EGBN filing — read by section

Item 2. Management’s Discussion and Analysis

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Eagle Bancorp, Inc. (the “Company”) and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. 
 This report contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward-looking statements can be identified by use of words such as “may,” “will,” “can,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “assume," "probable," "possible," "continue,” “should,” “could,” “would,” “strive," "seeks," "deem," "projections," "forecast," "consider," "indicative," "uncertainty," "likely," "unlikely," ""likelihood," "unknown," "attributable," "depends," "intends," "generally," "feel" "typically," "judgment," "subjective" and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market (including the macroeconomic and other challenges and uncertainties resulting from the coronavirus (“COVID-19”) pandemic, including on our credit quality and business operations), interest rates and interest rate policy, competitive factors and other conditions, which by their nature are not susceptible to accurate forecast, and are subject to significant uncertainty. For details on factors that could affect these expectations, see the risk factors contained in this report and the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company’s past results are not necessarily indicative of future performance, and nothing contained herein is meant to or should be considered and treated as earnings guidance of future quarters’ performance projections. All information is as of the date of this report. Any forward-looking statements made by or on behalf of the Company speak only as to the date they are made. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward looking statement for any reason. 
 
 GENERAL 
 The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating twenty-three years of successful operations. The Company provides general commercial and consumer banking services through EagleBank (the “Bank”), its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System. The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the Company’s primary market area. The Company’s philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of twenty branch offices, including nine in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C. 
 The Bank offers a broad range of commercial banking services to its business and professional clients, as well as full service consumer banking services to individuals living and/or working primarily in the Bank’s market area. The Bank emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, non-profit organizations and associations, and investors living and working in and near the primary service area. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, “NOW” accounts and money market and savings accounts, business, construction, and commercial loans, residential mortgages and consumer loans, and cash management services. The Bank is also active in the origination and sale of residential mortgage loans and the origination of Small Business Administration ("SBA”) loans. The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under best efforts and or mandatory delivery commitments with the investors to purchase the loans subject to compliance with pre-established criteria. The decision whether to sell residential mortgage loans on a mandatory or best efforts lock basis is a function of multiple factors, including but not limited to overall market volumes of mortgage loan originations, forecasted “pull-through” rates of origination, loan closing operational considerations, pricing differentials between the two methods, and availability and pricing of various interest rate hedging strategies associated with the mortgage origination pipeline. The Company continually monitors these factors to maximize profitability and minimize operational and interest rate risks. 
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 The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated. The Company originates multifamily Federal Housing Administration ("FHA”) loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”). The Company securitizes these loans through the Government National Mortgage Association (“Ginnie Mae”) MBS I program and sells the resulting securities in the open market to authorized dealers in the normal course of business, and periodically bundles and sells the servicing rights. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages other real estate owned (“OREO”) assets. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Additionally, the Bank offers investment advisory services through referral programs with third parties. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance. 
 Impact of COVID-19 
 In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. Governmental responses to the pandemic have included orders closing nonessential businesses, directing individuals to restrict their movements, observe social distancing, and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to COVID-19 pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. Since the inception of the pandemic in March of 2020, much progress has been made in reopening economies back up domestically and abroad. In the United States and in other nations around the world, the availability of vaccination to immunize the masses ramped up significantly in the first quarter of 2021. While there is a hopeful reason to be optimistic, we remain cautious given the potential for lingering effects of the pandemic. 
 Certain of our business and consumer customers have experienced and continue to experience varying degrees of financial distress. In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including directing employees to work from home insofar as is possible, implementing our business continuity plans and protocols to the extent necessary, and our branches have modified hours and advanced safety measures. We have established general guidelines for returning 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. 
 
 
 On March 27, 2020, the CARES Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act 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. 
 As an SBA preferred lender, the Bank is participating in the PPP program, and at March 31, 2021, had an outstanding balance of PPP loans of $565.0 million to just over 1,800 business' loans. The statutory interest rate on these loans is 1.00% and the average yield, which includes fee and cost amortization, was 3.50% for the first quarter of 2021. On May 3, 2021, we transacted to sell 849 PPP loans for a total purchase price of $169.0 million. Immediately following this sale, the principal outstanding on PPP loans totaled approximately $378.4 million across 789 notes. 
 There have also been various governmental actions taken or proposed to provide forms of relief, such as streamlining the application process for forgiveness of all PPP loans under $50,000, limiting debt collections efforts, including foreclosures, and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees. Following the CARES Act, the Consolidated Appropriations Act was signed in to law on December 27, 2020 which expanded and modified the PPP as well as provided additional COVID-19 support. Subsequently, the American Rescue Plan Act of 2021 was signed in to law on March 11, 2021 providing an additional $1.9 trillion in relief in the form of testing and vaccination sites along with direct stimulus checks. Governmental actions taken in response to the COVID-19 pandemic have not always been coordinated or consistent across jurisdictions but, in general, have been expanding in scope and intensity. The efficacy and ultimate effect of these actions is not known. 
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 In response to the COVID-19 pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications. Initial modifications under the program have predominantly been for 90 days, with a second 90 day modification if warran ted. The de ferred payments along with interest accrued during the deferral period are due and payable on the existing maturity date of the existing loan. As of March 31, 2021, we had ongoing temporary modifications on approximately 58 loans representing $143.4 million (approximately 1.9% of total loans) in outstanding balances. Overall, through the twelve months of the pandemic ending March 31, 2021, the Bank's COVID-19 modification program has granted temporary modifications on approximately 787 loans representing approximately $1.6 billion in outstanding balances. At March 31, 2021, the level of loans currently in COVID-19 related modification is $143 million. 
 
 
 Some of these deferrals may have met the criteria for treatment under U.S. generally accepted accounting principles ("GAAP") as troubled debt restructurings ("TDRs"). 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 U.S. 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. 
 Steadily improving economic forecasts, improved unemployment numbers, improvement of credits in the portfolio along with a reduction in total loans, higher provisioning in 2020 associated with the implementation of the expected loss methodology for determining our provision for credit losses as required by the Current Expected Credit Loss ("CECL") standard described below, resulted in a negative provision for credit losses for the first three months of 2021. We continue to monitor the impact of COVID-19 closely even as economic forecasts improve. In addition, we continue to monitor the effects that have resulted from the CARES Act and other legislative and regulatory developments related to COVID-19; however, the extent to which the COVID-19 pandemic could impact our operations and financial results during the remainder of 2021 is highly uncertain. 
 
 CRITICAL ACCOUNTING POLICIES 
 The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and Note 1 to the Consolidated Financial Statements included in this report. There have been no significant changes to the Company’s accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 except as indicated below and in “Accounting Standards Adopted in 2021” in Note 1 to the Consolidated Financial Statements in this report. 
 Provision for Credit Losses and Provision for Unfunded Commitments 
 A consequence of lending activities is that we may incur credit losses, so we record an allowance for credit losses ("ACL") with respect to loan receivables and a reserve for unfunded commitments (“RUC”) as estimates of those losses. The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as changes in interest rates, the financial performance of borrowers and regional unemployment rates, which management estimates by using a national forecast and estimating a regional adjustment based on historical differences between the two. 
 CECL requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The Provision for Unfunded Commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. The RUC is determined by estimating future draws and applying the expected loss rates on those draws. 
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 Management has significant discretion in making the judgments inherent in the determination of the provisions for credit loss, ACL, and the RUC. Our determination of these amounts requires significant reliance on estimates and significant judgment as to the amount and timing of expected future cash flows on loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts. 
 
 
 The Provision for Credit Losses ("PCL") represents the expected credit losses arising from the Company's loan and 
 AFS securities portfolios. 
 
 
 The Company uses a loan-level probability of default ("PD")/ loss given default ("LGD") cash flow method with an exposure at default ("EAD") model to estimate expected credit losses for the commercial, income producing – commercial real estate, owner occupied – commercial real estate, real estate mortgage - residential, construction – commercial and residential, construction – C&I (owner occupied), home equity, and other consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, probability of default, and loss given default. The modeling of expected prepayment speeds is based on historical internal data. PPP loans are included in the model but do not carry a reserve, as these loans are fully guaranteed by the 
 SBA, whose guarantee is backed by the full faith and credit of the U.S. Government. 
 
 
 The Company uses regression analysis of historical internal and peer data (as Company loss data is insufficient) to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default will react to forecasted levels of the loss drivers. 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 a loss driver over our reasonable and supportable period of two years, and reverts back to a historical loss rate over the following twelve months on a straight-line basis. Improved unemployment projections, which inform our CECL economic forecast reduced our loss reserve during the three months ended March 31, 2021. 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 reserve for credit losses attributes portions of the ACL and RUC to the commercial and consumer portfolio 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. 
 
 
 Under CECL, reserve for credit losses are significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. For example, the COVID-19 pandemic has negatively impacted the performance outlook in the Accommodation & Food Service segment of our loan portfolio, which informs our CECL economic forecast and increased our loss reserve for the three months ended March 31, 2021. See Notes 1 and 5 to the Consolidated Financial Statements for more information on the provision for credit losses. 
 
 Goodwill and Other Intangibles 
 Goodwill is subject to impairment testing at the reporting unit level and must be conducted at least annually. The Company performs impairment testing during the fourth quarter of each year or when events or changes in circumstances indicate the assets might be impaired. 
 Determining the fair value of a reporting unit under the goodwill impairment test involves judgement 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 comparables. 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. Annual impairment testing of intangibles and goodwill as required by GAAP will be performed in the fourth quarter of 2021. 
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 RESULTS OF OPERATIONS 
 Earnings Summary 
 Net income for the three months ended March 31, 2021 was $43.5 million compared to $23.1 million for the three months ended March 31, 2020, a 88% increase. Net income per basic and diluted common share for the three months ended March 31, 2021 was $1.36 compared to $0.70 per basic and diluted common share for the same period in 2020, a 94% increase. 
 Net income increased for the three months ended March 31, 2021 relative to the same period in 2020 due primarily to a reversal of the provision for credit losses and significant gain on sale of residential mortgages, whereas the first quarter of 2020 included provisions for credit losses at the beginning of the COVID-19 pandemic, as well as, mark-to-market losses related to a hedge position on mortgage operations. In particular, the provision for credit losses decreased to a net credit of $2.4 million for the three months ended March 31, 2021 compared to $14.3 million for the same period in 2020, a 116% decrease (see "Provision for Credit Losses" section below for further details on drivers of the change). 
 Total revenue (i.e. net interest income plus noninterest income) was $93.2 million for the first quarter of 2021 as compared to $85.2 million in the same period of 2020. The most significant portion of revenue is net interest income, which increased to $82.7 million for the three months ended March 31, 2021 compared to $79.7 million for the same period in 2020. The increase in net interest income was primarily due to an increase in assets, which more than offset the decline in net interest margin. 
 The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, was 2.98% for the three months ended March 31, 2021 and 3.49% for the same period in 2020. The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below. 
 The benefit of noninterest sources funding earning assets decreased by 34 basis points to 24 basis points for the three months ended March 31, 2021 as compared to 58 basis points for the same period in 2020, due to significantly lower market interest rates. The combination of a 17 basis point decrease in the net interest spread and a 34 basis point decrease in the value of noninterest sources resulted in a 51 basis point decrease in the net interest margin for the three months ended March 31, 2021 as compared to the same period in 2020. 
 Total noninterest income for the three months ended March 31, 2021 increased to $10.6 million from $5.5 million for the three months ended March 31, 2020, a 94% increase. The largest factor behind the increase was the gain on sale of loans which increased from $944 thousand to $5.2 million between the three months ended March 31, 2021 and March 31, 2020 due to higher gains on the sale of residential mortgage loans ($4.2 million). F or further information on the components and drivers of these changes see "Noninterest Income" section below. 
 Gain on sale of loans for the three months ended March 31, 2021 was $5.2 million compared to $944 thousand for the three months ended March 31, 2020, an increase of 449%. The change was primarily due to a loss on a negative mark-to-market hedge position in the residential mortgage operation in the first quarter of 2020 as contrasted to low interest rates driving more residential mortgage activity in the first quarter of 2021. 
 Other income for the three months ended March 31, 2021 increased to $3.8 million from $1.9 million for the three months ended March 31, 2020, a 105% increase, due substantially to $911 thousand gain from the cancellation of an FHLB borrowing, swap fee income of $695 thousand and $576 thousand higher gains associated with the origination, securitization, sale and servicing of FHA loans. 
 Noninterest expenses totaled $38.0 million for the three months ended March 31, 2020, as compared to $37.3 million for the three months ended March 31, 2020, a 2% increase. See the "Noninterest Expense" section for further detail on the components and drivers of the change. 
 Income tax expenses were $14.6 million for the three months ended March 31, 2021 an increase of 75.1%, compared to the same period in 2020. The components and drivers of the change are discussed in the "Income Tax Expense" section below. 
 The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 40.74% for the first quarter of 2021, as compared to 43.83% for the first quarter of 2020. 
 The Company believes it has effectively managed its net interest income over the past twelve months by growing its balance sheet over the past twelve months. 
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 At March 31, 2021, total loans (including PPP loans) were 3.0% lower than they were at December 31, 2020, and average loans were 0.99% higher in the first three months of 2021 as compared to the first three months of 2020 (which did not include any PPP loans as the program had not yet started). PPP loans represented $565 million of total loans at the end of the first quarter 2021. Excluding PPP loans, the decrease in loan balance is mostly attributable to elevated payoffs and prepays due in part to successful completion of construction projects and low nominal interest rates. From a liquidity and funding perspective, the Company continues to benefit from funding from the build in both interest bearing and noninterest bearing accounts. At March 31, 2021, total deposits were 0.1% higher than deposits at December 31, 2020, while average deposits were 24.7% higher for the first three months of 2021 compared with the first three months of 2020. This has allowed the Company to sustain strong primary and secondary sources of liquidity. 
 On May 3, 2021, we transacted to sell 849 PPP loans for a total purchase price of $169.0 million. Immediately following this sale, the principal outstanding on PPP loans totaled approximately $378.4 million across 789 notes . 
 
 
 In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 68.8% and 83.4% of average earning assets for the first three months of 2021 and 2020, respectively. The decline was primarily a result of strong deposit inflows in the second and third quarters of 2020, which significantly increased cash and securities. 
 
 
 The ratio of common equity to total assets decreased to 11.33% at March 31, 2021 from 11.64% at March 31, 2020, as strong deposit inflows significantly increased assets held in cash and securities; average assets increased by 21.9%. As discussed later in “Capital Resources and Adequacy,” the regulatory capital ratios of the Bank and Company remain above well capitalized levels. 
 For the three months ended March 31, 2021, the Company reported an annualized return on average assets (“ROAA”) of 1.53%, as compared to 0.98% for the three months ended March 31, 2020. Total shareholders’ equity was $1.26 billion and $1.24 billion at March 31, 2021 and December 31, 2020, respectively, an increase of 1.6%. The annualized return on average common equity (“ROACE”) for the three months ended March 31, 2020 was 14.05% as compared to 7.81% for the three months ended March 31, 2020. The annualized return on average tangible common equity (“ROATCE”) for the three months ended March 31, 2021 was 15.33% as compared to 8.56% for the three months ended March 31, 2020. The increase in these ratios was primarily due to substantially lower provision of credit losses. 
 Net Interest Income and Net Interest Margin 
 Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans, investment securities, and interest bearing deposits with other banks and other short term investments. The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings. Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations). Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income. 
 Net interest income was $82.7 million for the three months ended March 31, 2021 and $79.7 million for the same period in 2020, which reflects the strong growth in average earning assets from deposit inflows increasing cash and securities, partially offset by a decline in the net interest margin, as explained below. 
 The net interest margin was 2.98% for the three months ended March 31, 2021 and 3.49% for the same period in 2020. The decline reflects the impact of lower rates on increased cash and securities balances, partially offset by improved funding mix and lower funding costs. 
 
 
 In the first quarter of 2021 as compared to the first quarter of 2020, average U.S. Treasury rates in the two to five year range decreased by approximately 78 basis points and the average yield curve flattened. The Company experienced 51 basis points of net interest margin compression between the first quarter of 2020 as compared to the first quarter of 2021 (from 3.49% to 2.98%). In addition, our cost of funds declined 64 basis points (from 1.06% to 0.42%), while the yield on earning assets declined by 115 basis points (from 4.55% to 3.40%). Average liquidity for the first quarter 2021 was $2.1 billion versus $619 million for the first quarter of 2020. The yield on our loan assets was negatively impacted by the low interest rate environment in the first quarter of 2021 as legacy fixed rate loans originated in higher rate eras matured and paid off. A substantial portion of the variable rate loan portfolio has interest rate floors that cushioned the decline in loan yields. 
 
 
 Average earning asset yields decreased 115 basis points to 3.40% for the three months ended March 31, 2021, as compared to 4.55% for the same period in 2020. The average cost of interest bearing liabilities decreased by 98 basis points (to 0.66% from 1.64%) for the three months ended March 31, 2021 as compared to the same period in 2020. Combining the change 
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 in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased b y 17 basis points for the three months ended March 31, 2021 as compared to 2020 (2.74% as compared to 2.91%). 
 
 
 The table below presents the average balances and rates of the major categories of the Company’s assets and liabilities for the three months ended March 31, 2021 and 2020. Included in the table are measurements of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets. 
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 Eagle Bancorp, Inc. 
 Consolidated Average Balances, Interest Yields And Rates (Unaudited) 
 (dollars in thousands) 
 
 
 Three Months Ended March 31, 
 2021 2020 
 Average
Balance Interest Average
Yield/Rate Average
Balance Interest Average
Yield/Rate 
 ASSETS 
 Interest earning assets: 
 Interest bearing deposits with other banks and other short-term investments $ 2,103,679 $ 553 0.11 % $ 588,148 $ 1,559 1.07 % 
 Loans held for sale (1) 
 104,784 739 2.82 % 38,749 354 3.65 % 
 Loans (1) (2) 
 7,726,716 88,499 4.65 % 7,650,993 96,401 5.07 % 
 Investment securities available for sale (2) 
 1,268,952 4,395 1.40 % 867,666 5,427 2.52 % 
 Federal funds sold 32,309 8 0.10 % 30,618 60 0.79 % 
 Total interest earning assets 11,236,440 94,194 3.40 % 9,176,174 103,801 4.55 % 
 
 Total noninterest earning assets 390,775 356,317 
 Less: allowance for credit losses 109,379 84,828 
 Total noninterest earning assets 281,396 271,489 
 TOTAL ASSETS $ 11,517,836 $ 9,447,663 
 
 LIABILITIES AND SHAREHOLDERS’ EQUITY 
 Interest bearing liabilities: 
 Interest bearing transaction $ 771,321 $ 427 0.22 % $ 805,134 $ 1,666 0.83 % 
 Savings and money market 4,839,348 3,970 0.33 % 3,337,958 11,082 1.34 % 
 Time deposits 921,208 3,503 1.54 % 1,287,310 7,798 2.44 % 
 Total interest bearing deposits 6,531,877 7,900 0.49 % 5,430,402 20,546 1.52 % 
 Customer repurchase agreements 20,615 11 0.22 % 30,008 87 1.17 % 
 Other short-term borrowings 300,003 495 0.66 % 220,058 357 0.64 % 
 Long-term borrowings 253,132 3,137 4.96 % 235,882 3,067 5.14 % 
 Total interest bearing liabilities 7,105,627 11,543 0.66 % 5,916,350 24,057 1.64 % 
 
 Noninterest bearing liabilities: 
 Noninterest bearing demand 3,069,372 2,266,362 
 Other liabilities 88,057 73,771 
 Total noninterest bearing liabilities 3,157,429 2,340,133 
 
 Shareholders’ Equity 1,254,780 1,191,180 
 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 11,517,836 $ 9,447,663 
 
 Net interest income $ 82,651 $ 79,744 
 Net interest spread 2.74 % 2.91 % 
 Net interest margin 2.98 % 3.49 % 
 Cost of funds 0.42 % 1.06 % 
 

 (1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $7.8 million and $4.3 million for the three months ended March 31, 2021 and 2020, respectively. 
 (2) Interest and fees on loans and investments exclude tax equivalent adjustments. 
 
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 Provision for Credit Losses 
 The provision for credit losses represents the amount of expense charged to current earnings to fund the ACL on loans and the ACL on available for sale investment securities. The amount of the allowance for credit losses on loans is based on many factors that reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank. 
 The provision for unfunded commitments is presented separately on the Statement of Income. This provision considers the probability that unfunded commitments will fund. 
 Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. Refer to additional detail regarding these forecasts in the “Cash Flow Method" section of Note 1 to the Consolidated Financial Statements. 
 The results of this process, in combination with conclusions of the Bank’s outside consultants’ review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under “Critical Accounting Policies” above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table on the next page which reflects activity in the allowance for credit losses. 
 During the three months ended March 31, 2021, the ACL on loans reflected a reversal of $2.4 million in provision for credit losses attributable to the ACL for loans and $5.2 million in net charge-offs, which were attributable primarily a variety of commercial C&I credits, which included two restaurants, one commercial real estate credit for a hotel and two Small Business Administration ("SBA") credits. The provision for credit losses on loans for the same period in 2020 was $14.3 million. The higher provisioning in the first quarter of 2020, as compared to the first quarter of 2021, was primarily due to the impact of COVID-19 on our actual and expected future credit losses. The reversal was also fueled by improved macroeconomic outlook, better unemployment rate, improvement of credits in the loan portfolio, and a reduction in total loans. Net charge-offs of $5.2 million in the first quarter of 2021 represented an annualized 0.27% of average loans, excluding loans held for sale, as compared to $2.2 million, or an annualized 0.12% of average loans, excluding loans held for sale, in the first quarter of 2020. 
 
 
 As part of its comprehensive loan review process, internal loan and credit committees carefully evaluate loans that are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves. 
 The maintenance of a high quality loan portfolio, with an adequate allowance for credit losses, will continue to be a primary management objective for the Company. 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. 
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 The following table sets forth activity in the allowance for credit losses for the periods indicated (unaudited). 
 
 
 Three Months Ended
March 31, 
 
 (dollars in thousands) 2021 2020 
 Balance at beginning of period $ 109,579 $ 73,658 
 Impact of adopting CECL — 10,614 
 Charge-offs: 
 Commercial 4,150 — 
 Income producing - commercial real estate 1,000 550 
 Owner occupied - commercial real estate — — 
 Real estate mortgage - residential — — 
 Construction - commercial and residential 206 1,768 
 Construction - C&I (owner occupied) — — 
 Home equity — — 
 Other consumer 1 — 
 Total charge-offs 5,357 2,318 
 
 Recoveries: 
 Commercial 96 69 
 Income producing - commercial real estate — — 
 Owner occupied - commercial real estate — — 
 Real estate mortgage - residential — — 
 Construction - commercial and residential — — 
 Construction - C&I (owner occupied) — — 
 Home equity — — 
 Other consumer 13 3 
 Total recoveries 109 72 
 Net charge-offs 5,248 2,246 
 Provision for Credit Losses- Loans (2,261) 14,310 
 Balance at end of period $ 102,070 $ 96,336 
 
 Annualized ratio of net charge-offs during the period to average loans outstanding during the period 0.27 % 0.12 % 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 The following table reflects the allocation of the allowance for credit losses at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category. 
 
 
 
 March 31, 2021 December 31, 2020 
 (dollars in thousands) Amount % (1) 
 Amount % (1) 
 
 Commercial $ 23,701 19 % $ 26,569 19 % 
 PPP loans — 8 % — 6 % 
 Income producing - commercial real estate 51,510 45 % 55,385 47 % 
 Owner occupied - commercial real estate 14,315 13 % 14,000 13 % 
 Real estate mortgage - residential 919 1 % 1,020 1 % 
 Construction - commercial and residential 8,342 11 % 9,092 11 % 
 Construction - C&I (owner occupied) 2,341 2 % 2,437 2 % 
 Home equity 907 1 % 1,039 1 % 
 Other consumer 35 — % 37 — % 
 Total allowance $ 102,070 100 % $ 109,579 100 % 
 

 (1) Represents the percent of loans in each category to total loans. 
 
 
 Nonperforming Assets 
 As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, and nonaccrual loans, which includes the nonperforming portion of TDRs and OREO, totaled $57.3 million at March 31, 2021 representing 0.51% of total assets, as compared to $65.9 million of nonperforming assets, or 0.59% of total assets, at December 31, 2020. 
 At March 31, 2021, the Company had no accruing loans 90 days or more past due. Management remains attentive to early signs of deterioration in borrowers’ financial conditions and to taking the appropriate action to mitigate risk. Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.36% of total loans at March 31, 2021, is adequate to absorb expected credit losses within the loan portfolio at that date. 
 CECL allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation. This can occur due to credit deterioration, increased collateral dependency or other factors leading to impairment. In particular, the Company individually evaluates loans on non-accrual and those identified as TDRs, though it may individually evaluate other loans or groups of loans as well if it determines they no longer share similar risk with their assigned segment. Reserves on individually assessed loans are determined by one of two methods: the fair value of collateral or the discounted cash flow. Fair value of collateral is used for loans determined to be collateral dependent, and the fair value represents the net realizable value of the collateral, adjusted for sales costs, commissions, senior liens, etc. The continuing payments are discounted over the expected life at the loan’s original contract rate and include adjustments for risk of default. 
 Loans are considered to have been modified in a TDR when, due to a borrower's financial difficulties, the Company makes unilateral concessions to the borrower that it would not otherwise consider. Concessions could include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Alternatively, management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions, and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant. Such modifications are not considered to be TDRs, as the accommodation of a borrower's request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty. For example: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business that suggests a temporary interest-only period on an amortizing loan; (2) there may be delays in absorption on a real estate project that reasonably suggests extension of the loan maturity at market terms; or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing. The determination of whether a restructured loan is a TDR requires c onsideration of all of the facts and circumstances surrounding the change in terms, and the exercise of prudent business judgment. The Company had eight TDRs at March 31, 2021 totaling approximately $16.8 million. five of these loans totaling approximately $10.3 million are performing under their modified terms. A default is considered to have occurred once the TDR 
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 is past due 90 days or more or it has been placed on nonaccrual. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. For both the three months ended March 31, 2021 and 2020, there were no loans modified in a TDR. 
 There is uncertainty regarding the region’s overall economic outlook given lack of clarity over how long COVID-19 will continue to impact our region. Management has been working with customers on payment deferrals to assist companies in managing through this crisis. Through March 31, 2021, we granted approximately 787 temporary modifications representing approximately $1.6 billion in outstanding balances (approximately 21% of total loans), including 729 temporary modifications representing $1.5 billion the majority of which have returned to pre-modification terms. Current deferrals total $143 million on 58 notes as of March 31, 2021. Some of these deferrals may have met the criteria for treatment under GAAP as TDRs. 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 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. 
 
 
 Total nonperforming loans amounted to $52.3 million at March 31, 2021 (0.69% of total loans) compared to $60.9 million at December 31, 2020 (0.79% of total loans). 
 Included in nonperforming assets at March 31, 2021 and December 31, 2020 was $4.9 million of OREO consisting of 4 foreclosed properties. While the Company has seen some s oftness in the market for ultra high-end residential properties in recent history, there is still an underpinning of demand for residential properties across lower price points. This is particularly true in light of COVID-19 and a general desire for increased space as some figure working from home may be part of future working arrangements. 
 OREO properties are carried at fair value less estimated costs to sell. It is the Company's policy to obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties generally not less frequently than annually. Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. There were no sales of an OREO property during the first three months of 2021 or 2020. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 The following table shows the amounts of nonperforming assets at the dates indicated (unaudited for March 31, 2021). 
 
 (dollars in thousands) March 31, 2021 December 31, 2020 
 Nonaccrual Loans: 
 Commercial $ 18,491 $ 15,352 
 Income producing - commercial real estate 17,157 18,879 
 Owner occupied - commercial real estate 14,077 23,158 
 Real estate mortgage - residential 1,942 2,932 
 Construction - commercial and residential 196 206 
 Construction - C&I (owner occupied) — — 
 Home equity 413 416 
 Other consumer — — 
 Accruing loans-past due 90 days — — 
 Total nonperforming loans (1) 52,276 60,943 
 Other real estate owned 4,987 4,987 
 Total nonperforming assets $ 57,263 $ 65,930 
 
 Coverage ratio, allowance for credit losses to total nonperforming loans 195.25 % 179.80 % 
 Ratio of nonperforming loans to total loans 0.69 % 0.79 % 
 Ratio of nonperforming assets to total assets 0.51 % 0.59 % 

 ________________________________________________________ 
 (1) Nonaccrual loans reported in the table above include one loan totaling $101 thousand that migrated from a performing TDR during the three months ended March 31, 2021, as compared to the three months ended March 31, 2020 when there were four loans totaling $1.3 million that migrated from a performing TDR. 
 Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio. 
 At March 31, 2021, there were $95.5 million of performing loans considered to be potential problem loans, defined as loans that are not included in the 90 days past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. Potential problem loans increased to $95.5 million at March 31, 2021 f rom $91.2 million at December 31, 2020. The Company has taken a conservative posture with respect to risk rating its loan portfolio. Based upon their status as potential problem loans, these loans receive heightened scrutiny and ongoing intensive risk management. 
 Noninterest Income 
 Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from bank owned life insurance (“BOLI”) and other income. 
 Total noninterest income for the three months ended March 31, 2021 increased to $10.6 million from $5.5 million for the three months ended March 31, 2020, a 94% increase. Gain on sale of loans for the three months ended March 31, 2021 increased to $5.2 million from $944 thousand for the three months ended March 31, 2020, a 449% increase, due to higher gains on the sale of residential mortgage loans in 2021 ($5.0 million) and the gain for the three months ended March 31, 2020 was net of a $2.6 million mark-to-market loss on a hedge position. Residential mortgage loan locked commitments were $422.2 million for the first quarter of 2020 as compared to $303.3 million for the first quarter 2021. Service charges on deposits for the three months ended March 31, 2021 decreased to $1.0 million from $1.4 million for the three months ended March 31, 2020, a 31% decreas e, due to to a decrease in insufficient funds fees. 
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 The decision whether to sell residential mortgage loans on a mandatory or best efforts lock basis is a function of multiple factors, including but not limited to overall market volumes of mortgage loan originations, forecasted “pull -through” rates of origination, loan underwriting and closing operational considerations, pricing differentials between the two methods, and availability and pricing of various interest rate hedging strategies associated with the mortgage origination pipeline. The Company continually monitors these factors to maximize profitability and minimize operational and interest rate risks. 
 Other income for the three months ended March 31, 2021 increased to $3.8 million from $1.9 million for the three months ended March 31, 2020, an 105% increase, primarily due to a $911 thousand gain on FHLB debt extinguishment, $695 thousand gain on swap fees, a nd a $576 thousand gain on FHA servicing fees. Ga in on sale of investment securities were $221 thousand for the three months ended March 31, 2021 compared to $822 thousand for the same period in 2020. 
 Servicing agreements relating to the Ginnie Mae mortgage-backed securities program require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. The Company will generally recover funds advanced pursuant to these arrangements under the FHA insurance and guarantee program. However, in the interim, the Company must absorb the cost of the funds it advances during the time the advance is outstanding. The Company must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan. At March 31, 2021, the Company had one loan outstanding under FHA mortgage loan servicing agreements for $3.1 million. T o the extent the mortgage loans underlying the Company’s servicing portfolio experience delinquencies, the Company would be required to dedicate cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts. 
 The Company originates residential mortgage loans and, pending market conditions and other factors outlined above, may utilize either or both "mandatory delivery" and “best efforts” forward loan sale commitments to sell those loans, servicing released. Loans sold are subject to repurchase in circumstances where documentation is deficient, the underlying loan becomes delinquent, or there is fraud by the borrower. Loans sold are subject to penalty if the loan pays off within a specified period following loan funding and sale. The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under GAAP for possible repurchases. There were no repurchases due to fraud by the borrower during the three months ended March 31, 2021. The reserve amounted to $193 thousand at March 31, 2021 and is included in other liabilities on the Consolidated Balance Sheets. 
 Beyond the participation in the PPP program, the Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium. There was $223 thousand of income from this source for the three months ended March 31, 2021 compared to $119 thousand for the same period in 2020. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter. See "Note 1: Summary of Significant Accounting Policies" for details regarding the Company’s participation in the PPP program. 
 Noninterest Expense 
 Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional, FDIC insurance, and other expenses. 
 Total noninterest expenses totaled $38.0 million for the three months ended March 31, 2021, as compared to $37.3 million for the three months ended March 31, 2020, a 2% increase due substantially to the followin g: 
 Salaries and employee benefits were $21.8 million for the three months ended March 31, 2021, as compared to $17.8 million for the same period in 2020, an increase of $4.0 million or 22%. The increase was due to increased headcount, increased incentive bo nus accruals based on economic outlook in the first quarter of 2021 (gradual reopening of economy) compared to accruals in the first quarter of 2020 (on-set of COVID-19 pandemic), and an increase in the number of shares granted and vested in 2021. 
 
 
 At March 31, 2021, the Company’s full time equivalent staff numbered 508 as compared to 494 at March 31, 2020. 
 Premises and equipment expenses amounted to $3.6 million and $3.8 million for the three months ended March 31, 2021 and 2020, respectively, a 5% decrease. 
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 Marketing and advertising expenses totaled $886 thousand for the three months ended March 31, 2021 and $1.1 million for the same period in 2020. The decrease was due to repurposing of marketing initiatives due to COVID-19, which resulted in a cutback of print, digital and radio advertising as well as a reduction in event-related sponsorships due to cancellations and virtual modifications to event structures. 
 
 
 Data processing expense increased to $2.8 million for the three months ended March 31, 2021 from $2.5 million for the same period in 2020, a 13% increase related to an increase in licensing fees. 
 Legal, accounting and professional fees decreased by $4.0 million from $7.0 million to $3.0 million, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 from , as the Bank recognized an increase in receivables on legal expenditures associated with insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies. The Bank does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time. Legal fees and expenditures were $964 thousand and $5.0 million for the three months ended March 31, 2021 and 2020, respectively, and were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests, as well as, our defense of the previously disclosed class action lawsuit. In connection with which we, each of the other defendants and the lead plaintiff, on behalf of the class, reached an agreement to settle in the days following the non-binding mediation on April 13, 2021. The amount of legal fees and expenditures for the year is net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies but does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time. See Part II, Item 1- "Legal Proceedings" for more information. 
 FDIC expenses were $2.4 million for the three months ended March 31, 2021 compared to $1.4 million for the same period in 2020, a 71% increase. The increases for the first three months of 2021 compared to the same period in 2020 were due to a higher deposit base. 
 The major components of other expenses include broker fees, franchise taxes, director compensation and insurance expense. Other expenses decreased to $3.5 million for the three months ended March 31, 2021 from $3.7 million for the same period in 2020, a 7% decrease. 
 The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 40.74% for the first quarter of 2021, as compared to 43.83% for the first quarter of 2020. The improvement in the first quarter of 2021 over the first quarter of 2020 was due to increases in noninterest income and net interest income, while non-interest expenses remained relatively flat. 
 As a percentage of average assets, total noninterest expense (annualized) was 1.32% for the three months ended March 31, 2021 as compared to 1.58% for the same period in 2020. 
 Income Tax Expense 
 The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) for the first quarter of 2021 was 25.1% as compared to 26.5% for the first quarter of 2020. The decrease was due to an increase in Low Income Housing Tax Credits in the first quarter 2021. 
 
 
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 FINANCIAL CONDITION 
 Summary 
 Total assets at both March 31, 2021 and December 31, 2020 were $11.1 billion. Total loans (excluding loans held for sale) were $7.5 billion at March 31, 2021, a 3.0% decrease, as compared to $7.8 billion at December 31, 2020, as we have continued to focus on serving our current loan clients and maintaining credit quality, over expanding the loan portfolio at lower rates and less favorable terms. Loans held for sale amounted to $142.2 million at March 31, 2021 and $88.2 million at December 31, 2020, a 61.2% increase. The investment portfolio totaled $1.4 billion at March 31, 2021. As compared to December 31, 2020, the investment portfolio at March 31, 2021 increased by $212 million, or 18.9%, primarily due to the deployment of deposit inflows into higher yielding assets. 
 Total deposits at both March 31, 2021 and December 31, 2020 were $9.2 billion. We continue to work on expanding the breadth and depth of our existing relationships while we pursue building new relationships. Total borrowed funds (excluding customer repurchase agreements) were $518.2 million at March 31, 2021, as compared to $568.1 million at December 31, 2020. 
 Total shareholders’ equity was $1.26 billion and $1.24 billion as of March 31, 2021 and December 31, 2020, respectively, an increase of $20 million. This increase was primarily from earnings of $43.5 million less $17.5 million in unrealized losses on AFS securities (net of taxes) and $7.9 million in dividends declared. 
 The Company’s capital ratios remain substantially in excess of regulatory minimum and buffer requirements, with a total risk based capital ratio of 17.86% at March 31, 2021, as compared to 17.04% at December 31, 2020, common equity tier 1 (“CET1”) risk based capital was 14.42% at March 31, 2021 compared to 13.49% at December 31, 2020, tier 1 risk based capital ratios of 14.42% at March 31, 2021, as compared to 13.49% at December 31, 2020, and a tier 1 leverage ratio of 10.28% at March 31, 2021, as compared to 10.31% at December 31, 2020. 
 The ratio of common equity to total assets was 11.33% at March 31, 2021, as compared to 11.16% at December 31, 2020. Book value per share was $39.45 at March 31, 2021, a 1% increase over $39.05 at December 31, 2020. In addition, the tangible common equity ratio was 10.48% at March 31, 2021, as compared to 10.31% at December 31, 2020. Tangible book value per share was $36.16 at March 31, 2021, a 1% increase over $35.74 at December 31, 2020. Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. 
 In order to be considered well-capitalized, the Bank must have a CET1 risk based capital ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. The Company and the Bank exceed all these requirements and satisfy the capital conservation buffer of 2.5% of CET1 capital required to engage in capital distribution. Failure to maintain the required capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses. 
 
 
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 Loans, net of amortized deferred fees and costs, at March 31, 2021 (unaudited) and December 31, 2020 by major category are summarized below. 
 
 
 March 31, 2021 December 31, 2020 
 (dollars in thousands) Amount % Amount % 
 Commercial $ 1,398,155 19 % $ 1,437,433 19 % 
 PPP loans 565,018 8 % 454,771 6 % 
 Income producing - commercial real estate 3,430,077 45 % 3,687,000 47 % 
 Owner occupied - commercial real estate 1,012,457 13 % 997,694 13 % 
 Real estate mortgage - residential 71,209 1 % 76,592 1 % 
 Construction - commercial and residential 829,481 11 % 873,261 11 % 
 Construction - C&I (owner occupied) 152,240 2 % 158,905 2 % 
 Home equity 67,167 1 % 73,167 1 % 
 Other consumer 885 — % 1,389 — % 
 Total loans 7,526,689 100 % 7,760,212 100 % 
 Less: allowance for credit losses (102,070) (109,579) 
 Net loans (1) 
 $ 7,424,619 $ 7,650,633 
 

 (1) Excludes accrued interest receivable of $46.4 million and $30.8 million at March 31, 2021 and December 31, 2020, respectively, which is recorded in other assets. 
 
 
 In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank. Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality. 
 Loans outstanding were $7.5 billion at March 31, 2021, a decrease of $233.5 million, or 3%, as compared to $7.8 billion at December 31, 2020. If PPP loans are excluded, the balance was $7.0 billion at March 31, 2021, a decrease of 4.7% from December 31, 2020. On May 3, 2021, we transacted to sell 849 PPP loans for a total purchase price of $169.0 million. Immediately following this sale, the principal outstanding on PPP loans totaled approximately $378.4 million across 789 notes. This past quarter, we faced headwinds in the form of low loan demand and a competitive, low interest rate environment. We also experienced elevated payoffs and prepayments due in part to successful project completions and low nominal interest rates. Notwithstanding an increased supply of residential units, multi-family commercial real estate leasing and collections in the Bank’s market area have held up well, particularly for well-located close-in projects. As a general matter, there has been some softening and slow decision making relative to renewals in the office leasing market. Overall, commercial real estate values have generally held up well, but we continue to be cautious of the capitalization rates at which some assets are trading and as a result we are being cautious with our valuations. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Valuations associated with the moderately priced housing market have generally been increasing, with well-located, Metro-accessible properties garnering a premium. We believe we are well positioned to originate loans for large commercial projects, and also see a path to growing the loan portfolio as economic conditions improve and more opportunities arise. The potential impact from the COVID-19 pandemic has not yet been fully reflected in the market across all asset types. Please refer to the COVID-19 risk factor in Item 1A below. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 Loan Portfolio Exposures- COVID-19: 
 Industry segments within the Loan Portfolio as of March 31, 2021 that we believe may have heightened risk from the COVID-19 pandemic include: 
 
 Industry Principal Balance
(in 000’s) % of Loan Portfolio 
 Accommodation & Food Services $ 807,237 (1 ) 
 10.7 % 
 Retail Trade 85,878 (2 ) 
 1.1 % 
 
 Commercial Real Estate exposure (not included above) 
 Restaurant 42,386 0.6 % 
 Hotel 26,255 0.3 % 
 Retail 374,863 5.0 % 
 Total $ 1,336,619 17.8 % 
 

 1 Includes $152,135 of PPP loans. 
 2 Includes $7,339 of PPP loans. 
 Concerns over exposures to the Accommodation and Food Service industry and Retail Trade are the most immediate at this time. Accommodation and Food Service exposure represents 10.7% of the Bank’s loan portfolio as of March 31, 2021 among 297 customers. Retail Trade exposure represents 1.1% of the Bank’s loan portfolio and represented 150 c ustomers. The Bank has ongoing extensive outreach to these customers and is assisting where necessary with PPP loans and payment deferrals or interest-only periods in the short term while customers work to adopt to the evolving landscape of the COVID-19 pandemic. The uncertain duration and severity of the pandemic and the timing of recovery may impact future credit challenges in these areas. 
 
 
 Although not evidenced at March 31, 2021, it is anticipated that some portion of the CRE loans secured by the above property types could be impacted by the tenancies associated with impacted industries. The Bank is working with CRE investor borrowers and monitoring rent collections as part of our portfolio management oversight. 
 Deposits and Other Borrowings 
 The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, savings accounts and certificates of deposit. The deposit base includes transaction accounts, time and savings accounts, which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the Federal Home Loan Banks (the “FHLB”), federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and IntraFi Network, LLC (“IntraFi”). 
 For the three months ended March 31, 2021, noninterest bearing deposits decreased $215.0 million as compared to December 31, 2020, while interest bearing deposits increased by $224.6 million during the same period. 
 From time to time, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from national brokerage networks, including IntraFi. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep product (“ICS”), which provide for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance. The Bank also is able to obtain one-way CDARS deposits and participates in IntraFi’s Insured Network Deposit (“IND”). At March 31, 2021, total deposits included $2.7 billion of brokered deposits (excluding the CDARS and ICS two-way) which represented 29.6% of total deposits. At December 31, 2020, total brokered deposits (excluding the CDARS and ICS two-way) were $2.4 billion, or 26.2% of total deposits. The CDARS and ICS two-way component represented $760.2 million, or 8%, of total deposits and $790.0 million, or 9%, of total deposits at March 31, 2021 and December 31, 2020, respectively. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank. However, to the extent that the condition, regulatory position or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in 
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 market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits. In that event, we would be required to obtain alternate sources for funding. 
 At March 31, 2021, the Company had $2.6 billion in noninterest bearing demand deposits, representing 28% of total deposits, compared to $2.8 billion of noninterest bearing demand deposits at December 31, 2020, or 31% of total deposits. Average noninterest bearing deposits of total deposits for the first three months of 2021 and 2020 were 32% and 30%. The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets. 
 As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds that are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $20.1 million at March 31, 2021 compared to $26.7 million at December 31, 2020. Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S. agency securities and/or U.S. agency backed mortgage backed securities. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts. 
 
 
 At March 31, 2021 the Company had $866.0 million in time deposits. Time deposits decreased by $111.8 million from year end December 31, 2020. The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered certificates of deposits ("CDs") to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning. 
 
 
 The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at March 31, 2021 and December 31, 2020. At March 31, 2021 and December 31, 2020, the Company had $300 million of FHLB short-term advances borrowed as part of the overall asset liability strategy and to support loan growth. Outstanding FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank’s commercial mortgage, residential mortgage and home equity loan portfolios. 
 Long-term borrowings outstanding at March 31, 2021 included the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024, and the Company’s July 26, 2016 issuance of $150.0 million of subordinated notes, due August 1, 2026. For additional information on the subordinated notes, please refer to Note 8 to the Consolidated Financial Statements included in this report. 
 Liquidity Management 
 Liquidity is a measure of the Company’s and Bank’s ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank’s primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. The Bank’s investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements and public funds, to generate cash from sales as needed to meet ongoing loan demand. These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial. 
 Additionally, the Bank can purchase up to $155 mil lion in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at March 31, 2021, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.7 billion, against which there was $685 million outstanding at March 31, 2021. The Bank also has a commitment from IntraFi to place up to $1.8 billion of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of $1.7 billion at March 31, 2021. At March 31, 2021, the Bank was also eligible to make advances from the FHLB up to $1.6 billion based on loans pledged as collateral to the FHLB, of which there was $300 m illion outstanding at March 31, 2021. 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 $611 million, is collateralized with specific loan assets 
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 identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only. 
 The loss of deposits through disintermediation is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank was founded under a philosophy of relationship banking and, therefore, believes that it has less of an exposure to disintermediation and resultant liquidity concerns than do many banks. The Bank makes competitive deposit interest rate comparisons weekly and feels its interest rate offerings are competitive. 
 
 
 There is, however, a risk that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks’ lines of credit to offset a decline in deposits in the short run. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The Asset Liability Committee of the Bank (the “ALCO”) and the full Board of Directors of the Bank have adopted policy guidelines which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan. Additionally, as noted above, if the condition, regulatory treatment or reputation of the Company or Bank deteriorates, we may experience an outflow of brokered deposits as a result of our inability to attract them or to accept or renew them. In that event, we would be required to obtain alternate sources for funding. 
 
 
 Our primary and secondary sources of liquidity remain strong. Average deposits increased 13% for the first quarter of 2021 as compared to the fourth quarter of 2020. We maintain a very liquid investment portfolio, including significant overnight liquidity. Average short term liquidity was $2.1 billion in first quarter of 2021, which is above EagleBank’s average needs. Secondary sources of liquidity amount to $2.3 billion. 
 At March 31, 2021, under the Bank’s liquidity formula, it had $6.2 billio n of primary and secondary liquidity sources. The amount is deemed adequate to meet current and projected funding needs. 
 Commitments and Contractual Obligations 
 Loan commitments outstanding and lines and letters of credit at March 31, 2021 are as follows: 
 
 (dollars in thousands) 
 Unfunded loan commitments $ 1,913,148 
 Unfunded lines of credit 93,836 
 Letters of credit 65,776 
 Total $ 2,072,760 

 
 Unfunded loan commitments are agreements whereby the Bank has made a commitment and the borrower has accepted the commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment as is the case in asset based lending credit facilities. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. As of March 31, 2021, unfunded loan commitments included $191.9 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature slightly. 
 Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. The pipeline of loan commitments remains strong. 
 Letters of credit include standby and commercial letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank’s customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the 
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 customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary. 
 Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk 
 A fundamental risk in banking is exposure to market risk, or interest rate risk, since a bank’s net income is largely dependent on net interest income. The Bank’s ALCO formulates and monitors the management of interest rate risk through policies and guidelines established by it and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives. 
 During the three months ended March 31, 2021, the Company was able to produce a net interest margin of 2.98% as compared to 3.49% during the same period in 2020, and continue to manage its overall interest rate risk position . The Company, along with many other banks, continues to be challenged in 2021 during a period of extremely low interest rates together with relatively low loan demand. 
 The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits. In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and risk in its portfolio of mortgage backed securities should interest rates remain at current levels. Further, the Company has been managing the investment portfolio to provide liquidity and some additional yield over cash. Additionally, the Company has limited call risk in its U.S. agency investment portfolio. During the three months ended March 31, 2021, the average investment portfolio balance increased by $401.3 million, or 46%, as compared to average balance for the three months ended March 31, 2020. The cash received from deposit growth along with cash flows from the investment portfolio were deployed into loans, the purchase of replacement investments and held in cash. 
 The percentage mix of municipal securities was 8% of total investments at March 31, 2021 and 9% at December 31, 2020. The portion of the portfolio invested in mortgage backed securities was 69% and 72% at March 31, 2021 and December 31, 2020, respectively. The portion of the portfolio invested in U.S. agency investments was 16% at March 31, 2021 and 10% at December 31, 2020. Shorter duration floating rate corporate bonds were 4% and 3% of total investments at March 31, 2021 and December 31, 2020, respectively, and SBA bonds, which are included in mortgage backed securities, were 4% and 6% of total investments at March 31, 2021 and December 31, 2020, respectively. The duration of the investment portfolio increased to 4.7 years at March 31, 2021 from 3.2 years at December 31, 2020. 
 The re-pricing duration of the loan portfolio was 19 mo nths at March 31, 2021 as compared to 21 mon ths at December 31, 2020 with fixed rate loans amounting to 46% and 45% of total loans at March 31, 2021 and December 31, 2020, respectively. Variable and adjustable rate loans comprised 54% (offset by 7.5% from the dilution impact of PPP loans) and 55% of total loans at March 31, 2021 and December 31, 2020, respectively. Variable rate loans are generally indexed to either the one month LIBOR interest rate, or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate. 
 The duration of the deposit portfolio decreased to 40 mo nths at March 31, 2021 from 42 months at December 31, 2020. The decrease since December 31, 2020 was due substantially to maturity and aging in of the CD portfolio. 
 The net unrealized loss before income tax on the investment portfolio was $1.9 mill ion at March 31, 2021 as compared to a net unrealized gain before tax of $20.1 million at March 31, 2020. The move to a net unrealized loss from a net unrealized gain on the investment portfolio was due primarily to higher interest rates at March 31, 2021 along with a changing portfolio mix. At March 31, 2021, the net unrealized loss position represented 0.14% of the investment portfolio’s book value. 
 There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, as a result of competitive pressures, customer preferences and the inability to perfectly forecast future interest rates and movements. 
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 One of the tools used by the Company to manage its interest rate risk is the static gap analysis presented below. The Company also employs an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related income statement effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities (including prepayments), loan prepayments, interest rates, and the level of noninterest income and noninterest expense. The data is then subjected to a “shock test” which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from March 31, 2021. In addition to analysis of simultaneous changes in interest rates along the yield curve, changes based on interest rate “ramps” is also performed. This analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes. 
 For the analysis presented below, at March 31, 2021, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor 10 basis points in the same analysis as of March 31, 2020), and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario. The floor rate in the analysis was lowered due to the fact that in the current interest rate environment, there are interest bearing accounts with current rates less than 10 basis points. 
 The Company’s analysis at March 31, 2021 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points. This moderate impact is due substantially to the significant level of variable rate and repriceable assets and liabilities and related shorter relative durations. The repricing duration of the investment portfolio at March 31, 2021 is 5 years, the loan portfolio 1.8 years, the interest bearing deposit portfolio 3.3 years, and the borrowed funds portfolio 5 years. 
 The following table reflects the result of simulation analysis on the March 31, 2021 asset and liabilities balances: 
 
 Change in interest
rates (basis points) Percentage change in net
interest income Percentage change in
net income Percentage change in
market value of portfolio
equity 
 + 400 7.6% 13.1% 2.8% 
 + 300 4.3% 7.3% 2.0% 
 + 200 1.1% 1.9% 1.3% 
 + 100 (1.0)% (1.6)% 0.6% 
 — — — — 
 - 100 (4.0)% (6.8)% (7.5)% 
 - 200 (4.6)% (7.7)% (20.0)% 

 
 The results of the simulation are within the relevant policy limits adopted by the Company for percentage change in net interest income. For net interest income, the Company has adopted a policy limit of -10% for a 100 basis point change, -12% for a 200 basis point change, -18% for a 300 basis point change and -24% for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change. The amounts in the first quarter exceeded these limits due to the already low level of rates on non-maturing deposit instruments. Management has determined that due to the level of market rates at March 31, 2021, interest rate shocks of -100, -200, -300 and -400 basis points leave the Bank with near zero down to negative rate instruments and are not considered practical or informative. The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at March 31, 2021 are not considered to be excessive. The impact of (4.0)% in net interest income and (6.8)% in net income given a 100 basis point decrease in market interest rates reflects in large measure the impact of variable rate loans and fed funds sold repricing downward while deposits remain at expected floor rates and are not expected to have lower interest rates. 
 In the first quarter of 2021, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above. The interest rate risk position at March 31, 2021, was relatively similar to the December 31, 2020 position for both the up and down rate scenarios. 
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 Although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in modeling. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase. 
 During the first quarter of 2021, average market interest rates increased across the yield curve. Overall, there was a steepening of the yield curve as compared to the fourth quarter of 2020 with rate increases being more significant at the longer end of the yield curve. 
 As compared to the first quarter of 2020, the average two-year U.S. Treasury rate decreased by 95 basis points from 1.08% to 0.13%, the average five year U.S. Treasury rate decreased by 53 basis points from 1.14% to 0.61% and the average ten year U.S. Treasury rate decreased by 5 basis points from 1.37% to 1.32%. The Company’s net interest margin was 2.98% for the first quarter of 2021 and 3.49% in the first quarter of 2020. The Company believes that the net interest margin in the most recent quarter as compared to 2020’s first quarter has been consistent with its interest rate risk analysis. 
 Gap Position 
 Banks a nd other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities. Net interest income represented 89% and 94% of the Company’s revenue for the first quarter of 2021 and 2020, respectively. 
 In falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by lower yielding short-term funds, or what is referred to as a negative mismatch or gap. Conversely, in a rising interest rate environment, net interest income is maximized with shorter term, higher yielding assets being funded by longer-term liabilities or what is referred to as a positive mismatch or gap. 
 The gap position, which is a measure of the difference in maturity and repricing volume between assets and liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indication of the sensitivity of the Company to changes in interest rates. A negative gap indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods. 
 At March 31, 2021, the Company had a negative gap position of approximately $107 million or 0.96% of total assets, out to three months, and a positive cumulative gap position of $167 million, or 1.5% of total assets out to twelve months; as compared to a negative gap position of approximately $376 million or 3.76% of total assets out to three months and a positive cumulative gap position of $472 million of 4.72% of total assets out to 12 months at March 31, 2020. T he change in the gap position at March 31, 2021 as compared to December 31, 2020 was due to term deposits moving into overnight deposits in the low and flat interest rate environment, and the maturity of a $100 million pay fixed balance sheet swap in April 2021. Such a change in the gap position is not deemed material to the Company's overall interest rate risk position, which relies more heavily on simulation analysis that captures the full opportunity within the balance sheet. The current position is within guideline limits established by the ALCO. While management believes that this overall position creates a reasonable balance in managing its interest rate risk and maximizing its net interest margin within plan objectives, there can be no assurance as to the actual results. 
 Management has carefully considered its strategy to maximize interest income by reviewing interest rate levels, economic indicators and call features within its investment portfolio, as well as interest rate floors within its loan portfolio. These factors have been discussed with the ALCO and management believes that current strategies remain appropriate to current economic and interest rate trends. 
 If interest rates increase by 100 basis points, the Company’s net interest income and net interest margin are expected to increase modestly due to the impact of significant volumes of variable rate assets more than offsetting the assumption of an increase in money market interest rates by 70% of the change in market interest rates. 
 If interest rates decline by 100 basis points, the Company’s net interest income and margin are expected to decline modestly as the impact of lower market rates on a large amount of liquid assets more than offsets the ability to lower interest rates on interest bearing liabilities. 
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 Because competitive market behavior does not necessarily track the trend of interest rates but at times moves ahead of financial market influences, the change in the cost of liabilities may be different than anticipated by the gap model. If this were to occur, the effects of a declining interest rate environment may not be in accordance with management’s expectations. 
 Gap Analysis 
 March 31, 2021 
 (dollars in thousands) 
 
 
 Repricible in: 0-3
months 4-12
months 13-36
months 37-60
months Over 60
months Total
Rate
Sensitive Non Sensitive Total 
 RATE SENSITIVE ASSETS: 
 Investment securities $ 122,403 $ 108,415 $ 310,435 $ 228,198 $ 599,656 $ 1,369,107 
 Loans (1)(2) 
 3,682,415 800,853 1,603,352 895,599 686,666 7,668,885 
 Fed funds and other short-term investments 1,734,159 — — — — 1,734,159 
 Other earning assets 77,119 — — — — 77,119 
 Total $ 5,616,096 $ 909,268 $ 1,913,787 $ 1,123,797 $ 1,286,322 $ 10,849,270 278,594 $ 11,127,864 
 
 RATE SENSITIVE LIABILITIES: 
 Noninterest bearing demand $ 89,083 $ 248,618 $ 544,481 $ 407,081 $ 1,305,071 $ 2,594,334 
 Interest bearing transaction 862,709 — — — — 862,709 
 Savings and money market 4,550,840 — — — 325,000 4,875,840 
 Time deposits 200,285 237,733 376,718 48,095 3,130 865,961 
 Customer repurchase agreements and fed funds purchased 20,061 — — — — 20,061 
 Other borrowings — 148,618 — 69,557 300,000 518,175 
 Total $ 5,722,978 $ 634,969 $ 921,199 $ 524,733 $ 1,933,201 $ 9,737,080 129,951 $ 9,867,031 
 GAP $ (106,883) $ 274,299 $ 992,587 $ 599,065 $ (646,878) $ 1,112,190 
 Cumulative GAP $ (106,883) $ 167,416 $ 1,160,003 $ 1,759,068 $ 1,112,190 
 
 Cumulative gap as percent of total assets (0.96) % 1.50 % 10.42 % 15.81 % 9.99 % 
 
 OFF BALANCE-SHEET: 
 Interest Rate Swaps - LIBOR based $ — $ — $ — $ — $ — $ — 
 Interest Rate Swaps - Fed Funds based — — — — — — 
 Total $ — $ — $ — $ — $ — $ — — $ — 
 GAP $ (106,883) $ 274,299 $ 992,587 $ 599,065 $ (646,878) $ 1,112,190 
 Cumulative GAP $ (106,883) $ 167,416 $ 1,160,003 $ 1,759,068 $ 1,112,190 
 
 Cumulative gap as percent of total assets (0.96) % 1.50 % 10.42 % 15.81 % 9.99 % 

 (1) Includes loans held for sale 
 (2) Nonaccrual loans are included in the over 60 months category 
 
 
 Capital Resources and Adequacy 
 The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company’s current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. 
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 The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has focused on commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At March 31, 2021, we did not exceed these regulatory concentration thresholds, we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators. Construction, land and land development loans represent 92% of total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, as our commercial real estate concentration fluctuates each quarter, we may be required to maintain higher levels of capital, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive Capital Plan and Policy, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios. 
 
 
 The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. 
 The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required. 
 The Board of Governors of the Federal Reserve Board and the FDIC have adopted rules (the “Basel III Rules”) implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the Basel III Rules, the Company and Bank are required to maintain, inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of 7.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%, a minimum total capital to risk-weighted assets ratio of 10.5%, and a minimum leverage ratio of 4.0%. At March 31, 2021, the Company and the Bank meet all these requirements, and satisfy the requirement to maintain a capital conservation buffer of 2.5% of CET1 capital for capital adequacy purposes. 
 During the fourth quarter of 2020, the Company started a new Repurch ase Program. Under the Board approval in December, the Company may repurchase up to an aggregate of 1,588,848 shares of its common stock (inclusive of shares remaining under the initial authorization), through December 31, 2021, subject to earlier termination by the Board of Directors (the “Repurchase Program Extension”). 
 The Company announced a regular quarterly cash dividend on March 31, 2021 of $0.25 per share to shareholders of record on April 21, 2021 and payable on May 3, 2021. 
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 The actual capital amounts and ratios for the Company and Bank as of March 31, 2021 (unaudited) and December 31, 2020 are presented in the table below. 
 
 
 Company Bank Minimum
Required For
Capital To Be Well
Capitalized
Under Prompt
Corrective 
 Actual Actual Adequacy Action 
 (dollars in thousands) Amount Ratio Amount Ratio Purposes Regulations* 
 As of March 31, 2021 
 CET1 capital (to risk weighted assets) $ 1,173,421 14.42 % $ 1,282,555 15.79 % 7.00 % 6.50 % 
 Total capital (to risk weighted assets) 1,453,707 17.86 % 1,370,841 16.88 % 10.50 % 10.00 % 
 Tier 1 capital (to risk weighted assets) 1,173,421 14.42 % 1,282,555 15.79 % 8.50 % 8.00 % 
 Tier 1 capital (to average assets) 1,173,421 10.28 % 1,282,555 11.27 % 4.00 % 5.00 % 
 
 As of December 31, 2020 
 CET1 capital (to risk weighted assets) $ 1,137,896 13.49 % $ 1,244,028 14.90 % 7.00 % 6.50 % 
 Total capital (to risk weighted assets) 1,438,224 17.04 % 1,338,356 16.03 % 10.50 % 10.00 % 
 Tier 1 capital (to risk weighted assets) 1,137,896 13.49 % 1,224,028 14.90 % 8.50 % 8.00 % 
 Tier 1 capital (to average assets) 1,137,896 10.31 % 1,224,028 11.29 % 4.00 % 5.00 % 

 
 
 * Applies to Bank only 
 
 Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At March 31, 2021 the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above. 
 In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020. In March 2020, the federal banking regulators issued an interim final rule that provides banking organizations with an alternative option to temporarily delay for two years the estimated impact of the adoption of the CECL methodology on regulatory capital, followed by the three-year phase-in period. The cumulative amount that is not recognized in regulatory capital will be phased in at 25 percent per year beginning January 1, 2022. We have elected to adopt the March 2020 interim final rule. 
 Use of Non-GAAP Financial Measures 
 The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP. 
 Tangible common equity to tangible assets (the "tangible common equity ratio"), tangible book value per common share, the annualized return on average tangible common equity, and efficiency ratio are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders' equity by common shares outstanding. The Company calculates the ROATCE by dividing net income available to common shareholders by average tangible common equity which is calculated by excluding the average balance of intangible assets from the average common shareholders’ equity. The Company calculates the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income. The efficiency ratio measures a bank’s overhead as a percentage of its revenue. The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. 
 
 
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 GAAP Reconciliation (Unaudited) 
 (dollars in thousands except per share data) 
 
 Three Months Ended 
 March 31, 2021 March 31, 2020 
 Common shareholders’ equity $ 1,260,833 $ 1,162,777 
 Less: Intangible assets (105,179) (104,695) 
 Tangible common equity $ 1,155,654 $ 1,058,082 
 
 Book value per common share $ 39.45 $ 36.11 
 Less: Intangible book value per common share (3.29) (3.25) 
 Tangible book value per common share $ 36.16 $ 32.86 
 
 Total assets $ 11,127,864 $ 9,992,219 
 Less: Intangible assets (105,179) (104,695) 
 Tangible assets $ 11,022,685 $ 9,887,524 
 Tangible common equity ratio 10.48 % 10.70 % 
 
 Average common shareholders’ equity $ 1,254,780 $ 1,191,180 
 Less: Average intangible assets (105,164) (104,697) 
 Average tangible common equity $ 1,149,616 $ 1,086,483 
 
 Net Income Available to Common Shareholders $ 43,469 $ 23,123 
 Average tangible common equity $ 1,086,016 $ 1,086,483 
 Annualized Return on Average Tangible Common Equity 
 15.33 % 8.56 % 

 
 
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk 
 Please refer to Item 2 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk.”
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
EAGLE BANCORP INC 10-Q

Item 2. Management’s Discussion and Analysis
