EAGLE BANCORP INC 10-Q

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Eagle Bancorp, Inc. (the “Company”) and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. This report contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward-looking statements can be identified by use of words such as “may,” “will,” “can,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “assume," "probable," "possible," "continue,” “should,” “could,” “would,” “strive," "seeks," "deem," "projections" "forecast," "consider," "indicative," "uncertainty," "likely," "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, 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. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company’s past results are not necessarily indicative of future performance. All information is as of the date of this report. Any forward-looking statements made by or on behalf of the Company speak only as to the date they are made. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward looking statement for any reason. GENERAL The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating twenty-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. The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the Company’s primary market area. The Company’s philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of twenty branch offices, including nine in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C. 45 Table of Contents The Bank offers a broad range of commercial banking services to its business and professional clients, as well as full service consumer banking services to individuals living and/or working primarily in the Bank’s market area. The Bank emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, non-profit organizations and associations, and investors living and working in and near the primary service area. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, “NOW” accounts and money market and savings accounts, business, construction, and commercial loans, residential mortgages and consumer loans, and cash management services. The Bank is also active in the origination and sale of residential mortgage loans and the origination of Small Business Administration ("SBA”) loans. The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under best efforts and mandatory delivery commitments with the investors to purchase the loans subject to compliance with pre-established criteria. The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated. The Company originates multifamily Federal Housing Administration ("FHA”) loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”). The Company securitizes these loans through the Government National Mortgage Association (“Ginnie Mae”) MBS I program and sells the resulting securities in the open market to authorized dealers in the normal course of business, and periodically bundles and sells the servicing rights. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages other real estate owned (“OREO”) assets. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Additionally, the Bank offers investment advisory services through referral programs with third parties. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance. Impact of COVID-19 In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. Governmental responses to the pandemic have included orders closing nonessential businesses, directing individuals to restrict their movements, observe social distancing, and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to COVID-19 pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. Our business and consumer customers are experiencing varying degrees of financial distress. In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including directing employees to work from home insofar as is possible and implementing our business continuity plans and protocols to the extent necessary. On March 27, 2020, the CARES Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act created the Paycheck Protection Program (the "PPP"), a 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. 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. Governmental actions taken in response to the COVID-19 pandemic have not always been coordinated or consistent across jurisdictions but, in general, have been expanding in scope and intensity. The efficacy and ultimate effect of these actions is not known. 46 Table of Contents 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 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 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. 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 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; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain. CRITICAL ACCOUNTING POLICIES The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and Note 1 to the Consolidated Financial Statements included in this report. There have been no significant changes to the Company’s accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 except as indicated below and in “Accounting Standards Adopted in 2020” in Note 1 to the Consolidated Financial Statements in this report. Provision for Credit Losses and Provision for Unfunded Commitments A consequence of lending activities is that we may incur credit losses, so we record an allowance for credit losses ("ACL") with respect to loan receivables and a reserve for unfunded commitments (“RUC”) as estimates of those losses. The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as changes in interest rates, the financial performance of borrowers and unemployment rates. As a result of our January 1, 2020, adoption of ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments,” and its related amendments, our methodology for estimating these credit losses changed significantly from December 31, 2019. The standard replaced the “incurred loss” approach with an “expected loss” approach known as CECL. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.” 47 Table of Contents The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, we consider forecasts about future economic conditions that are reasonable and supportable. The RUC represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. The RUC is determined by estimating future draws and applying the expected loss rates on those draws. Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for credit losses and the RUC. Our determination of the amount of the allowance for credit losses requires significant reliance on the credit risk rating we assign to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts. The Company uses the discounted cash flow (“DCF”) method to estimate expected credit losses for the commercial, income producing – commercial real estate, owner occupied – commercial real estate, real estate mortgage – residential, construction – commercial and residential, construction – C&I (owner occupied), home equity, and other consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, probability of default, and loss given default. The modeling of expected prepayment speeds 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. 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 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. Government. The allowance for credit losses attributable to each portfolio segment also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff, and trends in delinquencies. While our methodology in establishing the reserve for credit losses attributes portions of the ACL and RUC to the commercial and consumer portfolio segments, the entire ACL and RUC is available to absorb credit losses inherent in the total loan portfolio and total amount of unfunded credit commitments, respectively. Going forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. For example, the COVID-19 pandemic has negatively impacted 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. Goodwill 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. 48 Table of Contents RESULTS OF OPERATIONS Earnings Summary 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 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 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 3.26% 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. 49 Table of Contents 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. 50 Table of Contents 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). 51 Table of Contents 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. Net Interest Income and Net Interest Margin Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investment securities. The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings. Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations). Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income. 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. 52 Table of Contents 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 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. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets. ​ 53 Table of Contents Eagle Bancorp, Inc. Consolidated Average Balances, Interest Yields And Rates (Unaudited) (dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ ​ 2020 ​ 2019 ​ Average ​ ​ Average Average ​ ​ Average ​ Balance Interest Yield/Rate Balance Interest Yield/Rate ASSETS ​ ​ ​ ​ ​ Interest earning assets: ​ ​ ​ ​ ​ Interest bearing deposits with other banks and other short-term investments ​ $ 1,102,931 ​ $ 161 0.06 % $ 209,096 ​ $ 1,105 2.12 % Loans held for sale (1) ​ 80,227 ​ 686 3.42 % 34,760 ​ 349 4.02 % Loans (1) (2) ​ 8,015,751 ​ 92,242 4.63 % 7,260,899 ​ 101,540 5.61 % Investment securities available for sale (2) ​ 821,340 ​ 4,571 2.24 % 803,207 ​ 5,238 2.62 % Federal funds sold ​ 36,251 ​ 12 0.13 % 20,361 ​ 47 0.93 % Total interest earning assets ​ 10,056,500 ​ 97,672 3.91 % 8,328,323 ​ 108,279 5.21 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total noninterest earning assets ​ 373,842 ​ ​ ​ ​ 337,172 ​ ​ Less: allowance for credit losses ​ 103,633 ​ ​ ​ ​ 69,972 ​ ​ Total noninterest earning assets ​ 270,209 ​ ​ ​ ​ 267,200 ​ ​ TOTAL ASSETS ​ $ 10,326,709 ​ ​ ​ ​ $ 8,595,523 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND SHAREHOLDERS’ EQUITY ​ ​ ​ ​ ​ Interest bearing liabilities: ​ ​ ​ ​ ​ Interest bearing transaction ​ $ 801,508 ​ $ 530 0.27 % $ 705,628 ​ $ 1,197 0.68 % Savings and money market ​ 3,914,916 ​ 5,608 0.58 % 2,628,255 ​ 12,279 1.87 % Time deposits ​ 1,199,946 ​ 6,376 2.14 % 1,442,197 ​ 8,985 2.50 % Total interest bearing deposits ​ 5,916,370 ​ 12,514 0.85 % 4,776,080 ​ 22,461 1.89 % Customer repurchase agreements ​ 30,611 ​ 86 1.13 % 33,248 ​ 75 0.90 % Other short-term borrowings ​ 300,003 ​ 501 0.66 % 219,508 ​ 1,435 2.59 % Long-term borrowings ​ 267,849 ​ 3,208 4.74 % 217,458 ​ 2,979 5.42 % Total interest bearing liabilities ​ 6,514,833 ​ 16,309 1.01 % 5,246,294 ​ 26,950 2.06 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Noninterest bearing liabilities: ​ ​ ​ ​ ​ ​ ​ Noninterest bearing demand ​ 2,566,348 ​ ​ ​ 2,117,901 ​ ​ Other liabilities ​ 66,076 ​ ​ ​ 64,841 ​ ​ Total noninterest bearing liabilities ​ 2,632,424 ​ ​ ​ 2,182,742 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shareholders’ Equity ​ 1,179,452 ​ ​ ​ ​ 1,166,487 ​ ​ TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ​ $ 10,326,709 ​ ​ ​ ​ $ 8,595,523 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest income ​ ​ ​ ​ $ 81,363 ​ ​ ​ ​ $ 81,329 ​ Net interest spread ​ ​ ​ ​ ​ 2.90 % ​ ​ 3.15 % Net interest margin ​ ​ ​ ​ ​ 3.26 % ​ ​ 3.91 % Cost of funds ​ ​ ​ ​ ​ 0.65 % ​ ​ 1.30 % (1) Loans placed on nonaccrual status are included in average balances. 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. ​ 54 Table of Contents Eagle Bancorp, Inc. Consolidated Average Balances, Interest Yields and Rates (Unaudited) (dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended June 30, ​ ​ 2020 ​ 2019 ​ Average ​ ​ Average Average ​ ​ Average ​ Balance Interest Yield/Rate Balance Interest Yield/Rate ASSETS ​ ​ ​ ​ ​ Interest earning assets: ​ ​ ​ ​ ​ Interest bearing deposits with other banks and other short-term investments ​ $ 845,540 ​ $ 1,720 0.41 % $ 254,804 ​ $ 2,771 2.19 % Loans held for sale (1) ​ 59,488 ​ 1,040 3.50 % 26,386 ​ 550 4.17 % Loans (1) (2) ​ 7,833,372 ​ 188,643 4.84 % 7,150,300 ​ 199,160 5.62 % Investment securities available-for-sale (2) ​ 844,503 ​ 9,998 2.38 % 806,858 ​ 10,836 2.71 % Federal funds sold ​ 33,434 ​ 72 0.43 % 19,063 ​ 96 1.02 % Total interest earning assets ​ 9,616,337 ​ 201,473 4.21 % 8,257,411 ​ 213,413 5.21 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total noninterest earning assets ​ 365,080 ​ ​ ​ ​ 338,290 ​ ​ Less: allowance for credit losses ​ 94,231 ​ ​ ​ ​ 69,713 ​ ​ Total noninterest earning assets ​ 270,849 ​ ​ ​ ​ 268,577 ​ ​ TOTAL ASSETS ​ $ 9,887,186 ​ ​ ​ ​ $ 8,525,988 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND SHAREHOLDERS’ EQUITY ​ ​ ​ ​ ​ Interest bearing liabilities: ​ ​ ​ ​ ​ Interest bearing transaction ​ $ 803,321 ​ $ 2,196 0.55 % $ 648,557 ​ $ 2,378 0.74 % Savings and money market ​ 3,626,437 ​ 16,690 0.93 % 2,709,950 ​ 24,242 1.80 % Time deposits ​ 1,243,628 ​ 14,174 2.29 % 1,386,876 ​ 16,741 2.43 % Total interest bearing deposits ​ 5,673,386 ​ 33,060 1.17 % 4,745,383 ​ 43,361 1.84 % Customer repurchase agreements ​ 30,310 ​ 173 1.15 % 30,536 ​ 173 1.14 % Other short-term borrowings ​ 260,030 ​ 858 0.65 % 120,832 ​ 1,575 2.59 % Long-term borrowings ​ 251,866 ​ 6,275 4.93 % 217,408 ​ 5,958 5.45 % Total interest bearing liabilities ​ 6,215,592 ​ 40,366 1.31 % 5,114,159 ​ 51,067 2.01 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Noninterest bearing liabilities: ​ ​ ​ ​ ​ ​ ​ Noninterest bearing demand ​ 2,416,355 ​ ​ ​ 2,195,084 ​ ​ Other liabilities ​ 69,923 ​ ​ ​ 68,963 ​ ​ Total noninterest bearing liabilities ​ 2,486,278 ​ ​ ​ 2,264,047 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shareholders’ equity ​ 1,185,316 ​ ​ ​ ​ 1,147,782 ​ ​ TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ​ $ 9,887,186 ​ ​ ​ ​ $ 8,525,988 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest income ​ ​ ​ ​ $ 161,107 ​ ​ ​ ​ $ 162,346 ​ Net interest spread ​ ​ ​ ​ ​ 2.90 % ​ ​ 3.20 % Net interest margin ​ ​ ​ ​ ​ 3.36 % ​ ​ 3.97 % Cost of funds ​ ​ ​ ​ ​ 0.85 % ​ ​ 1.24 % (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. ​ 55 Table of Contents Provision for Credit Losses The provision for credit losses represents the amount of expense charged to current earnings to fund the ACL on loans and the ACL on available for sale investment securities. The amount of the allowance for credit losses on loans is based on many factors 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 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. The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. Refer to additional detail regarding these forecasts in the “Discounted Cash Flow Method" section of Note 1 to the Consolidated Financial Statements. The results of this process, in combination with conclusions of the Bank’s outside consultants’ review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under “Critical Accounting Policies” above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table on page 57 which reflects activity in the allowance for credit losses. 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. 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. 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. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves. The maintenance of a high quality loan portfolio, with an adequate allowance for credit losses, will continue to be a primary management objective for the Company. 56 Table of Contents 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) 2020 2019 Balance at beginning of period, prior to adoption of CECL ​ $ 73,658 ​ $ 69,944 ​ Impact of adopting CECL ​ ​ 10,614 ​ ​ ​ ​ Charge-offs: ​ ​ ​ ​ ​ Commercial ​ 7,145 ​ 5 ​ Income producing - commercial real estate ​ 550 ​ 5,343 ​ Owner occupied - commercial real estate ​ — ​ — ​ Real estate mortgage - residential ​ — ​ — ​ Construction - commercial and residential ​ 1,768 ​ — ​ Construction - C&I (owner occupied) ​ — ​ — ​ Home equity ​ — ​ — ​ Other consumer ​ — ​ 2 ​ Total charge-offs ​ 9,463 ​ 5,350 ​ ​ ​ ​ ​ ​ ​ ​ ​ Recoveries: ​ ​ ​ ​ ​ Commercial ​ 74 ​ 167 ​ Income producing - commercial real estate ​ — ​ 302 ​ Owner occupied - commercial real estate ​ — ​ 2 ​ Real estate mortgage - residential ​ — ​ 3 ​ Construction - commercial and residential ​ — ​ 37 ​ Construction - C&I (owner occupied) ​ — ​ — ​ Home equity ​ — ​ — ​ Other consumer ​ 4 ​ 21 ​ Total recoveries ​ 78 ​ 532 ​ Net charge-offs ​ 9,385 ​ 4,818 ​ Provision for Credit Losses- Loans ​ 33,909 ​ 6,960 ​ Balance at end of period ​ $ 108,796 ​ $ 72,086 ​ ​ ​ ​ ​ ​ ​ ​ ​ Annualized ratio of net charge-offs during the period to average loans outstanding during the period ​ 0.24 % 0.13 % ​ The following table reflects the allocation of the allowance for credit losses at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category. 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 (dollars in thousands) Amount % (1) Amount % (1) Commercial ​ $ 28,078 ​ 20 % $ 18,169 20 % PPP loans ​ ​ — ​ 6 % ​ — ​ — ​ Income producing - commercial real estate ​ 51,863 ​ 46 % 28,527 50 % Owner occupied - commercial real estate ​ 12,341 ​ 12 % 5,598 13 % Real estate mortgage - residential ​ 1,550 ​ 1 % 1,352 1 % Construction - commercial and residential ​ 11,410 ​ 12 % 17,739 14 % Construction - C&I (owner occupied) ​ 2,398 ​ 2 % 1,533 1 % Home equity ​ 1,112 ​ 1 % 575 1 % Other consumer ​ 44 ​ — ​ 227 — ​ Total allowance ​ $ 108,796 ​ 100 % $ 73,720 100 % (1) Represents the percent of loans in each category to total loans. ​ 57 Table of Contents 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, 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 1.36% 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 they no longer share similar risk with their assigned segment. Reserves on individually assessed loans are determined by one of two methods: the fair value of collateral or the discounted cash flow. Fair value of collateral is used for loans determined to be collateral dependent, and the fair value represents the net realizable value of the collateral, adjusted for sales costs, commissions, senior liens, etc. Discounted cash flow is used on loans that are not collateral dependent where structural concessions have been made and continuing payments are expected. The continuing payments are discounted over the expected life at the loan’s original contract rate and include adjustments for risk of default. Under the incurred loss methodology that the Company applied as of December 31, 2019 included in nonperforming assets were loans that the Company considered to be impaired. 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 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. For example, current average actual selling prices less average actual closing costs on an impaired multi-unit real estate project may have indicated the need for an adjustment in the appraised valuation of the project, which in turn could increase the associated ASC Topic 310 specific reserve for the loan. Generally, all appraisals associated with impaired loans were updated on a not less than annual basis. Loans are considered to have been modified in a TDR when, due to a borrower's financial difficulties, the Company makes unilateral concessions to the borrower that it would not otherwise consider. Concessions could include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Alternatively, management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions, and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant. Such modifications are not considered to be TDRs, as the accommodation of a borrower's request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty. For example: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business which suggests a temporary interest only period on an amortizing loan; (2) there may be delays in absorption on a real estate project which reasonably suggests extension of the loan maturity at market terms; or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing. The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the change in terms, and the exercise of prudent business judgment. The Company had thirteen 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 58 Table of Contents impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. For both the three months ended 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 708 notes and $1.63 billion at June 30, 2020 (approximately 20% of total loans). 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. 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 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 $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. It is the Company's policy to obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties generally not less frequently than annually. Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. There were no sales of OREO property during the first six months of 2020 and 2019. 59 Table of Contents The following table shows the amounts of nonperforming assets at the dates indicated (unaudited for June 30, 2020). ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ ​ December 31, (dollars in thousands) 2020 ​ 2019 Nonaccrual Loans: ​ ​ ​ ​ Commercial ​ $ 16,721 ​ ​ $ 14,928 ​ Income producing - commercial real estate ​ 17,278 ​ ​ 9,711 ​ Owner occupied - commercial real estate ​ 10,755 ​ ​ 6,463 ​ Real estate mortgage - residential ​ 8,217 ​ ​ 5,631 ​ Construction - commercial and residential ​ 5,385 ​ ​ 11,509 ​ Construction - C&I (owner occupied) ​ — ​ ​ — ​ Home equity ​ 600 ​ ​ 487 ​ Loans held for sale ​ ​ — ​ ​ ​ — ​ Other consumer ​ 6 ​ ​ — ​ Accrual loans-past due 90 days ​ — ​ ​ — ​ Total nonperforming loans (1) ​ 58,962 ​ ​ 48,729 ​ Other real estate owned ​ 8,237 ​ ​ 1,487 ​ Total nonperforming assets ​ $ 67,199 ​ ​ $ 50,216 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Coverage ratio, allowance for credit losses to total nonperforming loans ​ 184.52 % ​ 151.16 % Ratio of nonperforming loans to total loans ​ 0.74 % ​ 0.65 % Ratio of nonperforming assets to total assets ​ 0.69 % ​ 0.56 % (1) 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 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. Based upon their status as potential problem loans, these loans receive heightened scrutiny and ongoing intensive risk management. Noninterest Income Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from bank owned life insurance (“BOLI”) and other income. Total noninterest income for the three months ended 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). Residential mortgage loans closed were $308 million for the second quarter of 2020 as compared to $152 million for the second quarter of 2019. 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. 60 Table of Contents 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 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. 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. Servicing agreements relating to the Ginnie Mae mortgage-backed securities program require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. The Company will generally recover funds advanced pursuant to these arrangements under the FHA insurance and guarantee program. However, in the interim, the Company must absorb the cost of the funds it advances during the time the advance is outstanding. The Company must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan. At June 30, 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. The Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to sell those loans, servicing released. Loans sold are subject to repurchase in circumstances where documentation is deficient, the underlying loan becomes delinquent, or there is fraud by the borrower. Loans sold are subject to penalty if the loan pays off within a specified period following loan funding and sale. The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under GAAP for possible repurchases. There were no repurchases due to fraud by the borrower during the three months ended 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 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 $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 61 Table of Contents 2020. 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 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. 62 Table of Contents Income Tax Expense 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. 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. FINANCIAL CONDITION Summary 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 capital conservation buffer 63 Table of Contents 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 June 30, 2020 (unaudited) and December 31, 2019 by major category are summarized below. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, 2020 ​ December 31, 2019 (dollars in thousands) Amount % Amount % Commercial ​ $ 1,607,056 20 % $ 1,545,906 20 % PPP loans ​ ​ 456,476 ​ 6 % ​ — ​ — ​ Income producing - commercial real estate ​ 3,678,946 46 % 3,702,747 50 % Owner occupied - commercial real estate ​ 964,077 12 % 985,409 13 % Real estate mortgage - residential ​ 93,601 1 % 104,221 1 % Construction - commercial and residential ​ 995,550 12 % 1,035,754 14 % Construction - C&I (owner occupied) ​ 149,845 2 % 89,490 1 % Home equity ​ 74,921 1 % 80,061 1 % Other consumer ​ 1,289 — ​ 2,160 — ​ Total loans ​ 8,021,761 100 % 7,545,748 100 % Less: allowance for credit losses ​ (108,796) ​ (73,658) ​ Net loans ​ $ 7,912,965 (1) ​ $ 7,472,090 ​ (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 $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. While as a general comment there has been some softening in the Suburban Maryland office leasing market, in certain well located pockets and submarkets, the sector has evidenced some positive absorption. Overall, commercial real estate values have generally held up well with price escalation in prime pockets, but we continue to be cautious of the cap rates at which some assets are trading and we are being careful with valuations as a result. While the 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 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 presented below as of June 30, 2020 (unaudited): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Principal Balance ​ % of Loan Industry (in 000’s) Portfolio ​ Accommodation & Food Services ​ $ 840,961 1 ​ ​ 10.5 % Retail Trade ​ 106,544 2 ​ 1.3 % ​ 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 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 64 Table of Contents 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 ​ % of Loan Property Type (in 000’s) Portfolio ​ Restaurant ​ $ 31,364 ​ ​ 0.4 % Hotel ​ 35,815 ​ 0.4 % Retail ​ 405,918 ​ 5.1 % ​ 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. Deposits and Other Borrowings The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, savings accounts and certificates of deposit. The deposit base includes transaction accounts, time and savings accounts, which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the Federal Home Loan Banks (the “FHLB”), federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and Promontory Interfinancial Network, LLC (“Promontory”). 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 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 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 $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. However, to the extent that the condition, regulatory position or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits. In that event, we would be required to obtain alternate sources for funding. At 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 $31.2 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 65 Table of Contents by U.S. agency securities and/or U.S. agency backed mortgage backed securities. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts. At June 30, 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 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 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. Liquidity Management Liquidity is a measure of the Company’s and Bank’s ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank’s primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. The Bank’s investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements and public funds, to generate cash from sales as needed to meet ongoing loan demand. These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial. Additionally, the Bank can purchase up to $172.5 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at June 30, 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. The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank of Richmond (“Federal Reserve Bank”). This facility, which amounts to approximately $660 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only. The loss of deposits through disintermediation is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank was founded under a philosophy of relationship banking and, therefore, believes that it has less of an exposure to disintermediation and resultant liquidity concerns than do many banks. The Bank makes competitive deposit interest rate comparisons weekly and feels its interest rate offerings are competitive. There is, however, a risk that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks’ lines of credit to offset a decline in deposits in the short run. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The Asset Liability Committee of the Bank (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 66 Table of Contents may experience an outflow of brokered deposits as a result of our inability to attract them or to accept or renew them. In that event, we would be required to obtain alternate sources for funding. Our primary and secondary sources of liquidity remain strong. Average deposits increased 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 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 June 30, 2020 are as follows (unaudited): ​ ​ ​ ​ ​ (dollars in thousands) ​ Unfunded loan commitments ​ $ 2,208,726 Unfunded lines of credit ​ 90,704 Letters of credit ​ 59,455 Total ​ $ 2,358,885 ​ Unfunded loan commitments are agreements whereby the Bank has made a commitment and the borrower has accepted the commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment as is the case in asset based lending credit facilities. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. As of June 30, 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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. The pipeline of loan commitments remains strong. 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. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank’s customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary. Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk A fundamental risk in banking is exposure to market risk, or interest rate risk, since a bank’s net income is largely dependent on net interest income. The Bank’s ALCO formulates and monitors the management of interest rate risk through policies and guidelines established by it and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives. 67 Table of Contents 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 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 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 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 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 $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. One of the tools used by the Company to manage its interest rate risk is a static gap analysis presented below. The Company also employs an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related income statement effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities (including prepayments), loan prepayments, interest rates, and the level of noninterest income and noninterest expense. The data is then subjected to a “shock test” which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from June 30, 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. 68 Table of Contents 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 Change in interest ​ Percentage change in net ​ Percentage change in ​ market value of portfolio rates (basis points) interest income net income equity +400 ​ +17.4% ​ +31.6% ​ +17.3% +300 ​ +12.0% ​ +21.8% ​ +13.8% +200 ​ +6.7% ​ +12.1% ​ +10.0% +100 ​ +23% ​ +4.2% ​ +5.7% 0 ​ — ​ — ​ — -100 ​ -0.3% ​ -0.5% ​ -15.8% -200 ​ -0.8% ​ -1.4% ​ -28.1% ​ The results of the simulation are within the relevant policy limits adopted by the Company for percentage change in net interest income. For net interest income, the Company has adopted a policy limit of -10% for a 100 basis point change, -12% for a 200 basis point change, -18% for a 300 basis point change and -24% for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change. The amounts in the 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. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase. During the second quarter of 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. 69 Table of Contents 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. Treasury rate decreased by 176 basis points from 2.12% to 0.36% and the average ten year U.S. Treasury rate decreased by 165 basis points from 2.34% to 0.69%. 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. Gap Position Banks and other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities. This revenue represented 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. Conversely, in a rising interest rate environment, net interest income is maximized with shorter term, higher yielding assets being funded by longer-term liabilities or what is referred to as a positive mismatch or gap. The gap position, which is a measure of the difference in maturity and repricing volume between assets and liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indication of the sensitivity of the Company to changes in interest rates. A negative gap indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods. At June 30, 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. While management believes that this overall position creates a reasonable balance in managing its interest rate risk and maximizing its net interest margin within plan objectives, there can be no assurance as to actual results. Management has carefully considered its strategy to maximize interest income by reviewing interest rate levels, economic indicators and call features within its investment portfolio, as well as interest rate floors within its loan portfolio. These factors have been discussed with the ALCO and management believes that current strategies remain appropriate to current economic and interest rate trends. If interest rates increase by 100 basis points, the Company’s net interest income and net interest margin are expected to increase modestly due to the impact of significant volumes of variable rate assets more than offsetting the assumption of an increase in money market interest rates by 70% of the change in market interest rates. If interest rates decline by 100 basis points, the Company’s net interest income and margin are expected to decline modestly as the impact of lower market rates on a large amount of liquid assets more than offsets the ability to lower interest rates on interest bearing liabilities. Because competitive market behavior does not necessarily track the trend of interest rates but at times moves ahead of financial market influences, the change in the cost of liabilities may be different than anticipated by the gap model. If this were to occur, the effects of a declining interest rate environment may not be in accordance with management’s expectations. 70 Table of Contents GAP Analysis June 30, 2020 (dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ ​ ​ ​ ​ ​ 0-3 4-12 13-36 37-60 Over 60 ​ Rate ​ Non ​ ​ ​ Repricible in: ​ months ​ months ​ months ​ months ​ months ​ Sensitive ​ Sensitive ​ Total RATE SENSITIVE ASSETS: ​ ​ ​ ​ ​ ​ ​ ​ Investment securities ​ $ 155,966 ​ $ 114,656 ​ $ 146,829 ​ $ 119,774 ​ $ 235,169 ​ $ 772,394 ​ ​ ​ ​ Loans (1)(2) ​ 4,025,799 ​ 881,156 ​ 1,586,143 ​ 793,459 ​ 803,637 ​ 8,090,194 ​ ​ ​ ​ Fed funds and other short-term investments ​ 623,843 ​ — ​ — ​ — ​ — ​ 623,843 ​ ​ ​ ​ Other earning assets ​ 75,912 ​ — ​ — ​ — ​ — ​ 75,912 ​ ​ ​ ​ Total ​ $ 4,881,520 ​ $ 995,812 ​ $ 1,732,972 ​ $ 913,233 ​ $ 1,038,806 ​ $ 9,562,343 ​ ​ 237,327 ​ $ 9,799,670 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ RATE SENSITIVE LIABILITIES: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Noninterest bearing demand ​ $ 88,262 ​ $ 245,520 ​ $ 532,958 ​ $ 393,206 ​ $ 1,156,112 ​ $ 2,416,058 ​ ​ ​ ​ Interest bearing transaction ​ 861,703 ​ — ​ — ​ — ​ — ​ 861,703 ​ ​ ​ ​ Savings and money market ​ 3,279,718 ​ — ​ — ​ — ​ 225,000 ​ 3,504,718 ​ ​ ​ ​ Time deposits ​ 244,371 ​ 502,658 ​ 341,655 ​ 61,676 ​ 3,133 ​ 1,153,493 ​ ​ ​ ​ Customer repurchase agreements and fed funds purchased ​ 31,198 ​ — ​ — ​ — ​ — ​ 31,198 ​ ​ ​ ​ Other borrowings ​ — ​ — ​ 148,307 ​ 69,574 ​ 350,000 ​ 567,881 ​ ​ ​ ​ Total ​ $ 4,505,252 ​ $ 748,178 ​ $ 1,022,920 ​ $ 524,456 ​ $ 1,734,245 ​ $ 8,535,051 ​ ​ 76,724 ​ $ 8,611,775 GAP ​ $ 376,269 ​ $ 247,634 ​ $ 710,052 ​ $ 388,776 ​ $ (695,438) ​ $ 1,027,292 ​ ​ ​ ​ Cumulative GAP ​ $ 376,269 ​ $ 623,902 ​ $ 1,333,954 ​ $ 1,722,731 ​ $ 1,027,292 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cumulative gap as percent of total assets ​ 3.84 % 6.37 % 13.61 % 17.58 % 10.48 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ OFF BALANCE-SHEET: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest Rate Swaps - LIBOR based ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ ​ ​ ​ Interest Rate Swaps - Fed Funds based ​ 100,000 ​ (100,000) ​ — ​ — ​ — ​ — ​ ​ ​ ​ Total ​ $ 100,000 ​ $ (100,000) ​ $ — ​ $ — ​ $ — ​ $ — ​ ​ — ​ $ — GAP ​ $ 476,269 ​ $ 147,634 ​ $ 710,052 ​ $ 388,776 ​ $ (695,438) ​ $ 1,027,292 ​ ​ Cumulative GAP ​ $ 476,269 ​ $ 623,902 ​ $ 1,333,954 ​ $ 1,722,731 ​ $ 1,027,292 ​ $ — ​ ​ Cumulative gap as percent of total assets ​ 4.86 % 6.37 % 13.61 % 17.58 % 10.48 % ​ ​ (1) Includes loans held for sale (2) Nonaccrual loans are included in the over 60 months category Capital Resources and Adequacy The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company’s current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At June 30, 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. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive Capital Plan and Policy, which includes pro-forma 71 Table of Contents projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios. The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required. The Board of Governors of the Federal Reserve Board and the FDIC have adopted rules (the “Basel III Rules”) implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the Basel III Rules, the Company and Bank are required to maintain, inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of 7.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%, a minimum total capital to risk-weighted assets ratio of 10.5%, and a minimum leverage ratio of 4.0%. At 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”). 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 was put on hold during the first quarter of 2020 and there were no shares 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. 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. 72 Table of Contents 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ To Be Well ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum ​ Capitalized ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Required For ​ Under Prompt ​ ​ Company ​ Bank ​ Capital ​ Corrective ​ Actual ​ Actual Adequacy Action (dollars in thousands) ​ Amount Ratio Amount Ratio Purposes ​ Regulations* ​ As of June 30, 2020 ​ ​ ​ ​ ​ CET1 capital (to risk weighted assets) ​ $ 1,085,861 12.80 % $ 1,244,976 14.69 % 7.00 % 6.50 % Total capital (to risk weighted assets) ​ 1,379,471 16.26 % 1,332,586 15.72 % 10.50 % 10.00 % Tier 1 capital (to risk weighted assets) ​ 1,085,861 12.80 % 1,244,976 14.69 % 8.50 % 8.00 % Tier 1 capital (to average assets) ​ 1,085,861 10.63 % 1,244,976 12.20 % 4.00 % 5.00 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, 2019 ​ ​ ​ ​ ​ CET1 capital (to risk weighted assets) ​ $ 1,082,516 12.87 % $ 1,225,486 14.64 % 7.00 % 6.50 % Total capital (to risk weighted assets) ​ 1,362,253 16.20 % 1,299,223 15.52 % 10.50 % 10.00 % Tier 1 capital (to risk weighted assets) ​ 1,082,516 12.87 % 1,225,486 14.64 % 8.50 % 8.00 % Tier 1 capital (to average assets) ​ 1,082,516 11.62 % 1,225,486 13.18 % 4.00 % 5.00 % ​ * 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 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. In March 2020, the federal banking regulators issued an interim final rule that provides banking organizations with an alternative option to temporarily delay for two years the estimated impact of the adoption of the CECL methodology on regulatory capital, followed by the three-year phase-in period. The cumulative amount that is not recognized in regulatory capital will be phased in at 25 percent per year beginning January 1, 2022. We have elected to adopt the March 2020 interim final rule. Use of Non-GAAP Financial Measures The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP. Tangible common equity to tangible assets (the "tangible common equity ratio"), tangible book value per common share, the annualized return on average tangible common equity, and efficiency ratio are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders' equity by common shares outstanding. The Company calculates the ROATCE by dividing net income available to common shareholders by average tangible common equity which is calculated by excluding the average balance of intangible assets from the average common shareholders’ equity. The Company calculates the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income. The efficiency ratio measures a bank’s overhead as a percentage of its revenue. 73 Table of Contents The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. GAAP Reconciliation (Unaudited) (dollars in thousands except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended Six Months Ended ​ Year Ended Three Months Ended Six Months Ended ​ ​ June 30, 2020 June 30, 2020 December 31, 2019 June 30, 2019 June 30, 2019 Common shareholders’ equity ​ ​ ​ ​ $ 1,187,895 ​ $ 1,190,681 ​ ​ ​ ​ $ 1,184,582 ​ Less: Intangible assets ​ ​ ​ ​ (104,651) ​ (104,739) ​ ​ ​ ​ (105,219) ​ Tangible common equity ​ ​ ​ ​ $ 1,083,244 ​ $ 1,085,942 ​ ​ ​ ​ $ 1,079,363 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Book value per common share ​ ​ ​ ​ $ 36.86 ​ $ 35.82 ​ ​ ​ ​ $ 34.30 ​ Less: Intangible book value per common share ​ ​ ​ ​ (3.24) ​ (3.15) ​ ​ ​ ​ (3.05) ​ Tangible book value per common share ​ ​ ​ ​ $ 33.62 ​ $ 32.67 ​ ​ ​ ​ $ 31.25 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total assets ​ ​ ​ ​ $ 9,799,670 ​ $ 8,988,719 ​ ​ ​ ​ $ 8,670,003 ​ Less: Intangible assets ​ ​ ​ ​ (104,651) ​ (104,739) ​ ​ ​ ​ (105,219) ​ Tangible assets ​ ​ ​ ​ $ 9,695,019 ​ $ 8,883,980 ​ ​ ​ ​ $ 8,564,784 ​ Tangible common equity ratio ​ ​ ​ ​ 11.17 % 12.22 % ​ ​ ​ 12.60 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Average common shareholders’ equity ​ $ 1,179,452 ​ $ 1,185,316 ​ $ 1,172,051 ​ $ 1,166,487 ​ $ 1,147,782 ​ Less: Average intangible assets ​ (104,672) ​ (104,684) ​ (105,167) ​ (105,280) ​ (105,430) ​ Average tangible common equity ​ $ 1,074,780 ​ $ 1,080,632 ​ $ 1,066,884 ​ $ 1,061,206 ​ $ 1,042,352 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Income Available to Common Shareholders ​ $ 28,856 ​ $ 51,979 ​ $ 142,943 ​ $ 37,243 ​ $ 70,992 ​ Average tangible common equity ​ $ 1,074,780 ​ $ 1,080,632 ​ $ 1,066,884 ​ $ 1,061,206 ​ $ 1,042,352 ​ Annualized Return on Average Tangible Common Equity ​ 10.80 % 9.67 % 13.40 % 14.08 % 13.73 % ​ ​ Item 3. Quantitative and Qualitative Disclosures about Market Risk Please refer to Item 2 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk.” ​