and utility costs on special assets ($369 thousand).



The
efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 38.04% for the second quarter of 2019,
as compared to 38.55% for the second quarter of 2018. For the first six months of 2019, the efficiency ratio was 40.95% as compared
to 38.47% for the same period in 2018.



As
a percentage of average assets, total noninterest expense (annualized) was 1.55% for the three months ended June 30, 2019 as compared
to 1.66% for the same period in 2018. As a percentage of average assets, total noninterest expense (annualized) was 1.68% for
the six months ended June 30, 2019 as compared to 1.65% for the same period in 2018.



Income
Tax Expense






The
Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) increased to 26.6% and 26.3%
for the three and six months ended June 30, 2019, respectively, as compared to 25.1% and 25.4%, respectively, for the same period
in 2018. The higher effective tax rate for the three and six months ended June 30, 2019, was due primarily to a decrease in federal
tax credits and an increase in nondeductible expenses.



FINANCIAL
CONDITION



Summary



Total
assets at June 30, 2019 were $8.67 billion, a 3% increase as compared to $8.39 billion at December 31, 2018. Total loans (excluding
loans held for sale) were $7.39 billion at June 30, 2019, a 6% increase as compared to $6.99 billion at December 31, 2018. Loans
held for sale amounted to $37.5 million at June 30, 2019 as compared to $19.3 million at December 31, 2018, a 95% increase. The
investment portfolio totaled $745.3 million at June 30, 2019, a 5% decrease from the $784.1 million balance at December 31, 2018.





51







Total
deposits at June 30, 2019 were $6.95 billion, a slight decrease compared to deposits of $6.97 billion at December 31, 2018. Total
borrowed funds (excluding customer repurchase agreements) were $442.5 million at June 30, 2019, of which $225.0 million were FHLB
advances that subsequently matured in July 2019. The Company had $217.3 million in FHLB advances at December 31, 2018. We continue
to work on expanding the breadth and depth of our existing relationships while we pursue building new relationships.



Total
shareholders’ equity at June 30, 2019 increased 7%, from $1.11 billion at December 31, 2018 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 16.36% at June 30, 2019 and 16.08% at
December 31, 2018. In addition, the tangible common equity ratio was 12.60% at June 30, 2019 compared to 12.11% at December
31, 2018. Tangible book value per share was $31.25 at June 30, 2019, a 7% increase over $29.17 at December 31, 2018. Partly
as a result of our strong capital position, the Company reinstituted a quarterly cash dividend in the second quarter of 2019.
A $0.22 per share dividend was declared May 15th to shareholders of record on May 31st and was paid
June 14, 2019.



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 June 30, 2019 and December 31, 2018 by major category are summarized below.





|                                              |  | June
    30, 2019 |           |   | December
    31, 2018 | 
|--------------------------------------------- |  | ----------------- | --------- | - | --------------------- | 
|(dollars
    in thousands)                    |  | Amount            |           |   | %                     | 
|Commercial                                    |  | $                 | 1,475,201 |   |                       | 
|Income producing - commercial
    real estate |  |                   | 3,666,815 |   |                       | 
|Owner occupied - commercial
    real estate   |  |                   | 970,850   |   |                       | 
|Real estate mortgage
    - residential        |  |                   | 105,191   |   |                       | 
|Construction - commercial
    and residential |  |                   | 1,012,789 |   |                       | 
|Construction - C&I
    (owner occupied)       |  |                   | 76,324    |   |                       | 
|Home equity                                   |  |                   | 83,447    |   |                       | 
|Other
    consumer                            |  |                   | 1,998     |   |                       | 
|Total
    loans                               |  |                   | 7,392,615 |   |                       | 
|Less:
    allowance for credit losses         |  |                   | (72,086   | ) |                       | 
|Net
    loans                                 |  | $                 | 7,320,529 |   |                       | 



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 $7.39 billion at June 30, 2019, an increase of $401.2 million, or 6%, as compared
to $6.99 billion at December 31, 2018. Loan growth during the six months ended June 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 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. While the 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.





52







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 six months ended June 30, 2019, noninterest bearing deposits decreased $230.3 million as compared to December 31, 2018, while
interest bearing deposits increased by $205.9 million during the same period.



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 June 30, 2019, total deposits included $1.71 billion of brokered deposits (excluding the CDARS
and ICS two-way), which represented 25% of total deposits. At December 31, 2018, total brokered deposits (excluding the CDARS
and ICS two-way) were $1.36 billion, or 20% of total deposits. The CDARS and ICS two-way component represented $517.3 million,
or 7% of total deposits and $391.7 million or 6% of total deposits at June 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 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
June 30, 2019 the Company had $1.87 billion in noninterest bearing demand deposits, representing 27% 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 32% of total deposits for the first six months of 2019 and 33% for the first six 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 $31.7 million at June 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
June 30, 2019 the Company had $1.50 billion in time deposits. Time deposits increased by $173.9 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 June 30, 2019 and December 31, 2018. The Bank had $225.0 million in short-term borrowings outstanding under its credit facility
from the FHLB at June 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.





53







Long-term
borrowings outstanding at June 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
June 30, 2019, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.30 billion, against
which there was $181.4 million outstanding at June 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 $407.3
million at June 30, 2019. At June 30, 2019 the Bank was also eligible to make advances from the FHLB up to $1.6 billion based
on collateral at the FHLB, of which there was $225 million outstanding at June 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 $661.0 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 (“ALCO”)  and the full Board of Directors
of the Bank have adopted policy guidelines which emphasize the importance of core deposits, adequate asset liquidity and
a contingency funding plan.



At
June 30, 2019, under the Bank’s liquidity formula, it had $4.26 billion of primary and secondary liquidity sources. The
amount is deemed adequate to meet current and projected funding needs.



54





Commitments
and Contractual Obligations



Loan
commitments outstanding and lines and letters of credit at June 30, 2019 are as follows:



|(dollars
    in thousands)    |  | 2019 |          
|----------------------------- |  | ---- | ---------
|Unfunded
    loan commitments |  | $    | 2,398,984
|Unfunded lines of credit      |  |      | 90,902   
|Letters of credit             |  |      | 78,525   
|Total                         |  | $    | 2,568,411



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 June 30, 2019, unfunded loan commitments included $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 June 30, 2019, as compared to the same period in 2018, the Company was able to increase its net interest
income by 4%, produce a net interest margin of 3.91%, 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 and related declines in market values in that same portfolio should interest rates increase. Additionally,
the Company has limited call risk in its U.S. agency investment portfolio. During the three months ended June 30, 2019, the average
investment portfolio balances increased as compared to balances at June 30, 2018, but decreased from 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.





55







The
percentage mix of municipal securities was 9% of total investments at June 30, 2019 and 8% at June 30, 2018. The portion of the
portfolio invested in mortgage backed securities was 69% at both June 30, 2019 and June 30, 2018. The portion of the portfolio
invested in U.S. agency investments was 20% at June 30, 2019 and 23% at June 30, 2018. Shorter duration floating rate corporate
bonds were 1% of total investments at both June 30, 2019 and June 30, 2018, and SBA bonds, which are included in mortgage backed
securities, were 10% of total investments at both June 30, 2019 and June 30, 2018. Over the past 12 months, as a result of generally
lower interest rates, mortgage prepayment speeds increased and the duration of the investment portfolio decreased to 3.0 years
at June 30, 2019 from 3.8 years at June 30, 2018.



The
re-pricing duration of the loan portfolio was 19 months at June 30, 2019 versus 17 months at December 31, 2018, with fixed rate
loans amounting to 40% and 34% of total loans at June 30, 2019 and June 30, 2018, respectively. Variable and adjustable rate loans
comprised 60% and 66% of total loans at June 30, 2019 and June 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 28 months at June 30, 2019 from 26 months at December 31, 2018. The change since
December 31, 2018 was due substantially to a change in the mix and duration of time deposits as markets interest rates decreased
and customers anticipated continuing rate declines. Additionally, the Bank maintained a higher percentage of fixed rate time deposits
at June 30, 2019 than was the case in 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
60% of total loans (at June 30, 2019), has resulted in a loan portfolio yield of 5.61% for the three months ended June 30, 2019
as compared to 5.53% 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 gain before income tax on the investment portfolio was $5.2 million at June 30, 2019 as compared to a net unrealized
loss before tax of $9.5 million at December 31, 2018. The increase in the net unrealized gain on the investment portfolio at June
30, 2019 as compared to December 31, 2018 was due primarily to lower interest rates at June 30, 2019. At June 30, 2019, the net
unrealized gain position represented 0.7% 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 June 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 June 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.





56







As
quantified in the table below, the Company’s analysis at June 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 June 30, 2019 is 3.0 years, the loan portfolio 1.6 years, the interest bearing deposit portfolio
2.3 years, and the borrowed funds portfolio 1.5 years.



The
following table reflects the result of simulation analysis on the June 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
|------------------------------------------- |  | ------------------------------------------------ |  | --------------------------------------- |  | -----------------------------------------------------------------
|                                            |  |                                                  |  |                                         |  |                                                                  
|+400                                        |  | +16.6%                                           |  | +28.8%                                  |  | +3.9%                                                            
|+300                                        |  | +12.5%                                           |  | +21.6%                                  |  | +3.6%                                                            
|+200                                        |  | +8.4%                                            |  | +14.5%                                  |  | +3.1%                                                            
|+100                                        |  | +4.2%                                            |  | +7.3%                                   |  | +2.0%                                                            
|0                                           |  | —                                                |  | —                                       |  | —                                                                
|-100                                        |  | -3.8%                                            |  | -6.6%                                   |  | -3.0%                                                            
|-200                                        |  | -5.7%                                            |  | -9.9%                                   |  | -7.7%                                                            



The
results of simulation are within the 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. 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
June 30, 2019 are not considered to be excessive. The positive impact of +4.2% in net interest income and +7.3% in net income
given a 100 basis point increase in market interest rates reflects in large measure the impact of variable rate loans and fed
funds sold repricing counteracting the repricing of interest bearing deposits and floating rate FHLB advances.



In
the second 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 June 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 second 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 second quarter of 2018 with rate decreases being generally more significant at the longer end
of the yield curve.



As
compared to the second quarter of 2018, the average two-year U.S. Treasury rate decreased by 34 basis points from 2.47% to 2.13%,
the average five year U.S. Treasury rate decreased by 65 basis points from 2.77% to 2.12% and the average ten year U.S. Treasury
rate decreased by 59 basis points from 2.92% to 2.33%. The Company’s net interest margin was 3.91% for the second quarter
of 2019 and 4.15% 2018. The Company believes that the net interest margin in the most recent quarter as compared to 2018’s
second quarter has been consistent with its risk analysis at December 31, 2018.





57







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% of the Company’s
revenue for both the second quarter of 2019 and 2018.



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
June 30, 2019, the Company had a positive GAP position of approximately $395 million or 5% of total assets out to three months
and a positive cumulative GAP position of $172 million or 2% 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 June 30, 2019, as compared
to December 31, 2018, was due to an increase in earning assets. The change in the GAP position at June 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.



58









|GAP
    Analysis                                           |  |                |           |   |                 |   |          |                  |  |   |                  |   |  |                    |           |   |                          |   |           |                   |  |   |           | 
|---------------------------------------------------------- |  | -------------- | --------- | - | --------------- | - | -------- | ---------------- |  | - | ---------------- | - |  | ------------------ | --------- | - | ------------------------ | - | --------- | ----------------- |  | - | --------- | 
|June
    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                                  |  | $              | 185,852   |   |                 | $ | 76,621   |                  |  | $ | 169,361          |   |  | $                  | 121,902   |   |                          | $ | 225,600   |                   |  | $ | 779,336   | 
|Loans (1)(2)                                               |  |                | 4,003,852 |   |                 |   | 549,180  |                  |  |   | 1,091,962        |   |  |                    | 1,033,287 |   |                          |   | 751,840   |                   |  |   | 7,430,121 | 
|Fed
    funds and other short-term investments             |  |                | 189,899   |   |                 |   | —        |                  |  |   | —                |   |  |                    | —         |   |                          |   | —         |                   |  |   | 189,899   | 
|Other
    earning assets                                   |  |                | 74,295    |   |                 |   | —        |                  |  |   | —                |   |  |                    | —         |   |                          |   | —         |                   |  |   | 74,295    | 
|Total                                                      |  | $              | 4,453,898 |   |                 | $ | 625,801  |                  |  | $ | 1,261,323        |   |  | $                  | 1,155,189 |   |                          | $ | 977,440   |                   |  | $ | 8,473,651 | 
|                                                           |  |                |           |   |                 |   |          |                  |  |   |                  |   |  |                    |           |   |                          |   |           |                   |  |   |           | 
|RATE
    SENSITIVE LIABILITIES:                            |  |                |           |   |                 |   |          |                  |  |   |                  |   |  |                    |           |   |                          |   |           |                   |  |   |           | 
|Noninterest
    bearing demand                             |  | $              | 71,984    |   |                 | $ | 199,273  |                  |  | $ | 426,953          |   |  | $                  | 308,870   |   |                          | $ | 866,822   |                   |  | $ | 1,873,902 | 
|Interest
    bearing transaction                           |  |                | 862,553   |   |                 |   | —        |                  |  |   | —                |   |  |                    | —         |   |                          |   | —         |                   |  |   | 862,553   | 
|Savings
    and money market                               |  |                | 2,712,143 |   |                 |   | —        |                  |  |   | —                |   |  |                    | —         |   |                          |   | —         |                   |  |   | 2,712,143 | 
|Time
    deposits                                          |  |                | 255,101   |   |                 |   | 649,747  |                  |  |   | 459,757          |   |  |                    | 133,547   |   |                          |   | 3,142     |                   |  |   | 1,501,294 | 
|Customer
    repurchase agreements and fed funds purchased |  |                | 31,669    |   |                 |   | —        |                  |  |   | —                |   |  |                    | —         |   |                          |   | —         |                   |  |   | 31,669    | 
|Other
    borrowings                                       |  |                | 225,000   |   |                 |   | —        |                  |  |   | 148,130          |   |  |                    | —         |   |                          |   | 69,361    |                   |  |   | 442,491   | 
|Total                                                      |  | $              | 4,158,450 |   |                 | $ | 849,020  |                  |  | $ | 1,034,840        |   |  | $                  | 442,417   |   |                          | $ | 939,325   |                   |  | $ | 7,424,052 | 
|GAP                                                        |  | $              | 295,448   |   |                 | $ | (223,219 | )                |  | $ | 226,483          |   |  | $                  | 712,772   |   |                          | $ | 38,115    |                   |  | $ | 1,049,599 | 
|Cumulative
    GAP                                         |  | $              | 295,448   |   |                 | $ | 72,229   |                  |  | $ | 298,712          |   |  | $                  | 1,011,484 |   |                          | $ | 1,049,599 |                   |  |   |           | 
|                                                           |  |                |           |   |                 |   |          |                  |  |   |                  |   |  |                    |           |   |                          |   |           |                   |  |   |           | 
|Cumulative
    gap as percent of total assets              |  |                | 3.41      | % |                 |   | 0.83     | %                |  |   | 3.45             | % |  |                    | 11.67     | % |                          |   | 12.11     | %                 |  |   |           | 
|                                                           |  |                |           |   |                 |   |          |                  |  |   |                  |   |  |                    |           |   |                          |   |           |                   |  |   |           | 
|OFF
    BALANCE-SHEET:                                     |  |                |           |   |                 |   |          |                  |  |   |                  |   |  |                    |           |   |                          |   |           |                   |  |   |           | 
|Interest
    Rate Swaps - LIBOR based                      |  | $              | 100,000   |   |                 | $ | —        |                  |  | $ | (100,000         | ) |  | $                  | —         |   |                          | $ | —         |                   |  | $ | —         | 
|Interest
    Rate Swaps - Fed Funds based                  |  |                | —         |   |                 |   | —        |                  |  |   | —                |   |  |                    | —         |   |                          |   | —         |                   |  |   | —         | 
|Total                                                      |  | $              | 100,000   |   |                 | $ | —        |                  |  | $ | (100,000         | ) |  | $                  | —         |   |                          | $ | —         |                   |  | $ | —         | 
|GAP                                                        |  | $              | 395,448   |   |                 | $ | (223,219 | )                |  | $ | 126,483          |   |  | $                  | 712,772   |   |                          | $ | 38,115    |                   |  | $ | 1,049,599 | 
|Cumulative
    GAP                                         |  | $              | 395,448   |   |                 | $ | 172,229  |                  |  | $ | 298,712          |   |  | $                  | 1,011,484 |   |                          | $ | 1,049,599 |                   |  | $ | —         | 
|Cumulative
    gap as percent of total assets              |  |                | 4.56      | % |                 |   | 1.99     | %                |  |   | 3.45             | % |  |                    | 11.67     | % |                          |   | 12.11     | %                 |  |   |           | 



(1)
Includes loans held for sale.

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



59







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 June 30, 2019, non-owner-occupied
commercial real estate loans (including construction, land, and land development loans) represent 337% of total risk based capital.
Construction, land and land development loans represent 118% 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%.



60







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



|                                             |  |         |           |  |        |  |       |        |  |   |           |  |  | Minimum
                                         Required For
        Capital
        Adequacy Purposes |       |   | To
                                         Be Well Capitalized Under Prompt
        Corrective
        Action
        Regulations
        * | 
|-------------------------------------------- |  | ------- | --------- |  | ------ |  | ----- | ------ |  | - | --------- |  |  | ------------------------------------------------------------------------------------------------------- | ----- | - | -------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                             |  |         |           |  |        |  |       |        |  |   |           |  |  |                                                                                                         |       |  
|                                             |  |         |           |  |        |  |       |        |  |   |           |  |  |                                                                                                         |       |  
|                                             |  | Company |           |  | Bank   |  |       |        |  |  
|                                             |  | Actual  |           |  | Actual |  |       |        |  |  
|(dollars
    in thousands)                   |  | Amount  |           |  | Ratio  |  |       | Amount |  |   | Ratio     |  |  |                                                                                                         |       |  
|As
    of June 30, 2019                      |  |         |           |  |        |  |       |        |  |   |           |  |  |                                                                                                         |       |   |                                                                                                                                              | 
|CET1
    capital (to risk weighted aseets)   |  | $       | 1,075,087 |  |        |  | 12.87 | %      |  | $ | 1,227,269 |  |  |                                                                                                         | 14.70 | % |                                                                                                                                              | 
|Total
    capital (to risk weighted assets)  |  |         | 1,367,227 |  |        |  | 16.36 | %      |  |   | 1,299,409 |  |  |                                                                                                         | 15.57 | % |                                                                                                                                              | 
|Tier
    1 capital (to risk weighted assets) |  |         | 1,075,087 |  |        |  | 12.87 | %      |  |   | 1,227,269 |  |  |                                                                                                         | 14.70 | % |                                                                                                                                              | 
|Tier
    1 capital (to average assets)       |  |         | 1,075,087 |  |        |  | 12.66 | %      |  |   | 1,227,269 |  |  |                                                                                                         | 14.46 | % |                                                                                                                                              | 
|                                             |  |         |           |  |        |  |       |        |  |   |           |  |  |                                                                                                         |       |   |                                                                                                                                              | 
|As
    of December 31, 2018                  |  |         |           |  |        |  |       |        |  |   |           |  |  |                                                                                                         |       |   |                                                                                                                                              | 
|CET1
    capital (to risk weighted aseets)   |  | $       | 1,007,438 |  |        |  | 12.49 | %      |  | $ | 1,147,151 |  |  |                                                                                                         | 14.23 | % |                                                                                                                                              | 
|Total
    capital (to risk weighted assets)  |  |         | 1,297,427 |  |        |  | 16.08 | %      |  |   | 1,217,140 |  |  |                                                                                                         | 15.10 | % |                                                                                                                                              | 
|Tier
    1 capital (to risk weighted assets) |  |         | 1,007,438 |  |        |  | 12.49 | %      |  |   | 1,147,151 |  |  |                                                                                                         | 14.23 | % |                                                                                                                                              | 
|Tier
    1 capital (to average assets)       |  |         | 1,007,438 |  |        |  | 12.10 | %      |  |   | 1,147,151 |  |  |                                                                                                         | 13.78 | % |                                                                                                                                              | 



*
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 June 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.



61







GAAP
Reconciliation (Unaudited)

(dollars
in thousands except per share data)

|                                                        |  |                                           |           |   |                                        |   |           |                                                                                                                                                                                                         |  |   |                                                                                                                                                                                                    |   |  |                                                                                                                                                                                                  |          
|------------------------------------------------------- |  | ----------------------------------------- | --------- | - | -------------------------------------- | - | --------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------
|                                                        |  | Three
    Months Ended 
    June 30, 2019 |           |   | Six
    Months Ended
    June 30, 2019 |   |           | Twelve
                                         Months Ended
                                                                                December
                                         31, 2018 |  |   | Three
                                         Months Ended
                                                                                June
                                         30, 2018 |   |  | Six
                                         Months Ended
                                                                                June
                                         30, 2018 |          
|Common shareholders’
    equity                         |  |                                           |           |   |                                        | $ | 1,184,582 |                                                                                                                                                                                                         |  | $ | 1,108,941                                                                                                                                                                                          |   |  |                                                                                                                                                                                                  |          
|Less: Intangible
    assets                             |  |                                           |           |   |                                        |   | (105,219  | )                                                                                                                                                                                                       |  |   | (105,766                                                                                                                                                                                           | ) |  |                                                                                                                                                                                                  |          
|Tangible
    common equity                              |  |                                           |           |   |                                        | $ | 1,079,363 |                                                                                                                                                                                                         |  | $ | 1,003,175                                                                                                                                                                                          |   |  |                                                                                                                                                                                                  |          
|                                                        |  |                                           |           |   |                                        |   |           |                                                                                                                                                                                                         |  |   |                                                                                                                                                                                                    |   |  |                                                                                                                                                                                                  |          
|Book value per common share                             |  |                                           |           |   |                                        | $ | 34.30     |                                                                                                                                                                                                         |  | $ | 32.25                                                                                                                                                                                              |   |  |                                                                                                                                                                                                  |          
|Less: Intangible book value per common
    share        |  |                                           |           |   |                                        |   | (3.05     | )                                                                                                                                                                                                       |  |   | (3.08                                                                                                                                                                                              | ) |  |                                                                                                                                                                                                  |          
|Tangible book
    value per common share                |  |                                           |           |   |                                        | $ | 31.25     |                                                                                                                                                                                                         |  | $ | 29.17                                                                                                                                                                                              |   |  |                                                                                                                                                                                                  |          
|                                                        |  |                                           |           |   |                                        |   |           |                                                                                                                                                                                                         |  |   |                                                                                                                                                                                                    |   |  |                                                                                                                                                                                                  |          
|Total assets                                            |  |                                           |           |   |                                        | $ | 8,670,003 |                                                                                                                                                                                                         |  | $ | 8,389,137                                                                                                                                                                                          |   |  |                                                                                                                                                                                                  |          
|Less: Intangible
    assets                             |  |                                           |           |   |                                        |   | (105,219  | )                                                                                                                                                                                                       |  |   | (105,766                                                                                                                                                                                           | ) |  |                                                                                                                                                                                                  |          
|Tangible
    assets                                     |  |                                           |           |   |                                        | $ | 8,564,784 |                                                                                                                                                                                                         |  | $ | 8,283,371                                                                                                                                                                                          |   |  |                                                                                                                                                                                                  |          
|Tangible
    common equity ratio                        |  |                                           |           |   |                                        |   | 12.60     | %                                                                                                                                                                                                       |  |   | 12.11                                                                                                                                                                                              | % |  |                                                                                                                                                                                                  |          
|                                                        |  |                                           |           |   |                                        |   |           |                                                                                                                                                                                                         |  |   |                                                                                                                                                                                                    |   |  |                                                                                                                                                                                                  |          
|Average common shareholders’ equity                     |  | $                                         | 1,166,487 |   |                                        | $ | 1,147,782 |                                                                                                                                                                                                         |  | $ | 1,022,642                                                                                                                                                                                          |   |  | $                                                                                                                                                                                                | 1,002,091
|Less: Average intangible
    assets                     |  |                                           | (105,280  | ) |                                        |   | (105,430  | )                                                                                                                                                                                                       |  |   | (106,806                                                                                                                                                                                           | ) |  |                                                                                                                                                                                                  | (106,955 
|Average
    tangible common equity                      |  | $                                         | 1,061,206 |   |                                        | $ | 1,042,352 |                                                                                                                                                                                                         |  | $ | 915,836                                                                                                                                                                                            |   |  | $                                                                                                                                                                                                | 895,136  
|                                                        |  |                                           |           |   |                                        |   |           |                                                                                                                                                                                                         |  |   |                                                                                                                                                                                                    |   |  |                                                                                                                                                                                                  |          
|Net Income                                              |  | $                                         | 37,243    |   |                                        | $ | 70,992    |                                                                                                                                                                                                         |  | $ | 152,276                                                                                                                                                                                            |   |  | $                                                                                                                                                                                                | 37,296   
|Average tangible common equity                          |  | $                                         | 1,061,206 |   |                                        | $ | 1,042,352 |                                                                                                                                                                                                         |  | $ | 915,836                                                                                                                                                                                            |   |  | $                                                                                                                                                                                                | 895,136  
|Annualized Return
    on Average Tangible Common Equity |  |                                           | 14.08     | % |                                        |   | 13.73     | %                                                                                                                                                                                                       |  |   | 16.63                                                                                                                                                                                              | % |  |                                                                                                                                                                                                  | 16.71    



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 June 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 second quarter of 2019 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.



62







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 10(b)-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 June 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. | None          
| | ----------------------------------------- | --------------
| |                                           |               
| | (b) Use of Proceeds.                      | Not Applicable
| |                                           |               
| | (c) Issuer Purchases of Securities.       | None          



|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)                                         



63







|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)                                                       
|10.124 | 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  | 2019 Senior Executive Incentive Plan (26)                                                                               
|10.22  | 2019 Long Term Incentive Plan (27)                                                                                      
|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 June 30, 2019, December 31, 2018                                                    
| | ----- | -----------------------------------------------------------------------------------------------------------------------
| | (ii)  | Consolidated Statement
    of Operations for the three and six months ended June 30, 2019 and 2018                     
| | (iii) | Consolidated
    Statement of Comprehensive Income for the three and six months ended June 30, 2019 and 2018           
| | (iv)  | Consolidated
    Statement of Changes in Shareholders’ Equity for the three and six months ended June 30, 2019 and 2018
| | (v)   | Consolidated Statement
    of Cash Flows for the six months ended June 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.                               



64







|(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 15, 2019.           
|(27) | Incorporated by
    reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 15, 2019.           



65







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: August 9, 2019 | By:                
|                     |                    
|                     |                    
|Date: August 9, 2019 | By:                
|                     |                    
|                     |                    



66