EAGLE BANCORP INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Eagle Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Eagle Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2021 expressed an unqualified opinion thereon. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective January 1, 2020, due to the adoption of Accounting Standards Codification ("ASC") Topic 326, Financial Instruments – Credit Losses . Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses As described in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for credit losses was $109.6 million at December 31, 2020. As described by management in Note 1, the Company adopted ASC Topic 326 Financial Instruments – Credit Losses on January 1, 2020. The allowance is estimated using information about past events, current conditions and reasonable and supportable forecasts. Estimates that can and do change when actual events occur are made for the following components: 82 Table o f Contents • Reserves on pools of loans sharing similar risk characteristics using a lifetime loss rate model adjusted for a reasonable and supportable forecast. • Reserves on loans that do not share similar risk characteristics are evaluated on an individual basis. • Incremental reserves on pools of loans sharing similar risk characteristics for any necessary qualitative adjustments. Estimating an appropriate allowance for credit losses requires management to make certain assumptions about expected losses on loans in the loan portfolio over their remaining contractual life as of the balance sheet date. Significant judgments in estimating the allowance for credit losses include determining: • The appropriate historical loss experience to use in calculating a lifetime loss rate. • A reasonable and supportable forecast. • The nature and amount of qualitative adjustments. We identified the allowance for credit losses as a critical audit matter. The principal considerations for that determination included management’s judgment necessary in subjectively determining appropriate historical loss experience, specifically the use of peer data, selecting a reasonable and supportable forecast and determining the nature and amount of qualitative adjustments. In turn, auditing management’s judgments around those estimates involved a high degree of subjectivity. The primary procedures we performed to address this critical audit matter included, among others: • We evaluated the design and operating effectiveness of controls relating to management’s determination of the allowance for credit losses, including: • Controls over the development of the allowance for credit losses model, including validation of the model. • Controls over management’s selection of appropriate historical loss experience. • Controls over management’s review and approval of the allowance for credit losses, including management’s evaluation of qualitative adjustments that might impact the calculation of the allowance and management’s determination of a reasonable and supportable forecast. • We evaluated, with the support of specialists, management’s use of peer loss data in calculating historical loss rates by comparing the resulting historical loss experience to a group of the Company’s peers. • We evaluated management’s application of qualitative adjustments to the allowance for credit losses, which included substantively testing management’s process for developing and applying qualitative factors and assessing relevance of data used to develop factors including evaluating their judgements and assumptions for reasonableness. • We evaluated, with the support of specialists, management’s selection of a reasonable and supportable forecast and tested the accuracy of the application of that forecast to the lifetime historical loss rate calculation. We also evaluated with the support of specialists, the conceptual design of the credit loss model and the independent model validation. /s/ Dixon Hughes Goodman LLP We have served as the Company’s auditor since 2016. Charlotte, North Carolina March 1, 2021 83 Table o f Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Eagle Bancorp Inc. Opinion on Internal Control Over Financial Reporting We have audited Eagle Bancorp Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2020 and 2019, and for each of the three years in the period ended December 31, 2020, and our report dated March 1, 2021 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Dixon Hughes Goodman LLP Charlotte, North Carolina March 1, 2021 84 Table o f Contents EAGLE BANCORP, INC. Consolidated Balance Sheets (dollars in thousands, except per share data) Assets December 31, 2020 December 31, 2019 Cash and due from banks $ 8,435 $ 7,539 Federal funds sold 28,200 38,987 Interest bearing deposits with banks and other short-term investments 1,752,420 195,447 Investment securities available-for-sale, at fair value (amortized cost of $ 1,129,057 and $ 838,994 and allowance for credit losses of $ 167 and $ 0 as of December 31, 2020 and December 31, 2019, respectively). 1,151,083 843,363 Federal Reserve and Federal Home Loan Bank stock 40,104 35,194 Loans held for sale 88,205 56,707 Loans 7,760,212 7,545,748 Less allowance for credit losses ( 109,579 ) ( 73,658 ) Loans, net 7,650,633 7,472,090 Premises and equipment, net 13,553 14,622 Operating lease right-of-use assets 25,237 27,372 Deferred income taxes 38,571 29,804 Bank owned life insurance 76,729 75,724 Goodwill and intangible assets, net 105,114 104,739 Other real estate owned 4,987 1,487 Other assets 134,531 85,644 Total Assets $ 11,117,802 $ 8,988,719 Liabilities and Shareholders’ Equity Liabilities Deposits: Noninterest bearing demand $ 2,809,334 $ 2,064,367 Interest bearing transaction 756,923 863,856 Savings and money market 4,645,186 3,013,129 Time, $ 100,000 or more 546,173 663,987 Other time 431,587 619,052 Total deposits 9,189,203 7,224,391 Customer repurchase agreements 26,726 30,980 Other short-term borrowings 300,000 250,000 Long-term borrowings 268,077 217,687 Operating lease liabilities 28,022 29,959 Reserve for unfunded commitments 5,498 — Other liabilities 59,384 45,021 Total Liabilities 9,876,910 7,798,038 Shareholders’ Equity Common stock, par value $ 0.01 per share; shares authorized 100,000,000 , shares issued and outstanding 31,779,663 and 33,241,496 , respectively 315 331 Additional paid in capital 427,016 482,286 Retained earnings 798,061 705,105 Accumulated other comprehensive income 15,500 2,959 Total Shareholders’ Equity 1,240,892 1,190,681 Total Liabilities and Shareholders’ Equity $ 11,117,802 $ 8,988,719 See Notes to Consolidated Financial Statements. 85 Table o f Contents EAGLE BANCORP, INC. Consolidated Statements of Income Years Ended December 31, (dollars in thousands, except per share data) 2020 2019 2018 Interest Income Interest and fees on loans $ 368,854 $ 400,923 $ 368,606 Interest and dividends on investment securities 18,440 21,037 17,907 Interest on balances with other banks and short-term investments 2,601 7,438 6,616 Interest on federal funds sold 91 232 157 Total interest income 389,986 429,630 393,286 Interest Expense Interest on deposits 53,566 91,026 60,210 Interest on customer repurchase agreements 293 345 225 Interest on short-term borrowings 1,869 2,298 3,942 Interest on long-term borrowings 12,696 11,916 11,916 Total interest expense 68,424 105,585 76,293 Net Interest Income 321,562 324,045 316,993 Provision for Credit Losses 45,571 13,091 8,660 Provision for Unfunded Commitments 1,380 — — Net Interest Income After Provision For Credit Losses 274,611 310,954 308,333 Noninterest Income Service charges on deposits 4,416 6,247 7,014 Gain on sale of loans 22,089 8,474 5,963 Gain on sale of investment securities 1,815 1,517 97 Increase in the cash surrender value of bank owned life insurance 2,071 1,703 1,507 Other income 15,305 7,758 8,005 Total noninterest income 45,696 25,699 22,586 Noninterest Expense Salaries and employee benefits 74,440 79,842 67,734 Premises and equipment expenses 15,715 14,387 15,660 Marketing and advertising 4,278 4,826 4,566 Data processing 10,702 9,412 9,714 Legal, accounting and professional fees 16,406 12,195 9,742 FDIC insurance 7,941 3,206 3,512 Other expenses 14,680 15,994 15,783 Total noninterest expense 144,162 139,862 126,711 Income Before Income Tax Expense 176,145 196,791 204,208 Income Tax Expense 43,928 53,848 51,932 Net Income 132,217 142,943 152,276 Earnings Per Common Share Basic $ 4.09 $ 4.18 $ 4.44 Diluted $ 4.09 $ 4.18 $ 4.42 See Notes to Consolidated Financial Statements. 86 Table o f Contents EAGLE BANCORP, INC. Consolidated Statements of Comprehensive Income Years Ended December 31, (dollars in thousands) 2020 2019 2018 Net Income $ 132,217 $ 142,943 $ 152,276 Other comprehensive income (loss), net of tax: Unrealized gain (loss) on securities available for sale 14,422 11,254 ( 3,841 ) Reclassification adjustment for net gains included in net income ( 1,363 ) ( 1,101 ) ( 72 ) Total unrealized gain (loss) on investment securities 13,059 10,153 ( 3,913 ) Unrealized (loss) gain on derivatives ( 1,378 ) ( 2,049 ) 1,806 Reclassification adjustment for gain (loss) included in net income 860 ( 870 ) ( 418 ) Total unrealized (loss) gain on derivatives ( 518 ) ( 2,919 ) 1,388 Other comprehensive income (loss) 12,541 7,234 ( 2,525 ) Comprehensive Income $ 144,758 $ 150,177 $ 149,751 See Notes to Consolidated Financial Statements. 87 Table o f Contents EAGLE BANCORP, INC. Consolidated Statements of Changes in Shareholders’ Equity (dollars in thousands except share data) Common Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Shares Amount Balance January 1, 2018 34,185,163 $ 340 $ 520,304 $ 431,544 $ ( 1,750 ) $ 950,438 Net Income — — — 152,276 — $ 152,276 Other comprehensive income, net of tax — — — — ( 1,851 ) ( 1,851 ) Stock-based compensation expense — — 6,494 — — 6,494 Issuance of common stock related to options exercised, net of shares withheld for payroll taxes 108,201 1 775 — — 776 Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 14,162 ) 1 ( 1 ) — — — Time based stock awards granted 94,344 — — — — — Issuance of common stock related to employee stock purchase plan 14,373 — 808 — — 808 Balance Reclassification of the income tax effects of the Tax Cuts and Jobs Act from AOCI (ASU 2018-02) — — — 674 ( 674 ) — Balance December 31, 2018 34,387,919 $ 342 $ 528,380 $ 584,494 $ ( 4,275 ) $ 1,108,941 Net Income — — — 142,943 — $ 142,943 Other comprehensive loss, net of tax — — — — 7,234 7,234 Stock-based compensation expense — — 7,684 — — 7,684 Issuance of common stock related to options exercised, net of shares withheld for payroll taxes 26,784 — 332 — — 332 Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 15,127 ) 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 16,129 — 782 — — 782 Cash dividends declared ($ 0.66 per share) — — — ( 22,332 ) — ( 22,332 ) Common stock repurchased ( 1,304,500 ) ( 12 ) ( 54,891 ) — — ( 54,903 ) Balance December 31, 2019 33,241,496 331 482,286 705,105 2,959 1,190,681 Net Income — — — 132,217 — 132,217 Cumulative effect adjustment due to the adoption of ASC 326, net of tax — $ — $ — $ ( 10,931 ) $ — ( 10,931 ) Other comprehensive income, net of tax — — — — 12,541 12,541 Stock-based compensation expense — — 5,324 — — 5,324 Issuance of common stock related to options exercised, net of shares withheld for payroll taxes 3,300 — 63 — — 63 Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 28,811 ) — ( 1 ) — — ( 1 ) Vesting of performance based stock awards, net of shares withheld for payroll taxes 4,126 — — — — — Time based stock awards granted 176,252 — — — — — Issuance of common stock related to employee stock purchase plan 24,210 — 760 — — 760 Cash dividends declared ($ 0.88 per share) — — — ( 28,330 ) — ( 28,330 ) Common stock repurchased ( 1,640,910 ) ( 16 ) ( 61,416 ) — — ( 61,432 ) Balance December 31, 2020 31,779,663 $ 315 $ 427,016 $ 798,061 $ 15,500 $ 1,240,892 See Notes to Consolidated Financial Statements. 88 Table o f Contents EAGLE BANCORP, INC. Consolidated Statements of Cash Flows (dollars in thousands) 89 Table o f Contents Years Ended December 31, 2020 2019 2018 Cash Flows From Operating Activities: Net Income $ 132,217 $ 142,943 $ 152,276 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 45,571 13,091 8,660 Provision for unfunded commitments 1,380 — — Depreciation and amortization 4,696 6,174 6,969 Gains on sale of loans ( 22,089 ) ( 8,474 ) ( 5,963 ) Gain on MSRs ( 667 ) — — Securities premium amortization (discount accretion), net 8,196 5,186 4,445 Origination of loans held for sale ( 1,240,682 ) ( 665,726 ) ( 325,109 ) Proceeds from sale of loans held for sale 1,231,273 636,747 337,256 Net increase in cash surrender value of BOLI ( 2,071 ) ( 1,703 ) ( 1,507 ) Deferred income tax (benefit) expense ( 8,332 ) ( 61 ) ( 3,497 ) Net gain on sale of other real estate owned ( 1,180 ) — — Net gain on sale of investment securities ( 1,815 ) ( 1,517 ) ( 97 ) Stock-based compensation expense 5,324 7,684 6,494 Net tax (expense) benefits from stock compensation 118 ( 48 ) 110 Increase in other assets ( 28,626 ) ( 21,421 ) ( 16,643 ) Increase in other liabilities 9,826 19,809 2,061 Net cash provided by operating activities 133,139 132,684 165,455 Cash Flows From Investing Activities: Purchases of available-for-sale investment securities ( 739,955 ) ( 374,648 ) ( 331,884 ) Proceeds from maturities of available-for-sale securities 302,471 214,204 93,848 Proceeds from sale/call of available-for-sale securities 124,144 104,785 36,292 Purchases of Federal Reserve and Federal Home Loan Bank stock ( 9,160 ) ( 100,939 ) ( 47,872 ) Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock 4,250 89,250 60,690 Net increase in loans ( 240,911 ) ( 563,771 ) ( 583,393 ) Purchase of BOLI — ( 580 ) ( 11,000 ) Purchase of annuities — ( 2,589 ) — Proceeds from sale of other real estate owned 4,430 — — Purchases of premises and equipment ( 2,945 ) ( 2,839 ) ( 1,482 ) Net cash used in investing activities ( 557,676 ) ( 637,127 ) ( 784,801 ) Cash Flows From Financing Activities: Increase in deposits 1,964,812 250,106 1,120,301 Increase (decrease) in customer repurchase agreements ( 4,254 ) 567 ( 46,148 ) Increase (decrease) in short-term borrowings 50,000 250,000 ( 325,000 ) Increase in long-term borrowings 50,000 — — Proceeds from exercise of equity compensation plans 63 332 776 Proceeds from employee stock purchase plan 760 782 808 Common stock repurchased ( 61,432 ) ( 54,903 ) — Cash dividends paid ( 28,330 ) ( 22,332 ) — Net cash provided by financing activities 1,971,619 424,552 750,737 Net (Decrease) Increase In Cash and Cash Equivalents 1,547,082 ( 79,891 ) 131,391 Cash and Cash Equivalents at Beginning of Period 241,973 321,864 190,473 Cash and Cash Equivalents at End of Period $ 1,789,055 $ 241,973 $ 321,864 Supplemental Cash Flows Information: Interest paid $ 70,183 $ 105,985 $ 73,806 Income taxes paid $ 37,400 $ 54,650 $ 55,200 Non-Cash Investing Activities Initial recognition of operating lease right-of-use assets $ 1,696 $ 29,574 $ — Transfers from loans to other real estate owned $ 6,750 $ 93 $ — Change in fair value of cash flow hedge $ ( 904 ) $ — $ — Change in fair value of investments $ 17,822 $ — $ — See Notes to Consolidated Financial Statements. 90 Table o f Contents Eagle Bancorp, Inc. Notes to Consolidated Financial Statements for the Years Ended December 31, 2020, 2019 and 2018: Note 1 – Summary of Significant Accounting Policies The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. (the "Parent") and its subsidiaries (together with the Parent, the “Company”) with all significant intercompany transactions eliminated. EagleBank (the “Bank”), a Maryland chartered commercial bank, is the Company’s principal subsidiary. The investment in subsidiaries is recorded on the Company’s books (Parent Only) on the basis of its equity in the net assets of the subsidiary (see Note 26 "Parent Company Financial Information" for further detail). The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America (“GAAP”) and to general practices in the banking industry. The following is a summary of the significant accounting policies. 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. As of December 31, 2020, the Bank offers its products and services through twenty banking offices, six 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. Risks and Uncertainties The outbreak of COVID-19 and the ongoing pandemic has adversely impacted a broad range of industries in which the Company’s customers operate and has impaired and could continue to impair their ability to fulfill their financial obligations to the Company. The World Health Organization declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The ongoing pandemic has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material adverse impact on the Company’s employees and operations to date, COVID-19 could still potentially create widespread business continuity or credit issues for the Company depending on how much longer the pandemic lasts. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. The CARES Act also created the Paycheck Protection Program (the “PPP”), a program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. On December 27, 2020, The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was enacted, which includes additional funding for the PPP. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other follow-up legislative and regulatory relief efforts have had and are expected to continue to have a material impact on the Company’s operations. 91 Table o f Contents The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to control and manage COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware. Financial position and results of operations The Company’s fee income has been and could be further reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, the Company is unable to project the full extent of the materiality of such an impact, but recognizes the breadth of the economic impact is likely to impact its fee income in future periods. The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time the Company is unable to project the full extent of the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods. Capital and liquidity While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, and rates for short term funding have recently been very low. If funding costs were to become elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers of the Company’s customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding. Asset valuation Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. The ongoing COVID-19 pandemic has caused and could continue to cause prolonged volatility and potential declines in the Company’s stock price. As of June 30, 2020, the Company performed a qualitative assessment to determine whether it was more likely than not that the fair value of the only reporting unit was less than its carrying amount. As of June 30, 2020, a triggering event was deemed to have occurred as a result of COVID-19 and, accordingly, a step one assessment was performed by comparing the fair value of the reporting unit with its carrying amount (including goodwill). Determining the fair value of a reporting unit under the goodwill impairment test is subjective and often involves the use of significant estimates and assumptions. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparable factors. Based on the results of the assessment of the reporting unit, the Company concluded that no impairment existed as of June 30, 2020. The Company determined that there were no triggering events as of September 30, 2020 and an impairment analysis was not performed. An impairment analysis was performed during the fourth quarter (as of December 31, 2020) as part of our regularly scheduled annual impairment testing and again found no impairment existed. Future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Business Continuity Plan 92 Table o f Contents The Company has implemented a remote working strategy for many of its employees. The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. We have established general guidelines for returning to the workplace that include having employees maintain safe distances, staggered work schedules to limit the number of employees in a single location, more frequent cleaning of our facilities and other practices encouraging a safe working environment during this challenging time, including required COVID-19 training programs. The Company does not currently face any material resource constraint through the implementation of its business continuity plans. Lending operations and accommodations to borrowers In response to the COVID-19 pandemic and consistent with regulatory guidance, we have also implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications. At December 31, 2020, the Company had no accruing loans 90 days or more past due. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. As of December 31, 2020, we had ongoing temporary modifications on 36 loans representing approximately $ 72 million (approximately 0.9 % of total loans) in outstanding balances. Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e., non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend GAAP requirements to treat such short-term loan modifications as troubled debt restructurings ("TDRs"). Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board. The Company actively participates in the PPP, administered by the Small Business Administration (“SBA”). The PPP loans originated by the Bank generally have a two-year term and earn interest at 1% plus fees. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of December 31, 2020, PPP loans totaled $ 454.8 million to just over 1,400 businesses. The Company understands that loans funded through the PPP are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charges to earnings. Credit The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for credit losses (“ACL”) and record additional provision for credit losses. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest bearing deposits with other banks that have an original maturity of three months or less. Loans Held for Sale The Company regularly engages in sales of residential mortgage loans held for sale and the guaranteed portion of SBA loans originated by the Bank. The Company has elected to carry loans held for sale at fair value. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of these loans are recorded as a component of noninterest income in the Consolidated Statements of Income. The Company’s current practice is to sell residential mortgage loans held for sale on a servicing released basis, and, therefore, it has no intangible asset recorded in the normal course of business for the value of such servicing as of December 31, 2020 and December 31, 2019. 93 Table o f Contents The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e. interest rate lock commitments). Such interest rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. To protect against the price risk inherent in residential mortgage loan commitments, the Company utilizes either or both “best efforts” and “mandatory delivery” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Under a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor. The investor commits to a price, representing a premium on the day the borrower commits to an interest rate, that it will purchase the loan from the Company if the loan to the underlying borrower closes with the intent that the buyer/investor has assumed the interest rate risk on the loan as the Company protects itself from changes in interest rates. As a result, the Bank is not generally exposed to losses on loans sold utilizing best efforts, nor will it realize gains related to rate lock commitments due to changes in interest rates. The market values of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded. Because of the high correlation between rate lock commitments and best efforts contracts, very little gain or loss should occur on the interest rate lock commitments. Under a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay the investor a “pair-off” fee, based on then-current market prices, to compensate the investor for the shortfall. The Company manages the interest rate risk on interest rate lock commitments by entering into forward sale contracts of mortgage-backed securities, whereby the Company obtains the right to deliver securities to investors in the future at a specified price. Such contracts are accounted for as derivatives and are recorded at fair value in derivative assets or liabilities, carried on the Consolidated Balance Sheet within other assets or other liabilities with changes in fair value recorded in other income within the Consolidated Statements of Income. The period of time between issuance of a loan commitment to the customer and closing and sale of the loan to an investor generally ranges from 30 to 90 days under current market conditions. The gross gains on loan sales are recognized based on new loan commitments with adjustment for price and pair-off activity. Commission expenses on loans held for sale are recognized based on loans closed. In circumstances where the Company does not deliver the whole loan to an investor, but rather elects to retain the loan in its portfolio, the loan is transferred from held for sale to loans at fair value at the date of transfer. The sale of the guaranteed portion of SBA loans on a servicing retained basis gives rise to an excess servicing asset, which is computed on a loan by loan basis with the unamortized amount being included in intangible assets in the Consolidated Balance Sheets. This excess servicing asset is being amortized on a straight-line basis (with adjustment for prepayments) as an offset to servicing fees collected and is included in other income in the Consolidated Statements of Income. 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. When servicing is retained on multifamily FHA loans securitized and sold, the Company computes an excess servicing asset on a loan by loan basis with the unamortized amount being included in Intangible assets in the Consolidated Balance Sheets. Unamortized multifamily FHA MSRs totaled $ 807 thousand as of December 31, 2020 and $ 310 thousand as of December 31, 2019. Noninterest Income includes gains from the sale of the Ginnie Mae securities and net revenues earned on the servicing of multifamily FHA loans underlying the Ginnie Mae securities. Revenue from servicing commercial multifamily FHA mortgages is recognized as earned based on the specific contractual terms of the underlying servicing agreements, along with amortization of and changes in impairment of mortgage servicing rights. Investment Securities The Company has no securities classified as trading or as held-to-maturity. Securities available-for-sale are acquired as part of the Company’s asset/liability management strategy and may be sold in response to changes in interest rates, current market conditions, loan demand, changes in prepayment risk and other factors. Securities available-for-sale are carried at fair value, with unrealized gains or losses, other than impairment losses, being reported as accumulated other comprehensive income/(loss), a separate component of shareholders’ equity, net of deferred income tax. Realized gains and losses, using the specific identification method, are included as a separate component of noninterest income in the Consolidated Statements of Income. Premiums and discounts on investment securities are amortized/accreted to the earlier of call or maturity based on expected lives, which lives are adjusted based on prepayment assumptions and call optionality. Declines in the fair value of 94 Table o f Contents individual available-for-sale securities below their cost that are other-than-temporary in nature result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or a change in management’s intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include the: (1) duration and magnitude of the decline in value; (2) financial condition of the issuer or issuers; and (3) structure of the security. For the impairment of investment securities please see "Allowance for Credit Losses - Available-for-Sale Debt Securities" below. Loans Loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is accrued at the contractual rate on the principal amount outstanding. It is the Company’s policy to discontinue the accrual of interest when circumstances indicate that collection is doubtful. Deferred fees and costs are being amortized on the interest method over the term of the loan. Management considers individual loans impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments according to contractual terms. Loans are evaluated for impairment in accordance with the Company’s portfolio monitoring and ongoing risk assessment procedures. Management considers the financial condition of the borrower, cash flow of the borrower, payment status of the loan, and the value of the collateral, if any, securing the loan. Generally, individually assessed loans do not include large groups of smaller balance homogeneous loans such as residential real estate and consumer type loans which are evaluated collectively for impairment and are generally placed on nonaccrual when the loan becomes 90 days past due as to principal or interest. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (90 days or less) provided eventual collection of all amounts due is expected. The impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if repayment is expected to be provided solely by the collateral. In appropriate circumstances, interest income on individually assessed loans may be recognized on a cash basis. Allowance for Credit Losses On January 1, 2020, we adopted ASC 326 “Financial Instruments - Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments” (“ASC 326”), which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses ("ACL") with an expected loss methodology that is referred to as the current expected credit loss ("CECL") model. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable and held-to-maturity (“HTM”) debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASC 842 "Leases" . In addition, ASC 326 changed the accounting for available-for-sale (“AFS”) debt securities. One such change is to require credit-related impairments to be recognized as an ACL rather than as a write-down of the securities amortized cost basis when management does not intend to sell or believes that it is not more than likely that they will be required to sell the securities prior to recovery of the securities amortized cost basis. We adopted ASC 326 using the modified retrospective method. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company does not own HTM investment debt securities. The following table illustrates the impact of ASC 326. 95 Table o f Contents January 1, 2020 (dollars in thousands) As Reported Under ASC 326 Pre-ASC 326 Adoption Impact of ASC 326 Adoption Assets: Loans Commercial $ 1,545,906 $ 1,545,906 $ — Income producing - commercial real estate 3,702,747 3,702,747 — Owner occupied - commercial real estate 985,409 985,409 — Real estate mortgage - residential 104,221 104,221 — Construction - commercial and residential 1,035,754 1,035,754 — Construction - C&I (owner occupied) 89,490 89,490 — Home equity 80,061 80,061 — Other consumer 2,160 2,160 — Allowance for credit losses on loans $ ( 84,272 ) $ ( 73,658 ) $ ( 10,614 ) Liabilities: Reserve for Unfunded Commitments $ ( 4,118 ) $ — $ ( 4,118 ) The following table presents a breakdown of the provision for credit losses included in our Consolidated Statements of Income for the applicable periods (in thousands): For the Year Ended (dollars in thousands) December 31, 2020 December 31, 2019 Provision for credit losses- loans $ 45,404 $ 13,091 Provision for credit losses- AFS debt securities 167 — Total provision for credit losses $ 45,571 $ 13,091 Allowance for Credit Losses- Loans The ACL is an estimate of the expected credit losses in the loans held for investment portfolio. ASC 326 replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged- off. Reserves on loans that do not share risk characteristics are evaluated on an individual basis (nonaccrual, TDR). Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. The remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated by call report codes and a loan-level probability of default (“PD”) / Loss Given Default (“LGD”) cash flow method with and using an exposure at default (“EAD”) model. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments. The Company uses regression analysis of historical internal and peer data (as Company loss data is insufficient) to determine suitable credit loss drivers to utilize when modeling lifetime PD and LGD. This analysis also determines how expected PD will be impacted by different forecasted levels of the loss drivers. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in reserve for unfunded commitments (“RUC”) on the Consolidated Balance Sheets. For periods beyond which we are able to develop reasonable and supportable forecasts, we revert to the historical loss rate on a straight-line basis over a twelve-month period. 96 Table o f Contents The Company uses a loan-level PD/LGD cash flow method with an EAD model to estimate expected credit losses. In accordance with ASC 326, expected credit losses are measured on a collective (pooled) basis for financial assets with similar risk characteristics. The bank groups collectively assessed loans using a call report code. Some unique loan types, such as PPP loans, are grouped separately due to their specific risk characteristics. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of expected prepayment speeds is based on historical internal data. EAD is based on each instrument's underlying amortization schedule in order to estimate the bank's expected credit loss exposure at the time of the borrower's potential default. For our cash flow model, management utilizes and forecasts regional unemployment by using a national forecast and estimating a regional adjustment based on historical differences between the two as the loss driver over our reasonable and supportable period of two years and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity. In 2020, COVID-19 negatively impacted unemployment projections, which inform our CECL economic forecast and resulted in increased our ACL during 2020. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period. The ACL also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff, and trends in delinquencies. While our methodology in establishing the ACL attributes portions of the ACL and RUC to the separate loan pools or segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively. Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses. A summary of our primary portfolio segments is as follows: Commercial . The commercial loan portfolio is comprised of lines of credit and term loans for working capital, equipment, and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, and acquisitions; and are generally secured by accounts receivable, inventory, equipment and other assets of our clients’ businesses. Income producing – commercial real estate . Income producing commercial real estate loans are comprised of permanent and bridge financing provided to professional real estate owners/managers of commercial and residential real estate projects and properties who have a demonstrated a record of past success with similar properties. Collateral properties include apartment buildings, office buildings, hotels, mixed-use buildings, retail, data centers, warehouse, and shopping centers. The primary source of repayment on these loans is generally expected to come from lease or operation of the real property collateral. Income producing commercial real estate loans are impacted by fluctuation in collateral values, as well as rental demand and rates. Owner occupied – commercial real estate. The owner occupied commercial real estate portfolio is comprised of permanent financing provided to operating companies and their related entities for the purchase or refinance of real property wherein their business operates. Collateral properties include industrial property, office buildings, religious facilities, mixed-use property, health care and educational facilities. Real Estate Mortgage – Residential. Real estate mortgage residential loans are comprised of consumer mortgages for the purpose of purchasing or refinancing first lien real estate loans secured by primary-residence, second-home, and rental residential real property. Construction – commercial and residential . The construction commercial and residential loan portfolio is comprised of loans made to builders and developers of commercial and residential property, for both renovation, new construction, and development projects. Collateral properties include apartment buildings, mixed use property, residential condominiums, single and 1-4 residential property, and office buildings. The primary source of repayment on these loans is expected to come from the sale, permanent financing, or lease of the real property collateral. Construction loans are impacted by fluctuations in collateral values and the ability of the borrower or ultimate purchaser to obtain permanent financing. 97 Table o f Contents Construction – commercial and industrial ("C&I") (owner occupied) . The construction C&I (owner occupied) portfolio comprises loans to operating companies and their related entities for new construction or renovation of the real or leased property in which they operate. Generally these loans contain provisions for conversion to an owner occupied commercial real estate or to a commercial loan after completion of construction. Collateral properties include industrial, healthcare, religious facilities, restaurants, and office buildings. Home Equity . The home equity portfolio is comprised of consumer lines of credit and loans secured by subordinate liens on residential real property. Other Consumer . The other consumer portfolio is comprised of consumer purpose loans not secured by real property, including personal lines of credit and loans, overdraft lines, and vehicle loans. This category also includes other loan items such as overdrawn deposit accounts as well as loans and loan payments in process. We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on nonaccrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on nonaccrual. Classified loans represent the sum of loans graded substandard and doubtful. The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and in specific reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to management committees, Director’s Loan Committee, the Audit Committee, and the Board of Directors. The committees' reports to the Board are part of the Board's review on a quarterly basis of our consolidated financial statements. When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation that a loan will be in a trouble debt restructuring. We do not measure an ACL on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on nonaccrual status. Collateral Dependent Financial Assets 98 Table o f Contents Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset. A loan that has been modified or renewed is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. For further detail on TDRs regarding the CARES Act, please see Note 1 - "Summary of Significant Accounting Principles" - "Impact of COVID." Allowance for Credit Losses - Available-for-Sale Debt Securities Although ASC 326 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. One notable change from the legacy OTTI model is when evaluating whether credit loss exists, an entity may no longer consider the length of time fair value has been less than amortized cost. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment. The entire amount of an impairment loss is recognized in earnings only when: (1) the Company intends to sell the security; or (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes. Changes in the ACL are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectability of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. The majority of available-for-sale debt securities as of December 31, 2020 and 2019 were issued by U.S. agencies. However, as of December 31, 2020, the Company determined that part of the unrealized loss positions in AFS corporate and municipal securities could be the result of credit losses, and therefore, an ACL of $ 167 thousand was recorded. See Note 3 - "Investment Securities" for more information. We have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in accrued interest and other assets in the Consolidated Balance Sheets. Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable. 99 Table o f Contents Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records a reserve for unfunded commitments (“RUC”) on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company’s Consolidated Statement of Income. The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company’s Consolidated Balance Sheet. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization computed using the straight-line method for financial reporting purposes. Premises and equipment are depreciated over the useful lives of the assets, which generally range from three to seven years for furniture, fixtures and equipment, three to five years for computer software and hardware, and five to twenty years for building improvements. Leasehold improvements are amortized over the terms of the respective leases, which may include renewal options where management has the positive intent to exercise such options, or the estimated useful lives of the improvements, whichever is shorter. The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. These costs are included as a component of premises and equipment expenses on the Consolidated Statements of Income. Other Real Estate Owned (OREO) Assets acquired through loan foreclosure are held for sale and are recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. The new basis is supported by appraisals that are generally no more than twelve months old. Costs after acquisition are generally expensed. If the fair value of the asset declines, a write-down is recorded through noninterest expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in market conditions or appraised values. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired, including other intangible assets. Other intangible assets include purchased assets and mortgage servicing rights (“MSRs”) that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives. All intangible assets are subject to periodic impairment testing. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives. Goodwill is subject to impairment testing at the reporting unit level, which must be conducted at least annually or upon the occurrence of a triggering event. The Company has determined that it has a single reporting unit. If the fair values of the reporting unit exceed the book value, no write-down of recorded goodwill is required. If the fair value of a reporting unit is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value. Any impairment would be recorded through a reduction of goodwill or the intangible and an offsetting charge to noninterest expense. The Company performs impairment testing at any quarter-end when events or changes in circumstances indicate the assets might be impaired, or at least annually as of December 31. The Company performs a qualitative impairment assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company assesses qualitative factors on a quarterly basis. Based on the assessment of these qualitative factors, if it is determined that it is more likely than not that the fair value of a reporting unit is not less than the carrying value, then performing the impairment process is not necessary. However, if it is determined that it is more likely than not that the carrying value exceeds the fair value a quantified analysis is required to determine whether an impairment exists. Based on the results of qualitative assessments of the reporting unit, the Company concluded that no impairment existed at December 31, 2020. However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. 100 Table o f Contents Interest Rate Swap Derivatives As required by ASC Topic 815 " Derivatives and Hedging ", the Company records all derivatives on the Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. Customer Repurchase Agreements The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The agreements are entered into primarily as accommodations for large commercial deposit customers. The obligation to repurchase the securities is reflected as a liability in the Company’s Consolidated Balance Sheets, while the securities underlying the securities sold under agreements to repurchase remain in the respective assets accounts and are delivered to and held as collateral by third party trustees. Marketing and Advertising Marketing and advertising costs are generally expensed as incurred. Income Taxes The Company employs the asset and liability method of accounting for income taxes as required by ASC 740, “ Income Taxes .” Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e. temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse. The Company utilizes statutory requirements for its income tax accounting, and limits risks associated with potentially problematic tax positions that may incur challenge upon audit, where an adverse outcome is more likely than not. Therefore, no provisions are necessary for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax valuation allowance. In accordance with ASC 740, the Company may establish a reserve against deferred tax assets in those cases where realization is less than certain. The Company’s policy is to recognize interest and penalties on income taxes in other noninterest expenses. The Company remains subject to examination for income tax returns by the Internal Revenue Service, as well as all of the states where it conducts business, for the years ending after December 31, 2017. There are currently no examinations in process as of December 31, 2020. Transfer of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. In certain cases, the recourse to the Bank to repurchase assets may exist but is deemed immaterial based on the specific facts and circumstances. 101 Table o f Contents Earnings per Common Share Basic net income per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period measured. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period measured including the potential dilutive effects of common stock equivalents. Stock-Based Compensation In accordance with ASC Topic 718, “Compensation,” the Company records as salaries and employee benefits expense on its Consolidated Statements of Income an amount equal to the amortization (over the remaining service period) of the fair value of option and restricted stock awards computed at the date of grant. Salary and employee benefits expense on variable stock grants (i.e., performance based grants) is recorded based on the probability of achievement of the goals underlying the performance grant. Refer to Note 17 - "Stock-Based Compensation" for a description of stock-based compensation awards, activity and expense for the years ended December 31, 2020, 2019 and 2018. The Company records the discount from the fair market value of shares issued under its Employee Share Purchase Plan as a component of Salaries and employee benefits expense in its Consolidated Statement of Income. New Authoritative Accounting Guidance Accounting Standards Adopted in 2020 In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the Agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting and disclosures for loan modifications. Under Accounting Standards Codification ("ASC") 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Agencies confirmed with the staff of the Financial Accounting Standards Board (“FASB”) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance has had, and is expected to continue to have, a material impact on the Company’s financial statements; however, the full extent of such impact cannot be quantified at this time. See Note 4 - "Loans and Allowance for Credit Losses" for further detail. ASU 2016-13, “Measurement of Credit Losses on Financial Instruments (Topic 326).” Under the CECL standard and based on the January 1, 2020 effective date, the Company made an initial adjustment to the ACL of $ 10.6 million along with $ 4.1 million to the reserve for unfunded commitments. In accordance with adoption of CECL, the initial January 1, 2020 cumulative-effect adjustment was to retained earnings (net of taxes) under the modified retrospective approach. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Refer to the “Allowance for Credit Losses- Loans” section above for additional detail. ASU 2017-04, " Intangibles-Goodwill and Other (Topic 350") : Simplifying the Test for Goodwill Impairment, in January 2017. The objective of this guidance is to simplify an entity’s required test for impairment of goodwill by eliminating Step 2 from the goodwill impairment test. In Step 2 an entity measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this Update, an entity should perform its annual or quarterly goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount and record an impairment charge for the excess of the carrying amount over the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit and the entity must consider the income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Company adopted this standard during the current year and it did not have a material impact on the Company’s financial position, results of operations or cash flows. 102 Table o f Contents ASU 2018-13, " Fair Value Measurement" (Topic 820) : The ASU removes, modifies, and adds certain disclosures related to Level 3 investments, including: to disclose changes in unrealized gains and losses, the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty. The ASU became effective January 1, 2020 and had no significant impact on the Company's documentation requirements, financial statement or disclosures. ASU 2020-2 "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842) " ("ASU 2020-2") incorporates SEC SAB 119 (updated from SAB 102) into the Accounting Standards Codification (the "Codification") by aligning SEC recommended policies and procedures with ASC 326. ASU 2020-2 was effective on January 1, 2020 and had no significant impact on the Company's documentation requirements, financial statement or disclosures. ASU 2020-3 " Codification Improvements to Financial Instruments" ("ASU 2020-3") revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-3 was effective immediately upon its release in March 2020 and did not have a material impact on the Company's Consolidated Financial Statements. Accounting Standards Pending Adoption ASU 2019-12 "Income Taxes (Topic 740)" ("ASU 2019-12") simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance. ASU 2019-12 was effective for us on January 1, 2021 and is not expected to have a material impact on our consolidated financial statements for fiscal year 2021. ASU 2020-4, " Reference Rate Reform (Topic 848)" ("ASU 2020-4") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/ costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-4 also provides numerous optional expedients for derivative accounting. ASU 2020-4 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-4 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on the Company's business operations and 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 ("FRB") based principally on the type and amount of their deposits. During 2020, the Bank maintained balances at the Federal Reserve sufficient to meet reserve requirements, as well as significant excess reserves, on which interest is paid. The average daily balance maintained in 2020 was $ 1.1 billion a nd in 2019 was $ 307 million. The Company also has deposits with other banks that serve as collateral for derivative positions it holds, totaling $ 5.1 million at December 31, 2020 and $ 780 thousand at December 31, 2019. Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank ("FHLB") of Atlanta and noninterest bearing balances with domestic correspondent banks to cover associated costs for services they provide to the Bank. 103 Table o f Contents Note 3 – Investment Securities Available-for-Sale Amortized cost and estimated fair value of securities available-for-sale are summarized as follows: December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Estimated Fair Value (dollars in thousands) Credit Losses U. S. agency securities $ 181,087 $ 1,461 $ ( 627 ) $ — $ 181,921 Residential mortgage backed securities 811,328 14,506 ( 833 ) — 825,001 Municipal bonds 102,259 5,872 — ( 18 ) 108,113 Corporate bonds 34,383 1,624 ( 8 ) ( 149 ) 35,850 $ 1,129,057 $ 23,463 $ ( 1,468 ) $ ( 167 ) $ 1,150,885 December 31, 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (dollars in thousands) U. S. agency securities $ 180,228 $ 621 $ ( 1,055 ) $ 179,794 Residential mortgage backed securities 541,490 4,337 ( 1,975 ) 543,852 Municipal bonds 71,902 2,034 ( 5 ) 73,931 Corporate bonds 10,530 203 — 10,733 U.S. Treasury 34,844 11 — 34,855 $ 838,994 $ 7,206 $ ( 3,035 ) $ 843,165 In addition, at December 31, 2020 and December 31, 2019, the Company held $ 40.1 million and $ 35.2 million in equity securities, respectively, in a combination of FRB and FHLB stocks, which are required to be held for regulatory purposes and which are not marketable, and therefore are carried at cost. The unrealized losses that exist at December 31, 2020 are generally the result of changes in market interest rates and interest spread relationships since original purchases. However, as of December 31, 2020, the Company determined that part of the unrealized loss positions in AFS corporate and municipal securities were due to credit-related events, and therefore, an ACL of $ 167 thousand was recorded. The weighted average duration of debt securities, which comprise 99.9 % of total investment securities, is relatively short at 3.2 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 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. 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 as of December 31, 2020 and 2019 are as follows: Less than 12 Months 12 Months or Greater Total December 31, 2020 Number of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses (dollars in thousands) U. S. agency securities 28 $ 46,412 $ 67 $ 41,320 $ 560 $ 87,732 $ 627 Residential mortgage backed securities 35 170,178 782 6,419 51 176,597 833 Corporate bonds 3 5,764 8 — — 5,764 8 66 $ 222,354 $ 857 $ 47,739 $ 611 $ 270,093 $ 1,468 104 Table o f Contents Less than 12 Months 12 Months or Greater Total December 31, 2019 Number of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses (dollars in thousands) U. S. agency securities 36 $ 75,159 $ 439 $ 51,481 $ 616 $ 126,640 $ 1,055 Residential mortgage backed securities 111 197,794 1,148 90,742 827 288,536 1,975 Municipal bonds 1 1,994 5 — — 1,994 5 148 $ 274,947 $ 1,592 $ 142,223 $ 1,443 $ 417,170 $ 3,035 The amortized cost and estimated fair value of investments available-for-sale at December 31, 2020 and 2019 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. December 31, 2020 December 31, 2019 (dollars in thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value U. S. agency securities maturing: One year or less $ 53,916 $ 53,906 $ 96,332 $ 96,226 After one year through five years 110,083 110,777 76,121 75,821 Five years through ten years 17,087 17,240 7,775 7,747 Residential mortgage backed securities 811,328 825,001 541,490 543,852 Municipal bonds maturing: One year or less 4,329 4,348 5,897 5,969 After one year through five years 26,622 28,272 21,416 21,953 Five years through ten years 69,309 73,389 42,589 44,015 After ten years 2,000 2,121 2,000 1,994 Corporate bonds maturing: One year or less 5,218 5,220 502 508 After one year through five years 22,189 23,267 8,528 8,725 Five years through ten years 6,976 7,511 — — After ten years — — 1,500 1,500 U.S. treasury — — 34,844 34,855 Allowance for credit losses — ( 167 ) — — $ 1,129,057 $ 1,150,885 $ 838,994 $ 843,165 In 2020, gross realized gains on sales of investment securities were $ 1.9 million and gross realized losses on sales of investment securities were $ 46 thousand. In 2019, gross realized gains on sales of investment securities were $ 1.7 million and gross realized losses on sales of investment securities were $ 153 thousand. In 2018, gross realized gains on sales of investment securities were $ 391 thousand and gross realized losses on sales of investment securities were $ 294 thousand. Proceeds from sales and calls of investment securities for 2020, 2019 and 2018 were $ 124.1 million, $ 104.8 million, and $ 36.3 million, respectively. 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 December 31, 2020 was $ 268.4 million, which is well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of December 31, 2020 and December 31, 2019, 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. 105 Table o f Contents Note 4 – 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 December 31, 2020 and 2019 are summarized by type as follows: December 31, 2020 December 31, 2019 (dollars in thousands) Amount % Amount % Commercial $ 1,437,433 19 % $ 1,545,906 20 % PPP loans 454,771 6 % — — % Income producing - commercial real estate 3,687,000 47 % 3,702,747 50 % Owner occupied - commercial real estate 997,694 13 % 985,409 13 % Real estate mortgage - residential 76,592 1 % 104,221 1 % Construction - commercial and residential 873,261 11 % 1,035,754 14 % Construction - C&I (owner occupied) 158,905 2 % 89,490 1 % Home equity 73,167 1 % 80,061 1 % Other consumer 1,389 — 2,160 — Total loans 7,760,212 100 % 7,545,748 100 % Less: allowance for credit losses ( 109,579 ) ( 73,658 ) Net loans $ 7,650,633 $ 7,472,090 Unamortized net deferred fees amounted to $ 30.8 million and $ 25.2 million at December 31, 2020 and 2019, of which $ 30 thousand and $ 32 thousand at December 31, 2020 and 2019, respectively, represented net deferred costs on home equity loans. As of December 31, 2020 and 2019, the Bank serviced $ 124 million and $ 99 million, respectively, of multifamily FHA loans, SBA loans and other loan participations, which are not reflected as loan balances on the Consolidated Balance Sheets. Loan Origination/Risk Management The Company’s goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include carefully enforcing loan policies and procedures, evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. The remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated by call report codes and a loan-level PD/LGD cash flow method using an EAD model is applied. The loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments. The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing. At December 31, 2020, owner occupied commercial real estate and construction – C&I (owner occupied) represent approximately 15 % of the loan portfolio while non-owner occupied commercial real estate and real estate construction represented approximately 58 % of the loan portfolio. The combined owner and non-owner occupied and commercial real estate loans represented approximately 73 % of the loan portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in 85 % of all loans being secured or partially 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 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 . 106 Table o f Contents 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 19 % of the loan portfolio at December 31, 2020 and generally with 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 1 % of the commercial loan category. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit. 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 6 % of the loan portfolio at December 31, 2020 consists of PPP loans to eligible customers. PPP loans are expected to primarily be repaid via forgiveness provisions (under the CARES Act) from the SBA. These loans are fully guaranteed as to principal and interest by the SBA and ultimately by the full faith and credit of the U.S. Government; as a result, they were approved utilizing different underwriting standards than the Bank's other commercial loans. PPP loans are included in the CECL model but do not carry an allowance for credit loss due to the aforementioned government guarantees. Approximately 1 % of the loan portfolio at December 31, 2020 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 22 months as December 31, 2020. These credits represent first liens on residential property loans originated by the Bank. While the Bank’s general practice is to originate and sell (servicing released) loans made by its Residential Lending department, from time to time certain loan characteristics do not meet the requirements of third party investors and these loans are instead maintained in the Bank’s portfolio until they are resold to another investor at a later date or mature. Loans are secured primarily by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required. Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects. Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures; and 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination. Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate Loan Committee. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months. Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower’s architect. Each draw request shall also include the borrower’s soft cost breakdown certified by the borrower or their Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition. Commercial permanent loans are generally secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to 1.0. 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. 107 Table o f Contents 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 five to seven 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 $ 1.4 billion at December 31, 2020. 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 61.4 % of the outstanding ADC loan portfolio at December 31, 2020. 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 does not significantly utilize interest reserves in other loan products. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate this inherent risk, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1) construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction meetings among senior Company management, which includes monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves. The following tables detail activity in the ACL by portfolio segment for the years ended December 31, 2020 and 2019. PPP loans are excluded from these tables since they do not carry an allowance for credit loss, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. Government. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. 108 Table o f Contents (dollars in thousands) Commercial Income Producing - Commercial Real Estate Owner Occupied - Commercial Real Estate Real Estate Mortgage - Residential Construction - Commercial and Residential Home Equity Other Consumer Total Year Ended December 31, 2020 Allowance for credit losses: Balance at beginning of period, prior to adoption of ASC 326 $ 18,832 $ 29,265 $ 5,838 $ 1,557 $ 17,485 $ 656 $ 25 $ 73,658 Impact of adopting ASC 326 892 11,230 4,674 ( 301 ) ( 6,143 ) 245 17 10,614 Loans charged-off ( 12,082 ) ( 4,300 ) ( 20 ) ( 815 ) ( 2,947 ) ( 92 ) ( 3 ) ( 20,259 ) Recoveries of loans previously charged-off 130 — — — 4 — 28 162 Net loans charged-off ( 11,952 ) ( 4,300 ) ( 20 ) ( 815 ) ( 2,943 ) ( 92 ) 25 ( 20,097 ) Provision for credit losses 18,797 19,190 3,508 579 3,130 230 ( 30 ) 45,404 Ending balance $ 26,569 $ 55,385 $ 14,000 $ 1,020 $ 11,529 $ 1,039 $ 37 $ 109,579 At December 31, 2020 Allowance for credit losses: Individually evaluated for impairment $ 7,343 $ 6,425 $ 1,241 $ 330 $ 103 $ — $ — $ 15,442 Collectively evaluated for impairment 19,226 48,960 12,759 690 11,426 1,039 37 94,137 Ending balance $ 26,569 $ 55,385 $ 14,000 $ 1,020 $ 11,529 $ 1,039 $ 37 $ 109,579 Year Ended December 31, 2019 Allowance for credit losses: Balance at beginning of period $ 15,857 $ 28,034 $ 6,242 $ 965 $ 18,175 $ 599 $ 72 $ 69,944 Loans charged-off ( 4,868 ) ( 1,847 ) — — ( 3,496 ) — ( 8 ) ( 10,219 ) Recoveries of loans previously charged-off 405 26 3 3 354 — 51 842 Net loans (charged-off) recoveries ( 4,463 ) ( 1,821 ) 3 3 ( 3,142 ) — 43 ( 9,377 ) Provision for credit losses 7,438 3,052 ( 407 ) 589 2,452 57 ( 90 ) 13,091 Ending balance $ 18,832 $ 29,265 $ 5,838 $ 1,557 $ 17,485 $ 656 $ 25 $ 73,658 At December 31, 2019 Allowance for credit losses: Individually evaluated for impairment $ 5,714 $ 2,145 $ 415 $ 650 $ 100 $ 100 $ — $ 9,124 Collectively evaluated for impairment 13,118 27,120 5,423 907 17,385 556 25 64,534 Ending balance $ 18,832 $ 29,265 $ 5,838 $ 1,557 $ 17,485 $ 656 $ 25 $ 73,658 The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2020: (dollars in thousands) Business/Other Assets Real Estate Commercial $ 11,326 $ 4,026 PPP loans — — Income-producing-commercial real estate 3,193 15,686 Owner occupied - commercial real estate — 23,159 Real estate mortgage- residential — 2,932 Construction - commercial and residential — 206 Home Equity — 415 Other consumer — — Total $ 14,519 $ 46,424 109 Table o f Contents 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 is 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 is 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. The Company’s credit quality indicators are updated on an ongoing basis along with our credits rated watch or below reviews. The following table presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of December 31, 2020 and 2019. The December 31, 2020 data is further defined by year of loan origination. December 31, 2020 (dollars in thousands) Prior 2016 2017 2018 2019 2020 Total Commercial Pass 323,660 111,886 249,541 211,551 164,166 227,095 1,287,899 Watch 31,903 5,315 19,145 21,013 7,740 7,979 93,095 Special Mention 4,969 1,692 8,969 3,385 5,599 2,169 26,783 Substandard 17,679 5,803 1,820 3,525 829 — 29,656 Total 378,211 124,696 279,475 239,474 178,334 237,243 1,437,433 PPP loans — Pass — — — — — 454,771 454,771 110 Table o f Contents Total — — — — — 454,771 454,771 Income producing - commercial real estate — Pass 560,915 347,946 397,953 622,276 643,388 512,387 3,084,865 Watch 152,367 62,912 91,636 89,852 44,555 34,195 475,517 Special Mention 213 — — — 51,969 — 52,182 Substandard 58,555 800 4,656 4,883 5,542 — 74,436 Total 772,050 411,658 494,245 717,011 745,454 546,582 3,687,000 Owner occupied - commercial real estate — Pass 343,371 100,272 111,996 136,644 59,681 49,584 801,548 Watch 16,014 5,011 2,640 10,338 15,501 — 49,504 Special Mention 418 — — 83,110 19,091 — 102,619 Substandard 28,228 784 1,908 2,048 10,151 904 44,023 Total 388,031 106,067 116,544 232,140 104,424 50,488 997,694 Real estate mortgage - residential — Pass 16,310 2,693 10,199 12,746 18,209 10,116 70,273 Watch 1,996 699 — 728 — — 3,423 Substandard 1,198 1,698 — — — — 2,896 Total 19,504 5,090 10,199 13,474 18,209 10,116 76,592 Construction - commercial and residential — Pass 21,290 60,486 266,788 297,480 105,679 71,297 823,020 Watch 929 — 42,751 3,448 — — 47,128 Special Mention 12 — — 2,895 — — 2,907 Substandard — — 206 — — — 206 Total 22,231 60,486 309,745 303,823 105,679 71,297 873,261 Construction - C&I (owner occupied) — Pass 8,278 10,476 6,637 30,340 22,209 40,101 118,041 Watch 3,573 — 2,118 4,935 — — 10,626 Special Mention 124 — — — 14,436 15,678 30,238 Total 11,975 10,476 8,755 35,275 36,645 55,779 158,905 Home Equity — Pass 33,226 4,493 8,227 7,827 4,224 12,924 70,921 Watch 1,596 — — — — — 1,596 Substandard 603 — — — 47 — 650 Total 35,425 4,493 8,227 7,827 4,271 12,924 73,167 Other Consumer — Pass 929 190 64 74 94 31 1,382 Substandard 7 — — — — — 7 Total 936 190 64 74 94 31 1,389 Total Recorded Investment $ 1,628,363 $ 723,156 $ 1,227,254 $ 1,549,098 $ 1,193,110 $ 1,439,231 $ 7,760,212 111 Table o f Contents (dollars in thousands) Pass Watch Special Mention Substandard Doubtful Total Loans December 31, 2019 Commercial $ 1,470,636 $ 38,522 $ 11,460 $ 25,288 $ — $ 1,545,906 Income producing - commercial real estate 3,667,585 16,069 — 19,093 — 3,702,747 Owner occupied - commercial real estate 925,800 53,146 — 6,463 — 985,409 Real estate mortgage - residential 98,228 628 — 5,365 — 104,221 Construction - commercial and residential 1,113,734 — — 11,510 — 1,125,244 Home equity 78,626 948 — 487 — 80,061 Other consumer 2,160 — — — — 2,160 Total $ 7,356,769 $ 109,313 $ 11,460 $ 68,206 $ — $ 7,545,748 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. The following table presents, by class of loan, information related to nonaccrual loans as of December 31, 2020 and 2019. December 31, 2020 December 31, 2019 (dollars in thousands) Nonaccrual with No Allowance for Credit Loss Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans Total Nonaccrual Loans Commercial $ 3,263 $ 12,089 $ 15,352 $ 14,928 Income producing - commercial real estate 6,500 12,380 18,880 9,711 Owner occupied - commercial real estate 18,941 4,217 23,158 6,463 Real estate mortgage - residential 1,234 1,697 2,931 5,631 Construction - commercial and residential — 206 206 11,509 Home equity 416 — 416 487 Total nonaccrual loans (1)(2) $ 30,354 $ 30,589 $ 60,943 $ 48,729 (1) Excludes TDRs that were performing under their restructured terms totaling $ 10.5 million at December 31, 2020, and $ 16.6 million at December 31, 2019. (2) Gross interest income of $ 3.7 million and $ 3.0 million would have been recorded for 2020 and 2019, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans were $ 679 thousand and $ 630 thousand at December 31, 2020 and 2019, respectively. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status. 112 Table o f Contents The following table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of December 31, 2020 and 2019. (dollars in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 Days or More Past Due Total Past Due Loans Current Loans Nonaccrual Loans Total Recorded Investment in Loans December 31, 2020 Commercial $ 6,411 $ 21,426 $ — $ 27,837 $ 1,394,244 $ 15,352 $ 1,437,433 PPP loans — — — 454,771 — $ 454,771 Income producing - commercial real estate — 51,913 — 51,913 3,616,207 18,880 3,687,000 Owner occupied - commercial real estate 10,630 3,542 — 14,172 960,364 23,158 997,694 Real estate mortgage – residential 1,430 — — 1,430 72,231 2,931 76,592 Construction - commercial and residential 2,992 340 — 3,332 869,723 206 873,261 Construction - C&I (owner occupied) — — — 158,905 — $ 158,905 Home equity 467 4,552 — 5,019 67,732 416 73,167 Other consumer 21 1 — 22 1,367 — 1,389 Total $ 21,951 $ 81,774 $ — $ 103,725 $ 7,595,544 $ 60,943 $ 7,760,212 December 31, 2019 Commercial $ 3,063 $ 781 $ — $ 3,844 $ 1,527,134 $ 14,928 $ 1,545,906 Income producing - commercial real estate — 5,542 — 5,542 3,687,494 9,711 3,702,747 Owner occupied - commercial real estate 13,008 — — 13,008 965,938 6,463 985,409 Real estate mortgage – residential 3,533 — — 3,533 95,057 5,631 104,221 Construction - commercial and residential — — — — 1,113,735 11,509 1,125,244 Home equity 136 192 — 328 79,246 487 80,061 Other consumer — 9 — 9 2,151 — 2,160 Total $ 19,740 $ 6,524 $ — $ 26,264 $ 7,470,755 $ 48,729 $ 7,545,748 Pre Adoption of CECL Loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan was impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. The Bank’s loan policy required that loans be placed on nonaccrual if they were ninety days past-due, unless they were well secured and in the process of collection. Impaired loans, or portions thereof, were charged-off when deemed uncollectible. 113 Table o f Contents The following table presents, by class of loan, information related to impaired loans for the year ended December 31, 2019. Average Recorded Investment Interest Income Recognized (dollars in thousands) Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Total Recorded Investment Related Allowance Year To Date Year To Date December 31, 2019 Commercial $ 15,814 $ 11,858 $ 3,956 $ 15,814 $ 5,714 $ 15,682 $ 270 Income producing - commercial real estate 14,093 2,713 11,380 14,093 2,145 18,133 382 Owner occupied - commercial real estate 7,349 6,388 961 7,349 415 6,107 197 Real estate mortgage - residential 5,631 3,175 2,456 5,631 650 5,638 — Construction - commercial and residential 11,509 11,101 408 11,509 100 8,211 92 Home equity 487 — 487 487 100 487 — Other consumer — — — — — — — Total $ 54,883 $ 35,235 $ 19,648 $ 54,883 $ 9,124 $ 54,258 $ 941 The Company’s recorded investments in loans as of December 31, 2019 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows: (dollars in thousands) Commercial Income Producing - Commercial Real Estate Owner Occupied - Commercial Real Estate Real Estate Mortgage - Residential Construction - Commercial and Residential Home Equity Other Consumer Total December 31, 2019 Recorded investment in loans: Individually evaluated for impairment $ 25,288 $ 19,093 $ 6,463 $ 5,365 $ 11,510 $ 487 $ — $ 68,206 Collectively evaluated for impairment 1,520,618 3,683,654 978,946 98,856 1,113,734 79,574 2,160 7,477,542 Ending balance $ 1,545,906 $ 3,702,747 $ 985,409 $ 104,221 $ 1,125,244 $ 80,061 $ 2,160 $ 7,545,748 Loan Modifications A modification of a loan constitutes a troubled debt restructuring ("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 December 31, 2020, 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. 114 Table o f Contents In response to the COVID-19 pandemic and its economic impact to our customers, we implemented a short-term modification program that complies with the CARES Act and ASC 310-40 to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. This program allowed for a deferral of payments for 90 days, which we extended for an additional 90 days for certain loans, for a maximum of 180 days on a cumulative and successive basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Through December 31, 2020, we granted temporary modifications on approximately 750 loans representing $ 1.6 billion. These deferrals amounted to 36 loans representing approximately $ 72.4 million ( 0.9 % of total loans) in outstanding exposure at December 31, 2020 as many deferrals have migrated back to current payments, were placed on watch list or placed on nonaccrual. Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the GAAP requirements to treat such short-term loan modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board. The following table presents, by class, the recorded investment of loans modified in TDRs held by the Company during the years ended December 31, 2020 and 2019. For the Year Ended December 31, 2020 (dollars in thousands) Number of Contracts Commercial Income Producing - Commercial Real Estate Owner Occupied - Commercial Real Estate Construction - Commercial Real Estate Total Troubled debt restructurings Restructured accruing 7 $ 1,276 $ 9,183 $ 13 $ — $ 10,472 Restructured nonaccruing 3 — 6,342 2,370 — 8,712 Total 10 $ 1,276 $ 15,525 $ 2,383 $ — $ 19,184 Specific allowance $ 733 $ 2,989 $ — $ — $ 3,722 Restructured and subsequently defaulted $ — $ 6,342 $ 2,370 $ — $ 8,712 For the Year Ended December 31, 2019 (dollars in thousands) Number of Contracts Commercial Income Producing - Commercial Real Estate Owner Occupied - Commercial Real Estate Construction - Commercial Real Estate Total Troubled debt restructings Restructured accruing 7 $ 885 $ 14,806 $ 887 $ — $ 16,578 Restructured nonaccruing 2 142 — 2,370 — 2,512 Total 9 $ 1,027 $ 14,806 $ 3,257 $ — $ 19,090 Specific allowance $ — $ 1,000 $ — $ — $ 1,000 Restructured and subsequently defaulted $ — $ 7,115 $ 2,370 $ — $ 9,485 The Company had ten TDRs at December 31, 2020, totaling approximately $ 19.2 million, as compared to nine TDRs totaling approximately $ 19.1 million at December 31, 2019. At December 31, 2020, six of these TDR loans, totaling approximately $ 10.5 million, were performing under their modified terms, as compared to December 31, 2019, when there were seven performing TDR loans totaling approximately $ 16.6 million. During 2020, there were two performing TDRs totaling $ 6.3 million that defaulted on their modified terms that were reclassified to nonperforming loans, as compared to 2019, during which there were three performing TDR loans totaling approximately $ 9.5 million that defaulted on their modified terms and either charged-off or 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. During 2020, there were two restructured loans totaling approximately $ 870 thousand which had their collateral property sold and were paid in full and one restructured loan totaling $ 138 thousand that had previously defaulted that 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 115 Table o f Contents of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. During 2020, there were two loans modified in a TDR totaling approximately $ 572 thousand, as compared to 2019, during which there was one loan totaling approximately $ 2.3 million modified in a TDR. Loan Charge Off Criteria The criteria used to determine if a loan should be considered for charge off relates to its ultimate collectability includes the following: • All or a portion of the loan is deemed uncollectible; • Repayment is dependent upon secondary sources, such as liquidation of collateral, other assets, or judgment liens that may require an indefinite time period to collect. Loans may be identified for charge off in whole or in part based upon an impairment analysis consistent with ASC 326. If all or a portion of a loan is deemed uncollectible, such amount shall be charged off in the month in which the loan or portion thereof is determined to be uncollectible. Loans approved for nonaccrual status, or charge off, are managed by the Chief Credit Officer or as dictated by the Directors Loan Committee and/or Management Credit Review Committee. The Chief Credit Officer is expected to position the loan in the best possible posture for recovery, including, among other actions, liquidating collateral, obtaining additional collateral, filing suit to obtain judgment or restructuring of repayment terms. A review of charged off loans is made on a monthly basis to assess the possibility of recovery from renewed collection efforts. All charged off loans that are deemed to have the possibility of recovery, whether partial or full, are actively pursued. Charged off loans that are deemed uncollectible will be placed in an inactive file with documentation supporting the suspension of further collection efforts. In the process of collecting problem loans the Bank may resort to the acquisition of collateral through foreclosure and repossession actions, or may accept the transfer of assets in partial or full satisfaction of the debt. These actions may in turn result in the necessity of carrying real property or chattels as an asset of the Company pending sale. Purchased Loans For purchased loans acquired that are not deemed impaired at acquisition, credit marks representing the principal losses expected over the life of the loans are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required ACL for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit mark. The differences between the initial fair value and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans. The following table presents changes in the accretable yield, which includes income recognized from contractual interest cash flows, for the dates indicated. (dollars in thousands) 2020 2019 Balance at January 1, $ ( 975 ) $ ( 1,495 ) Net reclassifications from nonaccretable yield — — Accretion 370 520 Balance at December 31, $ ( 605 ) $ ( 975 ) Related Party Loans Certain directors and executive officers of the Company and the Bank have had loan transactions with the Company. Such loans were made in the ordinary course of the Company’s lending business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with third parties; and, in the opinion of management, did not involve more than the normal risk of collectability or present other unfavorable features. All of such loans are performing and none of such loans are disclosed as nonaccrual, past due, restructured or potential problem loans. The following table summarizes changes in amounts of loans outstanding, both direct and indirect, to those persons during 2020 and 2019. 116 Table o f Contents (dollars in thousands) 2020 2019 Balance at January 1, $ 52,368 $ 167,884 Additions 30,920 30,153 Repayments ( 10,332 ) ( 38,204 ) Additions due to Changes in Related Parties — 9,034 Deletions due to Changes in Related Parties — ( 116,499 ) Balance at December 31, $ 72,956 $ 52,368 Note 5 – Premises and Equipment Premises and equipment include the following at December 31: (dollars in thousands) 2020 2019 Leasehold improvements $ 32,540 $ 31,462 Furniture and equipment 32,770 30,898 Less accumulated depreciation and amortization ( 51,757 ) ( 47,738 ) Total premises and equipment, net $ 13,553 $ 14,622 Total depreciation and amortization expense for the years ended December 31, 2020, 2019 and 2018, was $ 4.0 million, $ 5.8 million and $ 5.6 million, respectively. 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. 2016-2 “Leases” (Topic 842) and all subsequent ASUs that modified ASC 842. For the Company, ASC 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 balance sheets. With the adoption of ASC 842, operating lease agreements were required to be recognized on the consolidated balance sheets as a right-of-use (“ROU”) asset and a corresponding lease liability. As of December 31, 2020, the Company had $ 25.2 million of operating lease ROU assets and $ 28.0 million of operating lease liabilities on the Company’s Consolidated Balance Sheet. The Company has elected 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 Balance Sheets. 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 December 31, 2020, 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 December 31, 2020, the Company signed two new leases for which occupancy had not yet commenced as of December 31, 2020. The Company oversaw construction of landlord-owned leasehold improvements to prepare the property for its intended use. The Company expects to occupy the leased spaces starting in the first quarter of 2021. The following table presents lease costs and other lease information. 117 Table o f Contents Years Ended (dollars in thousands) December 31, 2020 December 31, 2019 Lease cost Operating lease cost (cost resulting from lease payments) $ 8,411 $ 7,829 Variable lease cost (cost excluded from lease payments) 971 1,090 Sublease income ( 347 ) ( 348 ) Net lease cost $ 9,035 $ 8,571 Operating lease - operating cash flows (fixed payments) $ 9,232 $ 8,542 Right-of-use assets - operating leases $ 25,237 $ 27,372 Weighted average lease term - operating leases 6.20 yrs 4.94 yrs Weighted average discount rate - operating leases 4.00 % 4.00 % Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31, 2020 were as follows: (dollars in thousands) Twelve Months Ended: December 31, 2021 $ 8,342 December 31, 2022 6,832 December 31, 2023 5,909 December 31, 2024 5,137 December 31, 2025 4,146 Thereafter 9,500 Total Future Minimum Lease Payments 39,866 Amounts Representing Interest ( 11,844 ) Present Value of Net Future Minimum Lease Payments $ 28,022 Note 7 – Intangible Assets Intangible assets are included in the Consolidated Balance Sheets as a separate line item, net of accumulated amortization and consist of the following items: (dollars in thousands) Gross Intangible Assets Additions Accumulated Amortization FHA MSR Sales Net Intangible Assets December 31, 2020 Goodwill $ 104,168 $ — $ — $ — $ 104,168 Core deposit 7,070 — ( 7,070 ) — — Excess servicing (1) 2,478 667 ( 2,199 ) — 946 Non-compete agreements 345 — ( 345 ) — — $ 114,061 $ 667 $ ( 9,614 ) $ — $ 105,114 December 31, 2019 Goodwill $ 104,168 $ — $ — $ — $ 104,168 Core deposit 7,070 — ( 7,027 ) — 43 Excess servicing (1) 1,465 1,013 ( 1,971 ) — 507 Non-compete agreements 345 — ( 324 ) — 21 $ 113,048 $ 1,013 $ ( 9,322 ) $ — $ 104,739 118 Table o f Contents (1) The Company recognizes a servicing asset for the computed value of servicing fees on the sale of multifamily FHA loans and the sale of the guaranteed portion of SBA loans. Assumptions related to loan terms and amortization are made to arrive at the initial recorded values, which are included in other assets. The aggregate amortization expense was $ 292 thousand, $ 1.2 million, and $ 1.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. The future estimated annual amortization expense is presented below: Years Ending December 31: (dollars in thousands) Amount 2021 66 2022 66 2023 66 2024 66 2025 66 Thereafter 616 Total annual amortization $ 946 Note 8 – Other Real Estate Owned The activity within OREO for the years ended December 31, 2020 and 2019 is presented in the table below. There were no properties in the process of foreclosure as of December 31, 2020. For the years ended December 31, 2020 and 2019, there was one sale and no sales of OREO, respectively. Years Ended December 31, (dollars in thousands) 2020 2019 Beginning Balance $ 1,487 $ 1,394 Real estate acquired from borrowers 6,750 93 Properties sold ( 3,250 ) — Ending Balance $ 4,987 $ 1,487 Note 9 – Mortgage Banking Derivatives 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, best efforts, and mandatory delivery contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded. Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations. The fair values of the mortgage banking derivatives are recorded as freestanding assets or liabilities with the change in value being recognized in current earnings during the period of change. 119 Table o f Contents At December 31, 2020 the Bank had mortgage banking derivative financial instruments with a notional value of $ 367.7 million related to its interest rate lock commitments. The fair value of these mortgage banking derivative instruments at December 31, 2020 was $ 5.2 million included in other assets. At December 31, 2019 the Bank had mortgage banking derivative financial instruments with a notional value of $ 71.7 million related to its forward contracts. The fair value of these mortgage banking derivative instruments at December 31, 2019 was $ 280 thousand included in other assets and $ 66 thousand included in other liabilities. Included in gain on sale of loans for the year ended December 31, 2020 and 2019 was a net loss of $ 309 thousand and a net gain of $ 186 thousand, respectively, relating to mortgage banking derivative instruments. The amount included in gain on sale of loans for year ended December 31, 2020 and 2019 pertaining to its mortgage banking hedging activities was a net realized gain of $ 27 thousand and a net realized loss of $ 116 thousand, respectively. Note 10 – Other Derivatives The Company is exposed to certain risks 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. As of December 31, 2020 and 2019, the Company had one designated cash flow hedge interest rate swap transaction outstanding associated with the Company's variable rate deposits. The Company recognized $ 829 thousand in noninterest income during March 2019 due to the termination of two of its interest rate swap transactions as part of the Company’s asset liability strategy as well as declines in market interest rates. 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 next twelve months , the Company estimates (based on existing interest rates) that $ 444 thousand will be reclassified as an increase in interest expense. Non-designated Hedges Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. 120 Table o f Contents 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 in exchange for a fee. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Credit-risk-related Contingent Features The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. The Company is exposed to credit risk in the event of nonperformance by the interest rate swap 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 815, "Derivatives and Hedging." In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty. The designated 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; and 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 December 31, 2020, 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 $ 4.2 million. The aggregate fair value of all derivative contracts with credit risk contingent features that were a net asset position totaled $ 515 thousand as of December 31, 2019. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. As of December 31, 2020 the Company posted $ 1.5 million with its derivative counterparties against its obligations under these agreements because these agreements were in a net liability position. At December 31, 2019, the Company posted $ 500 thousand with its derivative counterparties against its obligations under these agreements because these agreements were in a net liability position. If the Company had breached any provisions under the agreements at December 31, 2020 or December 31, 2019, it could have been required to settle its obligations under the agreements at the termination value. 121 Table o f Contents 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 December 31, 2020 and December 31, 2019. (dollars in thousands) December 31, 2020 December 31, 2019 Notional Amount Fair Value Balance Sheet Category Fair Value Balance Sheet Category Derivatives not designated as hedging instruments Interest rate product $ 195,065 $ 3,491 Other Assets $ 311 Other Assets Mortgage banking derivatives 367,708 5,213 Other Assets 280 Other Assets $ 562,773 $ 8,704 Other Assets $ 591 Other Assets Derivatives designated as hedging instruments Interest rate product 100,000 $ 516 Other Liabilities $ 206 Other Liabilities Derivatives not designated as hedging instruments Interest rate product $ 209,830 $ 3,653 Other Liabilities $ 319 Other Liabilities Other Contracts 26,911 118 Other Liabilities 86 Other Liabilities Mortgage banking derivatives — — Other Liabilities 66 Other Liabilities $ 236,741 3,771 Other Liabilities 471 Other Liabilities Net derivatives on the balance sheet 4,287 677 Cash and other collateral (1) 4,168 506 Net derivative Amounts $ 119 $ 171 (1) Collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consist of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the years ended December 31, 2020 and December 31, 2019. The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income Amount of Gain or (Loss) Recognized in OCI on Derivative Year Ended December 31, Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Year Ended December 31, Derivatives in ASC 815-20 Hedging Relationships (dollars in thousands) 2020 2019 2020 2019 Derivatives in cash flow hedging relationships Interest rate products $ ( 1,510 ) $ ( 1,812 ) Interest expense $ ( 1,146 ) $ 1,165 Interest rate products — — Gain on sale of investment securities — 829 Total $ ( 1,510 ) $ ( 1,812 ) $ ( 1,146 ) $ 1,994 122 Table o f Contents The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the years ended December 31, 2020 and 2019. The Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income Year Ended December 31, 2020 2019 2019 Interest Expense Interest Expense Gain on sale of investment securities Total amounts of income and expense line items presented in the Consolidated Statements of Income in which the effects of fair value or cash flow hedges are recorded $ ( 1,146 ) $ 1,165 $ 829 Gain or (loss) on cash flow hedging relationships in ASC 815-20 Interest contracts Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ ( 1,146 ) $ 1,165 Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring $ — $ — $ 829 Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component $ ( 1,146 ) $ 1,165 $ 829 Effect of Derivatives Not Designated as Hedging Instruments on the Statements of Income Derivatives Not Designated as Hedging Instruments under ASC 815-20 Location of Gain or (Loss) Recognized in Income on Derivative Amount of Gain or (Loss) Recognized in Income on Derivative Year Ended December 31, 2020 2019 Interest rate products Other income / (expense) $ 153 $ ( 8 ) Mortgage banking derivatives Other income 5,213 280 Other contracts Other income / (expense) 32 ( 27 ) Total $ 5,398 $ 245 Balance Sheet Offsetting : Our interest rate swap derivatives are eligible for offset in the Consolidated Balance Sheet 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. Note 11 – Deposits The following table provides information regarding the Bank’s deposit composition at December 31, 2020 and 2019 as well as the average rate being paid on interest bearing deposits for the month of December 2020 and 2019. 2020 2019 (dollars in thousands) Balance Average Rate Balance Average Rate Noninterest bearing demand $ 2,809,334 — $ 2,064,367 — Interest bearing transaction 756,923 0.25 % 863,856 0.99 % Savings and money market 4,645,186 0.37 % 3,013,129 1.42 % Time, $100,000 or more 546,173 1.08 % 663,987 2.55 % Other time 431,587 1.92 % 619,052 2.21 % Total $ 9,189,203 $ 7,224,391 123 Table o f Contents The remaining maturity of time deposits at December 31, 2020 and 2019 are as follows: (dollars in thousands) 2020 2019 Three months or less $ 201,312 $ 260,028 More than three months through twelve months 325,329 538,352 Over twelve months 451,119 484,659 Total $ 977,760 $ 1,283,039 Interest expense on deposits for the years ended December 31, 2020, 2019 and 2018 is as follows: (dollars in thousands) 2020 2019 2018 Interest bearing transaction $ 3,190 $ 6,491 $ 3,348 Savings and money market 26,272 50,042 35,534 Time, $ 100,000 or more 13,464 20,016 17,138 Other time 10,640 14,477 4,190 Total $ 53,566 $ 91,026 $ 60,210 Related Party deposits totaled $ 25.7 million and $ 136.2 million at December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, time deposit accounts in excess of $ 250 thousand are as follows: Time deposits $250,000 or more (dollars in thousands) 2020 2019 Three months or less $ 32,967 $ 63,099 More than three months through twelve months 169,830 197,141 Over twelve months 28,280 90,361 Total $ 231,077 $ 350,601 Note 12 – 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 124 Table o f Contents partnership. The Company accounts for its affordable housing tax credit investments using the proportional amortization method. The Company’s net affordable housing tax credit investment s were $ 26.1 million and related unfunded commitments were $ 8.8 million as of December 31, 2020, and are included in Other Assets and Other Liabilities in the C onsolidated Balance Sheets. As of December 31, 2020, the expected payments for unfunded affordable housing commitments were as follows: Years Ending December 31: (dollars in thousands) Amount 2021 5,344 2022 330 2023 1,740 2024 509 2025 163 Thereafter 676 Total unfunded commitments $ 8,762 125 Table o f Contents Note 13 – Borrowings Information relating to short-term and long-term borrowings is as follows for the years ended December 31: 2020 2019 (dollars in thousands) Amount Rate Amount Rate Short-term: At Year-End: Customer repurchase agreements and federal funds purchased $ 26,726 0.26 % $ 30,980 1.18 % Federal Home Loan Bank – current portion 300,000 0.67 % 250,000 0.39 % Total $ 326,726 $ 280,980 Average Daily Balance: Customer repurchase agreements and federal funds purchased $ 29,345 1.00 % $ 30,024 1.15 % Federal Home Loan Bank – current portion 280,126 0.66 % 135,699 1.67 % Total $ 309,471 $ 165,723 Maximum Month-end Balance: Customer repurchase agreements and federal funds purchased $ 32,987 1.13 % $ 34,852 0.89 % Federal Home Loan Bank – current portion 300,000 0.67 % 440,000 0.92 % Total $ 332,987 $ 474,852 Long-term: At Year-End: Subordinated Notes $ 220,000 5.42 % $ 220,000 5.42 % Borrowings 50,000 1.81 % — — % Average Daily Balance: Subordinated Notes $ 220,000 5.42 % $ 220,000 5.42 % Borrowings 50,000 1.81 % — — % Maximum Month-end Balance: Subordinated Notes $ 220,000 5.42 % $ 220,000 5.42 % Borrowings 50,000 1.81 % — — % The Company offers its business customers a repurchase agreement sweep account in which it collateralizes these funds with U.S. agency and mortgage backed securities segregated in its investment portfolio for this purpose. By entering into the agreement, the customer agrees to have the Bank repurchase the designated securities on the business day following the initial transaction in consideration of the payment of interest at the rate prevailing on the day of the transaction. The Bank can purchase up to $ 170 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at December 31, 2020 and can place brokered funds under one-way CDARS and ICS deposits in the amount of $ 1.5 billion, against which there was $ 682 thousand outstanding at December 31, 2020. The Bank also has a commitment at December 31, 2020 from IntraFi to place up to $ 1.5 billion of brokered deposits from its Insured Network Deposits (“IND”) program in amounts requested by the Bank, as compared to an actual balance of $ 1.3 billion at December 31, 2020. At December 31, 2020, the Bank was also eligible to take advances from the FHLB up to $ 1.6 billion based on collateral at the FHLB, of which there was $ 350 million outstanding at December 31, 2020. 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 $ 644.6 million, is 126 Table o f Contents collateralized with specific loan assets pledged to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only. 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 Notes were offered to the public at par. The 2024 Notes 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 $ 147.4 million, which includes $ 2.6 million in deferred financing costs which is being amortized over the life of the 2026 Notes. On February 26, 2020, the Bank borrowed $ 50 million dollars under its borrowing arrangement with the Federal Home Loan Bank of Atlanta at a fixed rate of 1.81 % with a maturity date of February 26, 2030 as part of the overall asset liability strategy and to support loan growth. Note 14 – Income Taxes Federal and state income tax expense consists of the following for the years ended December 31: (dollars in thousands) 2020 2019 2018 Current federal income tax expense $ 40,201 $ 39,756 $ 39,498 Current state income tax expense 12,059 14,153 15,931 Total current tax expense 52,260 53,909 55,429 Deferred federal income tax expense (benefit) ( 5,212 ) 78 ( 2,634 ) Deferred state income tax benefit ( 3,120 ) ( 139 ) ( 863 ) Total deferred tax benefit ( 8,332 ) ( 61 ) ( 3,497 ) Total income tax expense $ 43,928 $ 53,848 $ 51,932 We had net deferred tax assets (deferred tax assets in excess of deferred tax liabilities) of $ 38.6 million and $ 29.8 million for the years ended at December 31, 2020 and 2019, respectively, which related primarily to our allowance for credit losses, and loan origination fees. Management believes it is more likely than not that all of the deferred tax assets will be realized. Temporary timing differences between the amounts reported in the Consolidated Financial Statements and the tax bases of assets and liabilities result in deferred taxes. The table below summarizes significant components of our deferred tax assets and liabilities as of December 31, 2020 and 2019: 127 Table o f Contents (dollars in thousands) 2020 2019 Deferred tax assets Allowance for credit losses $ 28,118 $ 19,144 Deferred loan fees and costs 8,104 6,354 Leases 7,183 7,790 Stock-based compensation 828 674 Net operating loss 6,896 6,184 Unrealized loss on interest rate swap derivatives 132 53 SERP 2,495 1,541 Premises and equipment 879 914 Other assets 1,982 816 Valuation allowances ( 5,845 ) ( 4,899 ) Total deferred tax assets 50,772 38,571 Deferred tax liabilities Unrealized net gain on securities available-for-sale ( 5,519 ) ( 1,081 ) Excess servicing ( 206 ) ( 51 ) Intangible assets — ( 9 ) Leases ( 6,470 ) ( 7,117 ) Other liabilities ( 6 ) ( 509 ) Total deferred tax liabilities ( 12,201 ) ( 8,767 ) Net deferred income tax assets $ 38,571 $ 29,804 The net operating loss carry forward acquired in conjunction with the Fidelity acquisition is subject to annual limits under Section 382 of the Internal Revenue Code of $ 718 thousand and expires in 2027. As of December 31, 2020, The Company has concluded, based on the weight of available positive and negative evidence, a portion of it’s state net operating loss deferred tax asset is not more likely than not to be realized and accordingly, a valuation allowance of $ 5.8 million and $ 4.9 million is carried as of December 31, 2020 and 2019, respectively. A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate for the years ended December 31 2020, 2019, and 2018 follows: 2020 2019 2018 Statutory federal income tax rate 21.00 % 21.00 % 21.00 % Increase (decrease) due to: State income taxes 5.04 % 5.49 % 5.83 % Tax exempt interest and dividend income ( 0.75 ) % ( 0.69 ) % ( 1.13 ) % Stock-based compensation expense 0.25 % 1.15 % 0.01 % Other ( 0.63 ) % 0.46 % ( 0.28 ) % Effective tax rate 24.91 % 27.41 % 25.43 % The Company remains subject to examination by taxing authorities for the years ending after December 31, 2016. Management has identified no uncertain tax positions at December 31, 2020. 128 Table o f Contents Note 15 – Net Income per Common Share The calculation of net income per common share for the years ended December 31 was as follows: (dollars and shares in thousands, except per share data) 2020 2019 2018 Basic: Net income $ 132,217 $ 142,943 $ 152,276 Average common shares outstanding 32,334 34,179 34,306 Basic net income per common share $ 4.09 $ 4.18 $ 4.44 Diluted: Net income $ 132,217 $ 142,943 $ 152,276 Average common shares outstanding 32,334 34,179 34,306 Adjustment for common share equivalents 28 32 137 Average common shares outstanding-diluted 32,362 34,211 34,443 Diluted net income per common share $ 4.09 $ 4.18 $ 4.42 Anti-dilutive shares 26 2 — Note 16 – Related Party Transactions The EagleBank Foundation, a 501(c)(3) non-profit, seeks to improve the well being of our community by providing financial support to local charitable organizations that help foster and strengthen vibrant, healthy, cultural and sustainable communities. The Company paid $ 185 thousand, $ 182 thousand, and $ 150 thousand to the EagleBank Foundation for the years ended December 31, 2020, 2019 and 2018, respectively. Certain directors and executive officers of the Company and the Bank have had loan transactions with the Company. Such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with outsiders. Please see further detail regarding Related Party Loans in Note 4 "Loans and Allowance for Credit Losses" and Related Party Deposits in Note 11 "Deposits" . Note 17 – Stock-Based Compensation The Company maintains the 2016 Stock Plan (“2016 Plan”), the 2006 Stock Plan (“2006 Plan”) and the 2011 Employee Stock Purchase Plan (“2011 ESPP”). In connection with the acquisition of Virginia Heritage, the Company assumed the Virginia Heritage 2006 Stock Option Plan and the 2010 Long Term Incentive Plan (the “Virginia Heritage Plans”). No additional options may be granted under the 2006 Plan or the Virginia Heritage Plans. The Company adopted the 2016 Plan upon approval by the shareholders at the 2016 Annual Meeting held on May 12, 2016. The 2016 Plan provides directors and selected employees of the Bank, the Company and their affiliates with the opportunity to acquire shares of stock, through awards of options, time vested restricted stock, performance-based restricted stock and stock appreciation rights. Under the 2016 Plan, 1,000,000 shares of common stock were initially reserved for issuance. For awards that are service based, compensation expense is being recognized over the service (vesting) period based on fair value, which for stock option grants is computed using the Black-Scholes model. For restricted stock awards granted under the 2006 plan, fair value is based on the average of the high and low stock price of the Company’s shares on the date of grant. For restricted stock awards granted under the 2016 plan, fair value is based on the Company’s closing price on the date of grant. For awards that are performance-based, compensation expense is recorded based on the probability of achievement of the goals underlying the grant. 129 Table o f Contents In February 2020, the Company awarded 152,184 shares of time vested restricted stock to senior officers, directors, and certain employees. The shares vest in three substantially equal installments beginning on the first anniversary of the date of grant. In February 2020, the Company awarded senior officers a targeted number of 44,741 performance vested restricted stock units (“PRSUs”). The vesting of PRSUs is 100 % after three years with payouts based on threshold, target or maximum average performance targets over a three year period. There are two performance metrics: 1) total shareholder's return; and 2) return on average assets. In April 2020, the Company awarded 24,068 shares of time vested restricted stock to the Chairman of the Board of Directors. The shares vest in three substantially equal installments beginning on the first anniversary of the date of grant. The Company has unvested restricted stock awards and PRSU grants of 308,673 shares at December 31, 2020. Unrecognized stock based compensation expense related to restricted stock awards and PRSU grants totaled $ 7.9 million at December 31, 2020. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 1.89 years. The following tables summarize the unvested restricted stock awards at December 31, 2020 and 2019. Years Ended December 31, 2020 2019 Performance Awards Shares Weighted- Average Grant Date Fair Value Shares Weighted- Average Grant Date Fair Value Unvested at beginning 58,780 $ 57.74 98,958 $ 54.76 Issued 44,741 40.19 43,145 55.76 Forfeited ( 8,586 ) 54.89 ( 65,589 ) 55.25 Vested ( 4,293 ) 62.70 ( 17,734 ) 45.50 Unvested at end 90,642 $ 49.11 58,780 $ 57.74 Years Ended December 31, 2020 2019 Time Vested Awards Shares Weighted- Average Grant Date Fair Value Shares Weighted- Average Grant Date Fair Value Unvested at beginning 110,714 $ 57.84 173,721 $ 58.93 Issued 176,252 42.51 112,636 55.76 Forfeited ( 18,385 ) 50.06 ( 44,600 ) 58.73 Vested ( 50,550 ) 58.76 ( 131,043 ) 57.20 Unvested at end 218,031 $ 45.89 110,714 $ 57.84 Below is a summary of stock option activity for the twelve months ended December 31, 2020 , 2019 and 2018. The information excludes restricted stock units and awards. 130 Table o f Contents Years Ended December 31, 2020 2019 2018 Shares Weighted- Average Exercise Price Shares Weighted- Average Exercise Price Shares Weighted- Average Exercise Price Beginning balance 6,589 $ 19.99 34,123 $ 14.69 143,224 $ 9.13 Issued 2,500 47.95 — — — — Exercised ( 3,300 ) 11.40 ( 26,784 ) 12.42 ( 108,201 ) 7.17 Forfeited — — ( 750 ) 49.08 ( 900 ) 34 Ending balance 5,789 $ 36.96 6,589 $ 19.99 34,123 $ 14.69 The following summarizes information about stock options outstanding at December 31, 2020. The information excludes restricted stock units and awards. Outstanding: Stock Options Outstanding Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life (Years) Range of Exercise Prices $ 5.76 - $ 10.72 — — — $ 10.73 - $ 11.40 1,789 $ 10.73 1.30 $ 11.41 - $ 24.86 — — — $ 24.87 - $ 49.91 4,000 48.69 7.65 5,789 $ 36.96 5.69 Exercisable: Stock Options Exercisable Weighted-Average Exercise Price Range of Exercise Prices $ 5.76 - $ 10.72 — — $ 10.73 - $ 11.40 1,789 $ 10.73 $ 11.41 - $ 24.86 — — $ 24.87 - $ 49.91 1,500 49.91 3,289 $ 28.60 There were no grants of stock options during the years ended December 31, 2019 and 2018. For 2020, there was one grant to an executive officer for 2,500 incentive stock options in January 2020, which has a ten-year term and vests in three equal installments beginning on the first anniversary of the date of grant. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions shown in the table below used for the grants during 2020. Year Ended December 31, 2020 Expected volatility 42.3 % Weighted-Average volatility 42.3 % Expected dividends — Expected term (in years) 6.5 Risk-free rate 1.67 % Weighted-average fair value (grant date) $ 21.06 The expected lives were based on the "simplified" method allowed by ASC 718 "Compensation," whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award. 131 Table o f Contents The total intrinsic value of outstanding stock options was $ 54 thousand and $ 192 thousand, respectively, at December 31, 2020 and 2019. The total fair value of stock options vested was $ 6 thousand, $ 35 thousand and $ 80 thousand, for 2020, 2019 and 2018, respectively. Unrecognized stock-based compensation expense related to stock options totaled $ 35 thousand at December 31, 2020. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 2.02 years. Cash proceeds, tax benefits and intrinsic value related to total stock options exercised is as follows: Years Ended December 31, (dollars in thousands) 2020 2019 2018 Proceeds from stock options exercised $ 63 $ 332 $ 776 Tax benefits realized from stock compensation 24 50 5 Intrinsic value of stock options exercised 91 1,022 4,958 Approved by shareholders in May 2011, the 2011 ESPP reserved 550,000 shares of common stock (as adjusted for stock dividends) for issuance to employees. Whole shares are sold to participants in the plan at 85 % of the lower of the stock price at the beginning or end of each quarterly offering period. The 2011 ESPP is available to all eligible employees who have completed at least one year of continuous employment, work at least 20 hours per week and at least five months a year. Participants may contribute a minimum of $ 10 per pay period to a maximum of $ 6,250 per offering period or $ 25,000 annually (not to exceed more than 10 % of compensation per pay period). At December 31, 2020, the 2011 ESPP had 346,301 shares reserved for issuance. Included in salaries and employee benefits in the accompanying Consolidated Statements of Income, the Company recognized $ 5.3 million, $ 7.7 million and $ 6.6 million in stock-based compensation expense for 2020, 2019 and 2018, respectively. In addition, during 2019 the Company accrued $ 4.5 million in stock-based compensation costs associated with the retirement of our former Chairman and Chief Executive Officer. Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Note 18 – Employee Benefit Plans The Company has a qualified 401(k) Plan which covers all employees who have reached the age of 21 and have completed at least one month of service as defined by the Plan. The Company makes contributions to the Plan based on a matching formula, which is reviewed annually. For the years 2020, 2019, and 2018, the Company recognized $ 1.5 million, $ 1.3 million, and $ 894 thousand in expense associated with this benefit, respectively. These amounts are included in salaries and employee benefits in the accompanying Consolidated Statements of Income. Note 19 – 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. 132 Table o f Contents 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, and two insurance carriers in 2019 totaling $ 2.6 million. These annuity contracts 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. The annuity contracts accrued $ 45 thousand, $ 23 thousand, and $ 81 thousand of income for the years ended December 31, 2020, 2019, and 2018, respectively, which were included in other noninterest income on the Consolidated Statement of Income. The cash surrender value of the annuity contracts was $ 14.5 million and $ 14.7 million at December 31, 2020 and 2019, respectively, was included in other assets on the Consolidated Balance Sheet. For the years ended December 31, 2020, 2019, and 2018 the Company recorded benefit expense accruals of $ 428 thousand, $ 404 thousand, and $ 686 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. Note 20 – Financial Instruments with Off-Balance Sheet Risk Various commitments to extend credit are made in the normal course of banking business. Letters of credit are also issued for the benefit of customers. These commitments are subject to loan underwriting standards and geographic boundaries consistent with the Company’s loans outstanding. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Loan commitments outstanding and lines and letters of credit at December 31, 2020 and 2019 are as follows: (dollars in thousands) 2020 2019 Unfunded loan commitments $ 2,175,271 $ 2,176,641 Unfunded lines of credit 107,683 86,426 Letters of credit 70,779 69,723 Total $ 2,353,733 $ 2,332,790 Because most of the Company’s business activity is with customers located in the Washington, D.C., metropolitan area, a geographic concentration of credit risk exists within the loan portfolio, the performance of which will be influenced by the economy of the region. The Bank maintains a reserve for the potential repurchase of residential mortgage loans, which amounted to $ 205 thousand at December 31, 2020 and $ 79 thousand at December 31, 2019. These amounts are included in other liabilities in the accompanying Consolidated Balance Sheets. Additions to the reserve are a component of other expenses in the accompanying Consolidated Statements of Income. The reserve is available to absorb losses on the repurchase of loans sold related to document and other fraud, early payment default and early payoff. Through December 31, 2020, no reserve charges have occurred related to fraud. The Company enters into interest rate lock commitments, which are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The residential mortgage division either locks in the loan and rate with an investor and commits to deliver the loan if settlement occurs under best efforts or commits to deliver the locked loan in a binding mandatory delivery program with an investor. Certain loans under rate lock commitments are covered under forward sales contracts of mortgage backed securities as a hedge of any interest rate risk. Forward sales contracts of mortgage backed securities 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 and mandatory contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest 133 Table o f Contents rates while taking into consideration the probability that the rate lock commitments will close or will be funded. These transactions are further detailed in Note 9 "Mortgage Banking Derivatives". Note 21 – Commitments and Contingent Liabilities The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments. Except for its loan commitments, as shown in Note 20 "Financial Instruments With Off Balance Sheet Risk" the following table shows details on these fixed and determinable obligations as of December 31, 2020 in the time period indicated. (dollars in thousands) Within One Year One to Three Years Three to Five Years Over Five Years Total Deposits without a stated maturity (1) $ 8,211,443 $ — $ — $ — $ 8,211,443 Time deposits (1) 526,641 376,825 74,294 — 977,760 Borrowed funds (2) 326,726 — 70,000 200,000 596,726 Operating lease obligations 8,342 12,741 9,283 9,500 39,866 Outside data processing (3) 4,592 8,190 1,677 — 14,459 George Mason sponsorship (4) 675 1,350 1,363 6,775 10,163 D.C. United (5) 820 844 — — 1,664 LIHTC investments (6) 5,343 2,070 672 676 8,761 Other (7) — 2,000 — — 2,000 Total $ 9,084,582 $ 404,020 $ 157,289 $ 216,951 $ 9,862,842 (1) Excludes accrued interest payable at December 31, 2020. (2) Borrowed funds include customer repurchase agreements, and other short-term and long-term borrowings. (3) The Bank has outstanding obligations under its current core data processing contract that expire in June 2024 and one other vendor arrangement that relates to network infrastructure and data center services that expires in December 2021. (4) The Bank has the option of terminating the George Mason agreement at the end of contract years 10 and 15 (that is, effective June 30, 2025 or June 30, 2030). Should the Bank elect to exercise its right to terminate the George Mason contract, contractual obligations would decrease $ 3.5 million and $ 3.6 million for the first option period (years 11 - 15 ) and the second option period ( 16 - 20 ), respectively. (5) Marketing sponsorship agreement with D.C. United. (6) LIHTC expected payments for unfunded affordable housing commitments. (7) As disclosed in the 8-K dated January 25, 2021, pursuant to the executed stipulation of settlement of the demand litigation, the Company has agreed to invest an additional $ 2 million incremental spend above 2020 levels by the end of 2023 to enhance its corporate governance, and risk and compliance controls and infrastructure. An accrual is recorded when it is both (a) probable that a loss has occurred and (b) the amount of loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings with respect to accruals, as well as the estimated range of possible losses. From time to time, the Company and its subsidiaries are involved in various legal proceedings incidental to their business in the ordinary course, including matters in which damages in various amounts are claimed. Based on information currently available, the Company does not believe that the liabilities (if any) resulting from such legal proceedings will have a material effect on the financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in such matters, ongoing legal expenses or an adverse outcome in one or more of these matters could materially and adversely affect the Company's financial condition, results of operations or cash flows in any particular reporting period, as well as its reputation. Certain legal proceedings involving us are described below. 134 Table o f Contents On July 24, 2019, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York (the "SDNY") 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. On November 7, 2019, the court appointed a lead plaintiff and lead counsel in that matter, and on January 21, 2020, the lead plaintiff filed an amended complaint on behalf of the same class against the same defendants as well as the Company's former General Counsel. The plaintiff alleges that certain of the Company's 10-K reports and other public statements and disclosures contained materially false or misleading statements about, among other things, the effectiveness of its internal controls and related party loans, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 20 (a) of that act, resulting in injury to the purported class members as a result of 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. On December 23, 2020, the securities class action plaintiffs and defendants filed a stipulation to stay the class action litigation pending a non-binding mediation on April 13, 2021. The SDNY so-ordered the stipulation on December 24, 2020. There can be no assurance, however, that the Class Action litigation will be settled. The Company intends to continue to defend vigorously against the claims asserted. As previously disclosed in the Company's Quarterly Report for the quarter ended September 30, 2020, the Company engaged with discussions with a shareholder regarding a demand letter previously received by the Board of Directors from such shareholder, largely relating to the subject matters covered by the putative class action lawsuit described above. On January 25, 2021, the Company announced that it had entered into a settlement agreement with respect to such shareholder demand letter. As required by DC Superior Court administrative procedures, shareholder’s counsel first filed a derivative action complaint against the individual directors and officers named in the demand letter, and the Company as a nominal Defendant, on February 4, 2021, a nd then filed the executed stipulation of settlement accompanied by the shareholder's brief in support of their unopposed motion to approve the settlement on February 10, 2020. The settlement is subject to certain conditions and limitations, and is still pending court approval. Pursuant to the executed stipulation of settlement of the demand litigation, the Company has agreed to implement certain corporate governance enhancements (many of which are already underway) and to invest an additional $ 2 million incremental spend above 2020 levels (over the course of three years ) to enhance its corporate governance, and risk and compliance controls and infrastructure. As part of the resolution of the matters that were the subject of the demand letter, once court approval is granted, the Company will make a one-time payment to the shareholder’s counsel in the amount of $ 500 thousand for attorneys’ fees and expenses (which one-time amount is expected to be recovered pursuant to the Company’s D&O insurance policy). The stipulation of settlement further provides for releases by the demanding shareholder on behalf of all Eagle Bancorp shareholders of liability with respect to the subject matters described in the demand letter and any other potential future shareholder derivative claims against all current and former Company and Bank officers and directors, and a release by the Company of certain claims against all current and former officers and directors, subject to court approval. The stipulation of settlement does not include or constitute an admission, concession, or finding of any fault, liability, or wrongdoing by the Company, the Bank or any defendant. Although the Company believes the stipulation of settlement is in the best interests of the Company’s shareholders, there can be no assurance that the stipulation of settlement will be approved by the court. The Company has received various document requests and subpoenas from securities and banking regulators and U.S. Attorney’s offices in connection with investigations, which the Company believes relate to 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, among other things. The Company is cooperating with these investigations. There have been no regulatory restrictions placed on the Company's ability to fully engage in its banking business as presently conducted as a result of these ongoing investigations. We are, however, unable to predict the duration, scope or outcome of these investigations. Estimating an amount or range of possible losses resulting from litigation, government actions and other legal proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, may involve fines, penalties, or damages that are discretionary in amount, involve a large number of claimants or significant discretion by regulatory authorities, represent a change in regulatory policy or interpretation, present novel legal theories, are in the early stages of the proceedings, are subject to appeal or could result in a change in business practices. In addition, because most legal proceedings are resolved over extended periods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy, the outcome of intermediate procedural and substantive rulings and other parties’ settlement posture and their evaluation of the strength or weakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses resulting from, the matters described above. 135 Table o f Contents Note 22 – Regulatory Matters The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain amounts and ratios (set forth in the table below) of Total capital, Tier 1 capital and CET1 (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined), referred to as the Leverage Ratio. Management believes, as of December 31, 2020 and 2019, that the Company and Bank met all capital adequacy requirements to which they are subject. The actual capital amounts and ratios for the Company and Bank as of December 31, 2020 and 2019 are presented in the table below: Company Bank Minimum Required For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Regulations * (dollars in thousands) Actual Amount Ratio Actual Amount Ratio As of December 31, 2020 CET1 capital (to risk weighted assets) $ 1,137,896 13.49 % $ 1,244,028 14.90 % 7.000 % 6.5 % Total capital (to risk weighted assets) 1,438,224 17.04 % 1,338,356 16.03 % 10.500 % 10.0 % Tier 1 capital (to risk weighted assets) 1,137,896 13.49 % 1,244,028 14.90 % 8.500 % 8.0 % Tier 1 capital (to average assets) 1,137,896 10.31 % 1,244,028 11.29 % 4.000 % 5.0 % As of December 31, 2019 CET1 capital (to risk weighted assets) $ 1,082,516 12.87 % $ 1,225,486 14.64 % 7.000 % 6.5 % Total capital (to risk weighted assets) 1,362,253 16.20 % 1,299,223 15.52 % 10.500 % 10.0 % Tier 1 capital (to risk weighted assets) 1,082,516 12.87 % 1,225,486 14.64 % 8.500 % 8.0 % Tier 1 capital (to average assets) 1,082,516 11.62 % 1,225,486 13.18 % 4.000 % 5.0 % * Applies to Bank only Federal bank and holding company regulations, as well as Maryland law, impose certain restrictions on capital distributions, including dividend payments and share repurchases by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At December 31, 2020, the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained capital ratios above the required minimums and the capital conservation buffer. As a result the Company may be restricted in paying dividends. 136 Table o f Contents Note 23 – Other Comprehensive Income The following table presents the components of other comprehensive income (loss) for the years ended December 31, 2020, 2019 and 2018. (dollars in thousands) Before Tax Tax Effect Net of Tax Year Ended December 31, 2020 Net unrealized gain (loss) on securities available-for-sale $ 19,637 $ ( 5,215 ) $ 14,422 Less: Reclassification adjustment for net gain (loss) included in net income ( 1,815 ) 452 ( 1,363 ) Total unrealized gain (loss) 17,822 ( 4,763 ) 13,059 Net unrealized gain (loss) on derivatives ( 2,049 ) 671 ( 1,378 ) Less: Reclassification adjustment for gain (loss) included in net income 1,145 ( 285 ) 860 Total unrealized gain (loss) ( 904 ) 386 ( 518 ) Other comprehensive income (loss) $ 16,918 $ ( 4,377 ) $ 12,541 Year Ended December 31, 2019 Net unrealized gain (loss) on securities available-for-sale $ 15,183 $ ( 3,929 ) $ 11,254 Less: Reclassification adjustment for net gain (loss) included in net income ( 1,517 ) 416 ( 1,101 ) Total unrealized gain (loss) 13,666 ( 3,513 ) 10,153 Net unrealized gain (loss) on derivatives ( 2,731 ) 682 ( 2,049 ) Less: Reclassification adjustment for gain (loss) included in net income ( 1,198 ) 328 ( 870 ) Total unrealized gain (loss) ( 3,929 ) 1,010 ( 2,919 ) Other comprehensive income (loss) $ 9,737 $ ( 2,503 ) $ 7,234 Year Ended December 31, 2018 Net unrealized loss on securities available-for-sale $ ( 4,279 ) $ ( 438 ) $ ( 3,841 ) Less: Reclassification adjustment for net loss included in net income ( 97 ) ( 25 ) ( 72 ) Total unrealized loss ( 4,376 ) ( 463 ) ( 3,913 ) Net unrealized gain on derivatives 2,033 227 1,806 Less: Reclassification adjustment for losses included in net income ( 560 ) ( 142 ) ( 418 ) Total unrealized gain 1,473 85 1,388 Other comprehensive loss $ ( 2,903 ) $ ( 378 ) $ ( 2,525 ) 137 Table o f Contents The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2020, 2019 and 2018. (dollars in thousands) Securities Available For Sale Derivatives Accumulated Other Comprehensive Income (Loss) Year Ended December 31, 2020 Balance at Beginning of Period $ 3,109 $ ( 150 ) $ 2,959 Other comprehensive income (loss) before reclassifications 14,422 ( 1,378 ) 13,044 Amounts reclassified from accumulated other comprehensive income ( 1,363 ) 860 ( 503 ) Net other comprehensive income (loss) during period 13,059 ( 518 ) 12,541 Balance at End of Period $ 16,168 $ ( 668 ) $ 15,500 Year Ended December 31, 2019 Balance at Beginning of Period $ ( 7,044 ) $ 2,769 $ ( 4,275 ) Other comprehensive (loss) income before reclassifications 11,254 ( 2,049 ) 9,205 Amounts reclassified from accumulated other comprehensive income ( 1,101 ) ( 870 ) ( 1,971 ) Net other comprehensive (loss) income during period 10,153 ( 2,919 ) 7,234 Balance at End of Period $ 3,109 $ ( 150 ) $ 2,959 Year Ended December 31, 2018 Balance at Beginning of Period $ ( 3,131 ) $ 1,381 $ ( 1,750 ) Other comprehensive (loss) income before reclassifications ( 3,841 ) 1,806 ( 2,035 ) Amounts reclassified from accumulated other comprehensive income ( 72 ) ( 418 ) ( 490 ) Net other comprehensive (loss) income during period ( 3,913 ) 1,388 ( 2,525 ) Balance at End of Period $ ( 7,044 ) $ 2,769 $ ( 4,275 ) The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the years ended December 31, 2020, 2019 and 2018. Details about Accumulated Other Amount Reclassified from Accumulated Other Comprehensive (Loss) Income Affected Line Item in the Statement Where Net Income is Presented Comprehensive Income Components Year Ended December 31, (dollars in thousands) 2020 2019 2018 Realized gain on sale of investment securities $ 1,815 $ 1,517 $ 97 Gain on sale of investment securities Interest income (expense) derivative deposits ( 1,145 ) 1,198 560 Interest expense on deposits Income tax (expense) benefit ( 167 ) ( 744 ) ( 167 ) Tax expense Total Reclassifications for the Period $ 503 $ 1,971 $ 490 Net Income 138 Table o f Contents Note 24 – 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 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. 139 Table o f Contents 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 December 31, 2020 and 2019: (dollars in thousands) Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total (Fair Value) December 31, 2020 Assets: Investment securities available-for-sale: U. S. agency securities $ — $ 181,921 $ — $ 181,921 Residential mortgage backed securities — 825,001 — 825,001 Municipal bonds — 108,113 — 108,113 Corporate bonds — 34,350 1,500 35,850 Loans held for sale — 88,205 — 88,205 Interest rate caps — 3,413 — 3,413 Mortgage banking derivatives — — 5,213 5,213 Total assets measured at fair value on a recurring basis as of December 31, 2020 $ — $ 1,241,003 $ 6,713 $ 1,247,716 Liabilities: Interest rate swap derivatives $ — $ 516 $ — $ 516 Credit risk participation agreements — 118 — 118 Interest rate caps — 3,574 — 3,574 Total liabilities measured at fair value on a recurring basis as of December 31, 2020 $ — $ 4,208 $ — $ 4,208 December 31, 2019 Assets: Investment securities available-for-sale: U. S. agency securities $ — $ 179,794 $ — $ 179,794 Residential mortgage backed securities — 543,852 — 543,852 Municipal bonds — 73,931 — 73,931 Corporate bonds — — 10,733 10,733 U.S. Treasury — 34,855 — 34,855 Loans held for sale — 56,707 — 56,707 Interest rate caps — 317 — 317 Mortgage banking derivatives — — 280 280 Total assets measured at fair value on a recurring basis as of December 31, 2019 $ — $ 889,456 $ 11,013 $ 900,469 Liabilities: Interest rate swap derivatives $ — $ 203 $ — $ 203 Credit risk participation agreements — 86 — 86 Interest rate caps — 312 — 312 Mortgage banking derivatives — — 66 66 Total liabilities measured at fair value on a recurring basis as of December 31, 2019 $ — $ 601 $ 66 $ 667 140 Table o f Contents 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, U.S. 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 Income 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 Income. Gains and losses on sales of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Income. As such, the Company classifies loans subjected to fair value adjustments as Level 2 valuation. The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of December 31, 2020 and 2019. December 31, 2020 (dollars in thousands) Fair Value Aggregate Unpaid Principal Balance Difference Loans held for sale $ 88,205 $ 86,551 $ 1,654 December 31, 2019 (dollars in thousands) Fair Value Aggregate Unpaid Principal Balance Difference Loans held for sale $ 56,707 $ 55,834 $ 873 No residential mortgage loans held for sale were 90 or more days past due or on nonaccrual status as of December 31, 2020] or December 31, 2019. 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 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. 141 Table o f Contents 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. 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, 2020 $ 10,931 $ 280 $ 11,211 Realized (loss) gain included in earnings — 4,933 4,933 Migrated to Level 2 valuation ( 9,233 ) — ( 9,233 ) Reclass fair value asset to cost method ( 198 ) — $ ( 198 ) Ending balance at December 31, 2020 $ 1,500 $ 5,213 $ 6,713 Liabilities: Beginning balance at January 1, 2020 $ — $ 66 $ 66 Realized gain included in earnings — ( 66 ) ( 66 ) Ending balance at December 31, 2020 $ — $ — $ — (dollars in thousands) Investment Securities Mortgage Banking Derivatives Total Assets: Beginning balance at January 1, 2019 $ 9,794 $ 229 $ 10,023 Realized gain included in earnings ( 20 ) 51 31 Unrealized gain included in other comprehensive income 131 — 131 Purchases of available-for-sale securities 4,030 — 4,030 Principal redemption ( 3,004 ) — ( 3,004 ) Ending balance at December 31, 2019 $ 10,931 $ 280 $ 11,211 Liabilities: Beginning balance at January 1, 2019 Realized loss included in earnings $ — $ 269 $ 269 Principal redemption — ( 203 ) ( 203 ) Ending balance at December 31, 2019 $ — $ 66 $ 66 The other equity and debt securities classified as Level 3 consist of one corporate bond of a local banking company and equity investments in the form of common stock of two local banking companies which are not publicly traded, and for which the carrying amounts approximate fair value. Form Level 3 assets measured at fair value on a recurring or nonrecurring basis as of December 31, 2020 and 2019, the significant unobservable inputs used in the fair value measurements were as follows: December 31, 2020 December 31, 2019 (dollars in thousands) Valuation Technique Description Range Weighted Average (1) Fair Value Weighted Average (1) Fair Value Mortgage banking derivatives Pricing Model Pull Through Rate 72 % - 85 % 79.14 % $ 5,213 76.25 % $ 280 142 Table o f Contents (1) Unobservable inputs for mortgage banking derivatives were weighted by loan amount. Mortgage banking derivatives for loans settled on a mandatory basis: The Company relied 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. Mortgage banking derivative for loans settled best efforts basis: The significant unobservable input (Level 3) used in the fair value measurement of the Company's interest rate lock commitments is the pull through ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. An increase in the pull through ratio (i.e. higher percentage of loans are estimated to close) will increase the gain or loss. The pull through ratio is largely dependent on the loan processing stage that a loan is currently in. The pull through rate is computed by the Company's secondary marketing consultant using historical data and the ratio is periodically reviewed by the Company for reasonableness. 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. Pre Adoption of CECL : The Company did not record loans at fair value on a recurring basis; however, from time to time, a loan was considered impaired and an allowance for loan loss was established. The Company considered a loan impaired when it was probable that the Company would be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management had determined that nonaccrual loans and loans that had their terms restructured in a TDR met this impaired loan definition. Once a loan was identified as individually impaired, management measures impairment in accordance with ASC 310, “ Receivables .” The fair value of impaired assessed loans was 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 represented loans for which the fair value of expected repayments or collateral exceeded the recorded investment in such loans. Post adoption of CECL (Individually Assessed Loans) : 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. For individually evaluated individually assessed loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company classifies as a Level 3 valuation. Other real estate owned : 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: 143 Table o f Contents (dollars in thousands) Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total (Fair Value) December 31, 2020 Individually assessed loans: Commercial $ — $ — $ 9,285 $ 9,285 Income producing - commercial real estate — — 21,638 21,638 Owner occupied - commercial real estate — — 21,930 21,930 Real estate mortgage - residential — — 2,602 2,602 Construction - commercial and residential — — 103 103 Home equity — — 416 416 Other real estate owned — — 4,987 4,987 Total assets measured at fair value on a nonrecurring basis as of December 31, 2020 $ — $ — $ 60,961 $ 60,961 (dollars in thousands) Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total (Fair Value) December 31, 2019 Impaired loans: Commercial $ — $ — $ 10,100 $ 10,100 Income producing - commercial real estate — — 11,948 11,948 Owner occupied - commercial real estate — — 6,934 6,934 Real estate mortgage - residential — — 4,981 4,981 Construction - commercial and residential — — 11,409 11,409 Home equity — — 387 387 Other real estate owned — — 1,487 1,487 Total assets measured at fair value on a nonrecurring basis as of December 31, 2019 $ — $ — $ 47,246 $ 47,246 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. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables.” The fair value of individually assessed 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 individually assessed 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 December 31, 2020, substantially all of the Company’s individually assessed loans were evaluated based upon the fair value of the collateral. In accordance with ASC 820, individually assessed 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. 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. 144 Table o f Contents 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. Estimated fair values of the Company’s financial instruments at December 31, 2020 and 2019 are as follows 145 Table o f Contents Fair Value Measurements (dollars in thousands) Carrying Value Fair Value Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) December 31, 2020 Assets Cash and due from banks $ 8,435 $ 8,435 $ 8,435 $ — $ — Federal funds sold 28,200 28,200 — 28,200 — Interest bearing deposits with other banks 1,752,420 1,752,420 — 1,752,420 — Investment securities 1,150,885 1,150,885 — 1,149,385 1,500 Federal Reserve and Federal Home Loan Bank stock 40,104 40,104 — 40,104 — Loans held for sale 88,205 88,205 — 88,205 — Loans 7,650,633 7,608,687 — — 7,608,687 Bank owned life insurance 76,729 76,729 — 76,729 — Annuity investment 14,468 14,468 — 14,468 — Mortgage banking derivatives 5,213 5,213 — — 5,213 Interest rate caps 3,413 3,413 — 3,413 — Liabilities Noninterest bearing deposits 2,809,334 2,809,334 — 2,809,334 — Interest bearing deposits 756,923 756,923 — 756,923 — Time deposits 977,760 993,500 — 993,500 — Customer repurchase agreements 26,726 26,726 — 26,726 — Borrowings 568,077 575,435 — 575,435 — Interest rate swap derivatives 516 516 — 516 — Credit risk participation agreements 118 118 — 118 — Interest rate caps 3,574 3,574 — 3,574 — December 31, 2019 Assets Cash and due from banks $ 7,539 $ 7,539 $ 7,539 $ — $ — Federal funds sold 38,987 38,987 — 38,987 — Interest bearing deposits with other banks 195,447 195,447 — 195,447 — Investment securities 843,363 843,363 — 832,432 10,931 Federal Reserve and Federal Home Loan Bank stock 35,194 35,194 — 35,194 — Loans held for sale 56,707 56,707 — 56,707 — Loans 7,472,090 7,550,249 — — 7,550,249 Bank owned life insurance 75,724 75,724 — 75,724 — Annuity investment 14,697 14,697 — 14,697 — Mortgage banking derivatives 280 280 — 280 — Interest rate swap derivatives Liabilities Noninterest bearing deposits 2,064,367 2,064,367 — 2,064,367 — Interest bearing deposits 3,876,985 3,876,985 — 3,876,985 — Time deposits 1,283,039 1,291,688 — 1,291,688 — Customer repurchase agreements 30,980 30,980 — 30,980 — Borrowings 467,687 328,330 — 328,330 — Interest rate swap derivatives 203 203 — 203 — Credit risk participation agreements, 86 86 — 86 — Interest rate caps 312 312 — 312 — Mortgage banking derivatives 66 66 — — 66 146 Table o f Contents Note 25 – Parent Company Financial Information Condensed financial information for Eagle Bancorp, Inc. (Parent Company only) is as follows: (dollars in thousands) December 31, 2020 December 31, 2019 Assets Cash $ 29,275 $ 43,204 Investment securities available-for-sale, at fair value 16,716 7,218 Investment in subsidiaries 1,347,235 1,334,197 Other assets 79,590 30,773 Total Assets $ 1,472,816 $ 1,415,392 Liabilities Other liabilities $ 13,847 $ 7,024 Long-term borrowings 218,077 217,687 Total liabilities 231,924 224,711 Shareholders’ Equity Common stock 315 331 Additional paid in capital 427,016 482,286 Retained earnings 798,061 705,105 Accumulated other comprehensive income 15,500 2,959 Total Shareholders’ Equity 1,240,892 1,190,681 Total Liabilities and Shareholders’ Equity $ 1,472,816 $ 1,415,392 Years Ended December 31, (dollars in thousands) 2020 2019 2018 Income Other interest and dividends $ 141,982 $ 85,851 $ 678 Gain on sale of investment securities — — — Total Income $ 141,982 $ 85,851 $ 678 Expenses Interest expense 11,915 11,916 11,916 Legal and professional 2,842 2,779 870 Directors compensation 500 491 614 Other 1,306 1,294 1,287 Total Expenses $ 16,563 $ 16,480 $ 14,687 Income (Loss) Before Income Tax (Benefit) and Equity in Undistributed Income of Subsidiaries 125,419 69,371 ( 14,009 ) Income Tax Benefit ( 607 ) ( 3,176 ) ( 2,892 ) Income (Loss) Before Equity in Undistributed Income of Subsidiaries 126,026 72,547 ( 11,117 ) Equity in Undistributed Income of Subsidiaries 6,191 70,396 163,393 Net Income $ 132,217 $ 142,943 $ 152,276 147 Table o f Contents Years Ended December 31, (dollars in thousands) 2020 2019 2018 Cash Flows From Operating Activities Net Income $ 132,217 $ 142,943 $ 152,276 Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed income of subsidiary ( 6,191 ) ( 70,396 ) ( 163,393 ) Net tax benefits from stock compensation 118 10 110 Securities premium amortization (discount accretion), net 6 2 — Depreciation and amortization 390 — — Increase in other assets ( 48,966 ) ( 21,447 ) ( 2,508 ) Increase (decrease) in other liabilities 6,823 2,460 ( 61 ) Net cash provided by (used in) operating activities 84,397 53,572 ( 13,576 ) Cash Flows From Investing Activities Purchases of available-for-sale investment securities ( 10,000 ) ( 7,030 ) — Proceeds from maturities of available-for-sale securities 613 — — Investment in subsidiary (net) — — 6,892 Net cash (used in) provided by investing activities ( 9,387 ) ( 7,030 ) 6,892 Cash Flows From Financing Activities Proceeds from exercise of stock options 63 332 776 Proceeds from employee stock purchase plan 760 782 808 Common stock repurchased ( 61,432 ) ( 54,903 ) — Cash dividends paid ( 28,330 ) ( 22,332 ) — Net cash (used in) provided by financing activities ( 88,939 ) ( 76,121 ) 1,584 Net (Decrease) in Cash ( 13,929 ) ( 29,579 ) ( 5,100 ) Cash and Cash Equivalents at Beginning of Year 43,204 72,783 77,883 Cash and Cash Equivalents at End of Year $ 29,275 $ 43,204 $ 72,783 148 Table o f Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.