What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-10 compared with 2020-05-11 · 446 added, 292 removed, 481 unchanged (61% of the section changed)

4 unchanged sentences

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,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “continue,” “should,” “could,” “seeks,” “considers,” “feels,” and similar words or phrases.

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,"

"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, 2019 and in other periodic and current reports filed by the Company with the Securities and Exchange Commission.

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, 2019, the Company's Quarterly Report on Form 10-Q for the quarter ended March 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.

4 unchanged sentences

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.

The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating twenty-one years of successful operations.

The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating twenty-two 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.

20 unchanged sentences

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 the 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.

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.

Our business and consumer customers are experiencing varying degrees of financial distress.

2 unchanged sentences

It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic.

The CARES Act includes the Paycheck Protection Program (the "PPP"), a nearly $350 billion program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks.

The CARES Act created the Paycheck Protection Program (the "PPP"), a new program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks.

These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.

On April 16, 2020, the SBA announced that all available funds had been exhausted and applications were no longer being accepted.

On April 27, 2020, the SBA resumed accepting PPP applications for an additional $310 billion in available funding.

As of April 30, 2020, principal outstanding on PPP loans totaled $444.8 million across 1,090 borrowers.

As of April 30, 2020 the Company had approved 1,233 applications totaling $449.7 million in PPP loans.

As an SBA preferred lender, the Bank is participating in the PPP program, and at June 30, 2020, had an outstanding balance of PPP loans of $456 million to just over 1,400 businesses.

The average interest rate on these loans is 1.00% and the average yield, which includes fee amortization, was 2.91% for the second quarter of 2020.

There have also been various governmental actions taken or proposed to provide forms of relief, such as limiting debt collections efforts, including foreclosures, and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees.

2 unchanged sentences

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.

Modifications under this program have predominately been for a period of 90 days.

Modifications under this program have predominantly been for a period of 90 days.

The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan.

As of March 31, 2020, we granted temporary modifications on approximately 32 loans representing approximately $45 million in outstanding exposure.

Through April 30, 2020, we granted approximately 382 temporary modifications representing approximately $576 million in outstanding exposure.

None of these loans were considered restructured as of March 31, 2020 due to the provision of the CARES Act that permits U.S.

As of June 30, 2020, we granted temporary modifications on approximately 708 loans representing $1.63 billion (approximately 20% of total loans) in outstanding exposure.

Through July 31, 2020, we granted approximately 724 temporary modifications representing approximately $1.65 billion in outstanding exposure, including 20 temporary modifications representing $14.5 million that subsequently returned to pre-modification terms.

Some of these deferrals may not 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.

These 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.

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.

Significant uncertainties as to future economic conditions exist, and we have taken deliberate actions in response, including maintaining record levels of on and off -balance sheet liquidity and have maintained well above well capitalized regulatory capital ratios.

Furthermore, we have suspended our share repurchase program.

Additionally, the economic pressures, coupled with the implementation of an expected loss methodology for determining our provision for credit losses as required by CECL, have contributed to an increased provision for credit losses for the first quarter of 2020.

Furthermore, we suspended our share repurchase program during the first quarter of 2020.

Accordingly, we made no share repurchases in the second quarter of 2020.

The Board of Directors and management continue to monitor this area and may enter the markets from time to time as determined appropriate.

Additionally, the economic pressures, coupled with the implementation of the expected loss methodology for determining our provision for credit losses as required by CECL, have contributed to an increased provision for credit losses for the first six months of 2020.

We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act and other legislative and regulatory developments related to COVID-19;

1 unchanged sentence

CRITICAL ACCOUNTING POLICIES

The Company’s Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry.

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.

7 unchanged sentences

Provision for Credit Losses and Provision for Unfunded Commitments

A consequence of lending activities is that we may incur credit losses and we record an ACL with respect to loan receivables and a reserve for unfunded commitments (the “RUC”).

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 unemployment rates.

15 unchanged sentences

The modeling of expected prepayment speeds are based on historical internal data.

The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default.

The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default.

This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers.

For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment as a loss driver.

For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment as an initial loss driver, which is next adjusted to estimate regional unemployment rates.

For all DCF models, management has determined that eight quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over twelve months on a straight-line basis.

Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.

PPP loans are included in the model but do not carry a reserve, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S.

The allowance for credit losses attributable to each portfolio segment also includes an amount for inherent risks not reflected in the historical analyses.

3 unchanged sentences

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 unemployment projections, which inform our CECL economic forecast and increased our loss reserve as of March 31, 2020.

See Notes 1 and 5 to the Consolidated Financial Statements and the “Provision for Credit Losses” section in Management’s Discussion and Analysis for more information on the provision for credit losses.

For example, the COVID-19 pandemic has negatively impacted unemployment projections, which inform our CECL economic forecast and increased our loss reserve as of June 30, 2020.

See Notes 1 and 5 to the Consolidated Financial Statements, the “Provision for Credit Losses” section in Management’s Discussion and Analysis, and the COVID-19 risk factors in Item 1A for more information on the provision for credit losses.

As of June 30, 2020 COVID-19 caused the occurrence of what management deemed to be a triggering event that caused us to perform a goodwill impairment test to determine if an impairment charge was required for that period.

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.

Based on the results of the assessment of all reporting units, the Company concluded that no impairment existed as of June 30, 2020.

However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss.

Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations.

RESULTS OF OPERATIONS

Earnings Summary

Net income for the three months ended March 31, 2020 was $23.1 million compared to $33.7 million net income for the three months ended March 31, 2019, a 31% decrease.

Net income per basic and diluted common share for the three months ended March 31, 2020 was $0.70 compared to $0.98 per basic and diluted common share for the same period in 2019, a 29% decrease.

Excluding nonrecurring costs in the first quarter of 2019 related to share based compensation awards and the resignation of our former CEO and Chairman amounting to $6.2 million ($0.13 per diluted share), earnings for the first quarter of 2019 were $38.3 million ($1.11 per diluted share).

Net income declined for the three months ended March 31, 2020 relative to the same period in 2019 due substantially to increased provisioning for credit losses and increased legal expenses.

In particular, the provision for credit losses increased to $16.4 million at March 31, 2020 compared to $3.4 million, a 398% increase, as the Company implemented CECL effective January 1, 2020 and increased reserves associated with COVID-19.

Net income for the three months ended June 30, 2020 was $28.9 million compared to $37.2 million net income for the three months ended June 30, 2019, a 23% decrease.

Net income per basic and diluted common share for the three months ended June 30, 2020 was $0.90 compared to $1.08 per basic and diluted common share for the same period in 2019, a 17% decrease.

Net income declined for the three months ended June 30, 2020 relative to the same period in 2019 due substantially to increased provisioning for credit losses offset by higher noninterest income (as discussed below).

In particular, the provision for credit losses increased to $19.7 million for the three months ended June 30, 2020 compared to $3.6 million for the same period in 2019, a 448% increase, as the Company implemented CECL effective January 1, 2020 and increased reserves associated with the impact of COVID-19.

See Note 1 and Note 5 for further detail on CECL.

The provision for income taxes was $8.3 million, a decrease of $3.6 million, or 30%, compared to the same period in 2019.

The decrease in income taxes was primarily due to lower taxable income resulting from the implementation of CECL and increased reserves associated with COVID-19.

The provision for income taxes for the three months ended June 30, 2020 was $9.4 million, a decrease of $4.1 million, or 30%, compared to the same period in 2019.

The decrease in income taxes was primarily due to a significant decline in pre-tax income for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due to increased credit reserves significantly attributable to COVID-19, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019.

The most significant portion of revenue (i.e.

net interest income plus noninterest income) is net interest income, which decreased by 1.6% for the three months ended March 31, 2020 over the same period in 2019 ($79.7 million versus $81.0 million).

For the three months ended March 31, 2020, the Company reported an annualized return on average assets (“ROAA”) of 0.98% as compared to 1.62% for the three months ended March 31, 2019.

Total shareholders’ equity increased 1% to $1.16 billion at March 31, 2020 compared to $1.15 billion at March 31, 2019, and decreased by 2% from $1.19 billion at December 31, 2019.

The annualized return on average common equity (“ROACE”) for the three months ended March 31, 2020 was 7.81% as compared to 12.12% for the three months ended March 31, 2019.

The annualized return on average tangible common equity (“ROATCE”) for the three months ended March 31, 2020 was 8.56% as compared to 13.38% for the three months ended March 31, 2019.

Refer to the “Use of Non-GAAP Financial Measures” section for additional detail.

The decline in these ratios was primarily due to a decrease in the net interest margin, the implementation of CECL and COVID-19 impacts, and additional legal costs associated with ongoing investigations.

Legal cost increases are discussed in the “Noninterest Expense” section.

net interest income plus noninterest income) is net interest income, which remained relatively stable for the three months ended June 30, 2020 over the same period in 2019 ($81.4 million as compared to $81.3 million).

This was largely attributable to the growth in average earning assets effectively offset by a decline in the net interest margin.

For the three months ended June 30, 2020, the Company reported an annualized return on average assets (“ROAA”) of 1.12% as compared to 1.74% for the three months ended June 30, 2019.

Total shareholders’ equity was $1.19 billion at both June 30, 2020 and December 31, 2019, a decrease of less than 1%.

The annualized return on average common equity (“ROACE”) for the three months ended June 30, 2020 was 9.84% as compared to 12.81% for the three months ended June 30, 2019.

The annualized return on average tangible common equity (“ROATCE”) for the three months ended June 30, 2020 was 10.80% as compared to 14.08% for the three months ended June 30, 2019.

Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.

The decline in these ratios was primarily due to the implementation of CECL and COVID-19 impacts and to a lower net interest margin.

The net interest margin, which measures the difference between interest income and interest expense (i.e.

net interest income) as a percentage of earning assets, was 3.49% for the three months ended March 31, 2020 and 4.02% for the same period in 2019.

Average earning asset yields decreased 66 basis points to 4.55% for the three months ended March 31, 2020, as compared to 5.21% for the same period in 2019.

The average cost of interest bearing liabilities decreased by 32 basis points (to 1.64% from 1.96%) for the three months ended March 31, 2020 as compared to the same period in 2019.

Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 34 basis points for the three months ended March 31, 2020 as compared to 2019 (2.91% versus 3.25%).

The benefit of noninterest sources funding earning assets decreased by 19 basis points to 58 basis points from 77 basis points for the three months ended March 31, 2020 versus the same period in 2019.

The combination of a 34 basis point decrease in the net interest spread and a 19 basis point decrease in the value of noninterest sources resulted in a 53 basis point decrease in the net interest margin for the three months ended March 31, 2020 as compared to the same period in 2019.

The Company considers the value of its noninterest sources of funds as very significant to its business model and its overall profitability.

The Company believes it has effectively managed its net interest margin and net interest income over the past twelve months as market interest rates have trended sharply lower.

This factor has been significant to overall earnings performance over the past twelve months as net interest income represents 94% of the Company’s total revenue for the three months ended March 31, 2020.

For the first three months of 2020, total loans grew 4% over December 31, 2019, and average loans were 9% higher in the first three months of 2020 as compared to the first three months of 2019.

At March 31, 2020, total deposits were 13% higher than deposits at December 31, 2019, while average deposits were 10% higher for the first three months of 2020 compared with the first three months of 2019.

In order to fund growth in average loans of 9% over the three months ended March 31, 2020 as compared to the same period in 2019, as well as sustain significant liquidity, the Company has relied on funding from interest bearing accounts primarily as a result of inflows from certain financial intermediary relationships as their clients moved to a more significant cash position in light of COVID-19 concerns.

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 83% and 86% of average earning assets for the first three months of 2020 and 2019, respectively.

For the first three months of 2020, as compared to the same period in 2019, average loans, excluding loans held for sale, increased $612.5 million, or 9%, due primarily to growth in income producing - commercial real estate and commercial loans.

Average investment securities for the three months ended March 31, 2020 and 2019 amounted to 9% and 10% of average earning assets, respectively.

The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 7% and 4% of average earning assets for the first three months of 2020 and 2019, respectively.

The provision for credit losses was $16.4 million for the three months ended March 31, 2020 as compared to $3.4 million for the three months ended March 31, 2019.

The higher provisioning in the first quarter of 2020, as compared to the first quarter of 2019, is primarily due to the implementation of CECL and the impact of COVID-19 on our expected future credit losses.

COVID-19 has negatively impacted unemployment projections, which inform our CECL economic forecast and increased our loss reserve.

Net charge-offs of $2.2 million in the first quarter of 2020 represented an annualized 0.12% of average loans, excluding loans held for sale, as compared to $3.4 million, or an annualized 0.19% of average loans, excluding loans held for sale, in the first quarter of 2019.

Net charge-offs in the first quarter of 2020 were attributable primarily to construction – commercial and residential ($1.7 million) and income producing – commercial real estate ($550 thousand).

At March 31, 2020 the allowance for credit losses represented 1.23% of loans outstanding, as compared to 0.98% at December 31, 2019.

The allowance for credit losses represented 202% of nonperforming loans at March 31, 2020, as compared to 151% at December 31, 2019.

The higher coverage ratio was due to an increase in the allowance at March 31, 2020, substantially due to the implementation of CECL and the impact of COVID-19 on our expected future credit losses.

Total noninterest income for the three months ended March 31, 2020 decreased to $5.5 million from $6.3 million for the three months ended March 31, 2019, a 13% decrease, due substantially to lesser gains on the sale of residential mortgage loans ($825 thousand versus $1.3 million) resulting from $2.6 million in hedge and mark to market losses attributable to the Federal Reserve’s large purchase of mortgage backed securities combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19.

Net investment gains were $822 thousand for the three months ended March 31, 2020 compared to $912 thousand for the same period in 2019.

Residential mortgage loans closed were $193 million for the first quarter of 2020 versus $93 million for the first quarter of 2019.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 43.83% for the first quarter of 2020, as compared to 43.87% for the first quarter of 2019.

Noninterest expenses totaled $37.3 million for the three months ended March 31, 2020, as compared to $38.3 million for the three months ended March 31, 2019, a 3% decrease.

Salaries and benefits costs decreased by $5.8 million.

The Company recognized $6.2 million of nonrecurring charges related to share based compensation awards and the resignation of our former CEO and Chairman, in March 2019.

In addition, health insurance claims increased by $409 thousand during the first quarter of 2020 relative to the first quarter of 2019, primarily due to a limited number of high cost claims

FDIC insurance increased $308 thousand from $1.1 million to $1.4 million due to the increased premium cost of a higher assessment base.

Other expenses decreased $717 thousand, from $4.5 million to $3.7 million due primarily to lower broker fees ($1.1 million) partially offset by higher telephone expenses ($173 thousand) associated with the transition to a new phone provider.

Noninterest expenses in the first quarter of 2020 decreased 3%, as compared to noninterest expenses of $32.2 million for the first quarter in 2019.

This decrease was due to the largely nonrecurring salaries and benefit costs discussed below in the “Noninterest Expense” section, offset substantially by increased legal expenses.

Legal, accounting and professional fees increased $5.3 million from $1.7 million to $7.0 million, as discussed in the “Noninterest Expense” section.

The ratio of common equity to total assets decreased to 11.64% at March 31, 2020 from 13.25% at December 31, 2019, due primarily to total assets growing faster than retained earnings, which were reduced by the implementation of CECL and the impact of COVID-19 on our expected future credit losses which significantly increased first quarter loan loss provisioning as discussed in the “Earnings Summary” above.

net interest income) as a percentage of earning assets, was 3.26% for the three months ended June 30, 2020 and 3.91% for the same period in 2019.

Average earning asset yields decreased 130 basis points to 3.91% for the three months ended June 30, 2020, as compared to 5.21% for the same period in 2019.

The average cost of interest bearing liabilities decreased by 105 basis points (to 1.01% from 2.06%) for the three months ended June 30, 2020 as compared to the same period in 2019.

Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 25 basis points for the three months ended June 30, 2020 as compared to 2019 (2.90% as compared to 3.15%).

The benefit of noninterest sources funding earning assets decreased by 40 basis points to 36 basis points from 76 basis points for the three months ended June 30, 2020 as compared to the same period in 2019, due to significantly lower market interest rates.

The combination of a 25 basis point decrease in the net interest spread and a 40 basis point decrease in the value of noninterest sources resulted in a 65 basis point decrease in the net interest margin for the three months ended June 30, 2020 as compared to the same period in 2019.

The provision for credit losses was $19.7 million for the three months ended June 30, 2020 as compared to $3.6 million for the three months ended June 30, 2019.

The higher provisioning in the second quarter of 2020, as compared to the second quarter of 2019, is primarily due to the implementation of the CECL accounting standard for loan loss allowances, as well as COVID-19 impacts and higher net charge-offs primarily related to COVID-19 effects.

Net charge-offs of $7.1 million in the second quarter of 2020 represented an annualized 0.36% of average loans, excluding loans held for sale, as compared to $1.5 million, or an annualized 0.08% of average loans, excluding loans held for sale, in the second quarter of 2019.

Net charge-offs in the second quarter of 2020 were attributable primarily to one commercial relationship to a personal services company that ceased business operations as a result of COVID-19.

At June 30, 2020 the allowance for credit losses represented 1.36% of loans outstanding, as compared to 0.98% at December 31, 2019.

The allowance for credit losses represented 185% of nonperforming loans at June 30, 2020, as compared to 151% at December 31, 2019.

The higher coverage ratio was due to an increase in the allowance at June 30, 2020, substantially due to the implementation of CECL and the impact of COVID-19 on our expected future credit losses.

Total noninterest income for the three months ended June 30, 2020 increased to $12.5 million from $6.4 million for the three months ended June 30, 2019, a 96% increase.

Service charges on deposits for the three months ended June 30, 2020 decreased to $942 thousand from $1.6 million for the three months ended June 30, 2019, a 41% decrease, due to lesser insufficient funds fees.

Gain on sale of loans for the three months ended June 30, 2020 increased to $3.1 million from $1.9 million for the three months ended June 30, 2019, a 60% increase, due to higher gains on the sale of residential mortgage loans ($1.2 million).

Other income for the three months ended June 30, 2020 increased to $6.9 million from $1.8 million for the three months ended June 30, 2019, a 277% increase, due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA loans ($2.5 million), $1.4 million higher small business investment company (“SBIC”) income related to a Community Reinvestment Act (“CRA”) qualified investment fund, $921 thousand higher swap fee income, and $591 thousand higher prepayment fees.

Net investment gains on sale were $713 thousand for the three months ended June 30, 2020 compared to $563 thousand for the same period in 2019.

Residential mortgage loans closed were $308 million for the second quarter of 2020 as compared to $152 million for the second quarter of 2019.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 37.18% for the second quarter of 2020, as compared to 38.04% for the second quarter of 2019.

Noninterest expenses totaled $34.9 million for the three months ended June 30, 2020, as compared to $33.4 million for the three months ended June 30, 2019, a 5% increase.

Salaries and employee benefits were $17.1 million for the three months ended June 30, 2020, as compared to $17.7 million for the same period in 2019, a decrease of $639 thousand or 4%.

Data processing expenses were $2.8 million for the three months ended June 30, 2020 compared to $2.6 million for the same period in 2019, a 6% increase.

Legal, accounting and professional fees increased $1.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

The reasons for the decrease in salaries and employee benefits and the increase in legal, accounting and professional fees for the periods noted above are discussed in the “Noninterest Expense” section.

FDIC expenses were $2.0 million for the three months ended June 30, 2020 compared to $1.1 million for the same period in 2019, a 76% increase, due to a higher assessment base resulting from growth in total assets.

Other expenses were $4.5 million for the three months ended June 30, 2020 compared to $4.2 million for the same period in 2019, a 6% increase, due primarily to $940 thousand higher other real estate owned ("OREO") expense offset by lower broker fees ($497 thousand).

Net income for the six months ended June 30, 2020 was $52.0 million compared to $71.0 million for the six months ended June 30, 2019, a 27% decrease.

Net income per basic common share for the six months ended June 30, 2020 was $1.60 compared to $2.06 per basic common share for the same period in 2019, a 22% decrease.

Net income per diluted common share for the six months ended June 30, 2020 was $1.60 compared to $2.05 per diluted common share for the same period in 2019, a 22% decrease.

Net income declined for the six months ended June 30, 2020 relative to the same period in 2019 due substantially to increased provisioning for credit losses offset by higher noninterest income (as discussed below).

In particular, the provision for credit losses increased to $34.0 million for the six months ended June 30, 2020 compared to $7.0 million for the same period in 2019, a 389% increase, as the Company implemented CECL effective January 1, 2020 and increased reserves associated with the impact of COVID-19 through the second quarter of 2020.

See Note 1 and Note 5 for further detail on CECL.

The provision for income taxes was $17.8 million for the six months ended June 30, 2020, a decrease of $7.6 million, or 30%, compared to the same period in 2019.

The decrease was primarily due to a significant decline in pre-tax income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019.

The decrease in the effective income tax rate was recorded in the second quarter of 2020 based on a reduced pre-tax income budget for the year due to increased credit reserves significantly attributable to COVID-19.

Net interest income decreased by less than 1% for the six months ended June 30, 2020 over the same period in 2019 ($161.1 million as compared to $162.3 million).

This was largely attributable to growth in average earning assets effectively offset by a decline in the net interest margin.

For the six months ended June 30, 2020, the Company reported an annualized ROAA of 1.06% as compared to 1.68% for the six months ended June 30, 2019.

The annualized ROACE for the six months ended June 30, 2020 was 8.82% as compared to 12.47% for the six months ended June 30, 2019.

The annualized ROATCE for the six months ended June 30, 2020 was 9.67% as compared to 13.73% for the six months ended June 30, 2019.

Refer to the "Use of Non-GAAP Financial Measures"

section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.

The decline in these ratios was primarily due to the implementation of CECL and COVID-19 impacts and to a lower net interest margin.

The net interest margin was 3.36% for the six months ended June 30, 2020 and 3.97% for the same period in 2019.

Average earning asset yields decreased 100 basis points to 4.21% for the six months ended June 30, 2020, as compared to 5.21% for the same period in 2019.

The average cost of interest bearing liabilities decreased by 70 basis points (to 1.31% from 2.01)% for the six months ended June 30, 2020 as compared to the same period in 2019.

Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 25 basis points for the six months ended June 30, 2020 as compared to 2019 (2.90% as compared to 3.20)%.

The benefit of noninterest sources funding earning assets decreased by 31 basis points to 46 basis points from 77 basis points for the six months ended June 30, 2020 as compared to the same period in 2019 due to significantly lower market interest rates.

The combination of a 30 basis point decrease in the net interest spread and a 31 basis point decrease in the value of noninterest sources resulted in a 61 basis point decrease in the net interest margin for the six months ended June 30, 2020 as compared to the same period in 2019.

Despite currently having lesser value resulting from lower interest rates, the Company continues to consider the value of its noninterest sources of funds as very significant to its business model and its overall profitability over the longer term.

The Company believes it has effectively managed its net interest income over the past twelve months as market interest rates have trended sharply lower.

This factor has been significant to overall earnings performance over the past twelve months as net interest income represents 87% of the Company's total revenue for the three months ended June 30, 2020.

For the first six months ended June 30, 2020, total loans grew 6% over December 31, 2019, and average loans were 10% higher in the first six months of 2020 as compared to the first six months of 2019.

At June 30, 2020, total deposits were 10% higher than deposits at December 31, 2019, while average deposits were 17% higher for the first six months of 2020 compared with the first six months of 2019.

In order to fund growth in average loans of 10% over the six months ended June 30, 2020 as compared to the same period in 2019, as well as sustain significant liquidity, the Company has relied on funding from interest bearing accounts primarily as a result of inflows from certain financial intermediary relationships as their clients moved to a more significant cash position in light of COVID-19 concerns.

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 81% and 87% of average earning assets for the first six months of 2020 and 2019, respectively.

For the first six months of 2020, as compared to the same period in 2019, average loans, excluding loans held for sale, increased $683.1 million, or 10%, due primarily to growth in income producing - commercial real estate, commercial and PPP loans.

Average investment securities for the six months ended June 30, 2020 and 2019 amounted to 2% and 3% of average earning assets, respectively.

The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 10% and 4% of average earning assets for the first six months of 2020 and 2019, respectively.

The provision for credit losses was $34.0 million for the six months ended June 30, 2020 as compared to $7.0 million for the six months ended June 30, 2019.

The higher provisioning for the six months ended June 30, 2020, as compared to the same period in 2019, is primarily due to the implementation of CECL and the impact of COVID-19 on our actual and expected future credit losses.

Net charge-offs of $9.4 million for the six months ended June 30, 2020 represented an annualized 0.24% of average loans, excluding loans held for sale, as compared to $4.8 million, or an annualized 0.13% of average loans, excluding loans held for sale, in the first six months of 2019.

Net charge-offs in the first six months of 2020 were attributable to commercial loans ($7.1 million) and commercial real estate loans ($2.3 million).

Total noninterest income for the six months ended June 30, 2020 increased to $18.0 million from $12.7 million for the six months ended June 30, 2019, a 42% increase.

Service charges on deposits for the six months ended June 30, 2020 decreased to $2.4 million from $3.3 million for the six months ended June 30, 2019, a 28% decrease, due to lesser insufficient funds fees.

Gain on sale of loans for the six months ended June 30, 2020 increased to $4.0 million from $3.3 million for the six months ended June 30, 2019, a 22% increase, due to higher gains on the sale of residential mortgage loans ($718 thousand).

Residential lending gains for the first six months of 2020 are net of $2.6 million in hedge and mark to market losses incurred during the first quarter of 2020 attributable to the Federal Reserve’s market actions negatively impacting mortgage backed securities pricing combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19 at the end of March.

Other income for the six months ended June 30, 2020 increased to $8.8 million from $3.7 million for the six months ended June 30, 2019, a 137% increase due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA loans ($2.5 million), $1.4 million higher SBIC income related to a CRA qualified investment fund, $1.1 million higher swap fee income, and $380 thousand higher prepayment fees.

Net investment gains were $1.5 million for both the six months ended June 30, 2020 and 2019.

Residential mortgage loans closed were $501 million for the first six months of 2020 as compared to $246 million for the first six months of 2019.

For the first six months of 2020, the efficiency ratio was 40.34% as compared to 40.95% for the same period in 2019.

Noninterest expenses totaled $72.2 million for the six months ended June 30, 2020, as compared to $71.7 million for the six months ended June 30, 2019, a 1% increase.

Noninterest expenses in 2020 periods increased slightly from the 2019 amounts primarily because of increased legal expenses.

This increase was almost entirely offset by not having the nonrecurring costs related to the former CEO retirement that were present in the 2019 period.

Salaries and employee benefits were $34.9 million for the six months ended June 30, 2020, as compared to $41.4 million for the same period in 2019, a decrease of $6.5 million or 16%.

Legal, accounting and professional fees increased $6.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The reason for the decrease in salaries and employee benefits and increase in legal, accounting and professional fees for the periods noted above are further discussed in the “Noninterest Expense” section.

Data processing expenses were $5.3 million for the six months ended June 30, 2020 compared to $5.0 million for the same period in 2019, a 6% increase.

FDIC expenses were $3.4 million for the six months ended June 30, 2020 compared to $2.2 million for the same period in 2019, a 52% increase, due to a higher assessment base resulting from growth in total assets.

Other expenses were $8.2 million for the six months ended June 30, 2020 compared to $8.7 million over the same period ended June 30, 2019, a 5% decrease, due primarily to lower broker fees ($1.6 million) partially offset by $940 thousand higher other real estate owned (“OREO”) expense.

The ratio of common equity to total assets decreased to 12.12% at June 30, 2020 from 13.25% at December 31, 2019, due to total assets growing faster than common equity, including common equity reductions due to $44 million in share repurchase activity, the approximately $11 million charge to common equity due to implementation of CECL on January 1, 2020, and COVID-19’s impact on our loan loss provisioning as discussed in the “Earnings Summary” above.

As discussed later in “Capital Resources and Adequacy,” the regulatory capital ratios of the Bank and Company remain above well capitalized levels.

2 unchanged sentences

Earning assets are composed primarily of loans and investment securities.

The cost of funds represent interest expense on deposits, customer repurchase agreements and other borrowings.

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.

The net interest margin was 3.49% for the first quarter of 2020, 4.02% for the first quarter of 2019, and 3.49% for the fourth quarter of 2019.

The net interest margin in the first quarter of 2020 and the fourth quarter of 2019 was stable at 3.49% due to a sharper decline in the cost of funds, which more than offset declining yields on loans and investments.

In a quarter when the average one month LIBOR rate declined by 39 basis points, our cost of funds declined by 9 basis points and our yield on earning assets was down by 8 basis points (loan yields declined by 11 basis points).

We have also been able to maintain about a 30% mix of average noninterest bearing deposits to total deposits, which is favorable.

Sharply lower market interest rates over the past four quarters and a continuing relatively flat yield curve maintains pressure on the Company’s net interest margin.

The decline in the net interest margin in the first quarter of 2020, versus the same period in 2019, was due to a decline in the yield on earning assets of 65 basis points exceeding the decline in the cost of funds of 13 basis points, as we elected to increase funding to meet a strong loan demand.

The significant decline in market rates (one month LIBOR averaged 110 basis points lower in the first quarter of 2020 versus the first quarter of 2019) negatively impacted our large variable and adjustable rate loan portfolio.

The yield on our loan portfolio was 5.07% in the first quarter of 2020 versus 5.62% in 2019.

Interest rates are now at a point where loan floor rates are operative, which will mitigate further loan yield declines.

For the three months ended March 31, 2020, net interest income decreased by 1.6%, average loans increased by $612.5 million, and average deposits increased by $709.3 million over the same period for 2019.

The net interest margin was 3.49% for the three months ended March 31, 2020 and 4.02% for the same period in 2019.

The abrupt decline in interest rates during the first quarter of 2020 not only reduced interest income on floating-rate commercial loans and liquid assets, but it also reduced depositor expectations concerning deposit rates.

Net interest income was $81.4 million for the three months ended June 30, 2020 and $81.3 million for the same period in 2019.

The lack of growth was primarily the result of lesser average yields on loans (4.63% as compared to 5.61%) effectively offset by growth in average earning assets of 21%.

The addition of the PPP loans at an average yield of 2.91% for the quarter negatively impacted the overall yield of the total loan portfolio by approximately seven basis points.

For the six months ended June 30, 2020, net interest income decreased by $1.2 million, average loans increased by $683.1 million, and average deposits increased by $1.15 billion over the same period for 2019.

The addition of the PPP loans at an average yield of 2.91% for the six months ended June 30, 2020 negatively impacted the overall yield of the total loan portfolio by approximately four basis points.

The net interest margin was 3.26% for the second quarter of 2020 and 3.91% for the second quarter of 2019.

In the second quarter of 2020, as average U.S.

Treasury rates in the two to five year range declined significantly by about 80-90 basis points and the average yield curve remained fairly flat, we experienced 23 basis points of net interest margin compression (from 3.49% to 3.26%) as compared to the first quarter of 2020.

In addition, our cost of funds declined 65 basis points (from 1.30% to 0.65%), while the yield on earning assets declined by 130 basis points (from 5.21% to 3.91%).

At June 30, 2020, the Bank had $456 million of outstanding PPP loans with an average rate of 1.00% and an average yield, which includes fee amortization, of 2.91% for the second quarter of 2020.

The lower loan yield on these PPP loans negatively affected second quarter loan portfolio yields by seven basis points.

Substantially higher average liquidity in the second quarter compared to the first quarter of 2020 contributed to the net interest margin compression as average deposit growth outweighed average loan growth.

For the three months ended June 30, 2020, average loans increased by $754.9 million and average deposits increased by $1.59 billion over the same period for 2019.

Average liquidity for the second quarter was $1.1 billion as compared to $229 million for the second quarter of 2019.

The yield on our substantial level of variable rate loans was negatively impacted by the much lower interest rate environment in the second quarter of 2020, including a 105 basis point decline in the average one-month LIBOR rate.

A substantial portion of the variable rate loans portfolio has interest rate floors which cushioned the decline in loan yields.

The net interest margin was 3.36% for the six months ended June 30, 2020 and 3.97% for the same period in 2019.

The low interest rate environment in the second quarter of 2020 reduced interest income on floating-rate commercial loans as well as liquid assets and reduced depositor expectations concerning deposit rates.

Because of the need to maintain higher levels of liquidity and delays in business investment activity due to COVID-19 disruptions, interest rates and margins can be expected to remain low.

As business conditions adjust to the new operating environment, deposit competition is expected to be more of a factor in influencing deposit rates than it was in the period immediately following the COVID-19 outbreak.

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, 2020 and 2019.

Included in the table is a measurement of interest rate spread and margin.

The tables below presents the average balances and rates of the major categories of the Company’s assets and liabilities for the three and six months ended June 30, 2020 and 2019.

Included in the tables 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.

5 unchanged sentences

(dollars in thousands)

Three Months Ended March 31,

Three Months Ended June 30,

Interest earning assets:

29 unchanged sentences

(1) Loans placed on nonaccrual status are included in average balances.

Net loan fees and late charges included in interest income on loans totaled $4.3 million and $4.1 million for the three months ended March 31, 2020 and 2019, respectively.

Net loan fees and late charges included in interest income on loans totaled $6.3 million and $4.7 million for the three months ended June 30, 2020 and 2019, respectively.

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

Eagle Bancorp, Inc.

Consolidated Average Balances, Interest Yields and Rates (Unaudited)

(dollars in thousands)

Six Months Ended June 30,

Interest earning assets:

Interest bearing deposits with other banks and other short-term investments

Loans held for sale (1)

Loans (1) (2)

Investment securities available-for-sale (2)

Federal funds sold

Total interest earning assets

Total noninterest earning assets

allowance for credit losses

Total noninterest earning assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest bearing liabilities:

Interest bearing transaction

Savings and money market

Time deposits

Total interest bearing deposits

Customer repurchase agreements

Other short-term borrowings

Long-term borrowings

Total interest bearing liabilities

Noninterest bearing liabilities:

Noninterest bearing demand

Other liabilities

Total noninterest bearing liabilities

Shareholders’ equity

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

Net interest income

Net interest spread

Net interest margin

Cost of funds

(1) Loans placed on nonaccrual status are included in average balances.

Net loan fees and late charges included in interest income on loans totaled $10.7 million and $8.8 million for the six months ended June 30, 2020 and 2019, respectively.

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

Provision for Credit Losses

The provision for credit losses represents the amount of expense charged to current earnings to fund the allowance for credit losses and the reserve for unfunded commitments (“RUC”).

The amount of the allowance for credit losses is based on many factors which reflect management’s assessment of the risk in the loan portfolio.

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 which 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 amount of the reserve for unfunded commitments considers the probability that those commitment will fund.

The provision for unfunded commitments is presented separately on the Statement of Operations.

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.

7 unchanged sentences

Also, refer to the table on page 57 which reflects activity in the allowance for credit losses.

During the three months ended March 31, 2020, the allowance for credit losses (“ACL”) reflected $14.3 million in provision for credit losses attributable to the ACL, a day one CECL impact of $10.6 million charged to retained earnings, and $2.2 million in net charge-offs during the period.

The provision for credit losses was $14.3 million for the three months ended March 31, 2020 as compared to $3.4 million for the same period in 2019.

The portion of the provision related to COVID-19 matters was about two thirds of the quarter’s reserve build.

During the three months ended June 30, 2020, the ACL on loans reflected $19.6 million in provision for credit losses attributable to the ACL for loans and $7.1 million in net charge-offs, which were attributable primarily to one commercial relationship to a personal services company that ceased business operations as a result of COVID-19.

The provision for credit losses on loans was $19.6 million for the three months ended June 30, 2020 as compared to $3.6 million for the same period in 2019.

During the six months ended June 30, 2020, the ACL on loans reflected $33.9 million in provision for credit losses attributable to the ACL for loans, a day one CECL impact of $10.6 million charged to retained earnings, and $9.4 million in net charge-offs during the period.

The provision for credit losses on loans was $33.9 million for the six months ended June 30, 2020 as compared to $7.0 million for the same period in 2019.

Net charge-offs of $9.4 million in the first six months of 2020 represented an annualized 0.24% of average loans, excluding loans held for sale, as compared to $4.8 million, or an annualized 0.13% of average loans, excluding loans held for sale, in the first six months of 2019.

As part of its comprehensive loan review process, internal loan and credit committees carefully evaluate loans which are past-due 30 days or more.

3 unchanged sentences

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

Three Months Ended March 31,

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

Six Months Ended June 30,

(dollars in thousands)

16 unchanged sentences

Net charge-offs

Provision for Credit Losses

Provision for Credit Losses- Loans

Balance at end of period

2 unchanged sentences

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.

Balances as of March 31, 2020 are calculated under CECL whereas balances as of December 31, 2019 are calculated under GAAP applicable at that time, the incurred loss model.

The increase in the allowance for credit losses

March 31, 2020

Balances as of June 30, 2020 are calculated under CECL whereas balances as of December 31, 2019 are calculated under GAAP applicable at that time, the incurred loss model.

June 30, 2020

December 31, 2019

8 unchanged sentences

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

For the three months ended March 31, 2020, after the initial adjustment to the allowance for credit losses as of January 1, 2020, we further increased the allowance for credit losses by $14.3 million.

The portion of the provision related to COVID-19 matters was about two thirds of the quarter’s reserve build.

For the three months ended June 30, 2020, after the initial adjustment to the allowance for credit losses on loans as of January 1, 2020, we further increased the allowance for credit losses on loans by $19.6 million and $33.9 million, respectively.

Nonperforming Assets

As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, nonaccrual loans, which includes the nonperforming portion of troubled debt restructurings (“TDRs”), and OREO, totaled $56.0 million at March 31, 2020 representing 0.56% of total assets, as compared to $50.2 million of nonperforming assets, or 0.56% of total assets, at December 31, 2019.

The Company experienced an increase in OREO, which totaled $8.2 million at March 31, 2020 as compared to $1.5 million at December 31, 2019.

The increase was due to foreclosures involving two ultra high-end residential properties located in Washington, D.C.

The Company is continuing to see softness in the market for ultra high-end residential properties.

The Company had no accruing loans 90 days or more past due at March 31, 2020.

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 $67.2 million at June 30, 2020 representing 0.69% of total assets, as compared to $50.2 million of nonperforming assets, or 0.56% of total assets, at December 31, 2019.

The Company had no accruing loans 90 days or more past due at June 30, 2020.

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 1.23% of total loans at March 31, 2020, is adequate to absorb expected credit losses within the loan portfolio at that date.

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 June 30, 2020, is adequate to absorb expected credit losses within the loan portfolio at that date.

The updated standard 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 the no longer share similar risk with their assigned segment.

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:

5 unchanged sentences

Impaired loans were defined as those as to which we believed it is probable that we would not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms had been modified in a TDR that had not shown a period of performance as required under applicable accounting standards.

Valuation allowances for those loans determined to be impaired are evaluated in accordance with ASC Topic 310—“ Receivables, ” and updated quarterly.

Valuation allowances for those loans determined to be impaired were evaluated in accordance with ASC Topic 310—“ Receivables, ” and updated quarterly.

For collateral dependent impaired loans, the carrying amount of the loan was determined by current appraised value less estimated costs to sell the underlying collateral, which may have been adjusted downward under certain circumstances for actual events and/or changes in market conditions.

9 unchanged sentences

The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the change in terms, and the exercise of prudent business judgment.

The Company had thirteen TDR’s at March 31, 2020 totaling approximately $20.4 million.

Eleven of these loans totaling approximately $17.9 million are performing under their modified terms.

For the first quarter of 2020 and 2019, there were no performing TDR loans that defaulted on their modified terms.

The Company had thirteen TDRs at June 30, 2020 totaling approximately $20.3 million.

Ten of these loans totaling approximately $12.3 million are performing under their modified terms.

For the first six months of 2020 and 2019, there was one performing TDR loan totaling $5.5 million and one performing TDR loan totaling $2.3 million, respectively, that defaulted on its modified terms.

A default is considered to have occurred once the TDR 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.

If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further

The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.

For the three months ended March 31, 2020, there were four loans totaling $1.3 million modified in a TDR, as compared to the three months ended March 31, 2019, with one loan totaling $2.3 million modified in a TDR.

For both the three months ended June 30, 2020 and 2019, 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.

These deferrals amounted to 32 notes representing $45 million in outstanding exposure as of March 31, 2020 and 382 notes representing $576 million in outstanding exposure as of April 30, 2020.

Some of these deferrals might have met the criteria for treatment under U.S.

GAAP as troubled debt restructurings (TDRs), while many did not.

None of the deferrals are reflected in the Company’s balance sheet and asset quality measures as TDRs, however, due to the provision of the CARES Act that permits U.S.

These deferrals amounted to 708 notes and $1.63 billion at June 30, 2020 (approximately 20% of total loans).

Some of these deferrals may not have met the criteria for treatment under U.S.

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 U.S.

GAAP requirements to treat such short-term loan modifications as TDR.

These 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.

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.

Other loan portfolio areas of concern and additional COVID-19 loan related matters are discussed below.

Total nonperforming loans amounted to $47.7 million at March 31, 2020 (0.61% of total loans) compared to $48.7 million at December 31, 2019 (0.65% of total loans).

The slight decrease in the ratio of nonperforming loans to total loans at March 31, 2020 as compared to December 31, 2019 was due to a decrease in construction commercial and residential nonperforming loans.

Included in nonperforming assets at March 31, 2020 was $8.2 million of OREO consisting of five foreclosed properties.

Included in nonperforming assets at December 31, 2019 was $1.5 million of OREO, consisting of three foreclosed properties.

The Company had one foreclosed property with a net carrying value of $1.4 million at March 31, 2019.

Total nonperforming loans amounted to $59.0 million at June 30, 2020 (0.74% of total loans) compared to $48.7 million at December 31, 2019 (0.65% of total loans).

Included in nonperforming assets at June 30, 2020 was $8.2 million of OREO consisting of five foreclosed properties.

This compared to $1.5 million of OREO, consisting of three foreclosed properties at December 31, 2019.

The increase was due to foreclosures involving two ultra high-end residential properties located in Washington, D.C.

The Company is continuing to see softness in the market for ultra high-end residential properties.

This is particularly true in light of COVID-19 and the related limitations in marketing residential properties.

The Company had one foreclosed property with a net carrying value of $1.4 million at June 30, 2019.

OREO properties are carried at fair value less estimated costs to sell.

1 unchanged sentence

Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value.

There were no sales of OREO property during the first three months of 2020 and 2019.

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

There were no sales of OREO property during the first six months of 2020 and 2019.

The following table shows the amounts of nonperforming assets at the dates indicated (unaudited for June 30, 2020).

(dollars in thousands)

14 unchanged sentences

Ratio of nonperforming assets to total assets

Nonaccrual loans reported in the table above include loans that migrated from performing TDR.

There were no loans that migrated from a performing TDR during the three months ended March 31, 2020 and 2019, respectively.

Nonaccrual loans reported in the table above include one loan totaling $5.5 million that migrated from a performing TDR during the six months ended June 30, 2020, as compared to the six months ended June 30, 2019 when there was one loan totaling $2.3 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, 2020, there were $21.9 million of performing loans considered potential problem loans, defined as loans that are not included in the 90 day past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories.

Potential problem loans increased to $21.9 million at March 31, 2020 from $20.0 million at December 31, 2019.

At June 30, 2020, there were $16.0 million of performing loans considered 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 decreased to $16.0 million at June 30, 2020 from $20.0 million at December 31, 2019.

The Company has taken a conservative posture with respect to risk rating its loan portfolio.

2 unchanged sentences

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, 2020 decreased to $5.5 million from $6.3 million for the three months ended March 31, 2019, a 13% decrease, due substantially to lesser gains on the sale of residential mortgage loans ($825 thousand versus $1.3 million) resulting from $2.6 million in hedge and mark to market losses attributable to the Federal Reserve’s large purchase of mortgage backed securities, combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19.

Residential mortgage loans closed were $193 million for the first quarter of 2020 versus $93 million for the first quarter of 2019.

Net investment gains were $822 thousand for the three months ended March 31, 2020 compared to $912 thousand for the same period in 2019.

Total noninterest income for the three months ended June 30, 2020 increased to $12.5 million from $6.4 million for the three months ended June 30, 2019, a 96% increase.

Residential mortgage loans closed were $308 million for the second quarter of 2020 as compared to $152 million for the second quarter of 2019.

Net investment gains on sale were $713 thousand for the three months ended June 30, 2020 compared to $563 thousand for the same period in 2019.

Total noninterest income for the six months ended June 30, 2020 increased to $18.0 million from $12.7 million for the six months ended June 30, 2019, a 42% increase.

Residential mortgage loans closed were $501 million for the first six months of 2020 as compared to $246 million for the first six months of 2019.

Residential lending gains for the first six months of 2020 include $2.6 million in hedge and mark to market losses incurred during the first quarter of 2020 attributable to the Federal Reserve’s market actions negatively impacting mortgage backed securities pricing combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19 at the end of March.

Net investment gains were $1.5 million for both the six months ended June 30, 2020 and 2019.

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.

3 unchanged sentences

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, 2020, the Company had no funds advanced outstanding under FHA mortgage loan servicing agreements.

At June 30, 2020, the Company had no funds advanced outstanding under FHA mortgage loan servicing agreements.

To the extent the mortgage loans underlying the Company’s servicing portfolio experience delinquencies, the Company would be required to dedicate cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

Service charges on deposit accounts decreased by $269 thousand, or 16%, from $1.7 million for the three months ended March 31, 2019 to $1.4 million for the same period in 2020.

The decrease for the three month period was due primarily to a lower volume of insufficient funds charges.

The Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to sell those loans, servicing released.

2 unchanged sentences

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, 2020.

The reserve amounted to $63 thousand at March 31, 2020 and is included in other liabilities on the Consolidated Balance Sheets.

The Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium.

Income from this source was $119 thousand for the three months ended March 31, 2020 compared to $108 thousand for the same period in 2019.

There were no repurchases due to fraud by the borrower during the three months ended June 30, 2020.

The reserve amounted to $150 thousand at June 30, 2020 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 no income from this source for the three months ended June 30, 2020 compared to $16 thousand for the same period in 2019.

Income from this source was $119 thousand for the six months ended June 30, 2020 compared to $124 thousand for the same period in 2019.

Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter.

Refer to page 10 for detail regarding the Company’s participation in the PPP program.

Other income totaled $1.9 million for both the three months ended March 31, 2020 and 2019, a decrease of less than 1%.

ATM fees decreased to $275 thousand for the three months ended March 31, 2020 from $312 thousand for the same period in 2019, a decrease of 12%.

Noninterest fee income totaled $658 thousand for the three months ended March 31, 2020 an increase of $183 thousand, or 39%, over the same period in 2019.

Net investment gains were $822 thousand for the three months ended March 31, 2020 compared to $912 thousand for the same period in 2019.

Refer to page 10 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 $37.3 million for the three months ended March 31, 2020, as compared to $38.3 million for the three months ended March 31, 2019, a 3% decrease.

Total noninterest expenses in the first quarter of 2020 increased 16% compared to noninterest expenses of $32.2 million for the first quarter in 2019 excluding nonrecurring salaries and benefit costs defined below owing substantially to increased legal expenses discussed below.

Salaries and employee benefits were $17.8 million for the three months ended March 31, 2020, as compared to $23.6 million for the same period in 2019, a decrease of 25%.

The Company recognized $6.2 million of largely nonrecurring charges related to share based compensation awards and the resignation of our former CEO and Chairman in March 2019.

In addition, health insurance claims increased by $409 thousand during the first quarter of 2020 relative to the first quarter of 2019, primarily due to a limited number of high cost claims.

At March 31, 2020, the Company’s full time equivalent staff numbered 494 as compared to 492 at December 31, 2018, and 480 at March 31, 2019.

Premises and equipment expenses amounted to $3.8 million and $3.9 million for the three months ended March 31, 2020 and 2019, respectively, a 1% decrease.

For the three months ended March 31, 2020, the Company recognized $104 thousand of sublease revenue as compared to $124 thousand for the same period in 2019.

Total noninterest expenses totaled $34.9 million for the three months ended June 30, 2020, as compared to $33.4 million for the three months ended June 30, 2019, a 5% increase due substantially to higher legal fees as discussed below.

Total noninterest expenses totaled $72.2 million for the six months ended June 30, 2020, as compared to $71.7 million for the six months ended June 30, 2019, a 1% increase.

Noninterest expenses in 2020 periods increased slightly from the 2019 amounts primarily because of increased legal expenses.

This increase was almost entirely offset by not having the nonrecurring costs related to the former CEO retirement that were present in the 2019 period.

Salaries and employee benefits were $17.1 million for the three months ended June 30, 2020, as compared to $17.7 million for the same period in 2019, a decrease of $639 thousand or 4%.

The decrease was primarily due to a lower accrual for incentive bonuses and the release of a portion of an accrual related to the charges for share based compensation awards for our former CEO and Chairman in the second quarter of 2020.

The decrease was partially offset by higher salaries and increased headcount in the second quarter of

Salaries and employee benefits were $34.9 million for the six months ended June 30, 2020, as compared to $41.4 million for the same period in 2019, a decrease of $6.5 million or 16%.

The decrease was primarily due to the $6.2 million of largely nonrecurring charges accrued in the first quarter of 2019 related to share based compensation awards and the resignation of our former CEO and Chairman in March 2019, as well as a lower accrual for incentive bonuses and the release of a portion of an accrual related to the charges for share based compensation awards for our former CEO and Chairman in the first half of 2020.

The decrease was partially offset by higher salaries and increased headcount in the first half of 2020.

At June 30, 2020, the Company’s full time equivalent staff numbered 506 as compared to 492 at December 31, 2019, and 496 at June 30, 2019.

Premises and equipment expenses amounted to $3.5 million and $3.7 million for the three months ended June 30, 2020 and 2019, respectively, a 5% decrease.

For the three months ended June 30, 2020, the Company recognized $120 thousand of sublease revenue as compared to $126 thousand for the same period in 2019.

For the six months ended June 30, 2020, the Company recognized $224 thousand of sublease revenue as compared to $256 thousand for the same period in 2019.

Sublease revenue is accounted for as a reduction to premises and equipment expenses.

Marketing and advertising expenses totaled $1.1 million for both the three months ended March 31, 2020 and 2019.

Data processing expense increased to $2.5 million for the three months ended March 31, 2020 from $2.4 million for the same period in 2019, a 5% increase.

Legal, accounting and professional fees and expenses for the three months ended March 31, 2020 increased to $7.0 million from $1.7 million for the same period in 2019, a 309% increase.

Legal fees and expenditures of $4.6 million for the first quarter were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit, where we filed a motion to dismiss on April 2, 2020.

These elevated legal expenses included substantial expenses associated with the reviews by the Special Compliance Committee and the Audit Committee, with the assistance of outside legal counsel, of the facts and circumstances associated with these various governmental investigations and legal proceedings.

These reviews have since concluded.

The amount of legal fees and expenditures for the quarter 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.

FDIC insurance increased to $1.4 million for the three months ended March 31, 2020 from $1.1 million for the same period in 2019, a 28% increase due to a higher assessment base resulting from growth in total assets.

Other expenses decreased to $3.7 million for the three months ended March 31, 2020 from $4.5 million for the same period in 2019, a decrease of 16%, due primarily to lower broker fees ($1.1 million) partially offset by higher telephone expenses ($173 thousand) associated with the transition to a new phone provider.

The major components of cost in this category include broker fees, franchise taxes, core deposit intangible amortization and insurance expense.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 43.83% for the first quarter of 2020, as compared to 43.87% for the first quarter of 2019.

As a percentage of average assets, total noninterest expense (annualized) was 1.58% for the three months ended March 31, 2020 as compared to 1.81% for the same period in 2019.

Marketing and advertising expenses totaled $1.1 million for the three months ended June 30, 2020 and $1.3 million for the same period in 2019.

Marketing and advertising expenses totaled $2.2 million for the six months ended June 30, 2020 and $2.4 million for the same period in 2019.

Data processing expense increased to $2.8 million for the three months ended June 30, 2020 from $2.6 million for the same period in 2019, a 6% increase.

Data processing expense increased to $5.3 million for the six months ended June 30, 2020 from $5.0 million for the same period in 2019, a 6% increase.

Legal, accounting and professional fees increased $1.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Legal fees and expenditures of $2.5 million for the second quarter of 2020 were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit.

Legal, accounting and professional fees increased $6.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Legal fees and expenditures of $7.1 million for the first six months of 2020 were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit.

The amount of legal fees and expenditures for the three and six month periods ended June 30, 2020 are net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies, but do not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time.

FDIC expenses were $2.0 million for the three months ended June 30, 2020 compared to $1.1 million for the same period in 2019, a 76% increase.

FDIC expenses were $3.4 million for the six months ended June 30, 2020 compared to $2.2 million for the same period in 2019, 52% increase.

The increases for both the three and six months periods in 2020 compared to the same periods in 2019 were due to a higher assessment base resulting from growth in total assets.

The major components of other expenses include broker fees, franchise taxes, core deposit intangible amortization and insurance expense.

Other expenses increased to $4.5 million for the three months ended June 30, 2020 from $4.2 million for the same period in 2019, a 6% increase, due primarily to $940 thousand higher other real estate owned (“OREO”) expense offset by lower broker fees ($497 thousand).

Other expenses decreased to $8.2 million for the six months ended June 30, 2020 from $8.7 million for the same period June 30, 2019, a 5% decrease, due primarily to lower broker fees ($1.6 million) partially offset by $940 thousand higher OREO expense.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 37.18% for the second quarter of 2020, as compared to 38.04% for the second quarter of 2019.

For the first six months of 2020, the efficiency ratio was 40.34% as compared to 40.95% for the same period in 2019.

As a percentage of average assets, total noninterest expense (annualized) was 1.35% for the three months ended June 30, 2020 as compared to 1.55% for the same period in 2019.

As a percentage of average assets, total noninterest expense (annualized) was 1.46% for the six months ended June 30, 2020 as compared to 1.68% for the same period in 2019.

Income Tax Expense

The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) was 26.5% for the three months ended March 31, 2020 as compared to 26.1% for the same periods in 2019.

The higher effective tax rate for the three months ended March 31, 2020, was due primarily to a discrete item related to restricted stock awards vesting that increased the effective tax rate.

The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) for the second quarter of 2020 was 24.6% as compared to 26.6% for the second quarter of 2019.

The decrease in the effective income tax rate largely relates to a significant decline in pre-tax income for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due to increased credit reserves significantly attributable to COVID-19, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019.

The effective income tax rate for the six months ended June 30, 2020 was 25.5% as compared to 26.3% for the six months ended June 30, 2019.

The decrease in the effective income tax rate largely relates to a significant decline in pre-tax income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019.

FINANCIAL CONDITION

Total assets at March 31, 2020 were $9.99 billion, a 19% increase as compared to $8.39 billion at March 31, 2019, and an increase of 11% as compared to $8.99 billion at December 31, 2019.

Total loans (excluding loans held for sale) were $7.84 billion at March 31, 2020, a 9% increase as compared to $7.17 billion at March 31, 2019, and a 4% increase as compared to $7.55 billion at December 31, 2019.

Loans held for sale amounted to $60.0 million at March 31, 2020 as compared to $20.3 million at March 31, 2019, a 196% increase, and $56.7 million at December 31, 2019, a 6% increase.

The investment portfolio totaled $858.9 million at March 31, 2020, an 11% increase from the $772.2 million balance at March 31, 2019.

As compared to December 31, 2019, the investment portfolio at March 31, 2020 increased by $15.6 million or 2%.

Total deposits at March 31, 2020 were $8.14 billion compared to $6.68 billion at March 31, 2019, a 22% increase and $7.22 billion at December 31, 2019, a 13% increase.

Total borrowed funds (excluding customer repurchase agreements) were $567.8 million at March 31, 2020, $467.4 million at March 31, 2019 and $467.7 million at December 31, 2019.

Total shareholders’ equity increased 1% to $1.16 billion at March 31, 2020 compared to $1.15 billion at March 31, 2019, and decreased by 2% from $1.19 billion at December 31, 2019.

The increase in shareholders’ equity at March 31, 2020 compared to the same period in 2019 was primarily the result of growth in retained earnings offset by the day one CECL entry of $10.9 million net of taxes, $44 million in stock repurchases, and dividends declared of $7.2 million.

The Company’s capital ratios remain substantially in excess of regulatory minimum and buffer requirements, with a total risk based capital ratio of 15.44% at March 31, 2020, as compared to 16.20% at December 31, 2019, both common equity tier 1 (“CET1”) risk based capital and tier 1 risk based capital ratios of 12.14% at March 31, 2020, as compared to 12.87% at December 31, 2019, a tier 1 leverage ratio of 11.33% at March 31, 2020, as compared to 11.62% at December 31, 2019.

In addition, the tangible common equity ratio was 10.70% at March 31, 2020, compared to 12.22% at December 31, 2019.

Tangible book value per common share was $32.86 at March 31, 2020, a 0.6% increase over $32.67 at December 31, 2019.

Refer to the “Use of Non-GAAP Financial Measures” section for additional detail.

While the Company’s capital position remains well above regulatory well capitalized levels, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19, the Company’s remaining authorization to repurchase shares has been put on hold.

For the first quarter of 2020, the Company repurchased 1,193,052 shares (73% of authorized shares) at an average cost of $37.31 per share.

Total assets at June 30, 2020 were $9.80 billion, a 9% increase as compared to $8.99 billion at December 31, 2019.

Total loans (excluding loans held for sale) were $8.02 billion at June 30, 2020, a 6% increase as compared to $7.55 billion at December 31, 2019.

Loans held for sale amounted to $68.4 million at June 30, 2020 and $56.7 million at December 31, 2019, a 21% increase.

The investment portfolio totaled $772.4 million at June 30, 2020.

As compared to December 31, 2019, the investment portfolio at June 30, 2020 decreased by $71.0 million, or 8%.

Total deposits at June 30, 2020 were $7.94 billion, a 10% increase compared to deposits of $7.22 billion at December 31, 2019.

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 $567.9 million at June 30, 2020, as compared to $467.7 million at December 31, 2019.

Total shareholders’ equity was $1.19 billion at both June 30, 2020 and December 31, 2019.

During the six months ended June 30, 2020, growth in retained earnings, $11.7 million in unrealized gains on AFS securities, and $2.8 million in additional paid in capital attributable to share based compensation, were effectively offset by $44 million in stock repurchases, dividends declared of $14.2 million, and the day one CECL entry of $10.9 million net of taxes.

The Company’s capital ratios remain substantially in excess of regulatory minimum and buffer requirements, with a total risk based capital ratio of 16.26% at June 30, 2020, as compared to 16.20% at December 31, 2019, both common equity tier 1 (“CET1”) risk based capital and tier 1 risk based capital ratios of 12.80% at June 30, 2020, as compared to 12.87% at December 31, 2019, and a tier 1 leverage ratio of 10.63% at June 30, 2020, as compared to 11.62% at December 31, 2019.

The ratio of common equity to total assets was 12.12% at June 30, 2020, as compared to 13.25% at December 31, 2019.

Book value per share was $36.86 at June 30, 2020, a 3% increase over $35.82 at December 31, 2019.

In addition, the tangible common equity ratio was 11.17% at June 30, 2020, as compared to 12.22% at December 31, 2019.

Tangible book value per share was $33.62 at June 30, 2020, a 3% increase over $32.67 at December 31, 2019.

Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.

While the Company’s capital position remains above regulatory well capitalized levels, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19, the Board decided to place the Company’s remaining authorization to repurchase shares on hold during the first quarter of 2020.

Accordingly, no shares were repurchased during the second quarter of 2020.

The Board of Directors and Management continue to monitor this area and may enter the markets from time to time as determined appropriate.

Under the capital rules applicable to the Company and Bank, 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 meet all these requirements, and satisfy the requirement to maintain the fully phased in capital conservation buffer of 2.5% of CET1 capital for capital adequacy purposes.

The Company and the Bank meet all these requirements and satisfy the requirement to maintain the capital conservation buffer

of 2.5% of CET1 capital for capital adequacy purposes.

Failure to maintain the required capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.

Loans, net of amortized deferred fees and costs, at March 31, 2020 and December 31, 2019 by major category are summarized below.

March 31, 2020

Loans, net of amortized deferred fees and costs, at June 30, 2020 (unaudited) and December 31, 2019 by major category are summarized below.

June 30, 2020

December 31, 2019

7 unchanged sentences

allowance for credit losses

Net loans (1)

Excludes accrued interest receivable of $22.6 million and $21.3 million at March 31, 2020 and December 31, 2019, respectively, which is recorded Other assets.

(1) Excludes accrued interest receivable of $36.2 million and $21.3 million at June 30, 2020 and December 31, 2019, 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 reached $7.84 billion at March 31, 2020, an increase of $295.1 million, or 4%, as compared to $7.55 billion at December 31, 2019.

Loan growth during the three months ended March 31, 2020 was predominantly in commercial loans and the income producing – commercial real estate loan categories.

Despite an increased level of in-market competition for business, the Bank continued to experience organic loan production and portfolio growth.

Loans outstanding reached $8.02 billion at June 30, 2020, an increase of $476.0 million, or 6%, as compared to $7.55 billion at December 31, 2019.

Loan growth during the six months ended June 30, 2020 was predominantly in PPP loans.

Despite a continued level of in-market competition for business, the Bank continued to experience organic loan production and modest portfolio growth.

Notwithstanding increased supply of units, multi-family commercial real estate leasing in the Bank’s market area has held up well, particularly for well-located close-in projects.

2 unchanged sentences

While the ultra high-end real estate market has softened, the moderately priced housing market has remained stable to increasing, with well-located, Metro accessible properties garnering a premium.

However, the potential impact from COVID-19 has not yet been reflected in the market.

However, the potential impact from COVID-19 has not yet been fully reflected in the market.

Please refer to the COVID-19 risk factors in Item 1A below.

Loan Portfolio Exposures- COVID-19:

Industry areas of potential concern within the Loan Portfolio are represented below as of March 31, 2020:

Industry areas of potential concern within the Loan Portfolio are presented below as of June 30, 2020 (unaudited):

Principal Balance

Accommodation & Food Services

1 Includes $82,154 of PPP loans.

2 Includes $13,498 of PPP loans.

Concerns over exposures to the Accommodation and Food Service industry and retail are the most immediate at this time.

Accommodation and Food Service exposure represents 9.7% of the Bank’s loan portfolio as of March 31, 2020 among 349 customers.

Accommodation and Food Service exposure represents 10.5% of the Bank’s loan portfolio as of June 30, 2020 among 485 customers.

Retail trade exposure represents 1.3% of the Bank’s loan portfolio.

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 as customers work with the Bank to develop longer term stabilization strategies as the landscape of the COVID-19 pandemic evolves.

The duration and severity of the pandemic will likely impact future credit challenges in these areas.

In addition to the foregoing specific industries, the Bank has exposure not included in the above industry data secured by commercial real estate loans secured by the below property types as of March 31, 2020:

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 with the Bank to develop longer term stabilization strategies as the landscape of the COVID-19 pandemic evolves.

The uncertain duration and severity of the pandemic will likely impact future credit challenges in these areas.

The table below is collateral driven and shows exposures on loans secured by commercial real estate (“CRE”) by property type as of June 30, 2020 (unaudited).

This table excludes loans disclosed in the industry table above.

Principal Balance

Property Type

Although not evidenced at March 31, 2020, 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.

Although not evidenced at June 30, 2020, 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 process.

1 unchanged sentence

The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, savings accounts and certificates of deposit.

The deposit base includes transaction accounts, time and savings accounts and accounts, which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds.

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 Promontory Interfinancial Network, LLC (“Promontory”).

For the three months ended March 31, 2020, noninterest bearing deposits decreased $70.2 million as compared to December 31, 2019, while interest bearing deposits increased by $987.3 million during the same period.

For the six months ended June 30, 2020, noninterest bearing deposits increased $351.7 million as compared to December 31, 2019, while interest bearing deposits increased by $359.9 million during the same period.

From time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from national brokerage networks, including Promontory.

Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep product (“ICS”), which provides for reciprocal (“two-way”) transactions among banks facilitated by Promontory for the purpose of maximizing FDIC insurance.

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 Promontory for the purpose of maximizing FDIC insurance.

The Bank also is able to obtain one-way CDARS deposits and participates in Promontory’s Insured Network Deposit (“IND”).

At March 31, 2020, total deposits included $2.09 billion of brokered deposits (excluding the CDARS and ICS two-way) which represented 26% of total deposits.

At June 30, 2020, total deposits included $1.79 billion of brokered deposits (excluding the CDARS and ICS two-way) which represented 23% of total deposits.

At December 31, 2019, total brokered deposits (excluding the CDARS and ICS two-way) were $1.80 billion, or 25% of total deposits.

The CDARS and ICS two-way component represented $541.9 million, or 7%, of total deposits and $502.9 million, or 7%, of total deposits at March 31, 2020 and December 31, 2019, respectively.

The CDARS and ICS two-way component represented $489.7 million, or 6%, of total deposits and $502.9 million, or 7%, of total deposits at June 30, 2020 and December 31, 2019, respectively.

These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank.

1 unchanged sentence

In that event, we would be required to obtain alternate sources for funding.

At March 31, 2020, the Company had $2.00 billion in noninterest bearing demand deposits, representing 25% of total deposits, compared to $2.06 billion of noninterest bearing demand deposits at December 31, 2019, or 29% of total deposits.

Average noninterest bearing deposits were 29% of total deposits for the first three months of 2020 and 33% for the first three months of 2019.

At June 30, 2020, the Company had $2.42 billion in noninterest bearing demand deposits, representing 30% of total deposits, compared to $2.06 billion of noninterest bearing demand deposits at December 31, 2019, or 29% of total deposits.

A portion of the growth in noninterest bearing demand deposits in the second quarter was the result of funding PPP loans into operating accounts at the Bank.

Average noninterest bearing deposits were 30% of total deposits for the first six months of 2020 and 32% for the first six months of 2019.

The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets.

As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds which are not suited for either a certificate of deposit or a money market account.

The balances in these accounts were $31.4 million at March 31, 2020 compared to $31.0 million at December 31, 2019.

Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S.

The balances in these accounts were $31.2 million at June 30, 2020 compared to $31.0 million at December 31, 2019.

Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized

agency securities and/or U.S.

3 unchanged sentences

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, 2020 the Company had $1.27 billion in time deposits.

At June 30, 2020 the Company had $1.15 billion in time deposits.

Time deposits decreased by $129.5 million from year end December 31, 2019.

The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered CDs to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning.

The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at March 31, 2020 and December 31, 2019.

At March 31, 2020, the Company had $300.0 million of FHLB advances borrowed as part of the overall asset liability strategy and to support loan growth, as compared to $250 million at December 31, 2019.

The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at June 30, 2020 and December 31, 2019.

At June 30, 2020, the Company had $300.0 million of FHLB advances borrowed as part of the overall asset liability strategy and to support loan growth, as compared to $250 million at December 31, 2019.

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, 2020 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.

At March 31, 2020, the Company had $50 million of FHLB long-term advances borrowed as part of the overall asset liability strategy and to support loan growth.

Long-term borrowings outstanding at June 30, 2020 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.

At June 30, 2020, the Company had $50 million of FHLB long-term advances borrowed as part of the overall asset liability strategy and to support loan growth.

For additional information on the subordinated notes, please refer to Note 9 to the Consolidated Financial Statements included in this report.

4 unchanged sentences

These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial.

Additionally, the Bank can purchase up to $172.5 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at March 31, 2020, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.48 billion, against which there was $3.6 million outstanding at March 31, 2020.

The Bank also has a commitment from Promontory to place up to $1.0 billion of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of $883 million at March 31, 2020.

At March 31, 2020, the Bank was also eligible to make advances from the FHLB up to $1.7 billion based on collateral at the FHLB, of which there was $300 million outstanding at March 31, 2020.

Additionally, the Bank can purchase up to $172.5 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at June 30, 2020, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.47 billion, against which there was $2.1 million outstanding at June 30, 2020.

The Bank also has a commitment from Promontory to place up to $700 million of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of $565 million at June 30, 2020.

At June 30, 2020, the Bank was also eligible to make advances from the FHLB up to $1.88 billion based on collateral at the FHLB, of which there was $300 million outstanding at June 30, 2020.

The Bank may enter into repurchase agreements as well as obtain additional borrowing capabilities from the FHLB, provided adequate collateral exists to secure these lending relationships.

11 unchanged sentences

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.

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.

Over the last 12 months our average deposits have increased by 10% and we maintain a very liquid investment portfolio, including significant overnight liquidity.

Average short term liquidity was $606 million in first quarter of 2020, which is above EagleBank’s average needs.

Average deposits increased 10% for the second quarter of 2020 as compared to the first quarter of 2020.

We maintain a very liquid investment portfolio, including significant overnight liquidity.

Average short term liquidity was $1.14 billion in second quarter of 2020, which is above EagleBank’s average needs.

Secondary sources of liquidity amount to $3.4 billion.

At March 31, 2020, under the Bank’s liquidity formula, it had $4.95 billion of primary and secondary liquidity sources.

At June 30, 2020, under the Bank’s liquidity formula, it had $5.24 billion of primary and secondary liquidity sources.

The amount is deemed adequate to meet current and projected funding needs.

Commitments and Contractual Obligations

Loan commitments outstanding and lines and letters of credit at March 31, 2020 are as follows:

Loan commitments outstanding and lines and letters of credit at June 30, 2020 are as follows (unaudited):

(dollars in thousands)

6 unchanged sentences

Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.

As of March 31, 2020, unfunded loan commitments included $215.0 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature.

As of June 30, 2020, unfunded loan commitments included $253.9 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature.

Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract.

1 unchanged sentence

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 although the Bank has seen additional draws on committed lines of credit during the second half of the first quarter.

The pipeline of loan commitments remains strong.

The Bank did see additional draws on committed lines of credit during the second half of the first quarter which were largely paid back down in the second quarter.

Letters of credit include standby and commercial letters of credit.

9 unchanged sentences

In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors.

Banking is generally a business of managing the maturity and re-pricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives.

During the three months ended March 31, 2020, as compared to the same period in 2019, the Company was able to produce a net interest margin of 3.49%, and continue to manage its overall interest rate risk position.

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 six months ended June 30, 2020, as compared to the same period in 2019, the Company was able to produce a net interest margin of 3.36% as compared to 3.97%, and continue to manage its overall interest rate risk position.

The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits.

In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and prepayment risk in its portfolio of mortgage backed securities should interest rates remain at current levels.

Further, the Company has been managing the investment portfolio to provide liquidity and provide some additional yield over cash.

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, 2020, the average investment portfolio balances increased by $57 million, or 7%, as compared to average balance for the three months ended March 31, 2019.

The cash received from deposit growth along with cash flows from the investment portfolio were deployed into loans and the purchase of replacement investments and held in cash.

The percentage mix of municipal securities was 9% of total investments at March 31, 2020 and 6% at March 31, 2019.

The portion of the portfolio invested in mortgage backed securities was 71% at March 31, 2020 and 72% at March 31, 2019.

During the three months ended June 30, 2020, the average investment portfolio balances increased by $12 million, or 1.6%, as compared to average balance for the three months ended June 30, 2019.

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 12% of total investments at June 30, 2020 and 9% at June 30, 2019.

The portion of the portfolio invested in mortgage backed securities was 68% at June 30, 2020 and 59% at June 30, 2019.

The portion of the portfolio invested in U.S.

agency investments was 9% at March 31, 2020 and 20% at March 31, 2019.

As of March 31, 2020 the Company held 4% of investment portfolio in US Treasury securities.

Shorter duration floating rate corporate bonds were 6% of total investments at March 31, 2020 and 1% at March 31, 2019, and SBA bonds, which are included in mortgage backed securities, were 8% and 10% of total investments at March 31, 2020 and March 31, 2019, respectively.

More recently over the last three months, as a result of generally lower interest rates, mortgage prepayment speeds increased and the duration of the investment portfolio decreased to 2.6 years at March 31, 2020 from 3.3 years at March 31, 2019.

The re-pricing duration of the loan portfolio was 19 months at March 31, 2020 versus 20 months at December 31, 2019, with fixed rate loans amounting to 39% of total loans at both March 31, 2020 and 2019.

Variable and adjustable rate loans comprised 61% of total loans at both March 31, 2020 and 2019.

agency investments was 7% at June 30, 2020 and 20% at June 30, 2019.

Shorter duration floating rate corporate bonds were 4% of total investments at June 30, 2020 and 1% at June 30, 2019, and SBA bonds, which are included in mortgage backed securities, were 9% and 10% of total investments at June 30, 2020 and June 30, 2019, respectively.

The duration of the investment portfolio remained relatively consistent at 3.1 years at June 30, 2020 from 3.0 years at June 30, 2019.

The re-pricing duration of the loan portfolio was 18 months at June 30, 2020 as compared to 19 months at June 30, 2020, with fixed rate loans amounting to 44% of total loans at June 30, 2020 and 39% at June 30, 2019.

Variable and adjustable rate loans comprised 56% (offset by 3% from the dilution impact of PPP loans) and 61% of total loans at both June 30, 2020 and 2019, respectively.

Variable rate loans are generally indexed to either the one month LIBOR interest rate, or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S.

Treasury interest rate.

The duration of the deposit portfolio increased to 33 months at March 31, 2020 from 27 months at December 31, 2019.

The change since December 31, 2019 was due substantially to a change in the deposit mix and the duration of time deposits as market interest rates decreased and brokered CDs matured and were replaced with longer duration CDs at lower rates.

The Company has continued its emphasis on funding loans in its marketplace, although competition for new loans persists.

A disciplined approach to loan pricing, with variable and adjustable rate loans comprising 61% of total loans at March 31, 2020, has resulted in a loan portfolio yield of 5.07% for the three months ended March 31, 2020 as compared to 5.62% for the same period in 2019.

The duration of the deposit portfolio increased to 39 months at June 30, 2020 from 33 months at March 31, 2020.

The increase since March was due substantially to a change in the deposit mix and the duration of money market accounts as deposit competition waned with rates at all-time lows.

The Company has continued its emphasis on funding loans in its marketplace, although competition for new loans has diminished.

A disciplined approach to loan pricing, with variable and adjustable rate loans comprising 56% of total loans (offset by 3% from the dilution impact of PPP loans) at June 30, 2020, has resulted in a loan portfolio yield of 4.84% for the six months ended June 30, 2020 as compared to 5.62% for the same period in 2019.

Variable and adjustable rate loans provide additional income opportunities should interest rates rise from current levels.

The net unrealized gain before income tax on the investment portfolio was $20.1 million at March 31, 2020 as compared to a net unrealized loss before tax of $4.2 million at December 31, 2019.

The increase in the net unrealized gain on the investment portfolio at March 31, 2020 as compared to December 31, 2019 was due primarily to lower interest rates at March 31, 2020.

At March 31, 2020, the net unrealized gain position represented 2.4% of the investment portfolio’s book value.

The net unrealized gain before income tax on the investment portfolio was $21.8 million at June 30, 2020 as compared to a net unrealized gain before tax of $20.1 million at March 31, 2019.

The increase in the net unrealized gain on the investment portfolio was due primarily to lower interest rates at June 30, 2020.

At June 30, 2020, the net unrealized gain position represented 3.0% 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.

3 unchanged sentences

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, 2020.

The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from June 30, 2020.

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, 2020, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 10 basis points, and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.

As quantified in the table below, the Company’s analysis at March 31, 2020 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points.

This moderate impact is due substantially to the significant level of variable rate and re-priceable assets and liabilities and related shorter relative durations.

The re-pricing duration of the investment portfolio at March 31, 2020 is 2.6 years, the loan portfolio 1.6 years, the interest bearing deposit portfolio 2.8 years, and the borrowed funds portfolio 6.3 years.

The following table reflects the result of simulation analysis on the March 31, 2020 asset and liabilities balances:

For the analysis presented below, at June 30 , 2020, 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 of 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.

As quantified in the table below, the Company’s analysis at June 30, 2020 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 June 30, 2020 is 3.1 years, the loan portfolio 1.5 years, the interest bearing deposit portfolio 3.3 years, and the borrowed funds portfolio 6.3 years.

The following table reflects the result of simulation analysis on the June 30, 2020 asset and liabilities balances:

Percentage change in

5 unchanged sentences

interest income

The results of simulation are within the relevant policy limits adopted by the Company for percentage change in net interest income.

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.

This policy is in violation due to the already low level of rates on non-maturing deposit instruments leading to larger percentage changes as even small changes may result in a large percentage change;

this policy will be updated in the second quarter.

Due to the level of market rates at March 31, 2020, interest rate shocks of -200, -300 and -400 basis points leave the Bank with zero and negative rate instruments and are not considered practical or informative.

The changes in net interest income, net income and the economic value of equity in both a higher and lower interest rate shock scenario at March 31, 2020 are not considered to be excessive.

The impact of -6.0% in net interest income and -10.4% 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 non-interest bearing deposits are not expected to have lower interest costs.

In the first quarter of 2020, 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, 2020 was similar to the interest rate risk position at December 31, 2019.

The amounts in the second 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 June 30, 2020, 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 June 30, 2020 are not considered to be excessive.

The impact of -0.3% in net interest income and -0.5% 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 second quarter of 2020, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above.

The interest rate risk position at June 30, 2020, was relatively similar to the March 31, 2020 position for the up rate scenarios, but the down rate scenarios are now limited by the already low interest rate environment.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table.

4 unchanged sentences

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 2020, average market interest rates decreased across the yield curve.

Overall, there was a slight steepening of the yield curve as compared to the first quarter of 2019 with rate decreases being generally more significant at the shorter end of the yield curve.

As compared to the first quarter of 2019, the average two-year U.S.

During the second quarter of 2020, average market interest rates decreased across the yield curve.

Overall, there was a slight steepening of the yield curve as compared to the second quarter of 2019 with rate decreases being generally more significant at the shorter end of the yield curve.

As compared to the second quarter of 2019, the average two-year U.S.

Treasury rate decreased by 194 basis points from 2.13% to 0.19%, the average five year U.S.

1 unchanged sentence

Treasury rate decreased by 165 basis points from 2.34% to 0.69%.

The Company’s net interest margin was 3.49% for the first quarter of 2020 and 4.02% in the first quarter of 2019.

The Company believes that the net interest margin in the most recent quarter as compared to 2019’s first quarter has been consistent with its interest risk analysis at December 31, 2019.

The Company’s net interest margin was 3.26% for the second quarter of 2020 and 3.91% in the second quarter of 2019.

The Company believes that the net interest margin in the most recent quarter as compared to 2019’s second quarter has been consistent with its interest rate risk analysis.

Banks and other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities.

This revenue represented 94% and 93% of the Company’s revenue for the first quarter of 2020 and 2019, respectively.

This revenue represented 87% and 93% of the Company’s revenue for the second quarter of 2020 and 2019, 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.

3 unchanged sentences

A negative gap indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods.

At March 31, 2020, the Company had a negative GAP position of approximately $370 million or 4% of total assets out to three months and a negative cumulative GAP position of $269 million or 3% of total assets out to 12 months;

as compared to a positive GAP position of approximately $295 million or 3% of total assets out to three months and a positive cumulative GAP position of $243 million or 3% of total assets out to 12 months at December 31, 2019.

The change in the GAP position at March 31, 2020, as compared to December 31, 2019, was due to an increase in immediately repricing interest bearing liabilities while increasing fixed rate assets.

The change in the GAP position at March 31, 2020 as compared to December 31, 2019 is not deemed material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis which captures the full optionality within the balance sheet.

At June 30, 2020, the Company had a positive gap position of approximately $476 million, or 5% of total assets, out to three months, and a positive cumulative gap position of $624 million, or 6% of total assets out to twelve months;

as compared to a negative gap position of approximately $370 million or 4% of total assets out to three months, and a negative cumulative gap position of $269 million or 3% of total assets out to twelve months at March 31, 2019.

The change in the gap position at June 30, 2020, as compared to March 31, 2020, was due to expected rate sensitivity of non-interest bearing accounts and the time frame in which they might migrate interest bearing accounts.

The change in the gap position at June 30, 2020 as compared to March 31, 2020 is not deemed material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis which captures the full optionality within the balance sheet.

The current position is within guideline limits established by the ALCO.

1 unchanged sentence

Management has carefully considered its strategy to maximize interest income by reviewing interest rate levels, economic indicators and call features within its investment portfolio, as well as interest rate floors within its loan portfolio.

These factors have been discussed with the ALCO and management believes that current strategies are appropriate to current economic and interest rate trends.

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.

2 unchanged sentences

If this were to occur, the effects of a declining interest rate environment may not be in accordance with management’s expectations.

March 31, 2020

June 30, 2020

(dollars in thousands)

29 unchanged sentences

The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years.

At March 31, 2020, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represent 357% of total risk based capital.

At June 30, 2020, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represent 342% of total risk based capital.

Construction, land and land development loans represent 106% of total risk based capital.

2 unchanged sentences

Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns.

The Company has an extensive Capital Plan and Policy, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.

The Company 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.

8 unchanged sentences

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%.

The Company and the Bank meet all these requirements, and satisfy the requirement to maintain the fully phased in capital conservation buffer of 2.5% of CET1 capital for capital adequacy purposes.

At June 30, 2020, 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 2019, the Company extended the Repurchase Program.

Under the Board approval in December, the Company may repurchase up to an aggregate of 1,641,000 shares of its common stock (inclusive of shares remaining under the initial authorization), through December 31, 2020, subject to earlier termination by the Board of Directors (the “Repurchase Program Extension”).

For the first quarter of 2020, the Company repurchased 1,193,052 shares (73% of authorized shares) at an average cost of $37.31 per share.

The Board of Directors and Management continue to monitor this area and may enter the markets from time to time as determined appropriate.

The Company announced a regular quarterly cash dividend on March 26, 2020 of $0.22 per share to shareholders of record on April 15, 2020 and payable April 30, 2020.

The actual capital amounts and ratios for the Company and Bank as of March 31, 2020 and December 31, 2019 are presented in the table below.

The Company announced a regular quarterly cash dividend on June 24, 2020 of $0.22 per share to shareholders of record on July 15, 2020 and payable July 31, 2020.

The actual capital amounts and ratios for the Company and Bank as of June 30, 2020 (unaudited) and December 31, 2019 are presented in the table below.

(dollars in thousands)

As of March 31, 2020

CET1 capital (to risk weighted aseets)

As of June 30, 2020

CET1 capital (to risk weighted assets)

Total capital (to risk weighted assets)

2 unchanged sentences

As of December 31, 2019

CET1 capital (to risk weighted aseets)

CET1 capital (to risk weighted assets)

Total capital (to risk weighted assets)

2 unchanged sentences

* Applies to Bank only

The regulatory capital ratios presented above vary slightly from what was presented in our second quarter earnings release, reflecting adjustments to fully capture the delay in reflecting the impact of the adoption of the CECL methodology provided by the federal banking regulators in March 2020, as described below.

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, 2020 the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above.

At June 30, 2020 the Bank could pay dividends to the parent 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.

9 unchanged sentences

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 efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income.

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.

3 unchanged sentences

Three Months Ended

March 31, 2020

March 31, 2019

Six Months Ended

Three Months Ended

Six Months Ended

June 30, 2020

December 31, 2019

June 30, 2019

Common shareholders’ equity

13 unchanged sentences

Annualized Return on Average Tangible Common Equity

Noninterest expenses

Total revenue (net interest income + non interest income)

Efficiency Ratio

Quantitative and Qualitative Disclosures about Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis